EXHIBIT 10.30
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The Commerce Group, Inc.
000 Xxxx Xxxxxx, Xxxxxxx, Xxxxxxxxxxxxx 00000 (508) 943-9000
January 29, 1999
AAA Southern New England
000 Xxxxx Xxxxxx Xxxxx
Xxxxxxxxxx, Xxxxx Xxxxxx 00000
Attention: X. Xxxxxx Xxxxxx, President
RE: American Commerce Insurance Company
Ladies and Gentlemen:
In November 1998, a subsidiary of The Commerce Group, Inc. ("CGI")
agreed to acquire Automobile Club Insurance Company, which as you know is now
known as American Commerce Insurance Company ("ACIC"). In connection with that
acquisition, which was completed in January 1999, CGI is willing to grant AAA
Southern New England and each other ACIC agent (each an "Agent" and
collectively, the "Agents") an option to purchase shares of CGI common stock in
order to provide an incentive for the Agents to maintain business with ACIC that
is at least equal to the business placed with ACIC during either 1997 or 1998.
You chose 1997. Each of those options is referred to as an "Initial Option."
In addition to the Initial Options, CGI is willing to grant to any
Agent, including AAA Southern New England, one or more additional options to
purchase shares of CGI common stock if the Agent increases the volume of
business placed with ACIC to the extent specified in this letter agreement. Each
of those options is referred to as a "Growth Option." The Initial Options and
the Growth Options are 'collectively referred to as the "Options."
The purpose of this letter agreement is to specify the circumstances
under which CGI will grant a Growth Option to AAA Southern New England and the
terms and conditions of any such Growth Option. When this letter agreement is
signed by AAA Southern New England and countersigned by CGI, it will constitute
CGI's irrevocable agreement to issue one or more Growth Options to the extent
and on the terms provided below.
1. Agreement to Grant Growth Options
(a) CGI agrees, subject to the terms and conditions set
forth in this letter agreement, to grant to AAA Southern New England
one Growth Option for each $1.0 million of direct written premiums
generated by additional "Qualifying Business" that AAA Southern New
England places with ACIC. Qualifying Business means private passenger
automobile and homeowner insurance for risks written outside of
AAA Southern New England
January 29, 1999
Page 2
Massachusetts. Additional "Qualifying Business" means the increase in
the aggregate amount of direct written premiums that ACIC receives from
Qualifying Business placed by AAA Southern New England during the
12-month period ending June 30 as compared to the baseline amount of
direct written premiums received by ACIC from Qualifying Business that
AAA Southern New England placed with ACIC during the year ended
December 31, 1997, and was considered for purposes of granting the
Initial Options (such baseline amount referred to as the "Initial
Options Base Amount").
(b) A Growth Option will be granted only as of July 31.
ACIC will calculate the amount of AAA Southern New England's Additional
Qualifying Business as of June 30 of each year beginning with June 30,
1998. The number of Growth Options granted as of July 31 of any year
will be that amount, rounded down to the nearest whole number, which is
equal to
(i) the aggregate amount of direct written
premiums from Qualifying Business placed by AAA Southern New
England with ACIC during the twelve-month period ended as of
June 30 of that year, minus
(ii) $8 million (i.e., the Initial Options Base
Amount), divided by
(iii) one million (1,000,000), minus
(iv) the number of Growth Options previously
granted to AAA Southern New England.
No Growth Option will be issued for an increment of additional business
of less than one million dollars ($1,000,000).
(c) For example, assume that the volume of direct written
premiums from Qualifying Business that AAA Southern New England placed
with ACIC for a June 30 year first exceeded $9.0 million (i.e., an
increase of $1.0 million above the Initial Options Base Amount) during
the 12-month period ending June 30, 1999, when the 12-month volume of
direct written premiums from Qualifying Business that such Agent placed
with ACIC was $9.5 million. Under those circumstances, CGI would grant
that Agent one Growth Option as of July 31, 1999.
(d) The July 31 date as of which a Growth Option is
granted is referred to as the "Grant Date".
