Direct General Corporation
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
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
DIRECT GENERAL CORPORATION
(Name of Registrant as Specified In
Its Charter)
Not Applicable
(Name of Person(s) Filing Proxy
Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
o No fee required.
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Fee computed on table below per Exchange Act
Rules 14a-6(i)(1)
and 0-11.
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1)
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Title of each class of securities to which transaction applies:
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Common stock, no par value per share, of Direct General
Corporation (Direct General Common Stock)
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2)
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Aggregate number of securities to which transaction applies:
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20,347,675 shares of Direct General Common Stock; 952,200
options to purchase Direct General Common Stock
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3)
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Per unit price or other underlying value of transaction computed
pursuant to Exchange Act
Rule 0-11
(set forth the amount on which the filing fee is calculated and
state how it was determined):
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$21.25 per share of Direct General Common Stock; $21.25
minus the actual exercise prices of outstanding options to
purchase 946,200 shares of Direct General Common Stock
which have exercise prices less than $21.25 per share
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4)
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Proposed maximum aggregate value of transaction:
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$433,740,194.00
$46,411.00
þ Fee paid
previously with preliminary materials:
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Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify the
previous filing by registration statement number, or the form or
schedule and the date of its filing.
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1)
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Amount Previously Paid:
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2)
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Form, Schedule or Registration Statement No.:
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Dear Fellow Shareholder:
On December 4, 2006, Direct General Corporation
(Direct General) entered into an Agreement and Plan
of Merger, which we refer to as the merger agreement, with Elara
Holdings, Inc. (Parent), an affiliate of Fremont
Partners and Texas Pacific Group, and Elara Merger Corporation
(Sub), a wholly owned subsidiary of Parent, pursuant
to which we will become a wholly owned subsidiary of Parent. A
special meeting of our shareholders will be held on
March 8, 2007, at 11:00 a.m. local time to vote
on a proposal to approve the merger agreement and the
transactions contemplated thereby so that the merger can occur.
The meeting will be held at our corporate headquarters located
at 1281 Murfreesboro Road, Nashville, Tennessee 37217. Notice of
the special meeting is enclosed.
If the merger is completed, you will be entitled to receive
$21.25 in cash, without interest and less any applicable
withholding tax, for each share of Direct General common stock
that you own. This price represents a premium of approximately
29% over the closing price of Direct Generals common stock
on December 4, 2006, the last trading date before the
public announcement that Direct General and Parent had entered
into the merger agreement, and a premium of approximately 39%
over the average closing price for the last 30 trading days
ending on December 4, 2006.
The proxy statement attached to this letter gives you detailed
information about the special meeting and the merger and
includes the merger agreement as Annex A. The receipt of
cash in exchange for shares of common stock in the merger will
constitute a taxable transaction to U.S. taxpayers for
U.S. federal income tax purposes. We encourage you to read
the proxy statement and the merger agreement carefully.
Our board of directors (based in large part upon the unanimous
recommendation of the special committee of our board, the
members of which are not affiliated with Parent or Sub and are
not members of Direct Generals management)
(1) approved the acquisition of Direct General by Parent on
the terms and subject to the conditions set forth in the merger
agreement, (2) adopted the merger agreement and approved
the transactions contemplated thereby, and (3) recommends
that you approve the merger agreement and the transactions
contemplated thereby, including the merger.
Your vote is important. We cannot complete the merger unless
holders of a majority of all outstanding shares of common stock
vote to approve the merger agreement. Our board of directors
recommends that you vote FOR the proposal to approve
the merger agreement and the transactions contemplated thereby,
including the merger. The failure of any shareholder to vote on
the proposal to approve the merger agreement will have the same
effect as a vote against the merger.
Regardless of your decision whether to attend the special
meeting, please mark, sign and date the accompanying proxy card
and return it in the enclosed prepaid envelope.
Our board of directors and management appreciate your support of
our company, and we hope you will support this exciting
transaction.
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Sincerely,
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Stephen L. Rohde
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William C. Adair, Jr.
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Chairman of the Special
Committee
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Chairman and Chief Executive
Officer
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This transaction has not been approved or disapproved by the
Securities and Exchange Commission or any state securities
commission. Neither the Securities and Exchange Commission nor
any state securities commission has passed upon the fairness or
merits of this transaction or upon the accuracy or adequacy of
the information contained in this proxy statement. Any
representation to the contrary is a criminal offense.
The proxy statement is dated February 5, 2007 and is first
being mailed to shareholders on or about February 6, 2007.
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS
To Be Held On March 8, 2007
PLEASE TAKE NOTICE that a special meeting of shareholders of
Direct General Corporation, a Tennessee corporation, will be
held on March 8, 2007, at 11:00 a.m. local time
at Direct General Corporations corporate headquarters
located at 1281 Murfreesboro Road, Nashville, Tennessee, 37217
for the following purposes:
1) To vote on a proposal to approve the Agreement and Plan
of Merger, dated as of December 4, 2006, by and among Elara
Holdings, Inc., a Delaware corporation, Elara Merger
Corporation, a Tennessee corporation, and Direct General
Corporation, a Tennessee corporation, as the merger agreement
may be amended from time to time, and the transactions
contemplated thereby, including the merger.
2) To approve the adjournment of the special meeting, if
necessary or appropriate, to solicit additional proxies if there
are insufficient votes at the time of the meeting to approve the
merger agreement.
3) To act upon other business as may properly come before
the special meeting and any and all adjourned or postponed
sessions thereof.
We urge you to carefully read the accompanying proxy statement
as it sets forth details of the proposed merger and other
important information related to the merger.
The record date for the determination of shareholders entitled
to notice of and to vote at the special meeting is
January 31, 2007. Accordingly, only shareholders of record
as of that date will be entitled to notice of and to vote at the
special meeting or any adjournment or postponement thereof.
