def14a
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant þ Filed by a Party other than the
Registrant o
Check the appropriate box:
o Preliminary Proxy Statement
o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Pursuant to §240.14a-12
Donegal Group Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
þ No fee required.
o Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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Exchange Act Rule 0-11(a)(2) and identify the filing for
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previous filing by registration statement number, or the Form
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NOTICE OF THE ANNUAL MEETING OF
STOCKHOLDERS
WE WILL HOLD ON APRIL 21, 2011
To the Stockholders of
DONEGAL GROUP INC.:
We will hold our annual meeting of stockholders at
10:00 a.m., local time, on Thursday, April 21, 2011,
at our principal executive offices, 1195 River Road, Marietta,
Pennsylvania 17547. At our annual meeting, our stockholders will
act on the following matters:
1. Election of the four nominees for Class A directors
we name in our accompanying proxy statement, each for a term of
three years and until the election of his or her respective
successor;
2. Ratification of the selection of KPMG LLP as our
independent registered public accounting firm for 2011;
3. Approval, by a non-binding vote of our stockholders, of
the compensation of our named executive officers we describe in
our accompanying proxy statement;
4. The determination, by a non-binding vote of our
stockholders, of the frequency with which we submit to our
stockholders for approval the compensation of our named
executive officers;
5. Approval of our 2011 employee stock purchase plan
so that we may continue to offer an employee stock purchase plan
following the expiration of our 2001 employee stock
purchase plan;
6. Approval of our 2011 equity incentive plan for employees
so that we will have sufficient shares available under our
equity incentive plan to continue this incentive compensation
plan for our employees; and
7. Approval of our 2011 equity incentive plan for directors
so that we will have sufficient shares available under our
equity incentive plan to continue this incentive compensation
plan for our directors.
No other director nomination or other matter may properly come
before our annual meeting because none of our stockholders has
timely submitted to us the information our by-laws require
regarding any nomination for election as a Class A director
or other proposed item of business. Therefore, under applicable
law, no stockholder may validly present any such action at our
2011 annual meeting nor will we conduct a vote of our
stockholders on any such matter.
Our board of directors has fixed the close of business on
March 4, 2011 as the record date for the determination of
our stockholders entitled to notice of, and to vote at, our
annual meeting.
We include our 2010 annual report to stockholders with this
notice of annual meeting and our proxy statement that
accompanies this notice of annual meeting.
Please submit your proxy, whether or not you expect to attend
our annual meeting in person, by mail, telephone or the internet
as we describe in the accompanying proxy materials.
By order of our board of directors,
Donald H. Nikolaus,
President and Chief Executive Officer
March 18, 2011
Marietta, Pennsylvania
Important
Notice Regarding the Availability of Proxy Materials for our
Annual Meeting of
Stockholders on April 21, 2011
You may view the accompanying proxy statement for our 2011
annual meeting of stockholders and our
2010 annual report to stockholders on our website at
www.donegalgroup.com. Any other information on our
website does not constitute a part of the accompanying proxy
statement or our 2010 annual report to stockholders.
DONEGAL
GROUP INC.
PROXY
STATEMENT
Our proxy statement contains information relating to our annual
meeting of stockholders that we will hold on Thursday,
April 21, 2011, at 10:00 a.m., local time, at our
executive offices, 1195 River Road, Marietta, Pennsylvania
17547. On March 18, 2011, we mailed our proxy statement,
the accompanying proxy card and our 2010 annual report to our
stockholders of record as of the close of business on
March 4, 2011. We will bear all of the costs of preparing
and mailing our proxy materials to our stockholders. We will,
upon request, reimburse brokers, nominees, fiduciaries,
custodians and other record holders for their reasonable
expenses in forwarding our proxy materials to the beneficial
owners for whom they serve as record holders.
We use the following terms in this proxy statement:
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Atlantic States means Atlantic States Insurance
Company;
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Donegal Mutual means Donegal Mutual Insurance
Company;
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Le Mars means Le Mars Insurance Company;
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MICO means Michigan Insurance Company;
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Peninsula means the Peninsula Insurance Group;
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Sheboygan means Sheboygan Falls Insurance Company;
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Southern means Southern Insurance Company of
Virginia;
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UNCB means Union National Community Bank;
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UNFC means Union National Financial
Corporation; and
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We, us, our, DGI
or the Company mean Donegal Group Inc.
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CONTENTS
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Unless we otherwise specify, the information in our proxy
statement relates to our 2010 fiscal year. Our 2010 fiscal year
began on January 1, 2010 and ended on December 31,
2010.
iii
OUR
ANNUAL MEETING
Our board of directors solicits proxies from our stockholders
through this proxy statement for use in connection with our 2011
annual meeting of stockholders. We will hold our 2011 annual
meeting of stockholders at our principal executive offices at
1195 River Road, Marietta, Pennsylvania 17547 at
10:00 a.m., prevailing time, on April 21, 2011.
What
is the agenda for our annual meeting?
At our 2011 annual meeting, our stockholders will act upon:
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the election of the four nominees for Class A directors we
name in this proxy statement;
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the ratification of the selection of KPMG LLP as our independent
registered public accounting firm for 2011;
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the approval, by a non-binding vote of our stockholders, of the
compensation of our named executive officers we describe in this
proxy statement;
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the determination, by a non-binding vote of our stockholders, of
the frequency with which we submit to our stockholders for
approval the compensation of our named executive officers;
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the approval of our 2011 employee stock purchase plan;
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the approval of our 2011 equity incentive plan for
employees; and
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the approval of our 2011 equity incentive plan for directors.
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What
is the effect of our advance notice by-laws?
Like many publicly-owned companies, we have advance notice
by-laws. Advance notice by-laws require that a stockholder
provide us with prior notice of that stockholders
intention to nominate a candidate for election as director at
our 2011 annual meeting or to propose any other item of business
for stockholder action at our 2011 annual meeting. The purpose
of our advance notice by-laws is to assure that we can include
in our proxy statement for the information of all of our
stockholders all of the actions we propose to submit to a vote
of our stockholders at our annual meeting or that any other
stockholder intends to propose.
Because none of our stockholders has nominated a candidate for
election as director or proposed any other item of business for
transaction at our 2011 annual meeting of stockholders within
the time limits our advance notice by-laws specify, no business
other than the seven agenda items we list above may properly
come before our 2011 annual meeting of stockholders or be
submitted to a vote of our stockholders at our 2011 annual
meeting other than procedural matters related to the conduct of
our 2011 annual meeting.
The Delaware General Corporation Law, or the DGCL, our
certificate of incorporation and our by-laws govern the conduct
of business at our annual meeting, our relationships with our
stockholders and the rights, powers, duties and obligations of
our stockholders, directors, officers and employees.
What
is a quorum at our annual meeting?
Our by-laws state that the presence in person or by proxy of a
majority of the total number of votes the holders of all of our
outstanding shares of Class A common stock and Class B
common stock as of the record date may cast constitutes a quorum
at our annual meeting. Because Donegal Mutual owned
approximately 66% of the aggregate voting power of our
outstanding Class A common stock and our outstanding
Class B common stock on the record date and because Donegal
Mutual will attend our annual meeting, the presence of Donegal
Mutual at our annual meeting will assure the presence of a
quorum at our annual meeting and that our stockholders may
conduct the business of our annual meeting.
1
What
is the order of business at our annual meeting?
Our by-laws and applicable provisions of the DGCL govern the
organization and conduct of business at our annual meeting of
stockholders. At the direction of our board of directors, Donald
H. Nikolaus, our President and Chief Executive Officer, will
call our annual meeting to order and will chair our annual
meeting. As chair of our annual meeting, Mr. Nikolaus will
determine, in his reasonable discretion, the order of business
our stockholders will conduct at our annual meeting and the
procedural manner in which we conduct our annual meeting. We
have historically conducted the voting on the proposals we have
submitted to our stockholders as the first items of business at
our annual meeting. Mr. Nikolaus will then report on our
results of operations for 2010 and our outlook for 2011. After
Mr. Nikolaus completes his remarks, he will respond to
appropriate questions from our stockholders.
Who
may vote at and attend our annual meeting?
Our stockholders of record as of the close of business on
March 4, 2011, the record date our board of directors
designated for our 2011 annual meeting, are our stockholders who
may vote at our annual meeting. Stockholders of record,
including persons duly appointed as proxies by stockholders of
record, may attend and vote at our annual meeting. We reserve
the right to request photographic identification, such as a
drivers license, before we permit a stockholder or a proxy
for a stockholder to attend our annual meeting. Even if you
currently plan to attend our annual meeting in person, we
recommend that you return your proxy using one of the methods we
describe below under How do I vote my shares? By
doing so, we can then include your vote if you later decide not
to attend, or you are unable to attend, our annual meeting of
stockholders.
You are a stockholder of record if your name appears on the list
of our stockholders as of the record date that our transfer
agent prepares for our annual meeting. For example, you are a
stockholder of record if you receive dividend checks and proxy
materials directly from us. During the ten days that precede our
annual meeting, you may, upon proper request, inspect at our
principal executive offices in Marietta, Pennsylvania an
alphabetical list of the holders of record of our Class A
common stock and our Class B common stock during normal
business hours for any purpose germane to our annual meeting.
If a bank or broker holds your shares as your nominee, we
consider you the beneficial owner of shares held in street
name by your bank or broker, and we consider your nominee
as the stockholder of record of your shares. Your bank or broker
will send you, as the beneficial owner, a separate package
describing the procedure for voting your shares. You should
follow the instructions your bank or broker provides you on how
to vote your shares.
What
percentage of our outstanding voting power must we receive to
constitute approval by our stockholders of the items of business
our stockholders will transact at our annual
meeting?
Election of Class A Directors. The four
nominees our board of directors nominated for election as
Class A directors in accordance with our by-laws, who are
the only nominees eligible for election as Class A
directors at our annual meeting, and who receive the highest
number of FOR votes cast by the holders of our
Class A common stock and our Class B common stock,
voting together as a single class, will become Class A
directors for a term of three years and until our stockholders
elect their successors. If you properly submit your proxy and
mark Withhold Authority, the proxies will not vote
your shares with respect to the nominee or nominees as to which
you so indicate but we will count your shares as present at our
annual meeting in determining whether a quorum exists. Our
certificate of incorporation and by-laws do not authorize
cumulative voting in the election of our directors.
Ratification of the Selection of KPMG
LLP. Ratification of the selection of KPMG LLP as
our independent registered public accounting firm for 2011
requires the affirmative vote of a majority of the voting power
of our outstanding Class A common stock and our
Class B common stock present in person or by proxy at our
annual meeting.
Approval of the compensation of our named executive officers
we describe in this proxy statement. Approval, by
a non-binding vote of our stockholders, of the compensation of
our named executive officers we
2
describe in this proxy statement requires the affirmative vote
of a majority of the voting power of our outstanding shares of
Class A common stock and our outstanding shares of
Class B common stock present in person or by proxy at our
annual meeting. We identify our named executive officers in the
Summary Compensation Table on page 31 in this proxy
statement. Although the vote to approve the compensation of our
named executive officers we describe in this proxy statement is
not binding on us, our board of directors will review the
outcome of the voting and take the voting results into account
in making future determinations with respect to the compensation
of our named executive officers.
Determination of the frequency of our stockholder vote to
approve the compensation of our named executive
officers. Determination, by a non-binding vote of
our stockholders, of the submission to our stockholders for
approval once every one year, two years or three years the
compensation of our named executive officers. This determination
requires the affirmative vote of the holders of a majority of
the voting power of our outstanding shares of Class A
common stock and our outstanding shares of Class B common
stock present in person or by proxy at our annual meeting for
either every year, every two years or every three years. Our
board of directors recommends that stockholders vote once every
three years for the approval of the compensation of our named
executive officers. Although the periodic vote to approve the
compensation of our named executive officers is not binding on
us, our board of directors will review the outcome of the voting
and take the voting results into account in making future
determinations with respect to the frequency with which we
submit the compensation of our named executive officers to our
stockholders for approval.
Approval of our 2011 employee stock purchase
plan. Approval of our 2011 employee stock
purchase plan requires the affirmative vote of a majority of the
voting power of our outstanding shares of Class A common
stock and our outstanding shares of Class B common stock
present in person or by proxy at our annual meeting.
Approval of our 2011 equity incentive plan for
employees. Approval of our 2011 equity incentive
plan for employees requires the affirmative vote of the holders
of a majority of the voting power of our outstanding shares of
Class A common stock and our outstanding shares of
Class B common stock present in person or by proxy at our
annual meeting.
Approval of our 2011 equity incentive plan for
directors. Approval of our 2011 equity incentive
plan for directors requires the affirmative vote of the holders
of a majority of the voting power of our outstanding shares of
Class A common stock and our outstanding shares of
Class B common stock present in person or by proxy at our
annual meeting.
Although we consider abstentions and broker non-votes as
outstanding shares entitled to vote at our annual meeting and
count those shares in determining the number of votes necessary
for a majority, it will not affect the determination of the
presence of a quorum, because the presence of Donegal Mutual at
the annual meeting assures the presence of a quorum at our
annual meeting. Broker non-votes are shares held by brokers or
nominees for which we have not received voting instructions from
the beneficial owner of, or person otherwise entitled to vote
the shares, and as to which the broker or nominee does not have
discretionary voting power.
What
are the voting rights of our stockholders?
As of March 4, 2011, we had outstanding:
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20,013,067 shares of our Class A common stock, each of
which entitles its holder to cast one-tenth of a vote with
respect to each matter presented for a vote at our annual
meeting; and
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5,576,775 shares of our Class B common stock, each of
which entitles its holder to cast one vote with respect to each
matter presented for a vote at our annual meeting.
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Therefore, the holders of all of our outstanding Class A
common stock may in the aggregate cast a total of 2,001,306
votes on each matter submitted to a vote of our stockholders at
our annual meeting, and the holders of all of our outstanding
Class B common stock may cast in the aggregate a total of
5,576,775 votes on each matter submitted to a vote of our
stockholders at our annual meeting.
3
As of March 4, 2011, Donegal Mutual owned
8,355,184 shares, or 41.7%, of our outstanding Class A
common stock and 4,198,339 shares, or 75.3%, of our
outstanding Class B common stock. Donegal Mutual therefore
has the right to cast approximately two-thirds of the total
number of votes that may be cast at our annual meeting on all
matters presented for a vote of our stockholders at our annual
meeting.
Donegal Mutual has advised us that it will vote all of its
shares of our Class A common stock and our Class B
common stock as follows:
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for the election of Robert S. Bolinger, Patricia A. Gilmartin,
Philip H. Glatfelter and Jack L. Hess as Class A directors;
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for the ratification of the selection of KPMG LLP as our
independent registered public accounting firm for 2011;
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for the approval, by a non-binding vote of our stockholders, of
the compensation of our named executive officers we describe in
this proxy statement;
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for the determination, by a non-binding vote of our
stockholders, of every three years as the frequency with which
we submit to our stockholders for approval the compensation of
our named executive officers;
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for the approval of our 2011 employee stock purchase plan;
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for the approval of our 2011 equity incentive plan for
employees; and
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for the approval of our 2011 equity incentive plan for directors.
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Therefore, based on the votes Donegal Mutual will cast at our
2011 annual meeting, at our 2011 annual meeting our stockholders
will:
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elect Robert S. Bolinger, Patricia A. Gilmartin, Philip H.
Glatfelter, II and Jack L. Hess as Class A directors;
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ratify the selection of KPMG LLP as our independent registered
public accounting firm for 2011;
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approve, by a non-binding vote of our stockholders, the
compensation of our named executive officers we describe in this
proxy statement;
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determine, by a non-binding vote of our stockholders, every
three years as the frequency with which we submit to our
stockholders for approval the compensation of our named
executive officers;
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approve our 2011 employee stock purchase plan;
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approve our 2011 equity incentive plan for employees; and
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approve our 2011 equity incentive plan for directors.
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How do
I vote my shares?
If the certified list of the holders of our Class A common
stock and Class B common stock as of the record date that
our independent transfer agent prepared includes your name, you
are a stockholder of record and you may attend our annual
meeting and vote in person or vote by proxy. The proxies our
board of directors has named will vote your shares as you
direct. If you prefer, you may vote your proxy by telephone, by
using the internet or by mail by following the instructions we
have set forth on your proxy card. The deadline for stockholders
of record to vote telephonically or using the internet is
3:00 p.m., local time, on April 20, 2011. We must
receive proxies submitted by mail or by express delivery
services by 3:00 p.m., local time, on April 20, 2011.
4
You may vote by proxy in one of three following ways:
Vote by telephone use any touch-tone telephone to
vote your proxy 24 hours a day, 7 days a week. Have
your proxy card available when you call. When requested, enter
your control numbers listed on your proxy card and then follow
the prompts. The telephone number is
1-800-652-VOTE
(8683).
Vote through the internet use the internet to vote
your proxy 24 hours a day, 7 days a week. Have your
proxy card available when you access the web site. When
requested, enter your control numbers listed on your proxy card,
and then create and submit your ballot over the internet. The
website address is www.investorvote.com/DGIC.
Vote by mail mark, sign and date your proxy card and
return it in the postage-paid envelope we have provided you.
If a broker, bank, nominee or other holder of record holds your
shares, see How do I vote the shares I hold in street
name? below.
How do
I vote shares I hold in street name?
If you are not a stockholder of record, but you are a
beneficial owner as of the close of business on
March 4, 2011, which means that the list of record
stockholders our independent transfer agent prepared as of the
close of business on March 4, 2011 does not include your
name or the name of the designee you have selected, you must
either direct the holder of record of your shares how to vote
your shares on the matters our stockholders will consider and
vote upon at our annual meeting or you must first obtain a form
of proxy from your holder of record that you may then vote as if
you were a holder of record. Your broker or nominee may vote
your shares only on those proposals as to which your broker or
nominee has the discretion to vote your shares. Under the
NASDAQ Global Select Market, or NASDAQ, corporate
governance rules, your broker or nominee does not have
discretion to vote your shares on non-routine matters such as
the election of directors or proposals 3, 4, 5, 6 and 7.
How do
I vote shares I hold in my 401(k) plan?
If you participate in Donegal Mutuals 401(k) plan, you may
vote your shares of Class A common stock and Class B
common stock credited to your 401(k) plan account as of the
close of business on March 4, 2011 by completing, signing
and returning the proxy card that accompanies this proxy
statement.
How
does our board of directors recommend that our stockholders
vote?
Our board of directors unanimously recommends that you vote:
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FOR the election of the four nominees for
Class A directors we name in this proxy statement;
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FOR the ratification of the selection of KPMG LLP
as our independent registered public accounting firm for 2011;
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FOR the approval, by non-binding vote of our
stockholders, of the compensation of our named executive
officers we describe that compensation in this proxy statement;
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THREE YEARS for the determination, by a
non-binding vote of our stockholders, of the frequency with
which we submit to our stockholders for approval the
compensation of our named executive officers;
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FOR the approval of our 2011 employee stock
purchase plan;
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FOR the approval of our 2011 equity incentive plan
for employees; and
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FOR the approval of our 2011 equity incentive plan
for directors.
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Unless you mark your proxy card to the contrary, the proxies our
board of directors has appointed will vote your shares as
indicated above.
5
May I
change my vote before our annual meeting?
You may revoke your proxy at any time prior to the closing of
voting at our annual meeting. If you are a stockholder of
record, you may revoke your proxy by:
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submitting a written notice of revocation to our corporate
secretary;
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submitting a later dated proxy by telephone, internet or
mail; or
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voting in person at our annual meeting if you properly identify
yourself to our judges of election.
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However, if you attend our annual meeting and do not submit a
ballot, our proxies will vote the proxy you most recently
submitted.
If a bank, broker, nominee or other person is the holder of
record of the shares you own, you should follow the instructions
of the bank, broker, nominee or other holder of record regarding
the revocation of your proxy.
If you have any questions about our annual meeting or voting
your shares, please call Sheri O. Smith, our corporate secretary
at
(800) 877-0600
or e-mail
Ms. Smith at sherismith@donegalgroup.com.
STOCK
OWNERSHIP
Our
Principal Stockholders
The table below lists each person whom we believe owns
beneficially 5% or more of the outstanding shares of our
Class A common stock and 5% or more of the outstanding
shares of our Class B common stock as of March 4,
2011, except as otherwise noted.
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Class A
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Percent of
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Class B
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Percent of
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Shares
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Class A
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Shares
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Class B
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Name of Individual or
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Beneficially
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Common
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Beneficially
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Common
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Identity of Group
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Owned
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Stock
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Owned
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Stock
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Donegal Mutual Insurance Company
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8,355,184
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41.7
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%
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4,198,339
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75.3
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%
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1195 River Road
Marietta, PA 17547
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Dimensional Fund Advisors LP(1)
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1,412,433
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7.1
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1299 Ocean Avenue
Santa Monica, CA 90401
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Gregory M. Shepard(2)
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3,251,000
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16.2
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373,366
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6.7
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7028 Portmarnock Place
Bradenton, FL 34202
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(1) |
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As Dimensional Fund Advisors, LP reported in a
Schedule 13G it filed with the Securities and Exchange
Commission, or the SEC on February 11, 2011. Dimensional
Fund Advisors, LP serves as an investment advisor to four
investment companies and as investment manager to certain other
commingled group trusts and commingled accounts. Dimensional
Fund Advisors LP disclaims beneficial ownership of these
shares. |
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As Mr. Shepard reported in a Schedule 13D he filed
with the SEC on December 10, 2010. |
Our
Directors and Executive Officers
The following table shows the amount and percentage of our
outstanding Class A common stock and our outstanding
Class B common stock that each of our directors and
nominees for director, each of our executive officers named in
the Summary Compensation Table and all of our executive officers
and directors as a group owned beneficially as of the close of
business on March 4, 2011. The total shown for each person
includes shares that the person owned jointly, in whole or in
part, with the persons spouse, or individually by the
persons spouse and shares purchasable upon the exercise of
stock options that are currently exercisable or are exercisable
within 60 days of March 4, 2011. Ownership is less
than 1% unless otherwise indicated. The
6
business address of each of our officers and directors listed
below is
c/o Donegal
Group Inc., 1195 River Road, Marietta, Pennsylvania 17547.
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Percent of
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Class B
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Percent of
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Class A Shares
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Class A
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Shares
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Class B
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Beneficially
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Common
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Beneficially
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Common
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Name of Individual or Identity of Group
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Owned
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Stock
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Owned
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Stock
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Directors and Nominees for Director:
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Donald H. Nikolaus(1)
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841,254
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4.1
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%
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186,375
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3.3
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%
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Robert S. Bolinger
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24,343
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1,450
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Philip A. Garcia
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3,955
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Patricia A. Gilmartin
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23,962
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Philip H. Glatfelter, II
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28,660
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3,276
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Jack L. Hess(2)
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4,469
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Kevin M. Kraft, Sr.
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21,069
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John J. Lyons
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61,739
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1,776
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Jon M. Mahan
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21,221
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S. Trezevant Moore, Jr.
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12,388
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1,000
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R. Richard Sherbahn
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23,786
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677
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Richard D. Wampler, II
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22,004
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Executive Officers:
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Cyril J. Greenya
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90,658
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820
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Jeffrey D. Miller
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101,702
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582
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Robert G. Shenk
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102,870
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Daniel J. Wagner
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87,294
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166
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All directors and executive officers as a group (16 persons)
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1,471,374
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7.0
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%
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196,122
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3.5
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%
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* |
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Less than 1% unless otherwise indicated. |
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(1) |
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Includes 159,369 shares of Class A common stock and
3,938 shares of Class B common stock owned as of
March 4, 2011 by a family foundation of which
Mr. Nikolaus is trustee. |
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(2) |
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Mr. Hess is a nominee for election as a Class A
director at our 2011 annual meeting. |
Section 16(a)
Beneficial Ownership Reporting Compliance of Our Officers and
Directors
Section 16(a) of the Securities Exchange Act of 1934, or
the Exchange Act, requires that each of our executive officers,
each of our directors and each holder of 10% or more of our
Class A common stock or our Class B common stock
report his or her ownership of our Class A common stock and
our Class B common stock to the SEC. Such persons also must
file statements of changes in such ownership with the SEC. Our
executive officers and directors have advised us in writing that
each of them made all required filings on a timely basis during
2010, although one director subsequently timely amended his
report to correct an error.
Gregory M. Shepard reported on July 12, 2010 on a
Schedule 13D that he held beneficially more than 10% of our
Class A common stock. However, we have no record that
indicates that Mr. Shepard made a timely filing or any
filing under Section 16(a) of the Exchange Act reporting
his greater than 10% beneficial ownership of our Class A
common stock or of any change in that ownership since
July 12, 2010.
7
OUR
RELATIONSHIP WITH DONEGAL MUTUAL
Introduction
A group of local residents and business owners in Lancaster
County, Pennsylvania formed Donegal Mutual in 1889 to provide
property and casualty insurance. Now, 122 years later,
Donegal Mutual and we have over $1.0 billion in assets and
over $500 million in surplus. Donegal Mutual and we now
conduct business in 22 Mid-Atlantic, Midwestern, New England and
Southern states. An important part of our business culture is to
maintain and strengthen our founding principles and values.
Since 1986, Donegal Mutual and the insurance companies
subsidiaries of DGI have conducted business together as the
Donegal Insurance Group. During 2010, A.M. Best Company
reported that the Donegal Insurance Group ranked 116th among
property and casualty insurance companies in the United States
based on 2009 net premiums written and assigned the Donegal
Insurance Group an A.M. Best rating of A (Excellent). The
Donegal Insurance Group has also received the Wards Top 50
award for each of the last six years.
The
Formation of DGI
In the mid-1980s, Donegal Mutual recognized the desirability, as
a mutual insurance company, of developing additional sources of
capital and surplus so it could remain competitive and have the
surplus to expand its business and assure its long-term
viability. Donegal Mutual determined to implement a downstream
holding company structure as one of its strategic responses.
Accordingly, in 1986, Donegal Mutual formed us as a downstream
holding company. Initially, Donegal Mutual owned all of our
outstanding common stock. We in turn formed Atlantic States as
our wholly owned property and casualty insurance company
subsidiary. We subsequently effected a public offering to
provide the surplus necessary to support the business Atlantic
States began to receive on October 1, 1986 as its share
under a proportional reinsurance agreement, or the pooling
agreement, between Donegal Mutual and Atlantic States that
became effective on that date.