AAA Southern New England
January 29, 1999
Page 3
2. Exercise Price and Number of Option Shares
(a) The exercise price of a Growth Option (the "Exercise
Price") will be equal to one hundred twenty-five percent (125.0%) of
the average, rounded to the nearest cent, of the daily averages of the
high and low per share sale price of CGI common stock on the New York
Stock Exchange, or other exchange or market on which CGI common stock
then is principally traded, as reported in the Wall Street Journal, for
one month of June in the year in which the Grant Date occurs.
(b) Twenty-five thousand (25,000) shares of CGI common
stock will be purchasable upon exercise of each Growth Option, subject
to the terms and conditions of the Growth Option instrument.
3. Vesting
(a) A Growth Option will vest and become exercisable if,
and only if, the average annual volume of direct written premiums from
Qualifying Business that AAA Southern New England places with ACIC
during the five-year period ending on the June 30 immediately preceding
the fifth anniversary of the Grant Date is not less than the threshold
of direct written premiums that triggered the granting of that Growth
Option. The June 30 date on which the five-year measurement period ends
is referred to as the "Measurement Date." The fifth anniversary of the
July 31 Grant Date is referred to as the "Confirmation Date." CGI will
send to AAA Southern New England by the Confirmation Date a certificate
signed by its Chief Financial Officer attesting to the five-year
average of Qualifying Business.
(b) Continuing with the example in paragraph 1(c), assume
that the total direct written premiums from Qualifying Business that
AAA Southern New England placed with ACIC for a 12-month period ending
June 30 first exceeds $10.0 million during the year ending June 30,
2000, resulting in the grant of a second Growth Option as of July 31,
2000 and applicable vesting thresholds of $9.0 million and $10.0
million, respectively. Further, assume that the average annual volume
of direct written premiums from Qualifying Business that the Agent
places with ACIC during the five-year period ending on the respective
Measurement Dates of those two Growth Options is $9.5 million and $9.9
million, respectively. Under those circumstances, the first Growth
Option, granted as of July 31, 1999, would vest; but the second Growth
Option, granted as of July 31, 2000, would terminate.
AAA Southern New England
January 29, 1999
Page 4
4. Term. If a Growth Option vests as a consequence of the
five-year average volume of Qualifying Business, that Growth Option
will be exercisable beginning as of the Confirmation Date and may be
exercised at any time during the ensuing five-year period (i.e.,
through and including the tenth anniversary of the Grant Date of that
Growth Option). If a Growth Option is not exercised on or before the
tenth anniversary of the Grant Date, the Growth Option will expire and
the Agent will have no further rights thereunder.
5. Delivery of Growth Option Agreement. CGI will use all
commercially reasonable efforts to deliver to AAA Southern New England
within forty-five (45) days after the applicable Grant Date the
instrument representing the Growth Option granted as of that date. The
instrument will be in the form of the Common Stock Purchase Option
attached to this letter agreement as Exhibit A (the "Growth Option
Agreement"), modified to include the Grant Date, Measurement Date,
Confirmation Date, Expiration Date and Exercise Price of that
particular Growth Option. In the event of any inconsistency between the
terms of this letter agreement and the text of the attached form of
Growth Option Agreement, the terms of the form of Growth Option
Agreement shall govern.
6. Transferability. Prior to the Confirmation Date of a Growth
Option, neither that Growth Option nor any future interest in any
securities issuable upon the exercise of that Growth Option may be
sold, pledged or otherwise transferred without CGI's prior written
consent, which consent may be given or withheld in CGI's sole
discretion.
7. Termination. CGI may terminate its obligation to grant future
Growth Options under this letter agreement by giving AAA Southern New
England written notice at least ninety (90) days prior to the effective
date of such termination. A termination shall be effective as of the
first July 1 that is at least ninety (90) days after the date of CGI's
notice or any subsequent July 1 that CGI may specify in its termination
notice. Termination of this letter agreement shall not affect any
Growth Option previously granted to AAA Southern New England or the
obligation CGI may have hereunder to issue a Growth Option to AAA
Southern New England based upon the amount of Qualifying Business
placed by AAA Southern New England during the 12-month period ending on
the June 30 immediately preceding the effective date of the termination
of this letter agreement.