By Order of the Board of Directors,
Ronald F. Wilson
Secretary
Nashville, Tennessee
February 5, 2007
PLEASE MARK, SIGN, DATE, AND RETURN THE ACCOMPANYING PROXY
REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE MEETING SO THAT
YOUR SHARES WILL BE REPRESENTED AT THE MEETING.
SHAREHOLDERS WHO ATTEND THE MEETING MAY REVOKE THEIR PROXIES AND
VOTE IN PERSON.
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Page
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51
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52
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66
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67
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ANNEX A Agreement And
Plan Of Merger
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ANNEX B Opinion Of
Suntrust Robinson Humphrey
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ii
SUMMARY
TERM SHEET
This summary term sheet, together with the Questions and
Answers About the Special Meeting and the Merger
highlights selected information contained in the proxy statement
and the Annexes and may not contain all the information that may
be important to you. You should carefully read this entire proxy
statement and the other documents to which this proxy statement
refers you for a more complete understanding of the matters
being considered at the special meeting. In addition, the proxy
statement incorporates by reference important information about
Direct General Corporation into this proxy statement. You may
obtain the information incorporated by reference into this proxy
statement without charge by following the instructions in
Where You Can Find More Information found on
page 67.
The
Merger and the Merger Agreement
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The Parties to the Transaction (see
page 12). Direct General Corporation, which is a
Tennessee corporation, headquartered in Nashville, Tennessee, is
a financial services holding company whose principal operating
subsidiaries provide non-standard personal automobile insurance,
term-life insurance, premium finance and other consumer products
and services primarily on a direct basis and primarily in the
southeastern United States. Unless the context indicates
otherwise, the terms Direct General, the
Company, we, us, or
our mean Direct General Corporation and our
consolidated subsidiaries. Our common stock is traded on the
NASDAQ Global Select Market under the symbol DRCT.
Elara Holdings, Inc., which we refer to in this proxy statement
as Parent, is a Delaware corporation, headquartered in
San Francisco, California, and was formed solely for the
purpose of participating in the transactions contemplated by the
merger agreement and holding the shares of Elara Merger
Corporation and any successor by merger to Elara Merger
Corporation and has not conducted any other business activities
since its organization. Elara Merger Corporation, which we refer
to in this proxy statement as Sub, is a Tennessee corporation
formed solely for the purpose of merging with and into Direct
General and has not conducted any other business activities
since its organization. Sub is a wholly owned subsidiary of
Parent. Parent is affiliated with Fremont Partners and Texas
Pacific Group. Fremont Partners, founded in 1991, is a private
investment partnership that has managed more than
$2 billion of equity investments in 22 companies,
representing a total transaction value of $5.6 billion.
Texas Pacific Group is a private investment partnership that was
founded in 1992 and currently has more than $30 billion of
assets under management.
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The Merger (see page 50). You are being
asked to vote to approve an agreement and plan of merger, which
we refer to in this proxy statement as the merger agreement, and
the transactions contemplated thereby, which we refer to in this
proxy statement as the merger. In the merger, Sub will merge
with and into Direct General, and Direct General will continue
as the surviving corporation. As a result of the merger, Direct
General will cease to be an independent, publicly traded company
and will become a wholly-owned subsidiary of Parent.
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Merger Consideration (see page 50). Upon
completion of the merger, each issued and outstanding share of
our common stock will automatically be cancelled and cease to
exist and will be converted into the right to receive $21.25 in
cash, without interest and less any applicable withholding tax.
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Treatment of Stock Options (see
page 50). Upon consummation of the merger, all
outstanding options to purchase our common stock will become
fully vested and immediately exercisable, other than options
held by certain members of management as described under
The Merger Interests of Directors and
Executive Officers in the Merger Continuing
Investors. All such stock options, excluding options held
by certain members of our management, will be cancelled in
exchange for a cash payment of an amount equal to the excess of
$21.25 over the exercise price per share of common stock subject
to the option, multiplied by the number of shares of common
stock subject to the unexercised option, without interest and
less any applicable withholding taxes.
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Conditions to the Merger (see page 56).
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Conditions of Obligations of Each Party. The
completion of the merger depends on the satisfaction of a number
of conditions, including the following:
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The merger agreement must have been approved by the affirmative
vote of the holders of a majority of all outstanding shares of
Direct General common stock;
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No statute, rule, regulation, executive order, decree,
injunction or other order may be enacted, issued, promulgated,
enforced or entered by any governmental entity that is in effect
and has the effect of making the merger illegal or otherwise
prohibits or prevents consummation of the merger;
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All waiting periods (and any extension thereof) under the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, relating to
the merger must have expired or terminated early; and
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Direct General, Parent and each subsidiary of either of Direct
General and Parent must have received all authorizations,
consents and approvals required from any department of insurance
or department of financing in the states in which Direct General
and our subsidiaries are domiciled or where the conduct of our
business requires the approval by such departments.
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Conditions of Obligations of Direct
General. The obligations of Direct General to
complete the merger are subject to the satisfaction of the
following conditions at or prior to the closing date, unless
waived by Direct General:
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The representations and warranties of Parent and Sub contained
in the merger agreement must have been true and correct in all
material respects as of December 4, 2006, and be true and
correct in all material respects as of the closing date, except
as do not materially impede the authority of Parent or Sub to
consummate the transactions contemplated by the merger
agreement; and
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Parent and Sub must have performed or complied with each of its
agreements and covenants required by the merger agreement.