Under the pooling agreement, Donegal Mutual and Atlantic States
pool substantially all of their respective premiums, losses and
loss expenses. Donegal Mutual then cedes 80% of the pooled
business to Atlantic States. Our insurance subsidiaries pay
dividends to us annually. For the year ended December 31,
2010, our insurance subsidiaries paid a total of
$12.0 million in dividends to us, which is a major source
of the funds for the dividends we pay to our stockholders.
Donegal Mutual received $5.5 million in dividends from us
for the year ended December 31, 2010.
As the capital of Atlantic States and our other insurance
subsidiaries has increased, the underwriting capacity of our
insurance subsidiaries, including Atlantic States, has increased
proportionately. The size of the underwriting pool has increased
substantially. Therefore, as we originally planned in the
mid-1980s, Atlantic States has successfully raised the capital
necessary to support the growth of its direct business as well
as accept increases in its allocation of business from the
underwriting pool. Atlantic States allocation of the
pooled business has increased from an initial allocation of 35%
in 1986 to an 80% allocation since March 1, 2008. We do not
anticipate any further changes in the pooling agreement between
Atlantic States and Donegal Mutual in the foreseeable future,
including any change in the participation of Atlantic States in
the underwriting pool.
Since we established Atlantic States in 1986, Donegal Mutual and
our insurance subsidiaries have conducted business together,
while retaining their separate legal and corporate existences.
As such, Donegal Mutual and our insurance subsidiaries share the
same business philosophies, the same management, the same
employees, the same facilities and we offer the same types of
insurance products. We believe Donegal Mutuals majority
voting interest in us fosters our ability to implement our
business philosophies, enjoy management continuity, maintain
superior employee relations and provide a stable environment
within which we can grow our businesses.
In addition, as the Donegal Insurance Group, Donegal Mutual and
our insurance subsidiaries share a combined business plan to
achieve market penetration and underwriting profitability
objectives. The products
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Donegal Mutual and our insurance subsidiaries offer are
generally complementary, which permits the Donegal Insurance
Group to offer a broad range of products in a given market and
to expand the Donegal Insurance Groups ability to service
an entire personal lines or commercial lines account.
Distinctions within the products Donegal Mutual and our
insurance subsidiaries offer generally relate to specific risk
profiles within similar classes of business, such as preferred
tier products versus standard tier products. We and Donegal
Mutual do not allocate all of the standard risk gradients to one
company. As a result, the underwriting profitability of the
business the individual companies write directly will vary.
However, since the underwriting pool homogenizes the risk
characteristics of all business Donegal Mutual and our insurance
subsidiaries write directly, Donegal Mutual and Atlantic States
share the underwriting results in proportion to their respective
participation in the underwriting pool. We receive 80% of the
results of the underwriting pool because Atlantic States has an
80% participation in the pool. The business Atlantic States
derives from the pool represents a significant percentage of our
total revenues. However, that percentage has gradually decreased
over the past few years as we have acquired a number of other
companies in other jurisdictions.
In April 2001, we recapitalized. We effected a
one-for-three
reverse stock split of our common stock and renamed it
Class B common stock and issued two shares of our
Class A common stock as a stock dividend for each
post-reverse stock split share of our Class B common stock.
Our Class A common stock has one-tenth of a vote per share
and our Class B common stock has one vote per share. As a
result of the reverse split and the stock dividend, each of our
stockholders as of April 19, 2001 continued to own the same
number of shares of our common stock, with one-third of the
shares being shares of our Class B common stock and
two-thirds of the shares being shares of our Class A common
stock. As a result, the relative voting power and equity
interest of our then stockholders remained constant, and Donegal
Mutuals continued ownership of more than a majority of the
voting power of our outstanding common stock better enabled us
to maintain our long-term relationship with Donegal Mutual,
which our board of directors believes is a central part of our
business strategy.
We effected our recapitalization because we believed a capital
structure that has more than one class of publicly traded
securities offered us a number of benefits. The principal
benefit from our recapitalization is our ability to issue our
Class A common stock or securities convertible into or
exchangeable for our Class A common stock for financing,
acquisition and compensation purposes without materially
adversely affecting the relative voting power of any of our
stockholders, including Donegal Mutual. At the time of our
recapitalization, our board of directors recognized that our
recapitalization was likely to favor longer-term investors,
including Donegal Mutual, and could discourage attempts to
acquire us, which our board of directors believed to be remote
in any event because Donegal Mutual has owned more than a
majority of the voting power of our common stock since our
formation in 1986.
Every DGI stockholder has invested in our Class A common
stock or our Class B common stock with the prior knowledge
that Donegal Mutual has greater than majority voting control of
us for the reasons previously discussed, and that Donegal Mutual
intends to retain that greater than majority voting control for
the long-term future because it believes that greater than
majority voting control is in our long-term best interests and
the long-term best interests of Donegal Mutual.
We believe our relationships with Donegal Mutual since 1986 have
made a substantial contribution to our growth, financial
condition and success in the property and casualty insurance
industry, and will continue to be a benefit to us, to our
stockholders and to the policyholders of our insurance
subsidiaries for the long-term future. These relationships
provide us and our insurance subsidiaries with many advantages.
We believe these advantages include the following:
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enabling our stable management, the consistent underwriting
discipline of our insurance subsidiaries, external growth,
long-term profitability and financial strength;
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creating operational and expense synergies from the combination
of resources and integrated operations of Donegal Mutual and our
insurance subsidiaries;
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enhancing our opportunities to expand by acquisition because of
the ability of Donegal Mutual to affiliate with and acquire
control of other mutual insurance companies and, thereafter,
demutualize them and combine them with us;
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producing more stable and uniform underwriting results for our
insurance subsidiaries over extended periods of time than we
could achieve without our relationship with Donegal
Mutual; and
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providing Atlantic States with a significantly larger
underwriting capacity because of the underwriting pool Donegal
Mutual and Atlantic States have maintained since 1986.
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The
Coordinating Committee
We and Donegal Mutual have maintained a coordinating committee
since our formation in 1986. The coordinating committee consists
of two members of our board of directors, neither of whom is a
member of Donegal Mutuals board of directors, and two
members of Donegal Mutuals board of directors, neither of
whom is a member of our board of directors. The purpose of the
coordinating committee is to establish and maintain a process
for an ongoing evaluation of the transactions between Donegal
Mutual, our insurance subsidiaries and us. The coordinating
committee considers the fairness of each intercompany
transaction to Donegal Mutual and its policyholders and to us
and our stockholders. Any change to an agreement between Donegal
Mutual and us, or any new agreement between Donegal Mutual and
us, is also subject to the applicable provisions of the
Pennsylvania Insurance Company Law of 1921, as amended.
The coordinating committee approval process for a new agreement
between Donegal Mutual and us or one of our insurance
subsidiaries or a change in such an agreement is as follows:
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a new agreement and any change to a previously approved
agreement must receive coordinating committee approval. The
coordinating committee will only approve a new agreement or a
change in an existing agreement if:
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both of our members on the coordinating committee determine that
the new agreement or the change in an existing agreement is fair
and equitable to us and in the best interests of our
stockholders; and
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both of Donegal Mutuals members on the coordinating
committee determine that the new agreement or the change in an
existing agreement is fair and equitable to Donegal Mutual and
in the best interests of Donegal Mutuals policyholders;
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the new agreement or the change in an existing agreement must be
approved by our board of directors; and
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the new agreement or the change in an existing agreement must be
approved by the Donegal Mutual board of directors.
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The coordinating committee also meets annually to review each
existing agreement between Donegal Mutual and us or our
insurance subsidiaries, including a number of reinsurance
agreements between Donegal Mutual and our insurance
subsidiaries. The purpose of this annual review is to examine
the results of the reinsurance agreements over the immediately
preceding year and for the five preceding years and to determine
if the results of the existing agreements between Donegal Mutual
and us remain fair and equitable to us and our stockholders and
fair and equitable to Donegal Mutual and its policyholders or if
Donegal Mutual and we should mutually agree to certain
adjustments. In the case of these reinsurance agreements, the
adjustments typically relate to the reinsurance premiums, losses
and reinstatement premiums. These agreements are ongoing in
nature and will continue in effect throughout 2011 in the
ordinary course of business.
Robert S. Bolinger and John J. Lyons serve as our members of the
coordinating committee. See Proposal 1
Election of Directors for certain information about
Messrs. Bolinger and Lyons. Dennis J. Bixenman and John E.
Hiestand serve as Donegal Mutuals members of the
coordinating committee. Certain information about
Mr. Bixenman and Mr. Hiestand is as follows:
Mr. Bixenman, age 64, has been a director of Donegal
Mutual since 2006 and is currently a Vice President and Senior
Consultant at Williams & Co. Consulting, Inc., an
environmental and business consulting
10
firm with its headquarters in Sioux Falls, South Dakota.
Mr. Bixenman is a certified public accountant with
extensive experience in auditing and preparing financial
statements. Mr. Bixenman beneficially owns
1,555 shares of our Class A common stock and no shares
of our Class B common stock. In 2010, Donegal Mutual paid
directors and meeting fees of $34,000 in cash to
Mr. Bixenman and granted him a restricted stock award of
311 shares as director compensation.
Mr. Hiestand, age 72, has been a director of Donegal
Mutual since 1983 and has been a self-employed provider of
insurance administrative services for more than the past five
years. Mr. Hiestand beneficially owns 5,901 shares of
our Class A common stock and 157 shares of our
Class B common stock. In 2010, Donegal Mutual paid
directors and meeting fees of $32,250 in cash to
Mr. Hiestand and granted him a restricted stock award of
311 shares as director compensation.
Our
Relationship With Donegal Mutual
Donegal Mutual provides facilities, personnel and other services
to us and our insurance subsidiaries. Donegal Mutual allocates
certain related expenses to Atlantic States in accordance with
the relative participation of Donegal Mutual and Atlantic States
in the pooling agreement. Our insurance subsidiaries other than
Atlantic States reimburse Donegal Mutual for their respective
personnel costs and bear their proportionate share of
information services costs based on their written insurance
premiums compared to the total written insurance premiums of the
Donegal Insurance Group. Charges for these services totaled
$64.0 million in 2010.
We lease office equipment and automobiles to Donegal Mutual and
Southern. Donegal Mutual and Southern made total lease payments
to us of $922,937 in 2010.
Donegal Mutual and Atlantic States participate in an
underwriting pool. Both companies pool substantially all of
their respective premiums, losses and loss expenses and receive
an allocated percentage of their combined underwriting results.
The underwriting pool excludes certain intercompany reinsurance
Donegal Mutual assumes from our insurance subsidiaries. Since
March 1, 2008, Atlantic States has had an 80% share of the
results of the pool and Donegal Mutual has had a 20% share of
the results of the pool.
Donegal Mutual and Atlantic States may amend or terminate the
pooling agreement at the end of any calendar year by mutual
agreement, subject to approval by the boards of directors of
Donegal Mutual and Atlantic States and by the coordinating
committee. Our 2010 annual report to stockholders contains
additional information describing the underwriting pool.
In addition to the underwriting pool and third-party reinsurance
agreements, our insurance subsidiaries have various ongoing
reinsurance agreements with Donegal Mutual. These agreements
include:
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Donegal Mutual and Peninsula have a quota-share reinsurance
agreement whereby Peninsula transfers to Donegal Mutual 100% of
the premiums and losses related to the workers
compensation product line Peninsula writes in certain states.
Peninsula offers workers compensation insurance in those
states in order to provide the Donegal Insurance Group with an
additional pricing tier where an insurance company may only
offer a single pricing tier.
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Donegal Mutual and Southern maintain a quota-share reinsurance
agreement that transfers to Southern 100% of the premiums and
losses related to certain personal lines products Donegal Mutual
offers in Virginia through the use of Donegal Mutuals
automated policy quoting and policy issuance system.
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Donegal Mutual and Le Mars have a quota-share reinsurance
agreement whereby Donegal Mutual transfers to Le Mars 100% of
the premiums and losses related to certain products Donegal
Mutual offers in certain Midwest states. This reinsurance
facilitates the offering of additional complementary products to
Le Mars commercial accounts.
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Donegal Mutual also maintains 100% retrocessional reinsurance
agreements with Southern and Le Mars. The original purpose of
these agreements was to permit Southern and Le Mars to share
Donegal Mutuals A.M. Best rating of A (Excellent).
The retrocessional reinsurance agreements do not otherwise
provide for pooling or reinsurance with or by Donegal Mutual and
do not transfer insurance risk to Donegal Mutual for financial
and accounting purposes. In addition, Donegal Mutual and we
entered
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11
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into a capital support agreement with Sheboygan that permits
Sheboygan to share Donegal Mutuals A.M. Best rating
of A (Excellent).
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Donegal Mutual and MICO maintain a quota-share reinsurance
agreement that transfers 25% of MICOs business to Donegal
Mutual effective December 1, 2010. The purpose of this
reinsurance agreement is to permit the Donegal Insurance Group
to retain a portion of MICOs business that MICO had
historically reinsured with third parties. This retention is in
addition to MICOs historical retention of 25% of its
business. Because of the reinsurance pooling agreement between
Donegal Mutual and us, DGI will receive an 80% allocation, or
20%, of the MICO business Donegal Mutual reinsures, plus the 25%
MICO retains, for a total of 45% in 2011. Over time, we
anticipate the Donegal Insurance Group share of the MICO
business it reinsures will increase.
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The coordinating committee annually reviews each of the
agreements and transactions we have previously described between
Donegal Mutual and our insurance subsidiaries and the results
thereof to each of Donegal Mutual and us for the most recent
year and for the past five years. In February 2011, the
coordinating committee determined that the terms of such
agreements were fair and equitable to us and our stockholders
and, fair and equitable to Donegal Mutual and its policyholders.
Accordingly, the coordinating committee unanimously approved the
terms of such agreements and transactions for 2011.
We refer you to footnote 3 of the notes to our financial
statements included in our annual report to stockholders for
further information about the reinsurance agreements between
Donegal Mutual and our insurance subsidiaries. The intent of
these catastrophe and excess of loss reinsurance agreements is
to lessen the effects of a single large loss, or an accumulation
of smaller losses arising from one event, to levels that are
appropriate given each insurance subsidiarys size,
underwriting profile and surplus position.
We own 48.2% and Donegal Mutual owns 51.8% of Donegal Financial
Services Corporation, or DFSC. DFSC has entered into an
agreement to acquire Union National Financial Corporation, or
UNFC, and its wholly-owned subsidiary Union National Community
Bank, or UNCB. The stockholders of UNFC have approved the
acquisition, subject to approval by the Office of Thrift
Supervision, or OTS. At December 31, 2010, UNFC had
consolidated assets of $448.0 million. DFSC owns 100% of
Province Bank FSB, or Province Bank, a federal savings bank with
offices in Marietta, Columbia and Lancaster, Pennsylvania. We
and Donegal Mutual conduct banking operations in the ordinary
course of business with Province Bank.
Donegal Mutual leases 3,600 square feet in a Donegal
Mutual-owned building in Marietta, Pennsylvania to Province
Bank. In addition, Province Bank leases 3,000 square feet
of space in a building in Lancaster, Pennsylvania from DFSC.
Both leases provide for an annual rent based on an independent
appraisal. Donegal Mutual and Province Bank are also parties to
an administrative services agreement whereby Donegal Mutual
provides various human resources services, principally payroll
and employee benefits administration, administrative support,
facility and equipment maintenance services and purchasing, to
Province Bank, subject to the overall limitation that the costs
Donegal Mutual charges to Province Bank may not exceed the costs
of independent vendors for similar services and further subject
to annual maximum cost limitations specified in the
administrative services agreement.
CORPORATE
GOVERNANCE MATTERS
The
Charters of the Committees of Our Board of
Directors
Our board of directors has adopted corporate governance
guidelines to assist our board committees in the discharge of
their respective responsibilities. Each committee of our board
has a written charter that sets forth the purposes, goals and
responsibilities of the committee as well as qualifications for
committee membership, procedures for committee membership,
appointment and removal of committee members, committee
structure and operations of committee reporting to our board of
directors. The charters of the committees of our board of
directors provide our stockholders with a description of the
manner in which our board and its committees functions. You may
view these charters on our website at
http://www.donegalgroup.com.
12
The
Composition of Our Board of Directors
The number of members of our board of directors cannot be less
than seven nor more than twelve. Our board of directors fixes
the size of our board of directors, and may increase or decrease
the size of our board of directors from time to time by
resolution. Currently, our board of directors has fixed the
number of directors at 11. Our board of directors has three
classes, with terms expiring at successive annual meetings.
Because Donegal Mutual owns more than a majority of the combined
voting power of our outstanding shares of Class A common
stock and our outstanding shares of Class B common stock,
applicable NASDAQ regulations classify us as a controlled
company. As we are a controlled company, we are exempt
from a number of NASDAQ corporate governance requirements,
including the requirement that a majority of the members of our
board of directors be independent.
The composition of our board is, however, subject to the
corporate governance rules of the Pennsylvania Insurance Holding
Companies Act, or the Holding Companies Act. The Holding
Companies Act requires that the board of directors of a
Pennsylvania-domiciled insurance company or a company that
controls a Pennsylvania-domiciled insurance company, such as we
do, maintain a committee or committees that undertake certain
corporate governance responsibilities. The Holding Companies Act
further requires that the members of the committee or committees
be solely directors who are not officers or employees of the
Pennsylvania-domiciled insurance company or its holding company
and who do not own beneficially a 10% or greater interest in the
voting stock of such insurance company or its holding company.
We maintain an audit committee, a compensation committee and a
nominating committee that comply with the requirements of the
Holding Companies Act.
Pursuant to the Holding Companies Act, our committees annually
perform the following responsibilities:
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recommend the selection of an independent registered public
accounting firm for our insurance company subsidiaries;
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review the financial condition of our insurance company
subsidiaries;
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review the scope and results of our insurance company
subsidiaries independent audit and any internal audit;
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nominate candidates for election as directors by
stockholders; and
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evaluate the performance of our insurance company
subsidiaries principal officers and recommend to their
boards of directors the selection and compensation of the
principal officers of our insurance company subsidiaries.
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Our
Board of Directors Committee Structure
We expect our directors to attend our board of directors
meetings, meetings of board committees on which they serve and
our meetings of stockholders. We expect our directors to devote
the time necessary to fulfill their responsibilities as
directors. During 2010, each of our directors attended 75% or
more of the meetings of our board of directors and committees of
our board on which that director serves. All of the members of
our board of directors attended our 2010 annual meeting of
stockholders.
Our board of directors has delegated some of its authority to
the following four committees of our board of directors:
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the executive committee;
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the audit committee;
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the nominating committee; and
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the compensation committee.
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In addition, together with Donegal Mutual, we jointly maintain a
coordinating committee. We refer you to Our Relationship
with Donegal Mutual The Coordinating Committee.
13
The following table shows the number of meetings each committee
of our board of directors held in 2010 and the attendance of the
members of those committees at their meetings.
Ms. Gilmartin and Messrs. Kraft and Moore are not
currently serving as a member of the committees of our board of
directors.
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Executive
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Audit
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Nominating
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Compensation
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Number of Meetings
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10
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10
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3
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5
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Held in 2010
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Robert S. Bolinger
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10
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Philip A. Garcia*
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8
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Philip H. Glatfelter, II
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10
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3
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5
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John J. Lyons
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9
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Jon M. Mahan
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3
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Donald H. Nikolaus
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10
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S. Richard Sherbahn
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10
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3
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5
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Richard D. Wampler, II
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10
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* |
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Mr. Garcia attended all of the meetings of the audit
committee held subsequent to the date on which our board of
directors appointed Mr. Garcia as a member of our audit
committee. |
Our
Executive Committee
Members: Glatfelter, Nikolaus (Chairperson) and Sherbahn. Our
executive committee has the authority to take all action that
our full board of directors can take, consistent with the DGCL,
our certificate of incorporation and our by-laws between
meetings of our board of directors.
The responsibilities of our executive committee include the
following matters:
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exercising all powers and authority of our board of directors
between meetings of our board of directors to the extent
consistent with the DGCL;
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consulting with and advising management on our general business,
operational, administrative and legal affairs;
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consulting with and advising management on the development of
our company policies;
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considering other matters which management may bring to the
executive committee from time to time; and
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performing such other functions as our board of directors may
specifically delegate to the executive committee from time to
time.
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Our executive committee has a written charter. The full text of
our executive committee charter may be reviewed on our website
at
http://www.donegalgroup.com.
Our executive committee reviews its charter annually.
Our
Audit Committee
Members: Bolinger, Garcia, Lyons and Wampler (Chairperson). Each
member of our audit committee satisfies the independence
requirements of the SEC and NASDAQ and is in compliance with
applicable provisions of the Holding Companies Act and the
Sarbanes-Oxley Act of 2002. Mr. Wampler, who is a certified
public accountant, serves as the financial expert member of our
audit committee.
The responsibilities of our audit committee include the
following matters:
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selecting our independent registered public accounting firm;
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reviewing the scope and results of our independent registered
public accounting firms audit of our financial statements
and any internal audit;
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14
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reviewing all of our periodic filings with the SEC and press
releases;
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reviewing related party transactions other than those
transactions subject to review by our coordinating
committee; and
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reviewing the adequacy of our accounting, financial, internal
and operating controls.
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Our audit committee has a written charter. The full text of our
audit committees charter may be viewed on our website at
http://www.donegalgroup.com.
Our audit committee reviews its charter annually.
Our
Nominating Committee
Members: Glatfelter (Chairperson) and Sherbahn
The responsibilities of our nominating committee include the
following matters:
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identifying individuals our nominating committee believes are
qualified to serve as members of our board of directors;
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recommending nominees to stand for election to our board of
directors;
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considering candidates nominated by other stockholders for
election as directors to our board of directors;
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evaluating the self-evaluations each of our board committees
prepares; and
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providing our board of directors with an annual performance
evaluation of our nominating committee.
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Our nominating committee has a written charter. You may view
this charter on our website at
http://www.donegalgroup.com.
Our nominating committee reviews its charter annually.
Our
Compensation Committee
Members: Glatfelter and Sherbahn (Chairperson). Because the
employees who provide services to us are employees of Donegal
Mutual for reasons of efficiency and cost savings and because
our insurance subsidiaries are members of the Donegal Insurance
Group along with Donegal Mutual and us, our compensation
committee and the compensation committee of Donegal Mutual
conduct joint meetings from time to time. The members of the
Donegal Mutual compensation committee are Frederick W. Dreher,
Philip H. Glatfelter, II and R. Richard Sherbahn. Following
these joint meetings, our compensation committee meets and makes
compensation determinations with respect to our executive
officers and other employees.
The responsibilities of our compensation committee include the
following matters:
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the annual review of the guidelines for compensation increases
for all of our employees;
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the annual review of the compensation of our executive officers;
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recommendations to our board of directors from time to time as
to grants of stock options to employees; and
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the oversight of the employee benefit plans we and Donegal
Mutual maintain.
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Our compensation committee has a written charter. You may view
the charter of our compensation committee on our website at
http://www.donegalgroup.com.
Our compensation committee reviews its charter annually.
See Executive Compensation Compensation
Discussion and Analysis for further information.
See Our Relationship with Donegal Mutual The
Coordinating Committee for a description of our
coordinating committee.
15
Our
Risk Management Committee
In addition to the committees our board of directors maintains,
we and Donegal Mutual have a risk management committee. Our risk
management committee consists of 14 of our and Donegal
Mutuals officers, including all of our executive officers.
The purpose of our risk management committee is to assess and
monitor the major strategic, operational, regulatory,
informational and external risks that affect our business and
the business of Donegal Mutual and our and Donegal Mutuals
internal and external resources for assessing and controlling
risk.
Our risk management committee is responsible for:
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evaluating the effectiveness of our assessment and management of
risks;
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developing and recommending policies and procedures relating to
risk assessment, risk management and risk reporting;
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assessing our risk management, compliance and control activities
and the adequacy of such activities in identifying our
risks; and
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reporting periodically to our board of directors.
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Our risk management committee meets quarterly and annually
evaluates its performance of its responsibilities.
Compensation
Committee Interlocks and Insider Participation
No member of our compensation committee is a former or current
officer of Donegal Mutual or DGI, nor does any member of our
compensation committee have any other interlocking
relationships, based on current SEC rules and regulations.
Related
Person Transactions
We have a written related person policy regarding the review,
approval or ratification involving certain persons that SEC
rules and regulations require us to disclose specified
information reporting any related person transactions in our
proxy statement and other filings we make with the SEC. This
policy applies, in our case, to any transactions with related
parties with the exception of those transactions that require
the prior approval of our coordinating committee because the
parties to the transactions are Donegal Mutual and us. See
Our Relationship with Donegal Mutual The
Coordinating Committee. Our related person policy
establishes procedures for the approval of transactions between
us and related persons because we recognize that related persons
transactions can present a heightened risk of a conflict of
interest and can create the appearance of impropriety.
Applicable SEC regulations define a related person
as including our directors, our executive officers, holders of
5% or more of any class of our common stock and each of their
immediate family members. Our policy requires that all proposed
related person transactions must receive the approval of our
audit committee before we can enter into the transaction. In
addition, if the transaction continues for more than one year,
our audit committee must annually approve the continuation of
the transaction.
Donald H. Nikolaus, our President and one of our directors and
the President and a director of Donegal Mutual, is a partner in
the law firm of Nikolaus & Hohenadel. Such firm has
served as general counsel to Donegal Mutual since 1970 and as
our general counsel since 1986, principally in connection with
the defense of claims litigation arising in Lancaster, Dauphin
and York counties of Pennsylvania. We pay such firm its
customary fees for such services. We paid Nikolaus &
Hohenadel legal fees of $445,231 in 2009 and $420,760 in 2010.
Patricia A. Gilmartin, one of our directors and a director of
Donegal Mutual, is an employee of Associated Donegal Insurance
Brokers. That firm has no affiliation with us except that it
receives insurance commissions in the ordinary course of
business from our insurance subsidiaries and Donegal Mutual in
accordance with their standard commission schedules and agency
contracts.