AAA Southern New England
January 29, 1999
Page 5
8. CGI Representations. CGI hereby represents to AAA Southern New
England as follows:
(a) CGI has the full power and authority to execute,
deliver and perform its obligations under this letter agreement and the
Options, and this letter agreement and the Initial Option have been,
and any Growth Option will be, duly authorized, executed and delivered
by CGI. This letter agreement and the Initial Option, each when
countersigned and delivered to CGI by AAA Southern New England,
constitute and any Growth Option will constitute the legal, valid and
binding obligation of CGI, enforceable against CGI in accordance with
their respective terms.
(b) Neither the execution and the delivery of this letter
agreement or any Option nor the performance of CGI's obligations
thereunder has violated or will violate any statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other
restriction of any government, governmental agency, or court to which
CGI is subject.
(c) The shares of CGI common stock issued upon an
exercise of an Option will be freely transferable by the holder without
registration under the Securities Act of 1933 (the "Securities Act") or
any applicable state securities law.
9. Agent Representations. AAA Southern New England hereby
represents to CGI as follows:
(a) AAA Southern New England understands that neither the
Initial Option nor any Growth Option has been or will be registered
under the Securities Act or the securities laws of any state in
reliance on exemptions from such registration requirements and
therefore may not be sold unless registered under the Securities Act
and applicable state securities laws or an exemption from registration
is available.
(b) AAA Southern New England is (i) a corporation,
partnership, limited liability company or business trust with assets in
excess of $5,000,000 and was not formed for the specific purpose of
acquiring the Initial Option or any Growth Option, or (ii) otherwise
qualifies as an "accredited investor" within the meaning of Rule 501(a)
under the Securities Act.
AAA Southern New England
January 29, 1999
Page 6
(c) AAA Southern New England acknowledges that it has had
access to and an opportunity to review CGI's filings with the United
States Securities and Exchange Commission, including (i) CGI's most
recent Annual Report of Form 10-K, (ii) CGI's most recent Quarterly
Report on Form 10-Q, and (iii) CGI's most recent Definitive Proxy
Statement.
(d) AAA Southern New England acknowledges that it has
consulted with its own legal and accounting advisers for advice about
the various legal, tax and economic considerations relating to the
Options, and that AAA Southern New England, either alone or together
with its legal and accounting advisers, has such knowledge and
experience in financial and business matters to be capable of
evaluating the merits and risks of the Initial Option, this letter
agreement and any Growth Option issued hereunder.
(e) AAA Southern New England will acquire the Initial
Option and any Growth Option for investment and not with a view, or for
sale in connection with, any distribution within the meaning of the
Securities Act.
10. Governing Law; Jurisdiction and Venue. This letter agreement
shall be governed by, and construed in accordance with, the laws of the
Commonwealth of Massachusetts without regard to the conflict of laws
provisions thereof. Exclusive jurisdiction and venue for any dispute
arising under this letter agreement or any Growth Option will be in an
appropriate federal or state court in the Commonwealth of
Massachusetts.
* * *
AAA Southern New England
January 29, 1999
Page 7
Please signify the acceptance by AAA Southern New England of the terms
of this letter agreement by signing in the space provided below. Upon the
signature of this letter agreement by both CGI and AAA Southern New England,
this letter will constitute a binding agreement between CGI and AAA Southern New
England, enforceable under Massachusetts law as an instrument under seal.
Very truly yours,
THE COMMERCE GROUP, INC.
By: -s- Xxxxxx X. Xxxxxxxxx, Xx.
-------------------------------
Name: Xxxxxx X. Xxxxxxxxx, Xx.
Title: President and Chief
Executive Officer
ACKNOWLEDGED AND ACCEPTED:
AAA SOUTHERN NEW ENGLAND
By: _______________________________________
Name: ___________________________________
Title: __________________________________