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Conditions of Obligations of Parent and
Sub. The obligations of Parent and Sub to
complete the merger are subject to the satisfaction of the
following conditions at or prior to the closing date, unless
waived by Parent and Sub:
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The representations and warranties of Direct General contained
in the merger agreement must have been true and correct as of
December 4, 2006, and be true and correct as of the closing
date as if made on the closing date, except, with respect to
certain of the representations and warranties, in each case or
in the aggregate, as does not have a material adverse effect on
Direct General and with respect to the other of the
representations and warranties, which must be true and correct
in all material respects;
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Direct General must have performed or complied in all material
respects with each of its agreements and covenants required by
the merger agreement;
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No change, event, violation, inaccuracy, circumstance or effect
that has or could reasonably be expected to have a material
adverse effect on us has occurred since December 4, 2006,
and is continuing;
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No pending or threatened suit, action or other proceeding shall
have been filed by a governmental entity challenging or seeking
to restrain or prohibit the merger or other transactions
contemplated by the merger agreement that would result in an
order, decree, or injunction with the effect of making the
merger illegal or otherwise prohibiting or preventing
consummation of the merger; and
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Parent or Sub shall have received the proceeds of the debt
financing contemplated by the financing commitments on the terms
and conditions set forth therein or on terms and conditions
reasonably acceptable to Parent or proceeds in the same
aggregate amount from other financing sources as provided in the
merger agreement.
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Restrictions on Solicitations of Other Offers (see
page 58). Under the terms of the merger
agreement, we have agreed not to:
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solicit, initiate, encourage, facilitate or induce any inquiry
with respect to, or the making, submission or announcement of,
any acquisition proposal (as defined in the merger agreement);
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participate or engage in any discussions or negotiations
regarding, or furnish to any person any nonpublic information
with respect to, or take any other action to facilitate or
encourage any inquiries or the making of any proposal that
constitutes or could reasonably be expected to lead to, any
acquisition proposal;
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approve, endorse, recommend or make or authorize any statement,
recommendation or solicitation in support of any acquisition
proposal;
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withdraw, amend or modify, or propose to withdraw, amend or
modify the recommendation of our board; or
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execute or enter into, or propose to execute or enter into, any
letter of intent or similar document or any contract, agreement
or commitment contemplating or otherwise relating to any
acquisition proposal or transaction contemplated thereby.
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Under specific circumstances set forth in the merger agreement,
including in order to comply with our board of directors
fiduciary duties, the board may withhold, withdraw, amend or
modify its recommendation, and in the event that a third party
has made a tender or exchange offer directly to you, and such
offer is a superior offer (as defined in the merger agreement),
the board may recommend that you accept the other offer, or, in
the event of a superior offer, the board may approve, endorse or
recommend such a superior offer. We may provide nonpublic
information to third parties making acquisition proposals and
engage in negotiations with such persons, provided that our
board of directors has concluded in good faith, and after
consultation with its legal and financial advisors, that such
acquisition proposal is reasonably likely to result in a
superior offer, we have complied with our obligations to not
solicit acquisition proposals, we enter into a confidentiality
agreement with the third party and we provide any information to
Parent that is provided to the third party. Please see The
Merger Agreement No Solicitations of Other
Offers.
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Termination of the Merger Agreement (see
page 59). The merger agreement may be terminated
in certain circumstances including:
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By mutual written consent of us and Parent;
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By either of us or Parent if:
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The merger shall not have been completed on or before
March 31, 2007, provided that if Parent shall have made
certain regulatory filings described in the merger agreement,
Parent may extend that date to June 30, 2007 if the only
condition to our obligations not yet satisfied is receipt of the
required insurance and finance regulatory authorizations,
consents and approvals; or
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A governmental entity shall have issued an order permanently
restraining, enjoining or otherwise prohibiting the merger and
such order is final and non-appealable; or
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Our shareholders do not approve the merger agreement at the
special meeting or any adjournment or postponement
thereof; or
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Our board of directors or any committee thereof shall have
withdrawn, amended or modified in a manner adverse to Parent its
recommendation that our shareholders approve the merger
agreement, fails to reaffirm its recommendation within five
calendar days after so requested by Parent or fails to reject or
approves or recommends any other acquisition proposal by a third
party other than the merger, fails to recommend that our
shareholders reject a tender or exchange offer made by a third
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party, we breach our obligations not to solicit an acquisition
proposal from a third party or our board resolves to do any of
the foregoing; or
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We have breached or failed to perform any of our
representations, warranties, covenants or agreements under the
merger agreement which would give rise to the failure to satisfy
certain of Parents conditions to close and where the beach
or failure to perform cannot be cured within a
20-day
period after receipt of written notice from Parent to us of such
breach; or
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A change, event, violation, inaccuracy, circumstance or effect,
individually or in the aggregate, shall have occurred since the
date of the merger agreement which has, or would reasonably be
expected to have, a material adverse effect on us; or
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Parent has breached or failed to perform any of its
representations, warranties, covenants or agreements under the
merger agreement which would give rise to the failure to satisfy
certain of our conditions to close if such breach or failure to
perform cannot be cured within a
20-day
period after receipt of written notice of such breach from us to
Parent; or
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Prior to obtaining the vote of shareholders at the special
meeting, we receive a superior offer and enter into a definitive
agreement with respect to such superior offer provided that we
have complied with our obligations under the merger agreement
and have paid to Parent the $13.0 million termination fee
as described under The Merger Agreement
Termination Fees beginning on page 60.
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Termination Fees (see page 60). We will
be obligated to pay a termination fee of $13.0 million to
Parent if the merger agreement is terminated by the following
party or parties under certain circumstances including:
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By Parent because our board of directors or any committee
thereof shall have withdrawn, amended or modified in a manner
adverse to Parent its recommendation that our shareholders
approve the merger agreement, fails to reaffirm its
recommendation within five calendar days after so requested by
Parent or fails to reject or approves or recommends any other
acquisition proposal by a third party other than the merger,
fails to recommend that our shareholders reject a tender or
exchange offer made by a third party, or we breach our
obligations not to solicit an acquisition proposal from a third
party or our board resolves to do any of the foregoing;
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By us if we shall have entered into a definitive and binding
agreement with respect to a superior offer pursuant to and in
compliance with the terms of the merger agreement; or
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An acquisition proposal has been made by a third party before
termination of the merger agreement under any of the following
three circumstances and within 12 months following the
termination of the merger agreement the Company enters into a
definitive agreement with respect to the Company:
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Parent terminates the merger agreement because the Company has
willfully or intentionally breached or failed to perform any of
its representations, warranties, covenants or agreements under
the merger agreement;
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Either Parent or Direct General terminates the merger agreement
because our shareholders shall not have approved the merger
agreement on or before March 31, 2007, or June 30,
2007, if the date is so extended in accordance with the terms of
the merger agreement; or
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Either Parent or Direct General terminates the merger agreement
because the merger shall not have been completed on or before
March 31, 2007, or June 30, 2007, if the date is so
extended in accordance with the terms of the merger agreement.