16
Frederick W. Dreher, a director of Donegal Mutual, is a partner
in the law firm of Duane Morris LLP, which, since 1986, has
represented us, our insurance subsidiaries and Donegal Mutual in
certain legal matters. We pay Duane Morris LLP its customary
fees for such services. We paid Duane Morris LLP legal fees of
$1,611,823 in 2009 and $2,555,384 in 2010.
Director
Compensation
Our objectives for our director compensation program is to
attract highly-qualified individuals to serve on our board of
directors and to align the interests of our directors with the
interests of our stockholders. Our compensation committee
reviews our director compensation program at least annually to
confirm that the compensation of the members of our board of
directors remains competitive and appropriate and to recommend
any changes it proposes to our board of directors.
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Compensation Type
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Amount
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Form of Payment
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Annual Retainer
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Base Retainer
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$
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35,000
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$30,000 in cash and an annual grant of 311 restricted shares of
Class A common stock (400 shares commencing in 2012) with
an estimated value of $5,000
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Additional retainer amount for each committee meeting attended
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$
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250
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Cash
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Additional retainer amount for each audit committee meeting
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$
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500
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Cash
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Periodic Equity Grant
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When we from time to time grant options to our executive
personnel, we typically also grant options to purchase shares of
Class A common stock to our directors exercisable for five years
at the closing market price on the date of grant
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Non-qualified stock options
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Under our equity incentive plan for directors, each of our
directors and each director of Donegal Mutual who is not also
one of our directors receives an annual restricted stock award
of 311 shares of our Class A common stock as of the
first business day of each year, provided the director served as
a member of our board of directors or the board of directors of
Donegal Mutual during any portion of the preceding year.
Effective for 2012, we have increased the number of shares
comprising the annual restricted stock award from
311 shares to 400 shares. Each of our directors and
each of the directors of Donegal Mutual is also eligible to
receive non-qualified options to purchase shares of our
Class A common stock in an amount our board of directors
determines from time to time. Donegal Mutual reimburses us for
the restricted stock awards granted to those directors of
Donegal Mutual who are not also members of our board of
directors.
17
The following table sets forth a summary of the compensation we
paid to our non-officer directors during 2010.
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Fees Earned
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Stock
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Option
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Name
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or Paid in Cash ($)
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Awards ($)
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Awards ($)
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Total ($)
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Robert S. Bolinger
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36,750
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4,503
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12,600
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53,853
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Philip A. Garcia
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35,500
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4,503
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12,600
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52,603
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Patricia A. Gilmartin
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31,500
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4,503
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12,600
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48,603
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Philip H. Glatfelter, II
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85,750
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4,503
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12,600
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102,853
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Kevin M. Kraft, Sr.
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34,000
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4,503
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12,600
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51,103
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John J. Lyons
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36,250
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4,503
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12,600
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53,353
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John M. Mahan
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31,500
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4,503
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12,600
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48,603
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S. Trezevant Moore, Jr.
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31,500
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4,503
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12,600
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48,603
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R. Richard Sherbahn
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33,750
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4,503
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12,600
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50,853
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Richard D. Wampler, II
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36,500
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4,503
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12,600
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53,603
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18
The following table summarizes the outstanding equity awards our
directors held as of December 31, 2010, excluding the
awards our chief executive officer, Mr. Nikolaus holds,
which we have reported elsewhere in this proxy statement:
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Option Awards
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Stock Awards
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Number of Securities
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Number of
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Market Value
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Underlying
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Shares or
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of Shares or
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Unexercised Options
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Option
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Units of Stock
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Units of Stock
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(#)
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(#)
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Exercise
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Option
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That Have Not
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That Have Not
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Name
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Exercisable
|
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Unexercisable
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Price ($)
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Expiration Date
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Vested (#)
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Vested ($)
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Robert S. Bolinger
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7,500
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21.00
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10/19/2011
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311
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4,503
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5,000
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2,500
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17.50
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7/17/2013
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10,000
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|
14.00
|
|
|
|
7/15/2015
|
|
|
|
|
|
|
|
|
|
Philip A. Garcia
|
|
|
|
|
|
|
10,000
|
|
|
|
14.00
|
|
|
|
7/15/2015
|
|
|
|
311
|
|
|
|
4,503
|
|
Patricia A. Gilmartin
|
|
|
7,500
|
|
|
|
|
|
|
|
21.00
|
|
|
|
10/19/2011
|
|
|
|
311
|
|
|
|
4,503
|
|
|
|
|
5,000
|
|
|
|
2,500
|
|
|
|
17.50
|
|
|
|
7/17/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
14.00
|
|
|
|
7/15/2015
|
|
|
|
|
|
|
|
|
|
Philip H. Glatfelter, II
|
|
|
7,500
|
|
|
|
|
|
|
|
21.00
|
|
|
|
10/19/2011
|
|
|
|
311
|
|
|
|
4,503
|
|
|
|
|
5,000
|
|
|
|
2,500
|
|
|
|
17.50
|
|
|
|
7/17/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
14.00
|
|
|
|
7/15/2015
|
|
|
|
|
|
|
|
|
|
Kevin M. Kraft, Sr.
|
|
|
7,500
|
|
|
|
|
|
|
|
21.00
|
|
|
|
10/19/2011
|
|
|
|
311
|
|
|
|
4,503
|
|
|
|
|
5,000
|
|
|
|
2,500
|
|
|
|
17.50
|
|
|
|
7/17/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
14.00
|
|
|
|
7/15/2015
|
|
|
|
|
|
|
|
|
|
John J. Lyons
|
|
|
7,500
|
|
|
|
|
|
|
|
21.00
|
|
|
|
10/19/2011
|
|
|
|
311
|
|
|
|
4,503
|
|
|
|
|
5,000
|
|
|
|
2,500
|
|
|
|
17.50
|
|
|
|
7/17/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
14.00
|
|
|
|
7/15/2015
|
|
|
|
|
|
|
|
|
|
Jon M. Mahan
|
|
|
7,500
|
|
|
|
|
|
|
|
21.00
|
|
|
|
10/19/2011
|
|
|
|
311
|
|
|
|
4,503
|
|
|
|
|
5,000
|
|
|
|
2,500
|
|
|
|
17.50
|
|
|
|
7/17/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
14.00
|
|
|
|
7/15/2015
|
|
|
|
|
|
|
|
|
|
S. Trezevant Moore, Jr.
|
|
|
5,000
|
|
|
|
2,500
|
|
|
|
17.50
|
|
|
|
7/17/2013
|
|
|
|
311
|
|
|
|
4,503
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
14.00
|
|
|
|
7/15/2015
|
|
|
|
|
|
|
|
|
|
R. Richard Sherbahn
|
|
|
7,500
|
|
|
|
|
|
|
|
21.00
|
|
|
|
10/19/2011
|
|
|
|
311
|
|
|
|
4,503
|
|
|
|
|
5,000
|
|
|
|
2,500
|
|
|
|
17.50
|
|
|
|
7/17/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
14.00
|
|
|
|
7/15/2015
|
|
|
|
|
|
|
|
|
|
Richard D. Wampler, II
|
|
|
7,500
|
|
|
|
|
|
|
|
21.00
|
|
|
|
10/19/2011
|
|
|
|
311
|
|
|
|
4,503
|
|
|
|
|
5,000
|
|
|
|
2,500
|
|
|
|
17.50
|
|
|
|
7/17/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
14.00
|
|
|
|
7/15/2015
|
|
|
|
|
|
|
|
|
|
In addition to the compensation we describe above, we reimburse
our directors for expenses they incur in connection with
attendance at our board of directors meetings, committee
meetings and stockholders meetings. We also reimburse our
directors for the reasonable expenses they incur associated with
other business activities related to their service on our board
of directors, such as participation in director education
programs.
Our
Code of Business Conduct and Ethics
We operate pursuant to our code of business conduct and ethics
because of the importance to us of conducting our business based
on integrity and earning the trust of the people with whom we do
business. Our code of business conduct and ethics seeks to
provide guidance to our employees and independent agents for
dealing with the legal and ethical issues that can arise in our
business dealings with others. You may view our code of business
conduct and ethics on our website at
http://www.donegalgroup.com.
We also maintain an internal audit department that evaluates our
business and financial processes and controls and reports
regularly to our audit committee.
19
PROPOSAL 1
ELECTION OF DIRECTORS
Introduction
The DGCL, the Holding Companies Act and our by-laws govern the
election of our directors by our stockholders. Because Donegal
Mutual has owned more than a majority of the voting power of our
common stock since our inception, Donegal Mutual has always had
the ability to control the election of all of our directors.
The following discussion summarizes these provisions and
describes the process our nominating committee follows in
connection with the nomination of candidates for election as
directors by our stockholders.
Nominations
Our by-laws provide that:
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|
|
|
|
our board of directors shall annually appoint a nominating
committee that consists of not less than two directors who are
not officers or employees of Donegal Mutual or us and who do not
own beneficially 10% or more of our Class A common stock or
our Class B common stock; and
|
|
|
|
our nominating committee shall, prior to each annual meeting of
stockholders, determine and nominate candidates for election as
directors by our stockholders.
|
In accordance with these by-law provisions, on April 22,
2010, our board of directors appointed a nominating committee
consisting of R. Richard Sherbahn and Philip H.
Glatfelter, II. Neither Mr. Sherbahn nor
Mr. Glatfelter is an officer or employee of Donegal Mutual
or us or a beneficial owner of a 10% or greater interest in our
Class A common stock or our Class B common stock.
Our
Nominating Procedures
Our stockholders may nominate candidates for election as
directors at any annual meeting of our stockholders provided
they comply with the advance notice provisions of our by-laws.
We describe those procedures under Stockholder
Proposals in this proxy statement. Our nominating
committee may also consider candidates our management proposes.
We do not use executive search firms to identify director
candidates.
With the exception of applicable regulations of the SEC, the
listing application standards of NASDAQ and the Holding
Companies Act, our nominating committee does not have any
specific, minimum qualifications for the nomination of
candidates for election as our directors. Our nominating
committee may take into account such factors as it deems
appropriate. These factors include the judgment, skill,
diversity and business experience of the candidate, the
interplay of the candidates experience with the experience
of the other members of our board of directors and the extent to
which the candidate would contribute to the overall
effectiveness and experience of our board of directors.
Our nominating committee and our board of directors considers,
at a minimum, the following factors in identifying and
evaluating potential new board members, including any candidates
nominated by our stockholders, or the continued services of our
current board members:
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|
|
|
We will nominate a candidate for election as a director based on
his or her professional experience. The nominee should have a
record of accomplishments and have recognized achievements in
his or her respective field.
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|
|
|
Whether the nominee serves as a member of Donegal Mutuals
board of directors.
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|
|
The nominee should have relevant education, expertise and
experience, and be able to offer advice and guidance to our
chief executive officer based on that expertise and experience.
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|
|
A nominee should possess high personal and professional ethics,
integrity and values.
|
20
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|
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|
|
A nominee should be inquisitive and objective, have the ability
to exercise practical and sound business judgment and have an
independent mind.
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|
|
A nominee should be willing to devote sufficient time and effort
to carrying out his or her duties and responsibilities
effectively.
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|
A nominee should be able to work effectively with others.
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|
|
We seek qualified individuals who, taken together, represent a
diversity of skills, backgrounds and experience, including
ethnic background, gender and professional experience.
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|
Our nominating committee assesses the areas of expertise and
functional skills that would assist us in rounding out the
existing collective strengths of our board as part of its
director selection process.
|
Since our formation in 1986, and because Donegal Mutual has had
a greater than majority voting control of us since our inception
in 1986, our board has always included a meaningful number of
directors who also serve as members of the board of directors of
Donegal Mutual. The Donegal Mutual representation on our board
of directors has ranged from six of eight directors in 1986 to
five of 11 directors in 2010. This membership will increase
to 6 of 11 directors following our annual meeting if our
board of directors nominees for election as Class A
directors receive a plurality of the votes cast at our annual
meeting. It is our intent and the intent of Donegal Mutual to
maintain a significant presence of Donegal Mutual directors on
our board as long as Donegal Mutual owns more than a majority of
the voting power of our common stock.
In nominating director candidates, our nominating committee
takes into account the relative diversity of our policyholder
and stockholder base. Our nominating committee does not
discriminate against any director candidate on the basis of
race, color, religion, sex, national origin, age, ancestry or
disability.
The
Role of Our Nominating Committee
Our nominating committee met on February 23, 2011 to
evaluate the performance and qualifications of the Class A
members of our board of directors whose terms will expire at our
2011 annual meeting. After considering the performance and
qualifications of the Class A members of our board of
directors during 2010, our nominating committee nominated the
candidates named below for election as Class A directors.
On March 7, 2011, our board of directors accepted the
report of our nominating committee and approved the nomination
by our nominating committee of the four persons named below as
candidates for election as Class A directors at our annual
meeting.
Our
Nominees for Election as Class A Directors
Our board of directors currently has 11 members, and consists of
four Class A directors, four Class B directors and
three Class C directors. We elect each director for a
three-year term and until the election of the directors
successor. The current three-year terms of our directors expire
at our annual meeting in 2011 (Class A), 2012
(Class B) and 2013 (Class C), respectively, and
upon the election of their respective successors.
We will elect four Class A directors at our annual meeting.
Unless you have marked your proxy card to the contrary, we have
instructed the proxies named on your proxy card to vote for the
election of the four nominees named below. With the exception of
Mr. Hess, each nominee for election as a Class A
director is currently a Class A director.
If any of the named nominees becomes unavailable for any reason,
our board of directors will designate a substitute nominee. Our
board of directors believes each nominee will be able to serve
if elected. A majority of our board of directors may fill any
vacancy that arises in our board of directors until the
expiration of the term of the class of directors in which the
vacancy occurs.
The names of our four nominees for election as Class A
directors, and our Class B directors and our Class C
directors who will continue in office after our annual meeting
until the expiration of their respective
21
terms and the election of their respective successors, together
with certain information regarding them, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
Year Term
|
Name
|
|
Age
|
|
Since
|
|
Will Expire*
|
|
Robert S. Bolinger
|
|
|
74
|
|
|
|
1986
|
|
|
|
2014
|
|
Patricia A. Gilmartin
|
|
|
71
|
|
|
|
1986
|
|
|
|
2014
|
|
Philip H. Glatfelter, II
|
|
|
81
|
|
|
|
1986
|
|
|
|
2014
|
|
Jack L. Hess
|
|
|
63
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
* |
|
If elected at our annual meeting |
Our
board of directors recommends a vote FOR the election of our
four nominees for Class A directors named
above.
Our
Class B and Class C Directors Who Will Continue in
Office
Class B
Directors
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
Director
|
|
Year Term
|
Name
|
|
Age
|
|
Since
|
|
Will Expire
|
|
Kevin M. Kraft, Sr.
|
|
|
58
|
|
|
|
2009
|
|
|
|
2012
|
|
Jon M. Mahan
|
|
|
41
|
|
|
|
2006
|
|
|
|
2012
|
|
Donald H. Nikolaus
|
|
|
68
|
|
|
|
1986
|
|
|
|
2012
|
|
Richard D. Wampler, II
|
|
|
69
|
|
|
|
2004
|
|
|
|
2012
|
|
Class C
Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
Year Term
|
Name
|
|
Age
|
|
Since
|
|
Will Expire
|
|
John J. Lyons
|
|
|
71
|
|
|
|
2001
|
|
|
|
2013
|
|
S. Trezevant Moore, Jr.
|
|
|
57
|
|
|
|
2006
|
|
|
|
2013
|
|
R. Richard Sherbahn
|
|
|
81
|
|
|
|
1986
|
|
|
|
2013
|
|
Mr. Bolinger retired in 2001 as chief executive officer of
Susquehanna Bancshares, Inc., a position he held from 1982 to
2001. Susquehanna Bancshares, Inc. had approximately
$14 billion in assets at December 31, 2010 and is one
of the major financial institutions in the Mid-Atlantic area
where we conduct a substantial portion of our business. From
2000 to 2002, Mr. Bolinger served as chairman of the board
of Susquehanna Bancshares, Inc. We believe
Mr. Bolingers experience as the chief executive
officer of a major financial institution qualifies him to serve
on our board of directors.
Mrs. Gilmartin has been an employee since 1969 of
Associated Donegal Insurance Brokers, which has no affiliation
with us, except that Associated Donegal Insurance Brokers
receives insurance commissions in the ordinary course of
business from our insurance subsidiaries and Donegal Mutual in
accordance with their standard commission schedules and agency
contracts. Mrs. Gilmartin has been a Donegal Mutual
director for 31 years and plays an important role in the
relationship between Donegal Mutual and us and our respective
insurance agents. Mrs. Gilmartin, who has been a registered
insurance agent for over 50 years, helps provide us with
insight into the concerns of agents. We believe the long
experience of Mrs. Gilmartin as an insurance agent and her
long association as one of our directors qualifies her to serve
on our board of directors.
Mr. Glatfelter, who has extensive banking experience,
retired in 1989 as a vice president of Meridian Bank, a position
he held for more than five years prior to his retirement.
Mr. Glatfelter has been a director of Donegal Mutual for
29 years and has been instrumental in promoting the growth
of Donegal Mutual and us. Mr. Glatfelter was Vice Chairman
of the Board of Donegal Mutual from 1991 to 2001 and has been
our Chairman of the Board and Chairman of the Board of Donegal
Mutual since 2001. He also serves on the board of directors of
Province Bank, our banking affiliate. Mr. Glatfelter is
also a director of a Lancaster County-based water utility and
has served as a director and chairman of several community-based
non-profit
22
entities. We believe Mr. Glatfelters extensive
experience with financial institutions and long service on our
board of directors qualifies him to continue to serve on our
board of directors.
Mr. Hess has been a certified public accountant for more
than 30 years, became a partner in Hess & Hess,
certified public accountants, in 1982 and was the managing
partner of that firm from 1998 to 2010. Effective
January 1, 2011, Hess & Hess merged with
Bertz & Co. and operates under the name Bertz,
Hess & Co., LLP. Mr. Hess has been a director of
Donegal Mutual since 2009 and a director of Conestoga
Title Insurance Company, an indirect subsidiary of Donegal
Mutual, since 2005. Mr. Hess background brings
significant auditing and tax expertise to our board of directors
as well as experienced business management skills, which we
believe qualifies Mr. Hess to become one of our directors.
Mr. Kraft has served as one of our directors since December
2009. Mr. Kraft has been the chief executive officer of
Clyde W. Kraft Funeral Home, Columbia, Pennsylvania since 1995.
Mr. Kraft served as a director of Central Savings and Loan
Association in Columbia, Pennsylvania from 1980 to 1992. After
Farmers First Bank acquired Central Savings and Loan
Association, Mr. Kraft served as a member of the regional
board of Farmers First Bank. Mr. Kraft currently serves on
the board of directors of a Lancaster County-based water utility
and Conestoga Title Insurance Company. Mr. Kraft is
also registered as an insurance agent with the Commonwealth of
Pennsylvania. Mr. Kraft has been a director of Donegal
Mutual since 2003. We believe Mr. Krafts experience
with financial institutions qualifies him to continue to serve
as a member of our board of directors.
Mr. Lyons has been president of Keefe Ventures, LLC, a
manager of private investment funds since 2002. Mr. Lyons
was also president and portfolio manager for investment funds
affiliated with Keefe Managers, Inc. from 1999 until 2007.
Mr. Lyons has significant experience in the turnaround of
troubled financial institutions, serving as president and chief
executive officer of
Gateway-American
Bank, Ft. Lauderdale, Florida; Regent National Bank,
Philadelphia, Pennsylvania; Monarch Savings Bank, Clark, New
Jersey and Jupiter-Tequesta National Bank, Tequesta, Florida,
from 1990 to 1998. Mr. Lyons was vice chairman of the
investment firm Advest, Inc., Hartford, Connecticut, subsequent
to that firms purchase of his bank consulting practice in
1989. Mr. Lyons began his banking career as an examiner for
the Federal Deposit Insurance Corporation in 1961.
Mr. Lyons currently manages a private equity fund called
Keefe Ventures Fund, LP which invests in community banking
organizations. Mr. Lyons extensive investment banking
experience and his services as a senior executive officer of a
major financial institution demonstrates his value as a member
of our board of directors.
Mr. Mahan has been a managing director in the Investment
Banking Division of Stifel Nicolaus & Company,
Incorporated, or Stifel Nicolaus, and, previously, Legg Mason
Wood Walker, Incorporated, prior to the acquisition of the Legg
Mason Capital Markets Division by Stifel Nicolaus on
December 1, 2005. Mr. Mahan joined Legg Mason in 1996
and served as a principal from 2001 to 2004. Mr. Mahan
specializes in corporate finance with a focus on mergers and
acquisitions, including experience with a variety of corporate
transactions involving mergers and acquisitions.
Mr. Mahans expertise benefits our analysis of
acquisition opportunities and makes him a desirable member of
our board of directors.
Mr. Moore served as a consultant from May 2008 to November
2008 to a medical malpractice insurance company. Mr. Moore
is currently a principal at Huguenot Capital. Prior thereto,
Mr. Moore was president and chief executive officer of
Luminent Mortgage Capital, Inc., or Luminent, from May 2007 to
May 2008 and was president and chief operating officer of
Luminent from March 2005 to May 2007. From 2000 to 2005,
Mr. Moore was executive vice president, Capital Markets, of
Radian Guaranty, Inc., or Radian. For five years prior to
joining Luminent in March 2005, Mr. Moore was the executive
vice president of capital markets for Radian. Prior to his
service at Radian, Mr. Moore held several senior level
positions in the mortgage industry, including First Union
National Bank from 1997 to 2000, Nationsbanc Capital Markets
from 1994 to 1997, Citicorp Securities from 1989 to 1994 and
First Boston from 1984 to 1989. We believe the experience of
Mr. Moore in mortgage securities amply qualifies him to
serve as a member of our board of directors.
Mr. Nikolaus has been president and chief executive officer
of Donegal Mutual since 1981 and a director of Donegal Mutual
since 1972. He has been our president and chief executive
officer since 1986. Mr. Nikolaus also serves as the
chairman and chief executive officer of Province Bank and as
chairman or president of each of our insurance subsidiaries.
Prior to the formation of Province Bank, Mr. Nikolaus
served as a director of
23
several regional banks. Mr. Nikolaus has also served as
chairman of the Insurance Federation of Pennsylvania.
Mr. Nikolaus has been a partner in the law firm of
Nikolaus & Hohenadel since 1972. Mr. Nikolaus
also currently serves as an executive officer and director of
several Lancaster County-based water utilities. The status of
Mr. Nikolaus as our chief executive officer for over
25 years provides a strong foundation for the continuation
of Mr. Nikolaus as a member of our board of directors.
Mr. Sherbahn, who was a certified financial planner for
many years, owned and operated Sherbahn Associates, Inc., a life
insurance and financial planning firm, from 1974 to 2007 and has
been a licensed insurance agent since 1956. Mr. Sherbahn
has been a director of Donegal Mutual for 43 years.
Mr. Sherbahn played a principal role in Donegal
Mutuals decision to form us and his long-term association
with Donegal Mutual and us supports the continuation of
Mr. Sherbahn as one of our directors.
Mr. Wampler is a certified public accountant and served as
a principal of the accounting firm of Brown Schultz
Sheridan & Fritz, a position held from 1998 to until
his retirement in 2005. For 28 years prior thereto, he was
a partner in the accounting firm of KPMG LLP where his practice
focused on property and casualty insurance companies.
Mr. Wampler is also a member of the subscribers advisory
committee of the third largest medical professional liability
insurer in Pennsylvania. We believe his background brings
expertise to our board of directors in understanding statutory
accounting principles as well as generally accepted accounting
principles and in analyzing and maintaining internal controls
over financial reporting.
Six of our 11 directors and nominees for director
(Mrs. Gilmartin and Messrs. Glatfelter, Hess, Kraft,
Nikolaus and Sherbahn) also serve as directors of Donegal Mutual
with whom we have a variety of inter-company agreements
providing for, among other things, the pooling of underwriting
results, reinsurance and expense-sharing. See Stock
Ownership Our Relationship with Donegal
Mutual. We believe our board membership appropriately
represents our public stockholders, who collectively own about
33.6% of the combined voting power of our Class A common
stock and our Class B common stock, and Donegal Mutual,
which owns 66.4% of the combined voting power of our
Class A common stock and Class B common stock.
PROPOSAL 2
RATIFICATION OF OUR AUDIT COMMITTEES SELECTION OF KPMG
LLP
AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR
2011
Our audit committee has appointed KPMG LLP as our independent
registered public accounting firm for our fiscal year ending
December 31, 2011. Although our by-laws do not require that
we submit our audit committees appointment of KPMG LLP to
our stockholders for ratification, we do so as a matter of good
corporate governance.
Representatives of KPMG LLP will attend our annual meeting and
will respond to appropriate questions. The KPMG LLP
representatives will also be able to make a statement if they
determine to do so.
Our
board of directors recommends that you vote FOR the
ratification of the appointment of KPMG LLP as our independent
registered public accounting firm for 2011.
Even if our stockholders ratify the appointment of KPMG LLP, our
audit committee in its discretion may select a different
independent registered public accounting firm at any time during
the year if it determines that such a change would be in our
best interests and in the best interests of our stockholders.
EXECUTIVE
COMPENSATION DISCUSSION AND ANALYSIS
Executive
Summary
2010
Performance Review
In a year marked by an unusual frequency of severe storms,
intense competition and a poor economic climate in the United
States, our results of operations for 2010, although modestly
better than 2009, were below our historical expectations. We
did, however, maintain our strong financial condition in 2010.
The
24
following table illustrates our net revenues and our net income
for the year ended December 31, 2010 and the price of our
Class A common stock at December 31, 2010 compared to
the same date with respect to 2009.
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|
|
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2010
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2009
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|
% Change
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|
Total revenues
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|
$
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408.8 million
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|
|
$
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386.7 million
|
|
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5.7
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%
|
Net income
|
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|
11.5 million
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|
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|
18.8 million
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|
|
|
−39.1
|
%
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Stock price at year end
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|
$
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14.48
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|
|
$
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15.54
|
|
|
|
−6.8
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%
|
Summary
of the 2010 Compensation of Our Named Executive
Officers
The compensation of our named executive officers in 2010
consisted of two principal elements:
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a base salary; and
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|
long-term incentive compensation in the form of stock options.
|
We paid no incentive bonuses in 2010 to our named executive
officers because the formula we use to determine those annual
bonuses resulted in no bonus pool for allocation to our
officers, including our named executive officers for 2010. In
addition, our named executive officers are eligible to
participate in our 401(k) plan to which we make contributions on
a formula basis, health and other insurance programs in which
all of our full-time employees may participate.
2010
Total Direct Compensation of Our Named Executive
Officers
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Annual
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Compensation
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|
Key Factors
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|
Purpose
|
|
2010 Actions
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|
Base Salary
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|
Fixed base salary changes on an annual basis depending on
performance and prevailing salaries within our peer group
|
|
Provides fixed amount of cash on which named executive officers
may rely
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|
Cash increase in 2010 limited to cost of living adjustments not
exceeding an average of 2.5%
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Annual Incentive Plan (Cash Incentive Award)
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Compensation committee determines funding level
Chief executive officer allocates individual bonuses based on performance against key business priorities and performance of their respective business units
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|
Motivates named executives to achieve individual officers performance goals
Reinforces pay for performance
Focuses entire organization on achieving key business objectives
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|
No bonuses paid in 2010 because the formula we use to calculate
these bonuses that are based on our underwriting profitability
resulted in no bonus pool for allocation
|
Long-Term Incentive Compensation
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Stock options that vest in three equal annual installments
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|
Stock options support our growth, provide a link between the compensation of our named executive officers and our stock price and also serves as retention device
Supports pay for performance because options granted at not less than 100% of market price on date of grant
|
|
Stock options granted in 2010 that are exercisable at $14.00 per
share, vest in three equal annual installments and expire on
7/15/2015
|
25
Because our underwriting profitability in 2010 was less than in
many prior years, the actual pay of our named executive officers
in 2010 was less than many prior years because we did not pay
any bonuses in 2010 based on our underwriting profitability. Our
annual incentive bonus program thus clearly reinforces our pay
for performance compensation philosophy for our named executive
officers.
Our 2010 compensation programs for our named executive officers
reflect best practices, and we have designed them to balance
risk and reward in our overall business strategy. The above
description of compensation programs that apply to our named
executive officers serves to emphasize that we tie a significant
percentage of the total compensation of our named executive
officers directly to our underwriting profitability. In
addition, our annual incentive bonus based on our underwriting
profitability causes our named executive officers to evaluate
carefully the taking of excessive risk because increased
underwriting losses would adversely affect their compensation.
Finally, our compensation programs for our named executive
officers do not have the practical effect of providing
guaranteed compensation to our named executive officers. We
therefore believe the compensation of our named executive
officers in 2010 directly aligned the interests of our named
executive officers with the interests of our stockholders.
We believe we have provided information in the above discussions
and in the Executive Compensation section of this
proxy statement that we have implemented compensation programs
for our named executive officers that are appropriate and
effectively align the interests of our named executive officers
and the interests of our stockholders and support the creation
of long-term value. Accordingly, our board of directors
recommends that you vote FOR the approval of the
compensation of our named executive officers we describe in this
proxy statement.
Evaluation
of Executive Performance in 2010 and Executive
Compensation
Our compensation committee does not restrict its evaluation of
the performance of our named executive officers to predetermined
formulas or a limited set of criteria. Our compensation
committee considered our progress during 2010 in achieving the
short-term and long-term objectives we describe below:
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Our continued achievement of underwriting results superior to
the underwriting results of other property and casualty
insurance companies on a long-term basis.
|
We believe we have continued to achieve this objective in 2010
notwithstanding increased severe weather events and prevailing
economic conditions. Our statutory combined ratio for 2010 was
102.9% compared to the property and casualty industry combined
ratio of 103.0% projected by A.M. Best Company for 2010. We
believe our underwriting results were reasonable in light of a
challenging underwriting environment, intense competition in a
soft market and unexpectedly adverse weather conditions.
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|
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|
Our achievement of consistent revenue growth over a five-year
period.
|
We believe we achieved this objective for the five years ended
December 31, 2010 because our compound rate of revenue
growth for that period was 5% despite a soft insurance market
and intense competition.
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|
Our status in being named as one of Wards top 50
performing insurance companies.
|
We believe we achieved this goal in 2010 because we received
this award for the sixth straight year.
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Our continued geographic expansion.
|
One measure of our achievement of this objective in 2010 was the
acquisition of MICO as of December 1, 2010 which enabled us
to commence business in Michigan.
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|
Our development of automated underwriting and policy issuance
software that enables us to compete with national carriers.
|
26
During 2010, we continued to expand the use of our
state-of-the-art
systems to all of our subsidiaries. We also received the 2010
Interface Partner Award from Applied Systems, an insurance
technology company, in recognition of our achievements in
agency-insurer communications.
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Our achievement of book value growth over a five-year period.
|
We believe we achieved this objective for the five years ended
December 31, 2010 because our compound rate of book value
growth for that period was 6.5%.
Our compensation committee believes that each component of our
executive compensation is consistent with our overall
compensation philosophy of pay for performance. We have designed
the components of our executive compensation to complement each
other and to reward the achievement of our short-term and
long-term business objectives. Our compensation committee
recognizes the individual fulfillment of our objectives through
adjustments to base salary and by awarding cash bonuses and
granting stock options.
The compensation of our chief executive officer is higher than
the compensation of our other named executive officers because
of our chief executive officers breadth of executive and
operating responsibilities for the entire Donegal Insurance
Group. The relationship between the compensation of our chief
executive officer and the compensation of our other named
executive officers is also influenced by the fact that we do not
have a chief operating officer. Our compensation committee also
considers individual fulfillment of duties, teamwork,
development, time in position, expenses and internal equity
among our named executive officers and their ability to
collaborate and communicate effectively with our other executive
officers.
On an overall basis, our compensation committee believes that we
made progress in achieving the targets our board of directors
established for these objectives at the start of 2010. Our
performance and book value growth in 2010 were the basis of the
decisions our compensation committee made at its meetings in
December 2010 and February 2011 with respect to adjustments to
base salary and our decision to pay no annual cash bonuses to
our named executive officers because of our underwriting results.
We believe the specific compensation decisions we made for each
of our named executive officers in 2010 appropriately reflects
our financial and operational performance in 2010. Our
compensation committee also evaluates the achievement by our
named executive officers of our other corporate objectives, and
the contribution of each of our named executive officers to
those achievements in each such officers primary area of
responsibility. We use our discretion in making compensation
decisions after reviewing our performance and the objective
performance of our named executives based on financial and
operational objectives. We do not have any form of employment,
severance or
change-of-control
agreements with any of our named executive officers.
Our
Compensation Philosophy and Risk Management
Considerations
Our compensation committee oversees our compensation and benefit
plans and policies. Its oversight of our compensation process
includes reviewing and recommending for approval by our board of
directors equity awards to our executive officers and all
compensation decisions relating to our executive officers.
Our compensation committee determined that the primary
objectives of our compensation programs for our executive
officers are to:
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Attract and retain talented and dedicated executive officers who
contribute to our growth, development and profitability and to
encourage their retention.
|
We believe we achieved this objective because three of our five
executive officers named in our summary compensation table have
worked with us for all 25 years since our formation in
1986, and our other two named executive officers have worked for
us for 23 and 17 years, respectively.
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|
Motivate our executive officers to achieve our strategic
business objectives and to reward them when they achieve those
objectives.
|
27
We believe we achieved this objective through our compound
annual growth rate, which was 5.0% for the five years ended
December 31, 2010, and through the compound rate of growth
in our book value, which was 6.5% for the five years ended
December 31, 2010.
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Provide long-term compensation to our executive officers that
rewards them for sustained financial and operating performance
and leadership excellence.
|
Our results, including the fact that we paid no annual incentive
bonuses to our named executive officers in 2010, demonstrate
that our compensation systems do not reward the undue taking of
risk.
To achieve these objectives, we compensate our executive
officers through a combination of base salary, annual cash
bonuses principally based on our underwriting income and
long-term equity compensation.
Our compensation committee believes that our underwriting
profitability-based bonus plan and our performance-based equity
ownership programs create incentives that are designed to result
in long-term stockholder value. We have designed the following
elements of our compensation programs to promote the creation of
long-term value and that we therefore believe discourages
behavior that could lead to excessive risk:
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|
The financial metrics we use to determine the bonuses of our
executive officers are metrics our compensation committee
believe promote long-term stockholder value. These measures
include underwriting profitability, return on equity and growth
in net written premium. Our compensation committee sets limits
on these bonus payments that encourage success without
encouraging excessive risk-taking that seeks short-term results.
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|
|
The stock options we grant vest in three equal annual
installments and remain exercisable for up to five years from
the date of grant, which our compensation committee believes
encourages our executive officers to attain sustained long-term
performance. In addition, the exercise price of the options we
grant is never less than the closing price of our Class A
common stock on the date we award the grant.
|
Retention
of Compensation Consultants
In December 2010, we retained Towers Watson, a
nationally-recognized compensation consulting firm, to assess
the competitiveness of our compensation program for
approximately 20 of our key executive officers compared with a
peer group of property and casualty insurance companies as well
as advice with respect to the design of compensation programs in
the future for our key executive officers. We have also retained
Towers Watson to assist us in developing a leadership succession
program. We do not expect the completed work product of Towers
Watson until later this year at which time our compensation
committee and our board of directors will consider the reports
and recommendations of Towers Watson.
COMPENSATION
DISCUSSION AND ANALYSIS
The
Compensation of Our Officers
Our officers receive the following compensation:
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|
|
|
Base Salary. We establish the base salaries of
our officers, including our named executive officers, based on
the scope of their responsibilities and the recommendation of
our chief executive officer to our compensation committee for
other than his own compensation. Our compensation committee
reviews the base salaries of our named executive officers
annually, including our chief executive officer, and recommends
adjustments to base salaries annually after taking into account
individual responsibilities, performance, length of service,
current salary, experience and compensation history as well as
our results of operations.
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|
|
Annual Cash Bonus. Our officers, including our
named executive officers, receive annual cash bonuses based
primarily on the underwriting results of the Donegal Insurance
Group. We determine the maximum aggregate amount available
annually for our officers pursuant to the formula we describe
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28
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|
|
above. Our compensation committee then recommends to our board
of directors the percentage of the maximum amount we should
allocate among our officers, including our named executive
officers, on a discretionary basis. Our chief executive officer
recommends the allocation of any earned bonuses for our
officers, including our named executive officers other than
himself, to our compensation committee. Our compensation
committee reviews our chief executive officers
recommendations and then recommends the annual bonuses for all
of our executive officers, including our chief executive
officer, to our board of directors. We pay the cash bonuses in a
single payment.
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|
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|
Long-Term Equity Incentives. We believe that
we can maximize our long-term performance best if we tie the
value of the long-term benefits our executives receive to our
long-term performance. We designed our long-term equity
compensation plans to provide all members of our management,
including our named executive officers, with equity incentives
to foster the alignment of their interests with the interests of
our stockholders.
|
The primary form of equity compensation that we have
historically awarded to our officers, including our named
executive officers, is stock options. Our compensation committee
receives preliminary recommendations for periodic stock option
grants from our chief executive officer for our officers other
than himself. Our compensation committee then reviews our chief
executive officers recommendations and recommends stock
option grants for all of our officers, including our chief
executive officer, to our board of directors for approval.
Our stock option plans authorize us to grant options to purchase
shares of our Class A common stock to our employees, officers
and directors.
In accordance with NASDAQ rules, we do not grant stock options
that have exercise prices below the fair market value of our
Class A common stock on the date of grant.
We do not reduce the exercise price of stock options if the
price of our Class A common stock subsequently declines
below the exercise price unless we first obtain stockholder
approval. However, we do adjust the exercise price of previously
granted stock options to reflect recapitalizations, stock or
extraordinary dividends, stock splits, mergers, spin-offs and
similar events as permitted by the applicable stock option plan.
Our
Compensation Process
In assessing the performance of our named executive officers in
light of the objectives our board of directors establishes, our
compensation committee reviews specific achievements associated
with attainment of the objectives, the degree of difficulty of
the objectives and the extent to which significant unforeseen
obstacles or favorable circumstances affected their performance.
As part of its oversight of the compensation of our named
executive officers, our compensation committee recommended the
following compensation adjustments for 2010 for our named
executive officers:
|
|
|
|
|
increases in the base salaries of our named executive officers
for 2010 that averaged 2.5%, which our compensation committee
considered reasonable based on publicly available information
from companies we informally consider our peer group (EMC
Insurance Group, Harleysville Group Inc., State Auto Financial
Corporation and Selective Insurance Group); and
|
|
|
|
due to the decrease in our underwriting profitability in 2010
compared to historical amounts, we made no incentive bonus
payments to our named executive officers in 2010.
|
Limitations
on the Deductibility of Compensation
Section 162(m) of the Internal Revenue Code of 1986, as
amended, or the Code, generally does not allow us to deduct
annual compensation we pay to any of our named executive
officers that is in excess of $1 million for federal income
tax purposes. However, compensation paid pursuant to a
performance-based plan is generally not subject to the
Section 162(m) limitation.
29
Although our compensation committee is aware of the
Section 162(m) limitation, our compensation committee
believes that it is equally important to maintain flexibility
and the competitive effectiveness of the compensation of our
named executive officers. Our compensation committee may,
therefore, from time to time, authorize compensation that is not
deductible for federal income tax purposes if our compensation
committee believes it is in our best interests and the best
interests of our stockholders to do so.
Our
Cash Incentive Plan
For a number of years, we have had a cash incentive compensation
plan for our officers, including our named executive officers,
that is tied to a formula that is based on the annual
underwriting income and other financial metrics of the Donegal
Insurance Group. The formula operates as follows:
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|
|
|
|
We first determine the base underwriting income of the Donegal
Insurance Group for the year;
|
|
|
|
We then adjust the base underwriting income by adding back our
accrual for bonuses to our officers, and make a formula-based
adjustment to limit the impact of any catastrophe losses and
guaranty fund assessments on our base underwriting income;
|
|
|
|
We then adjust the amount so determined as the plan specifies
based on variable percentages of the growth in net written
premium of Donegal Insurance Group for the year;
|
|
|
|
We then multiply the amount so determined by a percentage that
is based on our return on equity for the year; and
|
|
|
|
We then multiply the amount so determined by a predetermined
factor, and the resulting amount constitutes the executive
incentive compensation pool for the applicable year, which our
compensation committee allocates among our officers, including
our named executive officers.
|
If the Donegal Insurance Groups surplus for the year is
below an amount the Plan specifies, we reduce the executive
incentive compensation pool by 50%.
Other
Aspects of Our Compensation Philosophy
Other
Benefits
We provide our named executive officers with the same employee
benefits that all of our other employees receive under our
broad-based benefit plans. These plans provide for health
benefits, life insurance and other welfare benefits.
Perquisites
We do not provide our named executive officers with any
retirement or welfare plan benefits that we do not provide to
all of our other employees.
Recoupment
Policy
In order to align further managements interests with the
interests of our stockholders and to support good corporate
governance practices, it is the intention of our board of
directors to adopt a recoupment policy applicable to our annual
bonus based on the underwriting results of our insurance
subsidiaries and to stock options we have granted to our
executive officers promptly following the definitive adoption of
regulations under the Dodd-Frank Wall Street Reform and Consumer
Protection Act, or the Dodd-Frank Act.
30
Summary
Compensation Table
The following table shows the compensation we paid during 2008,
2009 and 2010 for services rendered in all capacities to our
chief executive officer, our chief financial officer and our
three other most highly compensated executive officers. We refer
to these officers, who we name in the table below, as our named
executive officers. We do not have employment agreements with
any of our named executive officers, nor do we provide any of
them with restricted stock awards, non-equity incentive plan
compensation, deferred compensation or pension benefits with the
exception of two of our executive officers who receive an annual
restricted stock award of 311 shares (400 shares
beginning in 2012) as part of their compensation as members
of our board of directors and the Donegal Mutual board of
directors.
Based on the compensation paid to our named executive officers
in 2010, their salaries accounted for 69.1% of their total
compensation in 2010 and none of them received any
performance-based bonus.
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Stock
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|
Option
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|
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|
Awards
|
|
Awards
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|
All
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|
at
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|
at
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Other
|
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Grant Date
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|
Grant Date
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|
Compen-
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Fair Value
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|
Fair Value
|
|
sation
|
|
Total
|
Name and Principal Position
|
|
Year
|
|
Salary($)
|
|
Bonus($)(1)
|
|
($)
|
|
($)(2)
|
|
($)(3)
|
|
($)
|
|
Donald H. Nikolaus,
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|
2010
|
|
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|
565,000
|
|
|
|
|
|
|
|
4,833
|
|
|
|
220,500
|
|
|
|
50,439
|
|
|
|
840,772
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|
President and Chief
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|
2009
|
|
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|
555,000
|
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|
150,000
|
|
|
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5,215
|
|
|
|
|
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|
48,384
|
|
|
|
758,599
|
|
Executive Officer
|
|
|
2008
|
|
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|
555,000
|
|
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|
360,000
|
|
|
|
5,340
|
|
|
|
360,500
|
|
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49,139
|
|
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1,329,979
|
|
Cyril J. Greenya,
|
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|
2010
|
|
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190,000
|
|
|
|
|
|
|
|
4,833
|
|
|
|
63,000
|
|
|
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45,772
|
|
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303,605
|
|
Senior Vice President and
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2009
|
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|
185,000
|
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34,000
|
|
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5,215
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|
|
|
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42,658
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266,873
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|
Chief Underwriting Officer
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2008
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180,000
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58,000
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|
|
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5,340
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82,400
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42,538
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368,278
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|
Jeffrey D. Miller,
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2010
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207,000
|
|
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69,300
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11,711
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288,011
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Senior Vice President and
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2009
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197,000
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38,000
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11,723
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246,723
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Chief Financial Officer
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2008
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187,000
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62,000
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92,700
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10,932
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352,632
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Robert G. Shenk,
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2010
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236,000
|
|
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|
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|
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63,000
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|
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13,362
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|
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312,362
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|
Senior Vice President,
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2009
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|
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232,000
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34,000
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|
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|
|
|
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13,265
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|
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|
279,265
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|
Claims
|
|
|
2008
|
|
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229,000
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|
|
|
58,000
|
|
|
|
|
|
|
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82,400
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|
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12,887
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|
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382,287
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|
Daniel J. Wagner,
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2010
|
|
|
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190,000
|
|
|
|
|
|
|
|
|
|
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63,000
|
|
|
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12,002
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|
|
|
265,002
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|
Senior Vice President
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2009
|
|
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185,000
|
|
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34,000
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|
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|
|
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11,642
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230,642
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|
and Treasurer
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2008
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180,000
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|
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58,000
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|
|
|
|
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82,400
|
|
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11,147
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|
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331,547
|
|
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|
(1) |
|
Our executive officers participate in a cash incentive bonus
plan. We refer you to Executive Compensation
Our Cash Incentive Plan. We paid no bonuses in 2010. |
|
(2) |
|
We show the option awards at an estimated grant date fair value,
which we obtained by using an option pricing model. Further, the
options are subject to a vesting schedule, and the estimated
value obtained from the option pricing model does not represent
actual value based upon trading prices of our Class A
common stock at the grant date. See Note 14 to our
consolidated financial statements included in our 2010 annual
report to stockholders for information on the accounting
treatment and calculation of the grant date fair value of these
stock options. |
|
(3) |
|
In the case of Mr. Nikolaus, the total shown includes
directors and committee meeting fees of $33,750 and a matching
401(k) plan contribution of $11,507 paid during 2010. In the
case of Messrs. Shenk, Miller and Wagner, the total shown
includes a matching 401(k) plan contribution of $11,056, $11,011
and $11,022, respectively, paid during 2010. In the case of
Mr. Greenya, the total shown includes directors fees of
$31,500 and a matching 401(k) plan contribution of $11,022 paid
during 2010. |
31
Grants
of Plan-Based Awards
During 2010, we granted non-qualified options to purchase shares
of our Class A common stock at an exercise price of $14.00
per share to our named executive officers, one-third of which
are currently vested. On the date we granted the options, the
closing market price of our Class A common stock was $12.06.
|
|
|
|
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|
|
|
|
|
|
|
|
Grant Date
|
|
|
Number of Shares
|
|
Fair Value of
|
Name
|
|
Subject to Option
|
|
Option Awards ($)
|
|
Donald H. Nikolaus
|
|
|
175,000
|
|
|
|
220,500
|
|
Cyril J. Greenya
|
|
|
50,000
|
|
|
|
63,000
|
|
Jeffrey D. Miller
|
|
|
55,000
|
|
|
|
69,300
|
|
Robert G. Shenk
|
|
|
50,000
|
|
|
|
63,000
|
|
Daniel J. Wagner
|
|
|
50,000
|
|
|
|
63,000
|
|
Stock
Incentive Plans
We have an equity incentive plan for employees and an equity
incentive plan for our directors. Under these plans, our board
of directors, upon the recommendation of our compensation
committee, may grant options to purchase our Class A common
stock and, in the case of our directors, restricted stock awards
as well as stock options. Grants under the plans can take the
form of incentive stock options, non-qualified stock options,
stock units and other stock-based awards. With the exception of
an annual fixed restricted stock award to our directors, all of
our incentive compensation grants have been stock options. The
purpose of the plans is to provide long-term incentive awards to
our employees and directors as a means to attract, motivate,
retain and reward talented persons.
As of December 31, 2010, we had reserved
756,500 shares of our Class A common stock for future
grants under our 2007 equity incentive plan for employees and
88,572 shares of our Class A common stock for future
grants under our 2007 equity incentive plan for directors. If
shares covered by an option are not issuable for any reason, we
may again grant options to purchase those shares. The total
number of reserved shares will increase to 3,900,000 shares
if our stockholders approve our 2011 equity incentive plan for
employees and our 2011 equity incentive plan for directors.
Our board of directors may adjust the number and kind of shares
available for grants and options under our plans and the
exercise price of outstanding options in the event of a merger,
consolidation, reorganization, stock split, stock dividend or
other event affecting the number of outstanding shares of our
common stock. Unless otherwise provided in individual option
agreements, unvested options do not automatically accelerate in
the event of a business combination or in the event of the sale
of all or substantially all of our assets.
Our board of directors, upon the recommendation of our
compensation committee, has:
|
|
|
|
|
the authority to determine the persons eligible to be granted
options, the number of shares subject to each option, the
exercise price of each option, the vesting schedule, the
circumstances in which the vesting of options may be accelerated
and any extension of the period for exercise; and
|
|
|
|
full discretionary authority to determine any matter relating to
options granted under our stock incentive plans.
|
Our board of directors has the authority to suspend, amend or
terminate our stock incentive plans, except as would adversely
affect the rights of persons holding outstanding awards without
the consent of such persons.
32
Outstanding
Equity Awards at Fiscal Year End
The following table summarizes the outstanding equity awards our
named executive officers held at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Market Value
|
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
Shares or
|
|
|
of Shares or
|
|
|
|
Unexercised Options
|
|
|
Option
|
|
|
|
|
|
Units of Stock
|
|
|
Units of Stock
|
|
|
|
(#)
|
|
|
(#)
|
|
|
Exercise
|
|
|
Option
|
|
|
That Have Not
|
|
|
That Have Not
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price ($)
|
|
|
Expiration Date
|
|
|
Vested (#)
|
|
|
Vested ($)
|
|
|
Donald H. Nikolaus
|
|
|
175,000
|
|
|
|
|
|
|
|
21.00
|
|
|
|
10/19/2011
|
|
|
|
311
|
|
|
|
4,503
|
|
|
|
|
116,667
|
|
|
|
58,333
|
|
|
|
17.50
|
|
|
|
7/17/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,000
|
|
|
|
14.00
|
|
|
|
7/15/2015
|
|
|
|
|
|
|
|
|
|
Cyril J. Greenya
|
|
|
30,000
|
|
|
|
|
|
|
|
21.00
|
|
|
|
10/19/2011
|
|
|
|
311
|
|
|
|
4,503
|
|
|
|
|
26,667
|
|
|
|
13,333
|
|
|
|
17.50
|
|
|
|
7/17/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
14.00
|
|
|
|
7/15/2015
|
|
|
|
|
|
|
|
|
|
Jeffrey D. Miller
|
|
|
30,000
|
|
|
|
|
|
|
|
21.00
|
|
|
|
10/19/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
|
15,000
|
|
|
|
17.50
|
|
|
|
7/17/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,000
|
|
|
|
14.00
|
|
|
|
7/15/2015
|
|
|
|
|
|
|
|
|
|
Robert G. Shenk
|
|
|
30,000
|
|
|
|
|
|
|
|
21.00
|
|
|
|
10/19/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
26,667
|
|
|
|
13,333
|
|
|
|
17.50
|
|
|
|
7/17/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
14.00
|
|
|
|
7/15/2015
|
|
|
|
|
|
|
|
|
|
Daniel J. Wagner
|
|
|
30,000
|
|
|
|
|
|
|
|
21.00
|
|
|
|
10/19/2011
|
|
|
|
|
|
|
|
|
|
|
|
|
26,667
|
|
|
|
13,333
|
|
|
|
17.50
|
|
|
|
7/17/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
14.00
|
|
|
|
7/15/2015
|
|
|
|
|
|
|
|
|
|
Option
Exercises and Stock Vested
The following table summarizes stock options exercised by our
named executive officers and, in the case of our named executive
officers who are also directors, restricted stock awards vested,
during 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Exercises and Stock Vested
|
|
|
Option Awards
|
|
Stock Awards
|
|
|
|
|
Number of Shares
|
|
Value Realized
|
|
Number of Shares
|
|
Value Realized
|
|
|
Name
|
|
Acquired on Exercise (#)
|
|
on Exercise ($)(1)
|
|
Acquired on Vesting (#)
|
|
on Vesting ($)(1)
|
|
|
|
Donald H. Nikolaus
|
|
|
|
|
|
|
|
|
|
|
311
|
|
|
|
4,503
|
|
|
|
|
|
Cyril J. Greenya
|
|
|
|
|
|
|
|
|
|
|
311
|
|
|
|
4,503
|
|
|
|
|
|
Jeffrey D. Miller
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert G. Shenk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel J. Wagner
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Value realized is based upon the closing price of our common
stock on NASDAQ on the date of exercise or vesting minus the
exercise price of the option awards. |
Pension
Benefits
None of our named executive officers participated in or had an
account balance in qualified or non-qualified defined benefit
plans that we sponsored in 2009 or 2010, and we contemplate none
for 2011. However, our compensation consultant, Towers Watson,
is currently evaluating types of pension benefits as part of its
review of our compensation structure.