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Parent will be required to pay us a termination fee of
$13.0 million if we are not in material breach of the
merger agreement and:
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We or Parent terminate the merger agreement and all conditions
of Parent and Sub to consummate the merger have been met, except
Parent has not obtained financing for the merger, and the merger
has not been consummated on or before March 31, 2007 or
June 30, 2007 if the date is so extended in accordance with
the terms of the merger agreement, or
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We terminate the merger agreement because Parent materially
breaches its covenant to use its reasonable best efforts to
obtain the debt financing upon the terms and conditions provided
in the merger agreement.
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Parent Liability Cap (see page 61). In no
event other than for fraud in the inducement, regardless of
whether we are entitled to seek injunctions or specific
performance or if the merger agreement has been terminated, will
we be entitled to monetary damages in excess of
$13.0 million, including payment by Parent of the
termination fee, if applicable, for all losses and damages
arising from or in connection with breaches by Parent and Merger
Sub of their obligations under the merger agreement or arising
from any other claim or cause of action under the merger
agreement.
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The
Special Meeting (see page 13)
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Date, Time and Place of the Special
Meeting. The special meeting is scheduled to be
held as follows:
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Date: March 8, 2007
Time: 11:00 a.m., local time
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Place:
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1281 Murfreesboro Road
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Nashville, Tennessee 37217
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Proposals to Be Considered at the Special
Meeting. At the special meeting, you will be
asked to vote on a proposal to approve the merger agreement and
the transactions contemplated thereby, including the merger. A
copy of the merger agreement is attached as Annex A to this
proxy statement. You will also be asked to vote on a proposal to
approve the adjournment of the special meeting, if necessary or
appropriate, to solicit additional proxies if there are
insufficient votes at the time of the special meeting to approve
the merger agreement, as may be amended from time to time, and
the transactions contemplated thereby.
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Record Date. Our board of directors has fixed
the close of business on January 31, 2007 as the record
date for the special meeting, and only holders of record of our
common stock on the record date are entitled to vote at the
special meeting. On the record date, there were outstanding and
entitled to vote 20,347,675 shares of common stock.
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Other
Important Considerations
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Recommendation of the Special Committee of Our Board of
Directors. The special committee, consisting
solely of independent directors, and acting with the advice and
assistance of independent legal and financial advisors,
evaluated and negotiated the merger proposal, including the
terms and conditions of the merger agreement, with Parent and
Sub. The special committee unanimously determined that the
merger is in the best interests of Direct General and our
shareholders, and declared it advisable to enter into the merger
agreement and unanimously recommended that the board of
directors (i) approve the execution, delivery and
performance of the merger agreement and the consummation of the
transactions contained therein and (ii) resolve to
recommend that our shareholders approve the merger agreement. In
the course of reaching its determination, the special committee
considered the factors and potential benefits of the merger as
set forth in The Merger Reasons for the
Merger, each of which the members of the special committee
believed supported its decision.
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Recommendation of Our Board of Directors (see
page 34). After careful consideration and upon
unanimous recommendation of the special committee, our board of
directors unanimously determined that the merger and the terms
of the other transactions contemplated by the merger agreement
are fair to, and in the best interests of, Direct General and
our shareholders, and unanimously recommends that our
shareholders approve the merger agreement and each of the
transactions contemplated thereby,
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including the merger. Our board of directors recommends that you
vote FOR the proposal to approve the merger
agreement and the transactions contemplated thereby, including
the merger, at the special meeting. For a discussion of the
material factors considered by our board of directors in
reaching its conclusions and the reasons why our board of
directors determined that the merger is fair to, and in the best
interests of, Direct General and our shareholders see The
Merger Reasons for the Merger.
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Interests of Directors and Executive Officers in the Merger
(see page 45). In considering the
recommendation of our board of directors that you vote for the
proposal to approve the merger agreement so that the merger can
occur, you should be aware that some of our executive officers
and members of our board of directors have interests in the
merger that may be in addition to or different from the
interests of our shareholders generally, and that may present
actual or potential conflicts of interest. The members of our
board of directors were aware of these interests and considered
them at the time they adopted the merger agreement. These
interests include the following:
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William C. Adair, Jr., our Chairman and Chief Executive
Officer, and Jacqueline C. Adair, one of our directors and our
Executive Vice President and Chief Operating Officer, have
entered into resignation and restrictive covenants agreements
with the Company that will become effective upon consummation of
the merger. Mr. Adair will be entitled to receive, among
other things, severance in the amount of $41,666.67 per
month for 24 months. Mr. Adair will also remain a
member of our board of directors. Ms. Jacqueline Adair will
be entitled to receive, among other things, severance in the
amount of $17,250.00 per month for 24 months and will
resign as a director and officer of the Company.
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Tammy R. Adair, our President, J. Todd Hagely, our Senior Vice
President and Chief Financial Officer, William J. Harter, our
Senior Vice President Corporate Development Banking
and Finance and Brian G. Moore, our President of our premium
finance subsidiaries, have each entered into employment and
non-competition agreements with the Company that will become
effective upon the consummation of the merger. Among other
things, Ms. Tammy Adair will be entitled to base salary in
the amount of $300,000 per year, and Messrs. Hagely,
Harter, and Moore will be entitled to base salary in the amount
of $215,000, $200,000, and $125,000 per year, respectively.