Non-Qualified
Deferred Compensation
None of our named executive officers participated in or had
account balances in non-qualified deferred compensation plans or
other deferred compensation plans that we maintained in 2008,
2009 or 2010, and we contemplate none for 2011. However, as
noted above, we expect to receive advice from our compensation
consultant and that advice may include some form of
non-qualified deferred compensation plans in the future.
33
Limitation
of Liability and Indemnification
Our certificate of incorporation includes a provision that
limits, to the maximum extent permitted by Delaware law, the
liability of our directors and officers to us and to our
stockholders for money damages except for liability resulting
from:
|
|
|
|
|
actual receipt of an improper benefit or profit in money,
property or services; or
|
|
|
|
active and deliberate dishonesty established by a final judgment
as being material to the cause of action.
|
This limitation does not, however, apply to violations of the
federal securities laws, nor does it limit the availability of
non-monetary relief in any action or proceeding.
Our certificate of incorporation and by-laws obligate us, to the
maximum extent permitted by Delaware law, to indemnify any
person who is or was a party to, or is threatened to be made a
party to, any threatened or pending action, suit or proceeding
by reason of the fact that such person is or was one of our
directors or officers, or, while one of our directors or
officers, is or was serving, at our request, as a director or
officer of another entity. Insofar as indemnification for
liabilities arising under the federal securities laws may be
permitted to our officers and directors pursuant to the
foregoing provisions, we have been informed that, in the opinion
of the SEC, such indemnification is against public policy as
expressed in such laws and is unenforceable.
In addition, our certificate of incorporation and by-laws permit
us, at our expense, to purchase and maintain insurance to
protect us and any director, officer or employee against any
liability of any character asserted against or incurred by us or
any such director, officer or employee or arising out of any
such persons corporate status, whether or not we would
have the power to indemnify such person against such liability
under Delaware law. We also maintain and intend to continue to
maintain directors and officers liability insurance.
Report of
Our Compensation Committee
Our compensation committee held a joint meeting with the
compensation committee of the board of directors of Donegal
Mutual. The compensation committees reviewed and discussed the
compensation discussion and analysis that appears under the
caption Executive Compensation Discussion and
Analysis with management.
Based on the review and discussion by our compensation committee
with management and the joint meeting with the members of the
compensation committee of Donegal Mutual, the members of our
compensation committee then held a separate meeting at which our
compensation committee reviewed our success in meeting our
corporate objectives for 2010 and the individual performance of
our named executive officers and then recommended to our board
of directors that our board of directors approve the inclusion
of the compensation discussion and analysis set forth in this
proxy statement under the caption Executive Compensation
Discussion and Analysis for filing with the SEC and the
incorporation by reference of such compensation discussion and
analysis in our annual report on
Form 10-K
for the year ended December 31, 2010 for filing with the
SEC.
|
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|
|
MEMBERS OF THE COMPENSATION COMMITTEES OF DONEGAL GROUP INC. AND
DONEGAL MUTUAL INSURANCE COMPANY
|
|
|
|
|
|
Frederick W. Dreher
Philip H. Glatfelter, II
R. Richard Sherbahn
|
|
|
|
March 7, 2011
|
|
|
34
Equity
Compensation Plan Information
The following table sets forth information regarding our equity
compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
(by class) Remaining
|
|
|
|
Number of Securities
|
|
|
|
|
|
Available for Future
|
|
|
|
(by Class) to be Issued
|
|
|
Weighted-Average
|
|
|
Issuance Under Equity
|
|
|
|
Upon Exercise of
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved by securityholders
|
|
|
3,998,667
|
(Class A)
|
|
$
|
16.80
|
(Class A)
|
|
|
839,474
|
(Class A)
|
Equity compensation plans not approved by securityholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,998,667
|
|
|
$
|
16.80
|
|
|
|
839,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROPOSAL 3
ADVISORY VOTE TO APPROVE THE COMPENSATION OF
OUR NAMED EXECUTIVE OFFICERS
The provisions of the Dodd-Frank Act require that we submit to a
non-binding advisory vote of the holders of our Class A
common stock and our Class B common stock a proposal that
our stockholders approve the compensation of our named executive
officers we describe in this proxy statement under
Executive Compensation. We submit to an advisory
vote of our stockholders at our 2011 annual meeting the
compensation of our named executive officers as summarized in
this section and more fully described in the Executive
Compensation section of this proxy statement. Although the
vote of our stockholders on this proposal is not binding on us,
the outcome of this vote will provide important information to
our board of directors and to its compensation committee as they
determine the compensation of our named executive officers in
future years.
Donegal Mutual has advised us that it will vote all of its
shares for the approval of the compensation of our named
executive officers as we describe such compensation in this
proxy statement. We refer you to the Executive
Compensation section of this proxy statement. Therefore,
our stockholders will approve the compensation of our named
executive officers during 2010 we describe in the
Executive Compensation section of this proxy
statement even if all of our stockholders other than Donegal
Mutual vote against the approval of such proposal.
We have designed the compensation available to our named
executive officers to implement our compensation philosophy for
our named executive officers. Our compensation philosophy for
our named executive officers focuses on the alignment of the
interests of our executive officers with the interests of
stockholders in achieving long-term value and pay for
performance. In the course of establishing the compensation of
our named executive officers described in this proxy statement,
our compensation committee with the assistance of our head of
human resources, we determined that the use of performance-based
incentives to motivate our named executive officers to achieve
short-term incentives, such as the cash bonuses we base on the
annual underwriting profitability of our insurance subsidiaries
and long-term business goals, such as the stock options we
grant. We did not make use of any compensation consultants in
determining the 2010 compensation of our named executive
officers.
The basic principles of our compensation for our named executive
officers are compensation plans that award pay for performance
and serve to align the incentive compensation, both short-term
and long-term, of our named executive officers with the
short-term and long-term interests of our stockholders. Because
our results of operations in 2009 and 2010 have not met our
expectations, the compensation of our named executive officers
in 2090 and 2010 was less than their compensation in 2008. Given
our performance, we believe these reductions are appropriate
given our compensation philosophy for our named executive
officers.
35
Our board of directors recommends that you vote FOR approval of
the following resolution relating to the compensation of our
named executive officers that we describe in this proxy
statement:
RESOLVED, that the stockholders of DGI approve the
compensation DGI paid to its named executive officers that DGI
has disclosed in its proxy statement with respect to its 2011
annual meeting of stockholders pursuant to the compensation
disclosure rules of the SEC, including the compensation
disclosure and analysis, or CDA, the compensation tables and the
narrative disclosures that accompany those tables in DGIs
proxy statement for its 2011 annual meeting of
stockholders.
PROPOSAL 4
ADVISORY VOTE TO DETERMINE THE FREQUENCY OF OUR SUBMISSION TO
OUR STOCKHOLDERS OF A PROPOSAL TO APPROVE THE COMPENSATION
OF OUR NAMED EXECUTIVE OFFICERS
The provisions of the Dodd-Frank Act require that we submit to a
non-binding vote of the holders of our Class A common stock
and our Class B common stock no less frequently than every
six years a proposal that our stockholders approve, on a
non-binding and advisory basis, the compensation of our named
executive officers.
The enclosed proxy card provides you with choices on this item.
You may vote that we submit a proposal to our stockholders for
approval of the compensation of our named executive officers
every year, every two years or every three years. You may also
abstain from voting on this item. However you decide to vote,
you are not voting to approve or disapprove the recommendation
of our board of directors with respect to this item.
For the reasons we describe below, we recommend that our
stockholders hold an advisory and non-binding vote once every
three years to approve the compensation of our named executive
officers:
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|
|
A vote every three years will permit our stockholders a more
meaningful opportunity within which to compare our long-term
performance with our long-term executive compensation programs.
A core principle of our executive compensation program is to
align managements interests with our stockholders
interests and to foster the long-term creation of value for our
stockholders.
|
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|
|
A vote every three years would allow us an adequate opportunity
to respond to any comments our stockholders make about our
executive compensation programs and to effect any changes we
believe are appropriate responses to our stockholders
comments. Our compensation committee and our board of directors
regularly review our executive compensation programs to
determine if any changes would be appropriate to maintain
employee satisfaction. A three-year period would allow us an
adequate opportunity to evaluate stockholder proposals relating
to executive compensation and then to implement any such changes
our compensation committee approves.
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|
|
Between the three-year vote to approve our executive
compensation programs, our executive officers will maintain
meaningful dialogue with our stockholders and our compensation
consultants with regard to our executive compensation programs.
|
On-going communication with our stockholders is an important
part of our system of corporate governance. We are open to
receiving communications from our stockholders about any aspect
of our business, including our executive compensation programs.
We believe our communications with our stockholders and the
ability of our stockholders to contact us at any time provides
for our accountability to our stockholders and lessens the need
for more frequent advisory votes on the compensation of our
named executive officers.
Accordingly, we recommend that you select Three
Years when you vote on the frequency of our conduct of
advisory votes by our stockholders on our executive compensation
programs. Our board of directors will review the non-binding
vote of our stockholders on the frequency of advisory votes on
the compensation of our named executive officers and take that
vote into account.
Donegal Mutual has advised us that it will vote all of its
shares for three years for the frequency of stockholder advisory
votes on our executive compensation programs. Because Donegal
Mutual controls approximately two-thirds of the voting power of
our Class A common stock and our Class B common stock,
36
our stockholders will approve the proposal to hold an advisory
vote of our stockholders to approve the compensation of our
named executive officers once every three years.
Our board of directors recommends that our stockholders
select three years on the proposal recommending the frequency of
advisory votes on the compensation of our named executive
officers. However, by asking our stockholders to vote to
determine the frequency of our submission to our stockholders of
a proposal to approve the compensation of our named executive
officers, we are not asking our stockholders to approve the
future compensation of our named executive officers. We are
asking our stockholders whether we should submit the
compensation of our named executive officers to our stockholders
for approval every year, every two years or every three
years.
PROPOSAL 5
APPROVAL OF OUR 2011 EMPLOYEE STOCK PURCHASE PLAN
Description
of Our 2011 Employee Stock Purchase Plan
Our board of directors adopted our 2011 Employee Stock Purchase
Plan, or our 2011 Purchase Plan, on March 7, 2011, subject
to stockholder approval of our 2011 Purchase Plan at our annual
meeting of stockholders and the listing on NASDAQ of the shares
of our Class A common stock reserved for issuance pursuant
to our 2011 Purchase Plan. The purpose of our 2011 Purchase Plan
is to provide our eligible employees with an opportunity to
acquire or to increase their proprietary interest in us by
providing our employees with a convenient opportunity to
purchase shares of our Class A common stock at a discount
from market prices prevailing at the time of purchase. We
believe our 2011 Purchase Plan meets the requirements of
Section 423 of the Code.
We have reserved 300,000 shares of our Class A common
stock for issuance under our 2011 Purchase Plan. Our 2011
Purchase Plan provides for appropriate adjustments in the event
that we effect a stock split, a stock dividend, share
combination or spinoff and certain other types of transactions
we specify in our 2011 Purchase Plan, including mergers,
consolidations, reorganizations and reclassifications. We will
list on NASDAQ our shares of Class A common stock reserved
for issuance under our 2011 Purchase Plan.
Subject to stockholder approval of our 2011 Purchase Plan at our
annual meeting and the listing of our shares of our Class A
common stock we have reserved for issuance under our 2011
Purchase Plan, we will discontinue our 2001 Employee Stock
Purchase Plan, or our Prior Purchase Plan, and will not issue
any additional shares of our Class A common Stock under our
Prior Purchase Plan.
A committee of three employees, or the purchase plan committee,
will administer our 2011 Purchase Plan. Our board of directors
will appoint the members of the purchase plan committee. The
purchase plan committee has the authority to amend our 2011
Purchase Plan rules and regulations from time to time for the
purpose of operating our 2011 Purchase Plan. Any interpretation
or construction by the purchase plan committee with respect to
our 2011 Purchase Plan will be final and conclusive as to all
participants absent contrary action by our board of directors.
Any interpretation or construction of our 2011 Purchase Plan by
our board of directors will be final and conclusive as to all
participants in our 2011 Purchase Plan.
All of the full-time employees of Donegal Mutual and all of our
respective subsidiaries, as well as all full-time employees of
each company from which we or Donegal Mutual assume 100%
quota-share reinsurance, who have completed one month of
employment prior to the beginning of an enrollment period under
our 2011 Purchase Plan will be eligible to participate in our
2011 Purchase Plan. An employee who is otherwise eligible to
purchase shares of our Class A common stock under our 2011
Purchase Plan may not do so, however, if exercising a right to
purchase shares of our Class A common stock under our 2011
Purchase Plan would either (i) cause the employee to own
shares of our Class A common stock that possesses 5% or
more of the total combined voting power or value of all of our
outstanding Class A common stock or any of our subsidiaries
or (ii) cause the employee to have purchase rights under
all of our stock purchase plans or any of our or Donegal
Mutuals subsidiaries that meet the requirements of
Section 423 of the Code that accrue at a rate that exceeds
$25,000 of the fair market value of our Class A common
stock or any of our respective subsidiaries for each calendar
year in which such right is outstanding. Separation from
employment for any reason will constitute an automatic
withdrawal from further participation in our 2011 Purchase Plan.
37
Our 2011 Purchase Plan provides for semi-annual subscription
periods. The subscription periods extend from January 1 through
June 30 and from July 1 through December 31, respectively,
beginning on July 1, 2011 and ending on June 30, 2021.
We will treat employees enrolled in our Prior Purchase Plan as
of June 30, 2011 as automatically enrolled for
participation in our 2011 Purchase Plan. Thereafter, enrollment
for participation in our 2011 Purchase Plan will occur during
the 30 calendar days preceding each subscription period.
Payroll deduction is the only payment method available for the
purchase of Class A common stock under our 2011 Purchase
Plan. Employees may invest a maximum of 10% of their base pay
towards the purchase of our Class A common stock in any
subscription period. At a minimum, an employee who wishes to
participate in our 2011 Purchase Plan must authorize a payroll
deduction that would be sufficient to enable such employees to
purchase at least ten shares of our Class A common stock
during any subscription period.
We will hold subscriptions we receive under our 2011 Purchase
Plan during each subscription period in a plan account we will
maintain for each participant. At the end of each subscription
period, we will divide the amount contained in each
employees plan account by the subscription price for the
applicable subscription period, and we will then credit the plan
account of the employee with the resulting number of whole
shares purchased. The subscription price for any subscription
period will be equal to the lesser of 85% of our Class A
common stock as reported on NASDAQ on the last trading day
before the first day of the enrollment period with respect to
such subscription period or 85% of the closing price of our
Class A common stock as reported on NASDAQ on the last
trading day of such subscription period.
An employee may not assign any of the employees rights
under our 2011 Purchase Plan, except by will or by the laws of
descent and distribution. During an employees lifetime,
only the employee may exercise the employees subscription
rights under our 2011 Purchase Plan.
Upon the termination of an employees employment or an
employees withdrawal from our 2011 Purchase Plan, we will
refund to the employee the amount of any cash credited to the
employees 2011 Purchase Plan account without interest.
Withdrawal from our 2011 Purchase Plan by one of our executive
officers who is subject to Section 16 of the Exchange Act,
except for withdrawal because of the termination of the
executive officer, will become effective only at the end of a
subscription period. Once an employee has withdrawn from our
2011 Purchase Plan, we will make no further payroll deduction
with respect to that employee. An employees withdrawal
from our 2011 Purchase Plan during one subscription period does
not restrict that employees right to participate in our
2011 Purchase Plan during any subsequent subscription period
under our 2011 Purchase Plan. A retiring employee or the
beneficiary of a participating employee upon the death of that
employee may elect to purchase the appropriate number of whole
shares of our Class A common stock using the date of
retirement or death as if it were the last day of a subscription
period.
Amendment
and Termination
Our 2011 Purchase Plan will remain in effect until June 30,
2022 or until the 300,000 shares of our Class A common
stock we have reserved for purchase under our 2011 Purchase Plan
have been purchased. Our board of directors has the right to
terminate our 2011 Purchase Plan at any time without prior
notice, provided, however, that any such termination shall not
adversely affect an employees rights under our 2011
Purchase Plan. Without the approval of our stockholders, we may
not amend our 2011 Purchase Plan to:
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increase the total number of shares of our Class A common
stock subject to our 2011 Purchase Plan;
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increase materially the benefits accruing to participants under
our 2011 Purchase Plan;
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change the formula by which we determine the price applicable to
the purchase of shares of our Class A common stock under
our 2011 Purchase Plan; or
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change the eligibility of employees for participation in our
2011 Purchase Plan.
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Federal
Income Tax Consequences
We intend that our 2011 Purchase Plan qualify under the
provisions of Section 423 of the Code. Based upon the
advice of counsel, we believe the normal operation of our 2011
Purchase Plan should generally have, under the Code and its
associated regulations, all as in effect on the date of this
proxy statement, the principal
38
federal income tax consequences we outline below. The tax
treatment we describe below does not take into account any
subsequent changes in the Code and its associated regulations
that may occur after the date of this proxy statement. The
following discussion is only a summary, and is neither
all-inclusive nor does it constitute tax advice. The summary
below also does not discuss any state or local tax consequences.
Furthermore, the description below may differ from the actual
tax consequences of participation in our 2011 Purchase Plan.
A participant in our 2011 Purchase Plan will not recognize
income for federal income tax purposes upon the purchase of our
Class A common stock under our 2011 Purchase Plan by reason
of the purchase price being the lower of 85% of the trading
price of our Class A common stock on the first or last day
of the applicable subscription period. For participants who do
not dispose of the shares of our Class A common stock under
our 2011 Purchase Plan within two years after the date on which
we granted the participant the right to participate nor within
one year after the date of the employees purchase of our
shares of Class A common stock, any gain on the sale of the
shares following the expiration of the required holding periods
we describe above, or any increase in value in the event of the
death of the participant prior to sale, will, under the present
provisions of the Code, be taxed as ordinary income to the
extent of the lesser of:
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an amount equal to the difference between the fair market value
of the shares on the date of grant and 85% of such value on such
date; or
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an amount equal to the difference between the fair market value
of the shares at the time of disposition and the amount the
employee paid for the employees shares of our Class A
common stock under our 2011 Purchase Plan.
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Any additional gain will constitute long-term capital gain
assuming the employee holds the shares of our Class A
common stock the employee purchased under our 2011 Purchase Plan
as capital assets. If an employee receives long-term capital
gains treatment from the sale of shares of our Class A
common stock the employee purchased pursuant to our 2011
Purchase Plan, we will not have any deduction for federal income
tax purposes as a result of that sale.
If a participant in our 2011 Purchase Plan disposes of shares of
our Class A common stock purchased pursuant to our 2011
Purchase Plan within two years after the date of the grant or
within one year of the purchase of shares of our Class A
common stock pursuant to our 2011 Purchase Plan, any gain of the
sale of those shares will, under the provisions of the Code as
currently in effect, be taxed as ordinary income to the extent
of the difference of the purchase prices of the shares under our
2011 Purchase Plan and the fair market value of the shares on
the date the participant purchased the shares and we will be
entitled to a federal income tax deduction equal to the amount
of such gain. Any additional gain the participant realizes will
constitute long-term or short-term capital gain, depending on
whether the participant has held the shares he or she purchased
for more or less than one year from the participants date
of purchase.
Under current law, any gain a participant realized, other than
long-term capital gain, will be taxed at a maximum federal
income tax rate of 35%. Long-term capital gain is currently
taxable at a maximum federal income tax rate of 15%.
The foregoing discussion is only a summary of certain of the
federal income tax consequences relating to our 2011 Purchase
Plan as in effect on the date of this proxy statement.
Our
board of directors recommends that you vote FOR approval of our
2011 Purchase Plan.
PROPOSAL 6
APPROVAL OF OUR 2011 EQUITY INCENTIVE PLAN FOR
EMPLOYEES
Description
of Our 2011 Equity Incentive Plan for Employees
Purpose
Our board of directors adopted our 2011 Equity Incentive Plan
for Employees, or our 2011 Incentive Plan, on March 7,
2011, subject to stockholder approval of our 2011 Incentive Plan
at our annual meeting. The objective of our 2011 Incentive Plan
is to provide an incentive to our employees to contribute to our
growth, development and financial success as well as that of the
member companies of the Donegal Insurance Group by continuing to
align the interests of our employees with the interests of our
stockholders.
39
Grants
Our 2011 Incentive Plan permits the granting of options to
purchase shares of our Class A common stock, including
options we intend will qualify as incentive stock options under
Section 422 of the Code, and non-qualified stock options we
do not intend will qualify under Section 422 of the Code.
Although all of our employees and all of the employees of our
subsidiaries and the employees of Donegal Mutual and all of the
employees of any company from which we or Donegal Mutual assume
100% quota-share reinsurance are eligible to receive options
under our 2011 Incentive Plan, the award of options to any
particular employee is subject to the discretion of our board of
directors and its compensation committee. We will focus the
grant of option awards to those of our officers and employees
who are responsible for management and direction of our business
as well as the management and the direction of the business of
the Donegal Insurance Group and to provide those officers and
employees with the opportunity to participate in the growth we
anticipate in the value of our Class A common stock.
Our board of directors may make the following types of grants
under our 2011 Incentive Plan:
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qualified and non-qualified stock options;
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restricted stock awards; and
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other stock-based awards based on, or measured by, or payable
in, shares of our Class A common stock.
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Upon the implementation of our 2011 Incentive Plan, we will no
longer grant options under our 2007 Incentive Plan. The maximum
number of shares of Class A common stock for which we may
grant options under our 2011 Incentive Plan may not exceed
3,500,000 shares. For administrative purposes, our board of
directors will reserve shares for issuance when we grant options
to purchase our Class A common stock under our 2011
Incentive Plan. If an option expires or terminates for any
reason before it is fully vested or exercised, we may again make
the number of shares subject to such option that have not been
purchased or that have not vested subject to an option under our
2011 Incentive Plan. We will make appropriate adjustments to
outstanding options and to the number or kind of shares subject
to our 2011 Incentive Plan in the event of a stock split,
reverse stock split, stock dividend, share combination or
reclassification and certain other types of corporate
transactions, including a merger or a sale of all or
substantially all of our assets. The maximum number of shares of
Class A common stock for which we may grant an option to
any employee in any calendar year under our 2011 Incentive Plan
may not exceed 250,000 shares.
Administration
Our board of directors or a board committee of two or more
members who are non-employee directors within the meaning of
Rule 16b-3
under the Exchange Act will administer our 2011 Incentive Plan.
Our compensation committee, with the advice of our chief
executive officer, will:
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recommend to our board of directors the employees to whom we
will grant options and the type, size and terms of each option
grant;
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determine the exercise price for the purchase of Class A
shares subject to options which may not be less than 100% of the
closing price of our Class A common stock on NASDAQ on the
date of grant of the option;
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determine whether the options are incentive stock options or
non-qualified options;
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interpret the provisions of our 2011 Incentive Plan and decide
all questions of fact arising in the application of our 2011
Incentive Plan; and
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make all other determinations necessary or advisable for the
administration of our 2011 Incentive Plan.
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Option
Agreements
Our compensation committee will determine the exercise price of
options we grant. The exercise price of an option will be equal
to or greater than 100% of the fair market value of our
Class A common stock on the date of grant. Our 2011
Incentive Plan defines fair market value as the last sales price
of our Class A common
40
stock on NASDAQ on the date we grant an option. In the event no
sales on NASDAQ occur on such date, we will determine the fair
market value as of the immediately preceding date on which a
transaction occurred.
An option holder, upon the exercise of an option or a portion of
an option, must pay the exercise price in full. The payment will
equal the exercise price of the options times the number of
shares for which the option holder has exercised his or her
option. An option holder may pay the exercise price by:
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cash;
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delivery of shares of our Class A common stock having a
fair market value on the date of exercise equal to the exercise
price of the options the option holder is exercising;
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having a broker or our transfer agent sell Class A common
stock simultaneously with the exercise of the option and
remitting the aggregate exercise price to us and the remainder
of the proceeds to the option holder; or
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any other method our board of directors authorizes.
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It is the policy of our compensation committee that an option
holder exercising an option must pay us any taxes we have the
obligation to withhold at the time of exercise.
We will evidence the grant of an option by delivering a written
option agreement to each option holder. The option agreement
will be consistent with the terms of our 2011 Incentive Plan and
as our compensation committee approves from time to time. The
option agreement will state the number of shares of our
Class A common stock the option holder may purchase
pursuant to the option granted, the exercise price, when the
option holder may exercise the options and the term of the
options.
The term of any option may not exceed ten years. Our board of
directors will determine when options become exercisable, and
may accelerate the exercisability of outstanding options at any
time for any reason. Except as we may otherwise provide in the
option agreement granting an option, an employee may only
exercise an option while the option holder remains an employee.
The option agreement explains the circumstances in which an
optionee may exercise an option after the termination of the
employees employment.
Transferability
An employee may not transfer options granted under our 2011
Incentive Plan except by will or the laws of descent and
distribution.
Incentive
Options and Non-Qualified Options
Our board of directors will determine whether options granted
are incentive stock options meeting the requirements of
Section 422 of the Code. We may grant incentive stock
options only to eligible employees. All of our employees, all of
Donegal Mutuals employees, all of the employees of our
respective subsidiaries and all employees of any company from
which we or Donegal Mutual assume 100% quota-share reinsurance
are eligible. An employee may not exercise an incentive stock
option after the expiration of five years from the date of
grant. An optionee may not receive incentive stock options that
first become exercisable in any calendar year for shares with an
aggregate fair market value determined at the date of grant in
excess of $100,000.
Amendment
and Termination
Our 2011 Incentive Plan will remain in effect until
April 20, 2022, after which date we may grant no further
options under our 2011 Incentive Plan. Without stockholder
approval, we may not amend our 2011 Incentive Plan if the
amendment would materially increase:
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the number of shares that we may issue;
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the benefits accruing to participants; or
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the requirements for eligibility for participation.
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In all other respects, our board of directors may amend, modify,
suspend or terminate our 2011 Incentive Plan, except that our
board of directors cannot make any modification, amendment or
termination to our 2011
41
Incentive Plan, without the consent of an optionee, if such
modification, amendment or termination would adversely affect
the rights of the optionee under a previously granted option.
Federal
Income Tax Consequences
A general summary of the federal income tax consequences of
grants under our 2011 Incentive Plan follows. Grants may also be
subject to state and local taxes. We intend this discussion for
use by our stockholders in determining how to vote at our annual
meeting and not as tax advice to our employees who receive
grants under our 2011 Incentive Plan.
An employee receiving an option will not recognize taxable
income upon the grant of the option, nor will we be entitled to
any deduction on account of such grant.
Upon the exercise of a non-qualified stock option, an employee
will recognize ordinary income in an amount equal to the excess
of the fair market value of the shares on the date of exercise
over the option price. The basis of shares acquired upon the
exercise of a non-qualified stock option will equal the fair
market value of the shares on the date of exercise, and the
holding period of the shares for capital gain purposes will
begin on the date of exercise. In general, we will be entitled
to a business expense deduction in the same amount and at the
same time as an employee recognizes ordinary income.
A purchase of shares upon exercise of an incentive stock option
will not result in recognition of income at that time, provided
the optionee was our employee during the period from the date of
grant until three months before the date of exercise
(12 months if employment terminated due to total and
permanent disability). The basis of the shares an employee
receives upon exercise of an incentive stock option is the
exercise price. The holding period for such shares for capital
gain purposes begins on the date of exercise.
If an employee does not dispose of the shares the employee
purchased upon the exercise of an incentive stock option within
one year after the purchase or within two years after the date
of the grant of such incentive stock option, whichever is later,
then any gain or loss realized on a later sale or exchange of
such shares will generally be a long-term capital gain or a
long-term capital loss equal to the difference between the
amount realized upon the disposition and the exercise price. If
the employee sells the shares during such period, i.e., within
two years after the date of grant of the incentive stock option
or within one year after the purchase of the shares by the
employee, the sale will be deemed a disqualifying
disposition. In that event, the employee will recognize
ordinary income equal to the amount, if any, by which the lesser
of the fair market value of such shares on the date of exercise
or the amount realized from the sale exceed the amount the
optionee paid for such shares.
Tax
Withholding
We have the right to require the recipient of any grant to pay
to us an amount necessary to satisfy our federal, state and
local tax withholding obligations with respect to a grant to
that recipient. We may withhold an amount necessary to satisfy
these amounts from other amounts we would otherwise pay to the
recipient.
Our
board of directors recommends a vote FOR approval of our 2011
Incentive Plan.
PROPOSAL 7
APPROVAL OF OUR 2011 EQUITY INCENTIVE PLAN FOR
DIRECTORS
Description
of our 2011 Equity Incentive Plan for Directors
Purpose
On March 7, 2011, our board of directors adopted our 2011
Equity Incentive Plan for Directors, or our 2011 Director
Plan, subject to stockholder approval at our annual meeting. The
purpose of our 2011 Director Plan is to enhance our ability
and the ability of the member companies of the Donegal Insurance
Group to attract and retain highly qualified directors, to
provide a portion of their compensation in the form of equity
and, in so doing, to strengthen the alignment of the interests
of our directors with the interests of our stockholders.
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Grants
Our 2011 Director Plan provides for:
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the grant of non-qualified stock options to eligible
non-employee directors; and
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an annual restricted stock award of a fixed amount of shares of
Class A common stock (400 shares beginning in
2012) to each of our directors and the directors of Donegal
Mutual who are not also our directors.
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We make annual restricted stock awards automatically to our
directors, without any action by our board of directors or the
board of directors of Donegal Mutual. The total number of shares
of Class A common stock that may be the subject of grants
under our 2011 Director Plan may not exceed
400,000 shares. Upon the implementation of our
2011 Director Plan, we will make no additional grants under
our 2007 director plan.
The number of persons who are eligible to participate in our
2011 Director Plan is currently 27, consisting of our
directors, the directors of Donegal Mutual, directors of our
respective subsidiaries and the directors of each of the
companies from which we or Donegal Mutual assume 100%
quota-share reinsurance. We have not granted any options or
restricted stock awards under our 2011 Director Plan, and
we have not made any determination as to the allocation of
grants of options or restricted stock awards under our
2011 Director Plan, except as described above.
Our 2011 Director Plan provides for appropriate adjustments
to outstanding options and to the number or kind of shares
subject to our 2011 Director Plan in the event of a stock
split, reverse stock split, stock dividend, share combination or
reclassification and certain other types of corporate
transactions, including a merger or a sale of all or
substantially all of our assets.
Our board of directors will administer our 2011 Director
Plan. Our board of directors has the power to interpret our
2011 Director Plan, the director options and the restricted
stock awards, and, subject to the terms of our
2011 Director Plan, to determine who will be granted
director options, the number of director options to be granted
to any outside director, the timing of such grant and the terms
of exercise. Our board of directors has the authority to amend
the terms of an option provided the amendment does not
materially impair the rights or obligations of the director,
subject to the condition that our board of directors may not
reprice stock options. Our board of directors also has the power
to adopt rules for the administration, interpretation and
application of our 2011 Director Plan. Our board of
directors does not have any discretion to determine who will be
granted restricted stock awards under our 2011 Director
Plan, to determine the number of restricted stock awards to be
granted to each director or to determine the timing of such
grants.
Restricted
Stock Awards
Restricted stock awards consist of shares of Class A common
stock that we issue in the name of the director but that
director may not sell or otherwise transfer until one year after
the date of grant. Upon the issuance of shares under a
restricted stock award, the director has all rights of a
stockholder with respect to the shares, except that the director
may not sell or otherwise transfer such shares until one year
after the date of grant.
We will evidence restricted stock awards by written agreements
in such form not inconsistent with our 2011 Director Plan
as our board of directors approves from time to time. Each
agreement will contain such restrictions, terms and conditions
our 2011 Director Plan requires.
Non-qualified
Stock Options
The exercise price of an option will be equal to or greater than
100% of the fair market value of our Class A common stock
on the date of grant. Our 2011 Director Plan defines fair
market value as the last sales price of our Class A common
stock on NASDAQ on the date the option is granted. In the event
there are no transactions on NASDAQ on such date, we will
determine the fair market value as of the immediately preceding
date on which a transaction occurred.
A director may pay the exercise price of an option in cash, by
delivering shares of our Class A common stock having a fair
market value on the date of exercise equal to the exercise price
of the options the director is exercising, by having a broker
sell Class A common stock simultaneously with the exercise
of the option
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and remitting the aggregate exercise price to us or by any other
method our board of directors may authorize from time to time.
The term of any option may not exceed ten years. Our board of
directors will determine when options become exercisable, and
may accelerate the exercisability of outstanding options at any
time for any reason. Except as provided in the letter
accompanying each option grant, an option may only be exercised
while the recipient remains a director. The grant letter will
explain the circumstances in which an option may be exercised
after termination of services as a director.
Transferability
A director may not transfer any options granted under our
2011 Director Plan are not transferable except by will or
the laws of descent and distribution.
Amendment
and Termination
Our 2011 Director Plan will remain in effect until
April 26, 2022, after which date we may not issue grants
under the plan. Our board of directors may terminate or amend
our 2011 Director Plan at any time, subject to any required
stockholder approval unless the termination or amendment would
impair any rights or obligations under any outstanding grant.
Federal
Income Tax Consequences
A general summary of the federal income tax consequences of
grants under our 2011 Director Plan follows. Grants may
also be subject to state and local taxes. This description is
intended for use by our stockholders in determining how to vote
at our annual meeting and not as tax advice to directors who
receive grants under our 2011 Director Plan.
A director receiving an option will not recognize income for
federal income tax purposes upon the grant of the option, nor
will we be entitled to any deduction on account of such grant.
Upon the exercise of a non-qualified stock option, the director
will recognize ordinary income in the amount by which the fair
market value of such shares then exceeds the option price.
A director who receives restricted stock will recognize ordinary
income in the year of receipt, measured by the value of the
shares received determined without regard to the transfer
restriction.
We will be entitled to a tax deduction in connection with grants
under our 2011 Director Plan in an amount equal to the
ordinary income realized by the director at the time the
director recognizes such income.
Tax
Withholding
We have the right to require the recipient of any grant to pay
to us an amount necessary to satisfy our federal, state and
local tax withholding obligations with respect to a grant to
that recipient. We may withhold an amount necessary to satisfy
these amounts from other amounts we would otherwise pay to the
recipient.
Our
board of directors recommends a vote FOR approval of our
2011 Director Plan.
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AUDIT AND
NON-AUDIT FEES
Our audit committee approves the fees and other significant
compensation we pay to our independent registered public
accounting firm for the preparation and issuance of an audit
report or related work incidental to the opinion. Our audit
committee also approves all auditing services and permitted
non-audit services, including the fees and terms for such
services, to be performed for us by our independent registered
public accounting firm, subject to the de minimis exceptions for
non-audit services described in the Exchange Act. Our audit
committee delegates to our audit committee chairman pre-approval
authority for non-audit services up to $25,000 subject to
subsequent approval by the full audit committee at its next
scheduled meeting.
Our audit committee reviewed and discussed with KPMG LLP the
following fees for services KPMG LLP rendered to us during our
2010 fiscal year and considered the compatibility of non-audit
services with KPMG LLPs independence.
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Audit Fees. The fees of KPMG LLP we incurred
in connection with the audit of our annual consolidated and
statutory financial statements for those fiscal years, the
reviews of our consolidated financial statements included in our
Form 10-Q
quarterly reports and services performed in connection with
filings of registration statements and offerings for our fiscal
years ended December 31, 2009 and 2010 were $765,000 and
$915,000, respectively.
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Audit-Related Fees. We did not pay KPMG LLP
any audit-related fees during 2009 or 2010.
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Tax Fees. We did not pay any tax fees to KPMG
LLP during 2009 or 2010.
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All Other Fees. We did not pay KPMG LLP any
fees for other services during our fiscal years ended
December 31, 2009 and 2010.
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Report of
Our Audit Committee
Our audit committee performs its responsibilities in accordance
with the Exchange Act. Each of our audit committee members
satisfies the independence and financial literacy requirements
under applicable Exchange Act rules. Our board of directors
believes that all four members of our audit committee, Robert S.
Bolinger, Philip A. Garcia, John J. Lyons and Richard D.
Wampler, II, satisfy the financial expertise requirements
and have the requisite experience the SECs rules
establish. Our audit committee operates pursuant to a written
charter. You may view the full text of our audit committee
charter on our website at
http://www.donegalgroup.com.
Our audit committee reviews and reassesses the adequacy of its
charter on an annual basis.
Our audit committee undertakes the following primary
responsibilities:
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the selection, appointment, determination of funding for,
compensation, retention and oversight of the work of our
independent registered public accounting firm and the review of
its qualifications and independence;
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the approval, in advance, of all auditing services and all
non-audit services to be performed by our independent registered
public accounting firm;
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the oversight of our accounting and financial reporting
processes, including the overview of our financial reports and
our internal audit function;
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the establishment of procedures for the receipt, retention and
treatment of complaints we receive regarding accounting,
internal accounting controls or auditing matters; and
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the responsibility for reviewing reports and disclosures of all
related person transactions, subject to the approval of the
audit committee and the process set forth in our by-laws
relating to the coordinating committee.
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In carrying out these responsibilities, our audit committee,
among other things:
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monitors preparation of quarterly and annual financial reports
by our management;
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supervises the relationship between us and our independent
registered public accounting firm, including having direct
responsibility for its appointment, compensation and retention,
reviewing the scope of its
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audit services, approving audit and non-audit services and
confirming the independence of our independent registered public
accounting firm; and
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oversees managements implementation and maintenance of
effective systems of internal and disclosure controls, including
review of our policies relating to legal and regulatory
compliance, ethics and conflicts of interest and review of our
internal audit program.
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Our management, which is responsible for our financial
statements and our reporting processes, including our system of
internal control, has advised the members of our audit committee
that our financial statements were prepared in accordance with
accounting principles generally accepted in the United States,
or GAAP.
Our audit committee met 10 times during 2010. Our audit
committee schedules its meetings in order to have sufficient
time to devote appropriate attention to all of its
responsibilities. When it deems it appropriate, our audit
committee holds meetings with our independent registered public
accounting firm and with our internal auditors in executive
sessions at which our management is not present.
The members of our audit committee rely without independent
verification, on the information and representations our
management provides to them and on the representations our
independent registered public accounting firm makes to them.
Accordingly, you should not construe the oversight our audit
committee provides as establishing an independent basis for a
determination that our management has established and maintains
appropriate internal control over financial reporting, that we
have prepared our financial statements in accordance with GAAP
or that our independent registered public accountants conduct
their audit of our financial statements in accordance with
auditing standards generally accepted in the United States.
As part of its oversight of our financial reporting process, our
audit committee reviews all annual and quarterly financial
statements and discusses them with our independent registered
public accounting firm and with management prior to the issuance
of the statements. During 2010, management advised our audit
committee that each of these financial statements had been
prepared in accordance with generally accepted accounting
principles, and management reviewed significant accounting and
disclosure issues with our audit committee. These reviews
included discussion with our independent registered public
accounting firm as to the matters required to be discussed
pursuant to Statement on Auditing Standards, AU Section 380
(SAS No. 61) (Interim Financial Information and
Rule 2.07 of
Regulation S-X,
Communication with Audit Committees, as amended; Statement on
Auditing Standards, AU Section 772 (SAS No. 100). Our
audit committee has received the written disclosures and the
letter from the independent registered public accounting firm
required by applicable requirements of the PCAOB regarding the
independent registered public accounting firms
communications with our audit committee concerning independence
and has discussed with the independent registered public
accounting firm its independence.
Our audit committee also reviewed methods of enhancing the
effectiveness of our internal and disclosure control systems.
Our audit committee, as part of this process, analyzed steps
taken to implement recommended improvements in our internal
control procedures.
Based on our audit committees reviews and discussions we
describe above, our audit committee recommended to our board of
directors that our board of directors approve the inclusion of
our audited financial statements in our Annual Report on
Form 10-K
for the year ended December 31, 2010 for filing with the
SEC.
Audit Committee
Robert S. Bolinger
Philip A. Garcia
John J. Lyons
Richard D. Wampler, II
March 10, 2011
46
STOCKHOLDER
PROPOSALS FOR OUR 2012 ANNUAL MEETING OF
STOCKHOLDERS
Any stockholder who, in accordance with and subject to the
provisions of
Rule 14a-8
of the proxy rules of the SEC, wishes to submit a proposal for
inclusion in our proxy statement for our 2012 annual meeting of
stockholders must deliver such proposal in writing to our
corporate secretary at our principal executive offices at 1195
River Road, Marietta, Pennsylvania 17547, not later than
November 21, 2011.
Pursuant to Section 2.3 of our by-laws, if a stockholder
wishes to present at our 2012 annual meeting of stockholders
(i) nominations of persons for election to our board of
directors or (ii) an item of business to be transacted by
our stockholders otherwise than pursuant to
Rule 14a-8
of the proxy rules of the SEC, the stockholder must comply with
the provisions relating to stockholder proposals set forth in
our by-laws, which we summarize below. Written notice of any
such proposal containing the information our by-laws require, as
summarized herein, must be received by our corporate secretary,
at our principal executive offices at 1195 River Road, Marietta,
Pennsylvania 17547, during the period that begins on
November 21, 2011 and that ends on December 21, 2011.
A written proposal of nomination for a director must set forth:
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the name and address of the stockholder, as the same appears on
our books, who intends to make the nomination (the
Proposing Stockholder);
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as to each person whom the Proposing Stockholder nominates for
election or reelection as a director, all information relating
to such person as in a solicitation of proxies for election of
such nominees as directors pursuant to the proxy rules under the
Exchange Act would require to be disclosed;
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the principal occupation or employment for the past five years
of each person whose nomination the Proposing Stockholder
intends to make;
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a description of any arrangement or understanding between each
person whose nomination the Proposing Stockholder proposes and
the Proposing Stockholder with respect to such persons
nomination for election as a director and actions such person
proposes to take;
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the written consent of each person so nominated to serve as a
director if elected as a director; and
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the number of shares of our Class A common stock and
Class B common stock the Proposing Stockholder beneficially
owns within the meaning of SEC
Rule 13d-3
and of record.
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As to any other business that the Proposing Stockholder intends
to bring before our 2012 annual meeting of stockholders, the
written proposal must set forth:
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a brief description of such business;
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the Proposing Stockholders reasons for presenting such
business at our 2012 annual meeting of stockholders;
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any material interest of the Proposing Stockholder in such
business;
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the name and address of the Proposing Stockholder; and
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the number of shares of our Class A common stock and our
Class B common stock the Proposing Stockholder beneficially
owns within the meaning of SEC
Rule 13d-3
and of record.
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Only candidates nominated by stockholders for election as a
member of our board of directors in accordance with our by-law
provisions as summarized herein will be eligible for election as
a member of our board of directors at our 2012 annual meeting of
stockholders. A written proposal relating to a matter other than
a nomination for election as a director must set forth
information regarding the matter equivalent to the information
that would be required under the proxy rules of the SEC if
proxies were solicited for stockholder consideration of the
matter at a meeting of stockholders.
Only such business may be conducted at our 2012 annual meeting
of stockholders as shall have been brought before our annual
meeting in accordance with the procedures set forth in our
by-law provisions as summarized herein. The chairman of our 2012
annual meeting of stockholders will have the discretion to
determine if a nomination or an item of business has been
proposed in accordance with the procedures set forth in our
by-laws as summarized herein. Only stockholder proposals
submitted in accordance with the by-
47
law provisions summarized above will be eligible for
presentation at our 2012 annual meeting of stockholders, and any
matter not submitted to our board of directors in accordance
with such provisions will not be considered or acted upon at our
2012 annual meeting of stockholders.
HOUSEHOLDING
We may, unless we receive contrary instructions from you, send a
single copy of our annual report, proxy statement and notice of
annual or special meeting to any household at which two or more
stockholders reside if we believe the stockholders are members
of the same family.
If you would like to receive our annual disclosure documents
directly in future years rather than from your broker or other
nominee holder, or if you and another stockholder share an
address and you and the other stockholder would like to receive
only one copy of our annual disclosure documents, follow these
instructions:
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If your shares are registered in your own name, please contact
our transfer agent and inform it of your request to revoke or
institute householding by calling Computershare
Trust Company at
(800) 317-4445
or writing to Computershare Trust Company, N.A., at
P.O. Box 43069, Providence, Rhode Island
02940-3078,
who will respond to your request within 30 days.
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If a bank, broker, nominee or other holder of record holds your
shares, please contact your bank, broker, nominee or other
holder of record directly.
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DIRECTOR
STOCKHOLDER COMMUNICATIONS
Stockholders who wish to communicate with our board of directors
or with one or more individual members of our board may do so by
sending their communication in writing addressed to a particular
director or directors, or in the alternative, to
Non-Management Directors as a group. Please send
your communication to our corporate secretary, Sheri O. Smith,
at our principal executive offices at 1195 River Road, Marietta,
Pennsylvania 17547 or by
e-mail to
sherismith@donegalgroup.com. Our corporate secretary will
promptly forward all such communications to the addressee or
addressees set forth in the communication.
We encourage our directors to attend our annual meetings of
stockholders. All of our directors attended our annual meeting
of stockholders in 2010.
OTHER
MATTERS
Our board of directors does not know of any matters to be
presented for consideration at our annual meeting other than the
matters described in the notice of annual meeting, but if any
matters are properly presented, proxies in the enclosed form
returned to us will be voted in accordance with the
recommendation of our board of directors or, in the absence of
such a recommendation, in accordance with the judgment of the
proxy holder.
By order of our board of directors,
Donald H. Nikolaus,
President and Chief Executive Officer
March 18, 2011
48
APPENDIX A
DONEGAL
GROUP INC.
2011
EMPLOYEE STOCK PURCHASE PLAN
Section 1. Purpose.
Donegal Group Inc. (the Company) has established
this 2011 Employee Stock Purchase Plan (this Plan)
for the benefit of the eligible employees of the Company, its
parent, Donegal Mutual Insurance Company (Donegal
Mutual), participating subsidiaries of the Company and of
Donegal Mutual and any company from which the Company or Donegal
Mutual assumes 100% quota share reinsurance.
The purpose of this Plan is to provide each eligible employee
with an opportunity to acquire or increase his or her
proprietary interest in the Company through the purchase of
shares of the Companys Class A common stock (the
Class A common stock) at a discount from the
market prices prevailing at the time of purchase. The Company
intends that this Plan meet the requirements of Section 423
of the Internal Revenue Code of 1986, as amended (the
Code).
Section 2. Eligible
Employees.
(a) Employees eligible to participate in this Plan
(Eligible Employees) will consist of all
individuals: (i) who are full-time employees, as defined in
Section 2(b) of this Plan, of the Company, Donegal Mutual,
any subsidiary, as defined in Section 424 of the Code, of
the Company or Donegal Mutual or any company from which the
Company or Donegal Mutual assumes 100% quota share reinsurance
(a Participating Company), and (ii) who have
completed one month of employment on or prior to the date on
which an Enrollment Period, as defined in Section 4 of this
Plan, begins.
(b) A full-time employee is an employee of the
Company, Donegal Mutual or any Participating Company who works
or is scheduled to work at least 1,000 hours during any
calendar year. The Company will consider an employee who is not
scheduled to work at least 1,000 hours during a calendar
year, but who in fact works at least 1,000 hours during a
calendar year, a full-time employee once the
employee is credited with at least 1,000 hours during such
year.
(c) A person who is otherwise an Eligible Employee may not
purchase any shares of Class A common stock under this Plan
to the extent that: (i) immediately after such person
purchases Class A common stock, the person would own shares
of Class A common stock, including shares that would be
owned if all outstanding options to purchase Common Stock such
person holds were exercised, that possess 5% or more of the
total combined voting power or value of all classes of stock of
the Company or any subsidiary of the Company or (ii) such
right would cause such person to have purchase rights under this
Plan and all other stock purchase plans of the Company or any
subsidiary of the Company or Donegal Mutual that meet the
requirements of Section 423 of the Code, that accrue at a
rate that exceeds $25,000 of fair market value of the stock of
the Company, or any subsidiary of the Company, determined at the
time the right to purchase Class A common stock under this
Plan is exercisable, for each calendar year in which a purchase
right under this Plan is outstanding. For this purpose, a right
to purchase Class A common stock accrues when such right
first becomes exercisable during the calendar year, but the rate
of accrual for any calendar year may in no event exceed $25,000
of the fair market value of Class A common stock subject to
the right, and the number of shares of Class A common stock
under one right may not be carried over to any other right.
(d) Notwithstanding other provisions in this Plan to the
contrary, any officer of the Company, Donegal Mutual or any
Participating Company who is subject to Section 16 of the
Securities Exchange Act of 1934 (the Exchange Act)
with respect to his or her ownership of shares of Class A
common stock (a Section 16 officer) will be
subject to the restrictions and conditions set forth in
Sections 7(b) and 9 of this Plan.
Section 3. Duration
of Plan and Subscription Periods.
This Plan is effective as of July 1, 2011 through and
including June 30, 2022. During the term of this Plan, this
Plan will have 20 semi-annual Subscription Periods.
Each Subscription Period will extend from July 1 through
December 31 or from January 1 through June 30,
respectively, with the first Subscription Period beginning on
July 1, 2011 and the last Subscription Period ending on
June 30, 2022.
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Section 4. Enrollment
and Enrollment Period.
Enrollment for participation in this Plan will take place during
the Enrollment Period that precedes each
Subscription Period. Enrollment Periods are in effect from June
1 through June 30 and from December 1 through December 31 of
each year. In addition, the Company will deem each individual
who participates in the Companys 2001 Employee Stock
Purchase Plan and who is an Eligible Employee as of May 31,
2011 as automatically enrolled in this Plan effective as of the
first Subscription Period. Except as provided regarding
automatic enrollment in this Plan as of the first Subscription
Period, any person who is an Eligible Employee and who would
like to participate in this Plan should file a subscription
agreement during an Enrollment Period, and that eligible
employees participation in this Plan will then commence as
of the commencement of the next Subscription Period. Once
enrolled, an Eligible Employee will continue to participate in
this Plan for each succeeding Subscription Period until such
Eligible Employee terminates his or her participation, the
Eligible Employee ceases to be an Eligible Employee or elects to
withdraw from this Plan, this Plan expires or the Company
terminates this Plan. An Eligible Employee who desires to change
his or her rate of contribution may do so effective as of the
beginning of the next Subscription Period by submitting a
properly completed and executed enrollment form to the Company
during the Enrollment Period for the next Subscription Period.
An Eligible Employee who is not a Section 16 officer may
also change his or her rate of contribution during a
Subscription Period only pursuant to Section 7(b) of this
Plan.
Section 5. Total
Number of Shares Available.
The total number of shares available under this Plan is
300,000 shares of Class A common stock. Such
Class A common stock may be authorized and unissued shares
or previously issued shares that the Company reacquired. In the
event the total number of shares available for purchase under
this Plan have been purchased prior to the expiration of this
Plan, the Company may terminate this Plan in accordance with
Section 13 of this Plan.
Section 6. Subscription
Price.
The Subscription Price for each share of
Class A common stock subscribed for purchase under this
Plan during each Subscription Period will be the lesser of
(i) 85% of the fair market value of such share as
determined as of the last trading day before the first day of
the Enrollment Period with respect to such Subscription Period
or (ii) 85% of the fair market value of such share as
determined on the last trading day of such Subscription Period.
The fair market value of a share will be the closing price the
NASDAQ Stock Market reports for the applicable date.
Section 7. Amount
of Contribution and Method of Payment.