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Shareholder Voting Agreement (see
page 47). Although we are not a party to the
agreement, our President, Tammy R. Adair, solely in her capacity
as trustee of the William C. Adair, Jr. Trust, which we
refer to in this proxy statement as the Trust, entered into a
Shareholder Voting Agreement with Parent and in connection with
the transaction. Under the terms of the agreement,
Ms. Tammy Adair, as trustee, agreed to vote shares held by
the Trust in favor of the merger with Parent and against any
proposal that would impede or prevent approval of the merger
agreement or consummation of the merger. As of December 29,
2006, the Trust owned 4,323,149 shares of our common stock,
which represents approximately 21% of our outstanding shares of
common stock.
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Financing the Merger (see page 42). The
total amount of cash that will be distributed to our
shareholders if we complete the merger will be approximately
$433,600,000. The merger will be financed from several sources,
including approximately $356,800,000 in cash raised by the sale
of equity securities of Parent. Parent has provided us a copy of
a commitment letter from each of Fremont Investors X L.L.C.,
Fremont Partners III, L.P. Fremont Partners III
Side-by-Side,
L.P., and TPG Partners V, L.P. to Parent in which each has
committed to purchasing a portion of Parents equity
pursuant to the terms set forth therein. In addition, Parent has
provided us a copy of a commitment letter from Cohen &
Company to Parent in which Cohen & Company has
committed to arrange the placement of trust preferred notes in
an aggregate amount equal to $30,000,000. Parent has also
provided us a copy of a commitment letter from Bear,
Stearns & Co. Inc. and Bear Stearns Corporation Lending
Inc. to Parent, in which $95,000,000 in borrowings under a
senior credit facility comprised of a $75,000,000 term loan and
a $20,000,000 revolving credit facility is made available to
Sub, in which Bear, Stearns & Co. Inc. will act as
exclusive advisor, sole lead arranger and sole bookrunner and
Bear Stearns Corporate Lending Inc. has committed to provide the
entire amount of the senior credit facility. The financing is
contingent on, among other things, completion of the merger.
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Limited Guarantees of Certain of Parents Obligations
(see page 44). In connection with the merger, we
entered into a limited guarantee with each of Fremont
Partners III, L.P., Fremont Partners III
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Side-by-Side,
L.P., and TPG Partners V, L.P., which we refer to in this
proxy statement as guarantors. Each of the guarantors has agreed
to severally and not jointly, irrevocably and unconditionally
guarantee a portion of Parents obligation in the event
that the merger agreement is terminated and Parent is obligated
to pay a termination fee, as further explained in The
Merger Agreement Termination Fees. In the
event that Parent is obligated to pay a termination fee, the
guarantors have each guaranteed a pro rata portion of such
obligation, such that the aggregate amount guaranteed by all the
guarantors shall be an amount up to $13.0 million.
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Opinion of Financial Advisor (see
page 35). On December 4, 2006, SunTrust
Robinson Humphrey delivered to our board of directors its
opinion that, as of such date and based on and subject to the
matters set forth in its opinion, from a financial point of
view, the $21.25 per share in cash to be received by the holders
of our common stock in the merger (other than holders of our
common stock that are affiliates of Parent or the continuing
investors) is fair. The full text of SunTrust Robinson
Humphreys opinion (which was subsequently confirmed on
February 2, 2007) describes the assumptions made, matters
considered and limitations on the review undertaken by SunTrust
Robinson Humphrey in connection with its opinion and is attached
as Annex B to this proxy statement. SunTrust Robinson
Humphrey provided its opinion for the information of our board
of directors in its consideration of the merger. SunTrust
Robinson Humphreys opinion is not a recommendation as to
how our shareholders should vote with respect to the merger. We
urge you to read the opinion carefully and in its entirety.
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Regulatory Approvals (see page 41). Under
the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, which we
refer to in this proxy statement as the HSR Act, and the rules
promulgated thereunder by the Federal Trade Commission, which we
refer to in this proxy statement as the FTC, the merger may not
be completed until notification and report forms have been filed
with the FTC and the Antitrust Division of the Department of
Justice and the applicable waiting period has expired or been
terminated. Direct General and Parent plan to file notification
and report forms under the HSR Act with the FTC and the
Antitrust Division on a date sufficient to allow expiration or
termination of the applicable waiting period prior to closing.
In addition, state insurance, finance and other laws that apply
to our various subsidiaries generally require that an acquiring
party in a merger transaction obtain approval from the relevant
state insurance and finance commissioner or banking or similar
department prior to the acquisition. Accordingly, applications
have been or will be filed with the insurance, finance, banking
or other required commissioners or departments of the states of
domicile (or state of commercial domicile in the case of
Florida) of Direct Generals insurance company, finance
company and small loan/payday lending subsidiaries. In addition,
filings have been made under the insurance and finance laws of
certain other states that require the filing of a
pre-acquisition notice and the expiration or termination of a
waiting period prior to the consummation of the merger.
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Material U.S. Federal Income Tax Consequences (see
page 44). The merger will be a taxable
transaction for all U.S. holders of Direct General common
stock. As a result, assuming you are a U.S. taxpayer, the
exchange of your shares of Direct General common stock for cash
in the merger will be subject to United States federal income
tax and may be subject to tax under applicable state, local, and
other tax laws. In general, you will recognize gain or loss
equal to the difference between (1) $21.25 per share
and (2) the adjusted tax basis of your shares of Direct
General common stock. You should consult your tax advisor on how
specific tax consequences of the merger apply to you.
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No Dissenters Rights (see
page 47). Our shareholders do not have a right
to dissent under the Tennessee Business Corporation Act unless
our common stock is delisted from the NASDAQ Global Select
Market prior to consummation of the merger.
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Market Price of Direct General Common Stock (see
page 49). The closing sale price of Direct
General common stock on the NASDAQ Global Select Market on
December 4, 2006, the last trading day prior to public
announcement of the Merger, was $16.51 per share. The
$21.25 per share to be paid for each share of Direct
General common stock in the Merger represents a premium of
approximately 29% over the closing price on December 4,
2006, and a premium of approximately 39% over the average
closing price for the last 30 trading days ending
December 4, 2006.