(a) An Eligible Employee must pay the Subscription Price
through a payroll deduction. The maximum payroll deduction may
not be more than 10% of an Eligible Employees Base Pay, as
defined in Section 7(c) of this Plan. An Eligible Employee
must authorize a minimum payroll deduction, based on such
employees Base Pay at the time of such authorization, that
will enable such employee to accumulate by the end of the
Subscription Period an amount sufficient to purchase at least
ten shares of Class A common stock. An Eligible Employee
may not make separate cash deposits toward the payment of the
Subscription Price.
(b) An Eligible Employee who is not a Section 16
officer may at any time during a Subscription Period reduce the
amount the Eligible Employee previously authorized the Company
to deduct from his or her Base Pay, provided the reduction
conforms with the minimum payroll deduction set forth in
Section 7(a) of this Plan. To do so, an Eligible Employee
should forward to the Company a properly completed and executed
written notice setting forth the requested reduction in his or
her payroll deduction. The change in payroll deduction will
become effective on a prospective basis as soon as practicable
after the Company receives the change notice. An Eligible
Employee may change his or her payroll deduction under this
Section 7(b), by forwarding to the Company a properly
completed and executed written notice setting forth such
reduction in his or her payroll deduction only once during any
Subscription Period. Any such reduction will remain in effect
for subsequent Subscription Periods, subject to compliance with
Section 7(a) of this Plan, until such Eligible Employee
terminates his or her participation in this Plan, the Eligible
Employee ceases to be an Eligible Employee, this Plan expires or
the Company terminates this Plan. A Section 16 officer may
not change his or her rate of contribution during a Subscription
Period.
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(c) Base Pay means the straight-time earnings
or regular salary paid to an Eligible Employee. Base Pay will
not include overtime, bonuses or other items that the committee
administering this Plan pursuant to Section 14 of this Plan
does not consider to be regular compensation. Payroll deductions
will commence with the first paycheck issued during the
Subscription Period and, except as set forth in Sections 9
and 10, will continue with each paycheck throughout the entire
Subscription Period, except for pay periods for which the
Eligible Employee receives no compensation (i.e.,
uncompensated personal leave, leave of absence, etc.).
Section 8. Purchase
of Shares.
The Company will maintain a Plan Account on its
books for recordkeeping purposes only in the name of each
Eligible Employee who authorized a payroll deduction (a
participant). At the close of each pay period, the
Company will credit the amount deducted from the
participants Base Pay to the participants Plan
Account. The Company will pay no interest on any Plan Account
balance in any circumstance. As of the last day of each
Subscription Period, the Company will divide the amount then in
the participants Plan Account by the Subscription Price
for such Subscription Period as determined pursuant to
Section 6 , and credit the participants Plan Account
with the number of whole shares that results. The Company will
not credit fractional shares under this Plan. The Company will
issue and deliver share certificates to each participant within
a reasonable time thereafter. The Company will carry forward any
amount remaining in a participants Plan Account to the
next Subscription Period. However, any amount the Company
carries forward pursuant to this Section 8 will not reduce
the amount a participant may contribute pursuant to
Section 7 of this Plan during the next Subscription Period.
If a participant does not accumulate sufficient funds in his or
her Plan Account to purchase at least ten shares of Class A
common stock during a Subscription Period, the Company will deem
such participant to have withdrawn from this Plan pursuant to
Section 9 of this Plan.
If the number of shares subscribed for purchase during any
Subscription Period exceeds the number of shares available for
purchase under this Plan, the Company will allocate the
remaining shares available for purchase among all participants
in proportion to their Plan Account balances, exclusive of any
amounts carried forward pursuant to the preceding paragraph. If
the number of shares that would be credited to any
participants Plan Account in either or both of the
Subscription Periods occurring during any calendar year exceeds
the limit specified in Section 2(c) of this Plan, the
Company will credit the participants Plan Account with the
maximum number of shares permissible, and refund the remaining
amounts to the participant in cash without interest thereon.
Section 9. Withdrawal
from This Plan.
A participant, other than a Section 16 officer, may
withdraw from this Plan at any time by giving a properly
completed and executed written notice of withdrawal to the
Company. As soon as practicable following the Companys
receipt of a notice of withdrawal, the Company will refund the
amount credited to the participants Plan Account in cash
without interest thereon. The Company will make no further
payroll deductions with respect to such participant except in
accordance with an authorization for a new payroll deduction
filed during a subsequent Enrollment Period in accordance with
Section 4 of this Plan. A participants withdrawal
will not affect the participants eligibility to
participate during any succeeding Subscription Period. A
withdrawal by a Section 16 officer, other than a withdrawal
under Section 10 of this Plan, will not become effective
until the Subscription Period that commences after the date the
Company receives written notice of such withdrawal.
Section 10. Separation
from Employment.
The Company will treat separation from employment for any
reason, including death, disability or retirement, as defined in
this Section 10, as an automatic withdrawal pursuant to
Section 9 of this Plan. However, at the election of a
participant who retires, or in the event of a participants
death at the election of the participants beneficiary, any
cash balance in such participants Plan Account may be used
to purchase the appropriate number of whole shares of
Class A common stock at a Subscription Price determined in
accordance with Section 6 of this Plan using the date of
the participants retirement or death as though it was the
last day of the Subscription Period. The Company will refund in
cash any cash balance in the Plan Account after such purchase to
the participant, or in the event of the participants death
to the participants beneficiary without interest thereon.
As used in this Section 10, retirement means a
termination of
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employment by reason of a participants retirement at or
after the participants earliest permissible retirement
date pursuant to and in accordance with his or her
employers regular retirement plan or practice.
Section 11. Assignment
and Transfer Prohibited.
No participant may assign, pledge, hypothecate or otherwise
dispose of his or her subscription or rights to subscribe under
this Plan to any other person, and any attempted assignment,
pledge, hypothecation or disposition will be void. However, a
participant may acquire shares of Class A common stock
subscribed to under this Plan in the names of the participant
and another person jointly with the right of survivorship upon
appropriate written notice to the Company. No subscription or
right to subscribe granted to a participant under this Plan will
be transferable by the participant otherwise than by will or by
the laws of descent and distribution, and such subscription
rights will be exercisable only by the participant during the
participants lifetime.
Section 12. Adjustment
of and Changes in Class A Common Stock.
In the event that the outstanding shares of Class A common
stock of the Company are hereafter increased or decreased or
changed into or exchanged for a different number or kind of
shares or other securities of the Company, or of another
corporation, by reason of reorganization, merger, consolidation,
recapitalization, reclassification, stock
split-up,
stock dividend, either in shares of Class A common stock or
of another class of the Companys stock, spin-off or
combination of shares, the committee appointed pursuant to
Section 14 of this Plan will make appropriate adjustments
in the aggregate number and kind of shares that are reserved for
sale under this Plan.
Section 13. Amendment
or Termination of This Plan.
The Board of Directors of the Company (the Board)
will have the right to amend, modify or terminate this Plan at
any time without notice, provided that the amendment,
modification or termination of this Plan does not adversely
affect any participants existing rights and provided
further that, without the approval of the stockholders of the
Company in accordance with applicable law and regulations, no
such amendment will increase the benefits accruing to
participants under this Plan, increase the total number of
shares subject to this Plan, change the formula by which the
price at which the shares will be sold is determined, or change
the class of employees eligible to participate in this Plan.
Section 14. Administration.
A committee of three employees of the Company the Board appoints
from time to time will administer this Plan. The committee may
from time to time adopt rules and regulations for carrying out
this Plan. Any interpretation or construction of any provision
of this Plan by the committee will be final and conclusive on
all persons absent contrary action by the Board. Any
interpretation or construction of any provision of this Plan by
the Board will be final and conclusive on all persons.
Section 15. Designation
of Beneficiary.
A participant may file a written designation of a beneficiary
who is to receive any cash credited to the participant under
this Plan in the event of such participants death prior to
the delivery to the participant of such cash. A participant may
change such designation of a beneficiary at any time upon
written notice to the Company. Upon the death of a participant
and upon the committees receipt of proof of the
participants death and of the identity and existence of a
beneficiary validly designated by the participant under this
Plan, the Company will deliver such cash to such beneficiary. In
the event of the death of a participant and in the absence of a
beneficiary validly designated under this Plan who is living at
the time of such participants death, the Company will
deliver such cash to the executor or administrator of the estate
of the participant, or if, to the knowledge of the Company, the
participant has not appointed such executor or administrator,
the Company, in its sole discretion, may deliver such cash to
the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent, or relative is known to
the Company, then to such other person as the Company may
designate. No designated beneficiary will, prior to the death of
the participant by whom the beneficiary has been designated,
acquire any interest in the shares or cash credited to the
participant under this Plan.
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Section 16. Employees
Rights.
Nothing contained in this Plan will prevent the Company, Donegal
Mutual or any Participating Company from terminating any
employees employment. No employee will have any rights as
a stockholder of the Company by reason of participation in this
Plan unless and until the Company has issued and delivered
certificates to the participant representing shares of
Class A common stock for which the participant has
subscribed.
Section 17. Use
of Funds.
The Company may use all payroll deductions it receives or holds
under this Plan for any corporate purpose, and the Company will
not be obligated to segregate such payroll deductions. Any
account established for a participant will be for recordkeeping
purposes only.
Section 18. Government
Regulations.
The Companys obligation to sell and deliver Class A
common stock under this Plan is subject to any prior approval or
compliance that may be required to be obtained or made from or
with any governmental or regulatory authority in connection with
the authorization, issuance or sale of such Class A common
stock.
Section 19. Titles.
Titles are provided in this Plan for convenience only and are
not to serve as a basis for interpretation or construction of
this Plan.
Section 20. Applicable
Law.
This Plan will be construed, administered and governed in all
respects under the laws of the Commonwealth of Pennsylvania and
the United States of America.
Section 21. Compliance
with
Rule 16b-3.
To the extent that
Rule 16b-3
under the Exchange Act applies to purchases made under this
Plan, it is the Companys intent that this Plan comply in
all respects with the requirements of
Rule 16b-3,
that the Company interpret any ambiguities or inconsistencies in
the construction of this Plan to give effect to such intention
and that if this Plan will not so comply, whether on the date of
adoption or by reason of any later amendment to or
interpretation of
Rule 16b-3,
the provisions of this Plan will be deemed to be automatically
amended so as to bring them into full compliance with such rule.
Section 22. Approval
of Stockholders.
Prior to June 30, 2011, the Company will submit this Plan
to its stockholders for approval in accordance with applicable
law and regulations. Subscriptions for the purchase of shares
under this Plan will be subject to the condition that the
stockholders of the Company approve this Plan prior to such date
in the manner contemplated by Section 423(b)(2) of the
Code. If the Companys stockholders do not approve this
Plan prior to such date, this Plan will terminate, all
subscriptions under this Plan will be terminated and be of no
further force or effect and the Company shall promptly refund in
cash, without interest, of all sums previously deducted from
their compensation pursuant to this Plan.
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APPENDIX B
DONEGAL
GROUP INC.
2011
EQUITY INCENTIVE PLAN FOR EMPLOYEES
1. Purpose. The purpose of this
2011 equity incentive plan for employees (this Plan)
is to encourage the employees of Donegal Group Inc. (the
Company) and its subsidiaries to acquire a
proprietary interest in the growth and performance of the
Company, and to continue to align the interests of those
employees with the interests of the Companys stockholders
to generate an increased incentive for such person to contribute
to the growth, development and financial success of the Company
and the member companies of the Donegal Insurance Group,
including companies from which the Company or Donegal Mutual
assumes 100% quota share reinsurance (the Group). To
accomplish these purposes, this Plan provides a means whereby
employees may receive stock options, stock awards and other
stock-based awards that are based on, or measured by, or payable
in shares of the Companys Class A common stock.
2. Administration.
(a) Administrators. The Board of
Directors of the Company (the Board) shall
administer this Plan. The Board shall appoint a committee, which
initially shall be the compensation committee to assist in the
administration of this Plan. The committee, with the advice of
the Companys chief executive officer, shall recommend to
the Board the employees to whom the Company should grant awards
and the type, size and terms of each grant. The Board has the
authority to make all other determinations necessary or
advisable for the administration of this Plan. All decisions,
determinations and interpretations of the Board shall be final
and binding on all grantees and all other holders of awards
granted under this Plan.
(b) The Committee. The committee
shall be comprised of two or more members of the Board, each of
whom shall be a non-employee director within the
meaning of
Rule 16b-3
under the Securities Exchange Act of 1934 (the Exchange
Act). In addition, each member of the committee shall be
an outside director within the meaning of
Section 162(m) of the Internal Revenue Code of 1986, as
amended (the Code). Subject to the foregoing, from
time to time, the Board may increase or decrease the size of the
committee, appoint additional members, remove members, with or
without cause, appoint new members, fill vacancies or remove all
members of the committee and thereafter directly administer this
Plan. The committee shall have those duties and responsibilities
assigned to it under this Plan, and the Board may assign to the
committee the authority to make certain other determinations and
interpretations under this Plan. All decisions, determinations
and interpretations of the committee in such cases shall be
final and binding on all grantees and all other holders of
awards granted under this Plan.
3. Shares Subject to this Plan.
(a) Shares Authorized. The
total aggregate number of shares of Class A common stock
that the Company may issue under this Plan is
3,500,000 shares, subject to adjustment as described below.
The Company may issue each of the shares authorized under this
Plan pursuant to incentive stock options awards within the
meaning of Section 422 of the Code. The shares may be
authorized but unissued shares or reacquired shares for purposes
of this Plan.
(b) Share Counting. For
administrative purposes, when the Board approves an award
payable in shares of Class A common stock, the Board shall
reserve, and count against the share limit, shares equal to the
maximum number of shares that the Company may issue under the
award. If and to the extent options granted under this Plan
terminate, expire or are canceled, forfeited, exchanged or
surrendered without having been exercised, and if and to the
extent that any restricted stock awards are forfeited or
terminated, or otherwise are not paid in full, the Company shall
make the shares reserved for such awards available again for
purposes of this Plan.
(c) Individual Limits. All awards
under this Plan shall be expressed in shares of Class A
common stock. The maximum number of shares of Class A
common stock with respect to all awards that the Company may
issue to any individual under this Plan during any calendar year
shall be 250,000 shares, subject to adjustment as described
below.
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(d) Adjustments. If any change in
the number or kind of shares of Class A common stock
outstanding occurs by reason of:
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a stock dividend, spinoff, recapitalization, stock split or
combination or exchange of shares;
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a merger, reorganization or consolidation;
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a reclassification or change in par value; or
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any other extraordinary or unusual event affecting the
outstanding Class A common stock as a class without the
Companys receipt of consideration, or if the value of
outstanding shares of Class A common stock is substantially
reduced as a result of a spinoff or the Companys payment
of any extraordinary dividend or distribution,
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the maximum number of shares of Class A common stock
available for issuance under this Plan, the maximum number of
shares of Class A common stock for which any individual may
receive grants in any year, the kind and number of shares
covered by outstanding awards, the kind and number of shares to
be issued or issuable under this Plan and the price per share or
applicable market value of such grants shall be automatically
equitably adjusted to reflect any increase or decrease in the
number of, or change in the kind or value of, issued shares of
Class A common stock to preclude, to the extent
practicable, the enlargement or dilution of rights and benefits
under this Plan and such outstanding grants. The Company shall
eliminate any fractional shares resulting from such adjustment.
Any adjustments to outstanding awards shall be consistent with
Section 409A of the Code, to the extent applicable.
4. Eligibility for
Participation. All employees of the Company
and its subsidiaries and the member companies of the Group,
including employees who are officers or members of the Board of
any of the foregoing companies, shall be eligible to participate
in this Plan. The committee shall recommend to the Board the
employees to receive awards and the number of shares of
Class A common stock subject to each award.
5. Awards. Awards under this Plan
may consist of stock options as described in Section 7,
stock awards as described in Section 8 and other
stock-based awards as described in Section 9. The committee
shall specify the terms and conditions of the award granted to
the grantee in an agreement. The award shall be conditioned upon
the grantees signed agreement to accept the award and to
acknowledge that all decisions and determinations of the
committee and the Board shall be final and binding on the
grantee, his or her beneficiaries and any other person having or
claiming an interest under the award. Awards under this Plan
need not be uniform as among the grantees. The Board may grant
awards that are contingent on, and subject to, stockholder
approval of this Plan or an amendment to this Plan.
6. Definition of Fair Market
Value. For purposes of this Plan, fair
market value shall mean the last sales price of a share of
Class A common stock on the NASDAQ Global Select Stock
Market, or NASDAQ, on the day on which the Board is determining
the fair market value, as reported by NASDAQ. In the event that
there are no transactions in shares of Class A common stock
on NASDAQ on such day, the Board will determine the fair market
value as of the immediately preceding day on which there were
transactions in shares of Class A common stock on that
exchange. If shares of common stock are not listed by NASDAQ,
the Board shall determine the fair market value pursuant to
Section 422 of the Code.
7. Stock Options. The committee
may recommend to the Board the grant of stock options to an
employee upon such terms and conditions as the committee deems
appropriate under this Section 7.
(a) Number of Shares. The
committee shall recommend the number of shares of Class A
common stock that will be subject to each grant of stock options.
(b) Type of Stock Option, Price and
Term. The committee may recommend to the
Board the grant of stock options to purchase Class A common
stock that the Company intends to qualify as incentive stock
options within the meaning of Section 422 of the Code, or
incentive stock options, or stock options that the Company does
not intend to so qualify, or non-qualified stock options. The
committee shall recommend the exercise price of shares of
Class A common stock subject to a stock option, which shall
be equal to or greater than the fair market value of a share of
Class A common stock on the date of grant.
(c) Exercisability of Stock
Options. Each stock option agreement shall
specify the period or periods of time within which a grantee may
exercise a stock option, in whole or in part, as the Board
determines. No
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grantee may exercise a stock option after ten years from the
grant date of the stock option. The Board may accelerate the
exercisability of any or all outstanding stock options at any
time for any reason.
(d) Termination of
Employment. Except as provided in the stock
option agreement, a grantee may exercise a stock option only
while the Company, Donegal Mutual or any of their respective
subsidiaries employs the grantee. The Board shall specify in the
option agreement under what circumstances and during what time
periods a grantee may exercise a stock option after employment
terminates. If the term of an incentive stock option continues
for more than three months after employment terminates due to
retirement or more than one year after termination of employment
due to death or disability, the stock option shall lose its
status as an incentive stock option and the Company shall treat
such stock option as a non-qualified stock option.
(e) Exercise of Stock Options. A
grantee may exercise a stock option that has become exercisable,
in whole or in part, by delivering a notice of exercise to the
Company. The grantee shall pay the exercise price for the stock
option:
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in cash;
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by delivery of shares of Class A common stock at fair
market value, shares of Class B common stock at fair market
value, or a combination of those shares, as the committee or the
Board may determine from time to time and subject to the terms
and conditions as the committee or the Board may prescribe;
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by payment through a brokerage firm of national standing whereby
the grantee will simultaneously exercise the stock option and
sell the shares acquired upon exercise through the brokerage
firm and the brokerage firm shall remit to the Company from the
proceeds of the sale of the shares the exercise price as to
which the option has been exercised in accordance with the
procedures permitted by Regulation T of the Federal Reserve
Board; or
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by any other method the committee or the Board authorizes.
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The Company must receive payment for the shares acquired upon
exercise of the stock option, and any required withholding taxes
and related amounts, by the time the committee specifies
depending on the type of payment being made, but in all cases
prior to the issuance of the shares.
(f) Incentive Stock Options. The
committee shall recommend other terms and conditions of an
incentive stock option as the committee deems necessary or
desirable in order to qualify such stock option as an incentive
stock option under Section 422 of the Code, including the
following provisions, which the committee may omit or modify if
no longer required under that section:
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As determined as of the grant date, the aggregate fair market
value of shares subject to incentive stock options that first
become exercisable by a grantee during any calendar year, under
all plans of the Company, shall not exceed $100,000;
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The exercise price of any incentive stock option granted to an
individual who owns stock having more than 10% of the total
combined voting power of all classes of stock of the Company
must be at least 110% of the fair market value of the shares
subject to the incentive stock option on the grant date, and the
individual may not exercise the incentive stock option after the
expiration of five years from the date of grant; and
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The grantee may not exercise the incentive stock option more
than three months, or one year in the case of death or
disability within the meaning of the applicable Code provisions,
after termination of employment.
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8. Stock Awards. The committee may
recommend to the Board the issuance of shares of Class A
common stock to an employee upon such terms and conditions as
the committee deems appropriate under this Section 8. The
committee may recommend to the Board the issuance of shares of
Class A common stock for cash consideration or for no cash
consideration, and subject to restrictions or no restrictions.
The committee may recommend conditions under which restrictions
on stock awards shall lapse over a period of time or
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according to other criteria as the committee deems appropriate,
including restrictions based upon the achievement of specific
performance goals.
(a) Number of Shares. The
committee shall recommend the number of shares of Class A
common stock to be issued pursuant to a stock award and any
restrictions applicable to the stock award.
(b) Requirement of Employment. The
Board shall specify in the stock award agreement under what
circumstances a grantee may retain stock awards after
termination of the grantees employment and under what
circumstances the grantee may forfeit the stock awards.
(c) Restrictions on
Transfer. During the period that the stock
award is subject to restrictions, a grantee may not sell,
assign, transfer, pledge or otherwise dispose of the shares of
the stock award except upon death as described in
Section 13. Each certificate representing a share of
Class A common stock issued under the stock award shall
contain a legend giving appropriate notice of the restrictions
on the stock award. The grantee shall be entitled to have the
legend removed when all restrictions on the shares subject to
the stock award have lapsed. The Company may maintain possession
of any certificates representing shares subject to the stock
award until all restrictions on the shares subject to the stock
award have lapsed.
(d) Right To Vote and To Receive
Dividends. The committee shall recommend to
what extent, and under what conditions, the grantee shall have
the right to vote the shares subject to the stock award and to
receive any dividends or other distributions paid on the shares
during the restriction period.
9. Other Stock-Based Awards. The
committee may recommend to the Board the grant of other awards
that are based on, measured by or payable in Class A common
stock to an employee on such terms and conditions as the
committee deems appropriate under this Section 9. The
committee may recommend to the Board the grant of other
stock-based awards subject to achievement of performance goals
or other conditions and may be payable in shares of Class A
common stock or cash, or a combination of cash and shares, as
recommended by the committee in the stock-based award agreement.
10. Grant Date. The grant date of
an award under this Plan shall be the date of the Board of
Directors approval or such later date as may be determined
by the Board at the time it authorizes the award. The Board may
not make retroactive grants of awards under this Plan. The
Company shall provide notice of the award to the grantee within
a reasonable time after the grant date.
11. Withholding. All grants under
this Plan shall be subject to applicable federal, including
FICA, state and local tax withholding requirements. The Company
may require that the grantee or other person receiving or
exercising a grant pay to the Company the amount of any federal,
state or local taxes that the Company is required to withhold
with respect to the grant, or the Company may deduct from other
wages paid to the grantee the amount of any withholding taxes
due with respect to the grants. The Board or the committee may
permit a grantee to elect to satisfy the Companys tax
withholding obligations with respect to grants paid in shares of
Class A common stock by having shares of Class A
common stock withheld, at the time such grants become taxable,
up to an amount that does not exceed the minimum applicable
withholding tax rate for federal, including FICA, state and
local tax liabilities. The Board or committee will value any
shares so withheld as of the date the grants become taxable.
12. Transferability of
Grants. Only the grantee of an award may
exercise rights under the award grant during the grantees
lifetime, and a grantee may not transfer those rights except by
will or by the laws of descent and distribution. When a grantee
dies, the personal representative or other person entitled to
succeed to the rights of the grantee may exercise those rights.
Any successor to a grantee must furnish proof satisfactory to
the Company of his or her right to receive the award under the
grantees will or under the applicable laws of descent and
distribution.
13. Requirements for Issuance of
Shares. The Company will not issue shares of
Class A common stock in connection with any award under
this Plan until the issuance of the shares complies with all
applicable legal requirements to the satisfaction of the Board.
The Board shall have the right to condition any award made to
any employee under this Plan on the employees undertaking
in writing to comply with the restrictions on his or her
subsequent disposition of shares subject to the award as the
Board shall deem necessary or advisable, and the Company may
legend certificates representing those shares to reflect any
such restrictions. Certificates representing shares of
Class A common stock issued under this Plan will be subject
to
B-4
such stop-transfer orders and other restrictions as applicable
laws, regulations and interpretations may require, including any
requirement that a legend be placed thereon. No grantee shall
have any right as a stockholder with respect to shares of
Class A common stock covered by an award until shares have
been issued to the grantee.
14. Amendment and Termination of this Plan.
(a) Amendments. The Board may
amend or terminate this Plan at any time, except that the Board
shall not amend this Plan without approval of the stockholders
of the Company if such approval is required in order to comply
with the Code or applicable laws, or to comply with applicable
stock exchange requirements. The Board may not, without the
consent of the grantee, negatively affect the rights of a
grantee under any award previously granted under this Plan.
(b) No Repricing Without Stockholder
Approval. The Board may not reprice stock
options nor may the Board amend this Plan to permit repricing of
options unless the stockholders of the Company provide prior
approval for the repricing.
(c) Termination. This Plan shall
terminate on April 20, 2021, unless the Board terminates
this Plan earlier or the term is extended with the approval of
the stockholders of the Company. The termination of this Plan
shall not impair the power and authority of the Board or the
committee with respect to an outstanding award.
15. Grants in Connection with Corporate Transactions
and Otherwise. Nothing contained in this Plan
shall be construed to:
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limit the right of the Board to grant awards under this Plan in
connection with the acquisition, by purchase, lease, merger,
consolidation or otherwise, of the business or assets of any
corporation, firm or association, including awards to employees
of those entities who become employees, or for other proper
corporate purposes; or
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limit the right of the Company to grant stock options or make
other stock-based awards outside of this Plan.
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Without limiting the foregoing, the Board may grant an award to
an employee of another corporation or other entity who becomes
an employee by reason of a corporate merger, consolidation,
acquisition of stock or property, reorganization or liquidation
involving the Company in substitution for a grant made by that
corporation or other entity. The terms and conditions of the
awards may vary from the terms and conditions this Plan requires
and from those of the substituted stock awards, as the Board
determines.
16. Right to Terminate
Employment. Nothing contained in this Plan or
in any award agreement entered into pursuant to this Plan shall
confer upon any grantee the right to continue in the employment
of the Company or any of its subsidiaries or the Group or affect
any right that the Company or any of its subsidiaries or the
Group may have to terminate the employment of the grantee.
17. Reservation of Shares. The
Company, during the term of this Plan, shall at all times
reserve and keep available the number of shares of Class A
common stock needed to satisfy the requirements of this Plan.
The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which the Companys
counsel has deemed such authority to be necessary to the lawful
issuance and sale of any shares under this Plan, shall relieve
the Company of any liability for the failure to issue or sell
any shares as to which the Company has not obtained such
requisite authority.
18. Effect on Other
Plans. Participation in this Plan shall not
affect an employees eligibility to participate in any
other benefit or incentive plan of the Company or any of its
subsidiaries or the Group. The Company shall not use any awards
granted pursuant to this Plan in determining the benefits
provided under any other plan unless specifically provided.
19. Forfeiture for
Dishonesty. Notwithstanding anything to the
contrary in this Plan, if the Board finds, by a majority vote,
after full consideration of the facts presented on behalf of
both the Company and any grantee, that the grantee has engaged
in fraud, embezzlement, theft, commission of a felony or
dishonest conduct in the course of his employment that damaged
the Company or any of its subsidiaries or the Group or that the
grantee has disclosed confidential information of the Company or
any of its subsidiaries or the Group,
B-5
the grantee shall forfeit all unexercised or unvested awards and
all exercised or vested awards under which the Company has not
yet delivered the certificates or cash payments therefor. The
decision of the Board in interpreting and applying the
provisions of this Section 19 shall be final. No decision
of the Board, however, shall affect the finality of the
discharge or termination of the grantee.
20. No Prohibition on Corporate
Action. No provision of this Plan shall be
construed to prevent the Company or any officer or director of
the Company from taking any action the Company or such officer
or director of the Company deems to be appropriate or in the
Companys best interest, whether or not such action could
have an adverse effect on this Plan or any awards granted under
this Plan, and no grantee or grantees estate, personal
representative or beneficiary shall have any claim against the
Company or any officer or director of the Company as a result of
the taking of the action.
21. Indemnification. With respect
to the administration of this Plan, the Company shall indemnify
each present and future member of the committee and the Board
against, and each member of the committee and the Board shall be
entitled without further action on such members part to
indemnity from the Company for, all expenses, including the
amount of judgments and the amount of approved settlements made
with a view to the curtailment of costs of litigation, other
than amounts paid to the Company itself, such member reasonably
incurs in connection with or arising out of, any action, suit or
proceeding in which he or she may be involved by reason of being
or having been a member of the committee or the Board, whether
or not he or she continues to be such member at the time of
incurring such expenses; provided, however, that this indemnity
shall not include any expenses such member incurs (i) in
respect of matters as to which he or she shall be finally
adjudged in any such action, suit or proceeding to have been
guilty of gross negligence or willful misconduct in the
performance of his or her duty as such member of the committee
or the Board; or (ii) in respect of any matter in which any
settlement is effected for an amount in excess of the amount
approved by the Company on the advice of its legal counsel; and
provided further that no right of indemnification under the
provisions set forth in this Section 21 shall be available
to or enforceable by any such member of the committee or the
Board unless, within 60 days after institution of any such
action, suit or proceeding, he or she shall have offered the
Company in writing the opportunity to handle and defend the same
at its own expense. The foregoing right of indemnification shall
inure to the benefit of the heirs, executors or administrators
of each such member of the committee or the Board and shall be
in addition to all other rights to which such member may be
entitled as a matter of law, contract or otherwise.
22. Miscellaneous Provisions.
(a) Compliance with Plan
Provisions. No grantee or other person shall
have any right with respect to this Plan, the Class A
common stock reserved for issuance under this Plan or in any
award until the Company and the grantee executed a written
agreement and all the terms, conditions and provisions of this
Plan and the award applicable to the grantee have been met.
(b) Approval of Counsel. In the
discretion of the Board, no shares of Class A common stock,
other securities or property of the Company or other forms of
payment shall be issued under this Plan with respect to any
award unless counsel for the Company is satisfied that such
issuance will be in compliance with applicable federal, state,
local and foreign legal, securities exchange and other
applicable requirements.
(c) Compliance with
Rule 16b-3. To
the extent that
Rule 16b-3
under the Exchange Act applies to this Plan or to awards granted
under this Plan, it is the intention of the Company that this
Plan comply in all respects with the requirements of
Rule 16b-3,
that any ambiguities or inconsistencies in construction of this
Plan be interpreted to give effect to such intention and that,
if this Plan shall not so comply, whether on the date of
adoption or by reason of any later amendment to or
interpretation of
Rule 16b-3,
the provisions of this Plan shall be deemed to be automatically
amended so as to bring them into full compliance with such rule.
B-6
(d) Section 409A
Compliance. This Plan is intended to comply
with the requirements of Section 409A of the Code and the
regulations issued thereunder. To the extent of any
inconsistencies with the requirements of Section 409A, this
Plan shall be interpreted and amended in order to meet the
requirements of Section 409A. Notwithstanding anything
contained in this Plan to the contrary, it is the intent of the
Company to have this Plan interpreted and construed to comply
with any and all provisions Section 409A including any
subsequent amendments, rulings or interpretations from
appropriate governmental agencies.
(e) Effects of Acceptance of the
Award. By accepting any award or other
benefit under this Plan, each grantee and each person claiming
under or through the grantee shall be conclusively deemed to
have indicated his acceptance and ratification of, and consent
to, any action taken under this Plan by the Company, the Board
or the committee or its delegates.
Date of Adoption by Board: March 7, 2011.
B-7
APPENDIX C
DONEGAL
GROUP INC.
2011
EQUITY INCENTIVE PLAN FOR DIRECTORS
1. Purpose. The purpose of this
2011 equity incentive plan for directors (this Plan)
is to enhance the ability of Donegal Group Inc. (the
Company) and its subsidiaries and the member
companies of the Donegal Insurance Group, including companies
from which the Company or Donegal Mutual assumes 100% quota
share reinsurance (the Group), to attract and retain
highly qualified directors, to establish a basis for providing a
portion of director compensation in the form of equity and, in
doing so, to strengthen the alignment of the interest of
directors of the Company and the members of the Group with the
interests of the Companys stockholders.
2. Administration.
(a) Administration by the
Board. The Board of Directors of the Company
(the Board) shall administer this Plan.
(b) Duty and Powers of the
Board. The Board shall have the power to
interpret this Plan and the awards granted under this Plan and
to adopt rules for the administration, interpretation and
application of this Plan. The Board shall have the discretion to
determine to whom the Company will grant stock options and to
determine the number of stock options the Company will grant to
any director, the timing of the grant and the terms of exercise.
The Board shall not have any discretion to determine to whom the
Company will grant restricted stock awards under this Plan.
(c) Compensation; Professional Assistance; Good Faith
Actions. Members of the Board shall not
receive any compensation for their services in administering
this Plan. The Company shall pay all expenses and liabilities
incurred in connection with the administration of this Plan. The
Company may employ attorneys, consultants, accountants or other
experts. The Board, the Company and the officers and directors
of the Company shall be entitled to rely upon the advice,
opinions or valuations of any such experts. All actions taken
and all interpretations and determinations the Board makes in
good faith shall be final and binding upon all grantees, the
Company and all other interested persons. No member of the Board
shall be personally liable for any action, determination or
interpretation the Board makes in good faith with respect to
this Plan, and the Company shall fully protect and indemnify all
members of the Board in respect to any such action,
determination or interpretation.
3. Shares Subject to this Plan.
(a) Shares Authorized. The
shares of stock issuable pursuant to awards shall be shares of
Class A common stock. The total aggregate number of shares
of Class A common stock that the Company may issue under
this Plan is 400,000 shares, subject to adjustment as
described below. The shares may be authorized but unissued
shares or reacquired shares for purposes of this Plan.
(b) Share Counting. For
administrative purposes, when the Board approves an award
payable in shares of Class A common stock, the Board shall
reserve, and count against the share limit, shares equal to the
maximum number of shares that the Company may issue under the
award. If and to the extent options granted under this Plan
terminate, expire or are canceled, forfeited, exchanged or
surrendered without having been exercised, and if and to the
extent that any restricted stock awards are forfeited or
terminated, or otherwise are not paid in full, the Company shall
make the shares reserved for such awards available again for
purposes of this Plan.
(c) Adjustments. If any change in
the number or kind of shares of Class A common stock
outstanding occurs by reason of:
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a stock dividend, spinoff, recapitalization, stock split or
combination or exchange of shares;
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a merger, reorganization or consolidation;
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a reclassification or change in par value; or
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any other extraordinary or unusual event affecting the
outstanding Class A common stock as a class without the
Companys receipt of consideration, or if the value of
outstanding shares of Class A common stock is substantially
reduced as a result of a spinoff or the Companys payment
of any extraordinary dividend or distribution,
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the maximum number of shares of Class A common stock
available for issuance under this Plan, the maximum number of
shares of Class A common stock for which any individual may
receive grants in any year, the kind and number of shares
covered by outstanding awards, the kind and number of shares to
be issued or issuable under this Plan and the price per share or
applicable market value of such grants shall automatically be
equitably adjusted to reflect any increase or decrease in the
number of, or change in the kind or value of, issued shares of
Class A common stock to preclude, to the extent
practicable, the enlargement or dilution of rights and benefits
under this Plan and such outstanding grants. Any fractional
shares resulting from such adjustment shall be eliminated. Any
adjustments to outstanding awards shall be consistent with
Section 409A of the Internal Revenue Code of 1986, as
amended, or the Code, to the extent applicable.
4. Eligibility for
Participation. Each director of the Company
and its subsidiaries and each director of a member of the Group
who is not eligible to receive stock options under the
Companys Equity Incentive Plan for Employees shall be
eligible to receive stock options under this Plan. Each director
of the Company and each director of the member companies of the
Group shall be eligible to receive restricted stock awards under
this Plan.
5. Awards. Awards under this Plan
may consist of stock options as described in Section 7 and
restricted stock awards as described in Section 8. Each
award shall be evidenced by a written agreement.
6. Definition of Fair Market
Value. For purposes of this Plan, fair
market value shall mean the last sales price of a share of
Class A common stock on the NASDAQ Stock Market, or NASDAQ,
on the day on which the board is determining the fair market
value, as reported by NASDAQ. In the event that there are no
transactions in shares of Class A common stock on NASDAQ on
such day, the Board will determine the fair market value as of
the immediately preceding day on which there were transactions
in shares of Class A common stock on that exchange. If
shares of Class A common stock are not listed by NASDAQ,
the Board shall determine the fair market value pursuant to
Section 422 of the Code.
7. Stock Options.
(a) Granting of Stock Options. The
Board may grant stock options to an outside director upon such
terms as the Board deems appropriate under this Section 7.
(b) Type of Stock Option and
Price. The Board may grant stock options to
purchase Class A common stock that the Board does not
intend to qualify as incentive stock options within the meaning
of Section 422 of the Code. The Board shall determine the
exercise price of shares of Class A common stock subject to
a stock option, which shall be equal to or greater than the fair
market value of a share of Class A common stock on the date
of grant.
(c) Exercisability of Stock
Options. Each stock option agreement shall
specify the period or periods of time within which a grantee may
exercise a stock option, in whole or in part, as the Board
determines. No grantee may exercise a stock option after ten
years from the grant date of the stock option. The Board may
accelerate the exercisability of any or all outstanding stock
options at any time for any reason.
(d) Rights upon Termination of
Service. Upon a grantees termination of
service as an outside director, as a result of resignation,
failure to be re-elected, removal for cause or any reason other
than death, the grantee shall have the right to exercise the
stock option during its term within a period of three years
after such termination to the extent that the stock option was
exercisable at the time of termination, or within such other
period, and subject to such terms and conditions, as the Board
may specify. In the event that a grantee dies prior to the
expiration of his or her stock option and without having fully
exercised his or her stock option, the grantees
representative or successor shall have the right to exercise the
stock option during its term within a period of one year after
the grantees death to the extent that the stock option was
exercisable at the time of death, or within such other period,
and subject to such terms and conditions, as the Board may
specify.
C-2
(e) Exercise of Stock Options. A
grantee may exercise a stock option that has become exercisable,
in whole or in part, by delivering a notice of exercise to the
Company. The grantee shall pay the exercise price for the stock
option:
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in cash;
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by delivery of shares of Class A common stock at fair
market value, shares of Class B common stock at fair market
value, or a combination of those shares, as the Board may
determine from time to time and subject to the terms and
conditions as the Board may prescribe;
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by payment through a brokerage firm of national standing whereby
the grantee will simultaneously exercise the stock option and
sell the shares acquired upon exercise through the brokerage
firm and the brokerage firm shall remit to the Company from the
proceeds of the sale of the shares the exercise price as to
which the option has been exercised in accordance with the
procedures permitted by Regulation T of the Federal Reserve
Board; or
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by any other method the Board authorizes.
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The Company must receive payment for the shares acquired upon
exercise of the stock option, and any required withholding taxes
and related amounts, by the time the Board specifies depending
on the type of payment being made, but in all cases prior to the
issuance of the shares.
8. Restricted Stock Awards.
(a) Granting of Awards. The
Company shall grant each director of the Company and each
director of Donegal Mutual an annual restricted stock award
consisting of 400 shares of Class A common stock,
except that a person who serves as a director on both boards
shall receive only one annual grant. The Company shall grant the
restricted stock awards on the first business day of January in
each year, commencing January 2, 2012, provided that the
director served as a member of the Board or of the board of
directors of a member of the Group during any portion of the
preceding calendar year.
(b) Terms of Restricted Stock
Awards. Each restricted stock award agreement
shall contain such restrictions, terms and conditions as this
Plan requires:
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The grantee may not sell or otherwise transfer the shares of
Class A common stock comprising the restricted stock awards
until one year after the date of grant. Although the Company
shall register the shares of Class A common stock
comprising each restricted stock award in the name of the
grantee, the Company reserves the right to place a restrictive
legend on the stock certificate. None of such shares of
Class A common stock shall be subject to forfeiture.
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Subject to the restrictions on transfer set forth in this
Section 8(b), a grantee shall have all the rights of a
stockholder with respect to the shares of Class A common
stock the Company issues pursuant to restricted stock awards
made under this Plan, including the right to vote the shares and
receive all dividends and other distributions paid or made with
respect to the shares.
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In the event of changes in the capital stock of the Company by
reason of stock dividends,
split-ups or
combinations of shares, reclassifications, mergers,
consolidations, reorganizations or liquidations while the shares
comprising a restricted stock award shall be subject to
restrictions on transfer, any and all new, substituted or
additional securities to which the grantee shall be entitled by
reason of the ownership of a restricted stock award shall be
subject immediately to the terms, conditions and restrictions of
this Plan.
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If a grantee receives rights or warrants with respect to any
shares comprising a restricted stock award, the grantee may
hold, exercise, sell or otherwise dispose of such rights or
warrants or any shares or other securities acquired by the
exercise of such rights or warrants free and clear of the
restrictions and obligations set forth in this Plan.
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9. Date of Grant. The grant date
of a stock option under this Plan shall be the date of the
Boards approval or such later date as the Board determines
at the time it authorizes the grant. The Board may not make
retroactive grants of stock options under this Plan. The Company
shall provide notice of the grant to the grantee within a
reasonable time after the grant date.
C-3
10. Requirements for Issuance of
Shares. The Company will not issue shares of
Class A common stock in connection with any award under
this Plan until the issuance of the shares complies with all of
the applicable legal requirements to the satisfaction of the
Board. The Board shall have the right to condition any award
made to any director on the directors undertaking in
writing to comply with the restrictions on his or her subsequent
disposition of shares subject to the award as the Board shall
deem necessary or advisable, and certificates representing those
shares may be legended to reflect any such restrictions.
Certificates representing shares of Class A common stock
issued under this Plan will be subject to such stop-transfer
orders and other restrictions as applicable laws, regulations
and interpretations may require, including any requirement that
a legend be placed on the certificate.
11. Withholding. The Company shall
have the right to require the grantee to remit to the Company an
amount sufficient to satisfy any federal, state or local
withholding tax requirements prior to the delivery of any
certificate for shares of Class A common stock. If and to
the extent the Board authorizes, in its sole discretion, a
grantee may make an election, by means of a form of election the
Board prescribes, to have shares of Class A common stock
that are acquired upon exercise of a stock option withheld by
the Company or to tender other shares of Class A common
stock or other securities of the Company owned by the grantee to
the Company at the time of exercise of a stock option to pay the
amount of tax that would otherwise be required by law to be
withheld by the Company. Any such election shall be irrevocable
and shall be subject to termination by the Board, in its sole
discretion, at any time. Any securities so withheld or tendered
will be valued by the Board as of the date of exercise.
12. Transferability of
Awards. Only the grantee of an award may
exercise rights under the award grant during the grantees
lifetime, and a grantee may not transfer those rights except by
will or by the laws of descent and distribution. When a grantee
dies, the personal representative or other person entitled to
succeed to the rights of the grantee may exercise those rights.
Any successor to a grantee must furnish proof satisfactory to
the Company of his or her right to receive the award under the
grantees will or under the applicable laws of descent and
distribution. Except as stated in this Section 12, no stock
option or interest therein and, for a period of one year after
the date of grant, no restricted stock award or any interest
therein, shall be subject to the debts, contracts or engagements
of the grantee or his or her successors in interest, nor shall
they be subject to disposition by transfer, alienation,
anticipation, pledge, encumbrance, assignment or any other
means, whether such disposition is voluntary or involuntary or
by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings, including
bankruptcy, and any attempted disposition thereof shall be null
and void and of no effect.
13. Amendment and Termination of this Plan.
(a) Amendments. The Board may
amend or terminate this Plan at any time, except that the Board
shall not amend this Plan without approval of the stockholders
of the Company if such approval is required in order to comply
with the Code or applicable laws, or to comply with applicable
stock exchange requirements. The Board may not, without the
consent of the grantee, negatively affect the rights of a
grantee under any award previously granted under this Plan.
(b) No Repricings Without Stockholder
Approval. The Board may not reprice stock
options, nor may the Board amend this Plan to permit repricing
of stock options unless the stockholders of the Company provide
prior approval for the repricing.
(c) Termination. This Plan shall
terminate on April 21, 2021, unless the Board earlier
terminates this Plan or the term is extended with the approval
of the stockholders of the Company. The termination of this Plan
shall not impair the power and authority of the Board with
respect to an outstanding award.
C-4
14. Reservation of Shares. The
Company, during the term of this Plan, shall at all times
reserve and keep available the number of shares of Class A
common stock needed to satisfy the requirements of this Plan.
The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority the
Companys counsel deems necessary to the lawful issuance
and sale of any shares under this Plan, shall relieve the
Company of any liability for the failure to issue or sell any
shares as to which the requisite authority the Company has not
obtained.
15. No Prohibition on Corporate
Action. No provision of this Plan shall be
construed to prevent the Company or any officer or director of
the Company from taking any action the Company or such officer
or director deems appropriate or in the Companys best
interest, whether or not such action could have an adverse
effect on this Plan or any awards granted under this Plan, and
no grantee or grantees estate, personal representative or
beneficiary shall have any claim against the Company or any
officer or director of the Company as a result of the taking of
the action.
16. Indemnification. With respect
to the administration of this Plan, the Company shall indemnify
each present and future member of the Board against, and each
member of the Board shall be entitled without further action on
such members part to indemnity from the Company for, all
expenses, including the amount of judgments and the amount of
approved settlements made with a view to the curtailment of
costs of litigation, other than amounts paid to the Company
itself, reasonably incurred by him or her in connection with or
arising out of, any action, suit or proceeding in which he or
she may be involved by reason of being or having been a member
of the Board, whether or not he or she continues to be such
member at the time of incurring such expenses; provided,
however, that this indemnity shall not include any expenses
incurred by any such member of the Board (i) in respect of
matters as to which he or she shall be finally adjudged in any
such action, suit or proceeding to have been guilty of gross
negligence or willful misconduct in the performance of his or
her duty as such member of the Board or (ii) in respect of
any matter in which any settlement is effected for an amount in
excess of the amount approved by the Company on the advice of
its legal counsel; and provided further that no right of
indemnification under the provisions set forth in this
Section 16 shall be available to or enforceable by any such
member of the Board unless, within 60 days after
institution of any such action, suit or proceeding, he or she
shall have offered the Company in writing the opportunity to
handle and defend same at its own expense. The foregoing right
of indemnification shall inure to the benefit of the heirs,
executors or administrators of each such member of the Board and
shall be in addition to all other rights to which such member
may be entitled as a matter of law, contract or otherwise.
17. Miscellaneous Plan Provisions.
(a) Compliance with Plan
Provisions. No grantee or other person shall
have any right with respect to this Plan, the Class A
common stock reserved for issuance under this Plan or in any
award until the Company and the grantee execute a written
agreement and the Company and grantee satisfy all the applicable
terms, conditions and provisions of this Plan and award.
(b) Approval of Counsel. In the
discretion of the Board, no shares of Class A common stock,
other securities or property of the Company or other forms of
payment shall be issued hereunder with respect to any award
unless counsel for the Company shall be satisfied that such
issuance will be in compliance with applicable federal, state,
local and foreign legal, securities exchange and other
applicable requirements.
(c) Compliance with
Rule 16b-3. To
the extent that
Rule 16b-3
under the Securities Exchange Act of 1934, as amended, applies
to awards granted under this Plan, it is the intention of the
Company that this Plan comply in all respects with the
requirements of
Rule 16b-3,
that any ambiguities or inconsistencies in construction of this
Plan be interpreted to give effect to such intention and that if
this Plan shall not so comply, whether on the date of adoption
or by reason of any later amendment to or interpretation of
Rule 16b-3,
the provisions of this Plan shall be deemed to be automatically
amended so as to bring them into full compliance with that rule.
C-5
(d) Section 409A
Compliance. This Plan is intended to comply
with the requirements of Section 409A of the Code and the
regulations issued thereunder. To the extent of any
inconsistencies with the requirements of Section 409A, this
Plan shall be interpreted and amended in order to meet the
requirements of Section 409A. Notwithstanding anything
contained in this Plan to the contrary, it is the intent of the
Company to have this Plan interpreted and construed to comply
with any and all provisions Section 409A including any
subsequent amendments, rulings or interpretations from
appropriate governmental agencies.
(e) Effects of Acceptance of the
Award. By accepting any award or other
benefit under this Plan, the Company shall conclusively deem
each grantee and each person claiming under or through the
grantee to have indicated his acceptance and ratification of,
and consent to, any action taken under this Plan by the Company,
the Board or its delegates.
Adopted by the Board on March 7, 2011.
C-6
6 IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. 6
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Proxy DONEGAL GROUP INC.
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 21, 2011
This Proxy Solicited on behalf of the Board of Directors
The undersigned hereby appoints Daniel J. Wagner and Jeffrey
D. Miler, and each or either of them, proxies of the undersigned,
with full power of substitution, to vote all of the shares
of Class A common stock and Class B common stock of Donegal Group
Inc. (the Company) that the undersigned may be entitled to vote
at the Annual Meeting of Stockholders of the Company to be held at
the Companys offices, 1195 River Road, Marietta, Pennsylvania
17547, on
April 21, 2011 at 10:00 a.m., and at any adjournment or postponement thereof, as set forth on the reverse side of this proxy card.
You are encouraged to specify your choices by marking
the appropriate boxes, SEE REVERSE SIDE, but you need not mark any
boxes if you wish to vote in accordance with our board of
directors recommendations.
C Non-Voting Items
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Change of Address
Please print new address below.
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IF VOTING BY MAIL, YOU MUST COMPLETE SECTIONS A - C ON BOTH SIDES OF THIS CARD. |
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Using a black ink pen, mark your votes with an X as
shown in
this example. Please do not write outside the designated areas. |
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Electronic Voting Instructions
You can vote by Internet or telephone!
Available 24 hours a day, 7 days a week!
Instead of mailing your proxy, you may choose one of the two voting
methods outlined below to vote
your proxy.
VALIDATION DETAILS ARE LOCATED BELOW IN THE TITLE BAR.
Proxies submitted by the Internet or telephone must be
received by 1:00 a.m., Central Time, on April 20, 2011.
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Vote by Internet |
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Log on to the Internet and go to |
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www.investorvote.com/DGIC |
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Follow the steps outlined on the secured website. |
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Vote by telephone |
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Call toll free 1-800-652-VOTE (8683) within the USA,
US territories & Canada any time on a touch tone
telephone. There is NO CHARGE to you for the call.
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Follow the instructions provided by the recorded message. |
6 IF YOU HAVE NOT VOTED VIA THE INTERNET OR TELEPHONE, FOLD ALONG THE
PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE. 6
A
Proposals |
Our Board of Directors recommends a vote FOR each nominee listed in Proposal 1, FOR
Proposal 2, FOR Proposal 3, for THREE YEARS under Proposal 4, FOR Proposal 5, FOR Proposal
6 and FOR Proposal 7. |
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1.
Election of Class A Directors:
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For
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Withhold |
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01 - Robert S.
Bolinger
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03 - Philip H. Glatfelter, II
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02 - Patricia A.
Gilmartin
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04 - Jack L. Hess
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For |
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2.
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Ratification of KPMG LLP as our independent registered public accounting firm for 2011. |
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Approval of our 2011 Employee Stock Purchase Plan. |
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3.
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Approval, by a non-binding vote, of the executive compensation of our named
executive officers during 2010. |
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Approval of our 2011 Equity Incentive Plan for Employees. |
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1 Yr |
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Abstain |
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Approval of our 2011 Equity Incentive Plan for Directors. |
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4.
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Determination, by a non-binding vote of our stockholders, of the frequency of our
stockholder vote to approve the compensation of our named executive officers every one, two or three years. |
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B Authorized Signatures This section must be completed for your
vote to be counted. Date and Sign Below.
Please sign exactly as name(s) appears hereon. Joint owners should
each sign. When signing as attorney, executor, administrator, corporate officer, trustee, guardian, or custodian, please give
full title.
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Date (mm/dd/yyyy) Please print date below. |
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Signature 1 Please keep signature within the box. |
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Signature 2 Please keep signature within the box. |
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01ADAD