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7
QUESTIONS
AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER
The following questions and answers are intended to address
briefly some commonly asked questions regarding the special
meeting, the merger agreement, and the merger. These questions
and answers do not address all questions that may be important
to you as a Direct General shareholder. Please refer to the more
detailed information contained elsewhere in this proxy
statement, the annexes to this proxy statement and the documents
referred to or incorporated by reference in this proxy statement.
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What is the proposed transaction? |
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Parent has agreed to acquire 100% of Direct Generals
outstanding shares for $21.25 per share in cash. The
transaction will be effected by Sub, a wholly owned subsidiary
of Parent, which will merge with and into Direct General, with
Direct General being the surviving corporation and becoming a
wholly owned subsidiary of Parent. |
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How does Direct Generals board of directors recommend
that I vote? |
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The board of directors, acting upon the unanimous recommendation
of the special committee, unanimously recommends that you vote
FOR the proposal to approve the merger agreement and
the transactions contemplated thereby and FOR the
proposal to adjourn the special meeting, if necessary or
appropriate, to solicit additional proxies if there are
insufficient votes at the time of the special meeting to approve
the merger agreement. You should read The
Merger Reasons for the Merger on pages 32
through 34 for a discussion of the factors that the special
committee and the board of directors considered in deciding to
recommend the approval of the merger agreement. |
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Why is the Board of Directors recommending the approval of
the merger agreement and transactions contemplated thereby? |
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Our board of directors believes that the merger and other
transactions contemplated by the merger agreement are fair to,
and in the best interests of, Direct General and our
shareholders. To review our board of directors reasons for
recommending approval of the merger agreement and transactions
contemplated thereby, see The Merger Reasons
for the Merger on pages 32 through 34. |
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If the merger is completed, what will I receive for my shares
of common stock? |
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You will receive $21.25 in cash, without interest and net of any
withholding tax, for each share of Direct General common stock
you own, upon surrender of your stock certificates after
completion of the merger. We refer to this amount per share of
Direct General common stock in this proxy statement as the
merger consideration. |
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If the merger is completed, what will I receive for my
outstanding options to purchase common stock? |
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Except for options held by certain members of management, each
of your outstanding options to purchase shares of our common
stock, whether vested or unvested, will be cancelled and
converted into the right to receive cash in the amount equal to
the number of shares of our common stock subject to such option,
multiplied by the excess, if any, of $21.25 over the exercise
price of the option, with the aggregate amount of such payment
rounded down to the nearest cent, without interest and less such
amounts that are required to be withheld or deducted pursuant to
applicable tax law. |
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When is the merger expected to be completed? |
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Direct General and Parent are working toward completing the
merger as quickly as reasonably possible. The merger cannot be
effected until a number of conditions are satisfied. The most
important conditions are the approval of the merger agreement
and transactions contemplated thereby by Direct Generals
shareholders at the special meeting, the termination or
expiration of the waiting period under the HSR Act and approval
by necessary insurance and financial regulatory agencies. |
8
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What effects will the proposed merger have on Direct
General? |
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As a result of the proposed Merger, Direct General will cease to
be a publicly-traded company and will be wholly owned by Parent.
You will no longer have any interest in our future earnings or
growth. Following consummation of the merger, the registration
of our common stock and our reporting obligations with respect
to our common stock under the Securities Exchange Act of 1934,
as amended, will be terminated upon application to the
Securities and Exchange Commission. In addition, upon completion
of the proposed merger, shares of our common stock will no
longer be listed on any stock exchange or quotation system,
including the NASDAQ. |
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What happens if the merger is not consummated? |
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If the merger agreement is not approved by our shareholders or
if the merger is not completed for any other reason,
shareholders will not receive any payment for their shares.
Instead, Direct General will remain an independent public
company and our common stock will continue to be listed and
traded on the NASDAQ. Under specified circumstances, Direct
General may be required to pay Parent a termination fee or
reimburse Parent for its
out-of-pocket
expenses as described under the caption The Merger
Agreement Termination Fees and Expenses. |
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Who is entitled to vote at the special meeting? |
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Holders of record of Direct General common stock as of the close
of business on January 31, 2007, are entitled to vote at
the special meeting. Each Direct General shareholder is entitled
to one vote for each share of Direct General common stock owned. |
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What happens if I sell my shares before the special
meeting? |
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The record date of the special meeting is earlier than the
special meeting and the date that the merger is expected to be
completed. If you transfer your shares of common stock after the
record date but before the special meeting, you may retain your
right to vote at the special meeting, but you will have
transferred the right to receive $21.25 per share in cash
to be received by our shareholders in the merger. |
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What vote is required for Direct Generals shareholders
to approve the merger agreement and transactions contemplated
thereby? |
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An affirmative vote of the holders of a majority of all
outstanding shares of Direct General common stock is required to
approve the merger agreement and transactions contemplated
thereby. |
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What do I need to do now? |
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After carefully reading and considering the information
contained in this proxy statement, please vote your shares of
Direct General common stock as soon as possible. Please return
the enclosed proxy card, even if you plan to attend the special
meeting, to ensure that your shares are voted. Your proxy
materials include detailed information on how to vote. |
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If my shares are held for me by my broker, will my broker
vote those shares for me? |
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Your broker will vote your shares only if you provide
instructions to your broker on how to vote. You should instruct
your broker on how to vote your shares, using the instructions
provided by your broker. |
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May I change my vote after I have mailed my proxy card? |
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Yes. You may change your vote at any time before your proxy is
voted at the special meeting. You may revoke your proxy by
notifying us in writing at Direct General Corporation, 1281
Murfreesboro Road, Nashville, Tennessee 37217, Attention: Ronald
F. Wilson, Secretary, or by submitting a new proxy, in each
case, dated after the date of the proxy being revoked. In
addition, your proxy may be revoked by attending the special
meeting and voting in person. However, simply attending the
special meeting without voting will not revoke your proxy. If
you have instructed a broker to vote your shares, you must
follow the instructions received from your broker to change your
vote. |
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Do I need to attend the special meeting in person? |
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No. It is not necessary for you to attend the special
meeting in order to vote your shares; however, failure to mark,
sign, date and return the accompanying proxy card will have the
same effect as a vote against the merger. |
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May I exercise dissenters rights in connection with the
merger? |
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Our shareholders do not have a right to dissent under the
Tennessee Business Corporation Act unless our common stock is
delisted from the NASDAQ Global Select Market prior to
consummation of the merger. |
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Should I send in my stock certificates now? |
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No. After the merger is completed, you will be sent
detailed written instructions for exchanging your Direct General
stock certificates for the merger consideration. |
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What other matters will be voted on at the special
meeting? |
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Only matters contained in this proxy statement will be voted on. |
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Where can I find more information about Direct General? |
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Direct General files periodic reports and other information with
the Securities and Exchange Commission. You may read and copy
this information at the Securities and Exchange
Commissions public reference facilities. Please call the
Securities and Exchange Commission at
1-800-SEC-0330
for information about these facilities. This information is also
available on the internet site maintained by the Securities and
Exchange Commission at http://www.sec.gov. You also may obtain
free copies of the documents Direct General files with the
Securities and Exchange Commission by clicking the
Investors tab under the Company Info
heading of our website at www.directgeneral.com, which is
provided as a textual reference only. For a more detailed
description of the information available, please refer to
Where You Can Find More Information on page 67
of this proxy statement. |
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Who can help answer my questions? |
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A. |
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If you have questions about the merger after reading this proxy
statement, need assistance in submitting your proxy or voting
your shares of common stock, or need additional copies of the
proxy statement or the enclosed proxy card, please call our
proxy solicitor, D.F. King & Co., Inc., toll-free at
1-800-859-8511
or collect at 1-212-269-5550. |
10
FORWARD
LOOKING STATEMENTS
This proxy statement, and the documents to which we refer you in
this proxy statement, contain forward-looking statements about
our plans, objectives, expectations and intentions.
Forward-looking statements include information concerning
possible or assumed future results of operations of our company,
the expected completion and timing of the merger and other
information relating to the merger. You can identify these
statements by words such as expect,
anticipate, intend, plan,
believe, seek, estimate,
may, will and continue or
similar words. You should read statements that contain these
words carefully. They discuss our future expectations or state
other forward-looking information, and may involve known and
unknown risks over which we have no control, including, without
limitation,
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the satisfaction of the conditions to consummate the merger,
including the approval of the merger agreement by our
shareholders;
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receipt of necessary approvals under applicable antitrust laws
and other relevant regulatory authorities including state
insurance and finance regulatory authorities;
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the occurrence of any event, change or other circumstance that
could give rise to the termination of the merger agreement;
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the outcome of any legal proceeding that may be instituted
against us (including the amendment of any legal proceedings
that currently are pending against us) and others following the
announcement of the merger agreement;
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the effect of the announcement of the merger on our customer
relationships, operating results and business generally,
including the ability to retain key employees;
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the failure to obtain the necessary debt financing arrangements
set forth in commitment letters received in connection with the
merger;
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the amount of the costs, fees, expenses and charges related to
the merger and the actual terms of certain financings that will
be obtained for the merger;
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the impact of the substantial indebtedness incurred to finance
the consummation of the merger; and
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other risks detailed in our current filings with the Securities
and Exchange Commission, including our most recent filings on
Form 10-Q
and 10-K.
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See Where You Can Find More Information on
page 67 of this proxy statement. You should not place undue
reliance on forward-looking statements. We cannot guarantee any
future results, levels of activity, performance or achievements.
The statements made in this proxy statement represent our views
as of the date of this proxy statement, and it should not be
assumed that the statements made herein remain accurate as of
any future date. Moreover, we assume no obligation to update
forward-looking statements or update the reasons actual results
could differ materially from those anticipated in
forward-looking statements, except as required by law.
11
THE
PARTIES TO THE TRANSACTION
Direct
General
Direct General Corporation, headquartered in Nashville,
Tennessee, was incorporated in 1993 and is a financial services
holding company whose principal operating subsidiaries provide
non-standard personal automobile insurance, term life insurance,
premium finance and other consumer products and services
primarily on a direct basis and primarily in the southeastern
United States. We own five property/casualty insurance
companies, two life/health insurance companies, two premium
finance companies, twelve insurance agencies, two administrative
service companies and one company that provides non-insurance
consumer products and services.
Our core business involves issuing non-standard personal
automobile insurance policies. These policies, which generally
are issued for the minimum limits of coverage required by state
laws, provide coverage to drivers who generally cannot obtain
insurance from standard carriers due to a variety of factors,
including the lack of flexible payment plans, the failure to
maintain continuous coverage, age, prior accidents, driving
violations, occupation and type of vehicle.
Through our premium finance subsidiaries, we finance the
majority of the insurance policies that we sell. Premium finance
involves making a loan to the insurance customer that is backed
by the unearned portion of the insurance premiums being
financed, which is the portion of the loan attributable to
future periods of coverage under the financed policy.
Direct Generals principal executive offices are located at
1281 Murfreesboro Road, Nashville, TN 37217, and our telephone
number is
(615) 399-4700.
For more information about Direct General, please visit our
website at www.direct-general.com. Our website address is
provided as an inactive textual reference only. Information
provided on our website is not part of this proxy statement, and
therefore is not incorporated by reference. See also Where
You Can Find More Information beginning on page 67.
Direct General common stock is traded on the NASDAQ Global
Select Market under the symbol DRCT.
Parent
Parent is a Delaware corporation formed solely for the purpose
of facilitating the transactions contemplated by the merger
agreement and holding the stock of Sub and any successor by
merger to Sub and has not conducted any other business
activities since its organization. Parent is affiliated with
Fremont Partners and Texas Pacific Group. Fremont Partners,
founded in 1991, is a private investment partnership that has
managed more than $2 billion of equity investments in
22 companies, representing a total transaction value of
$5.6 billion. Texas Pacific Group is a private investment
partnership that was founded in 1992 and currently has more than
$30 billion of assets under management. The executive
offices of Parent are located at 199 Fremont Street,
San Francisco, CA 94105, and its telephone number is
(415) 284-8100.
Sub
Sub is a Tennessee corporation formed solely for the purpose of
merging with and into Direct General and has not conducted any
business activities since its organization. Sub is a wholly
owned subsidiary of Parent. The executive offices of Sub are
located at 199 Fremont Street, San Francisco, CA 94105, and
its telephone number is
(415) 284-8100.
12
THE
SPECIAL MEETING
This proxy statement is furnished in connection with the
solicitation of proxies by our board of directors in connection
with a special meeting of our shareholders.
Date,
Time and Place of the Special Meeting
The special meeting is scheduled to be held as follows:
Date: March 8, 2007
Time: 11:00 a.m., local time
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Place:
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1281 Murfreesboro Road
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Nashville, Tennessee 37217
Proposals
to be Considered at the Special Meeting
At the special meeting, you will consider and vote upon a
proposal to approve the merger agreement and the transactions
contemplated thereby. A copy of the merger agreement is attached
as Annex A to this proxy statement. You will also be asked
to vote on a proposal to approve the adjournment of the special
meeting, if necessary or appropriate, to solicit additional
proxies if there are insufficient votes at the time of the
special meeting to approve the merger agreement, as may be
amended from time to time, and the transactions contemplated
thereby.
Record
Date
Our board of directors has fixed the close of business on
January 31, 2007, as the record date for the special
meeting, and only holders of record of Direct General common
stock on the record date are entitled to vote at the special
meeting. On the record date, there were outstanding and entitled
to vote 20,347,675 shares of common stock.
Voting
Rights; Quorum; Vote Required for Approval
Each share of common stock entitles its holder to one vote on
all matters properly coming before the special meeting. The
presence in person or representation by proxy of shareholders
entitled to cast a majority of the votes of all issued and
outstanding shares entitled to vote on the proposal to approve
the merger agreement, considered together, shall constitute a
quorum for the purpose of considering the proposal. Shares of
our common stock represented at the special meeting but not
voted, including shares of our common stock for which proxies
have been received but for which shareholders have abstained,
will be treated as present at the special meeting for purposes
of determining the presence or absence of a quorum for the
transaction of all business. In the event that a quorum is not
present at the special meeting, it is expected that the meeting
will be adjourned or postponed to solicit additional proxies.
If you hold your shares in an account with a broker or bank, you
must instruct the broker or bank on how to vote your shares. If
an executed proxy card returned by a broker or bank holding
shares indicates that the broker or bank does not have authority
to vote on the proposal to approve the merger agreement, the
shares will be considered present at the meeting for purposes of
determining the presence of a quorum, but will not be voted on
the proposal to approve the merger agreement. This is called a
broker non-vote. Your broker or bank will vote your shares only
if you provide instructions on how to vote by following the
instructions provided to you by your broker or bank.
Approval of the merger agreement requires the affirmative vote
of the holders of a majority of all outstanding shares of Direct
General common stock.
ABSTENTIONS AND BROKER NON-VOTES WILL HAVE THE SAME EFFECT AS
A VOTE AGAINST THE PROPOSAL TO APPROVE THE MERGER
AGREEMENT.
13
Each of our directors and executive officers has indicated that
he or she intends to vote his or her own shares in favor of the
proposal to approve the merger agreement. If our directors and
executive officers vote their shares in favor of approving the
merger agreement, 5.69% of the outstanding voting power of
shares of common stock will have voted for the proposal to
approve the merger agreement. In addition, our President is
trustee of the Trust, which owns 4,323,149, or 21.25% of our
outstanding common stock. The Trust entered into a voting
agreement on December 4, 2006, which requires our
President, solely in her capacity as trustee of the Trust, to
vote in favor of the merger agreement. If our directors and
executive officers and the trustee of the Trust vote in favor of
the merger, holders of approximately 23.07% of the voting power
of all other shares entitled to vote at the meeting would need
to vote in favor of the merger agreement for the merger to be
approved.
Voting
and Revocation of Proxies
Shareholders of record may submit proxies by mail. Shareholders
who wish to submit a proxy by mail should mark, date, sign and
return the proxy card in the envelope furnished. If you hold
your shares in your name as a shareholder of record, you may
vote by telephone or electronically through the Internet by
following the instructions included with your proxy card.
Shareholders who hold shares beneficially through a nominee
(such as a bank or broker) may be able to submit a proxy by
telephone or the Internet if those services are offered by the
nominee.
Proxies received at any time before the special meeting, and not
revoked or superseded before being voted, will be voted at the
special meeting. Where a specification is indicated by the
proxy, it will be voted in accordance with the specification.
Where no specification is indicated, the proxy will be voted
FOR the proposal to approve the merger agreement.
The persons you name as proxies may propose and vote for one or
more adjournments or postponements of the special meeting,
including adjournments or postponements to permit further
solicitations of proxies. No proxy voted against the proposal to
approve the merger agreement will be voted in favor of any
adjournment or postponement.
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES WITH YOUR PROXY
CARD. When the merger is completed, a separate letter of
transmittal will be mailed to you that will provide instructions
concerning your stock certificates and enable you to receive the
merger consideration.
Until your proxy is exercised at the special meeting, you can
revoke your proxy and change your vote in any of the following
ways:
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by delivering written notification to Direct General at our
principal executive offices at 1281 Murfreesboro Road,
Nashville, Tennessee 37217, Attention: Ronald F. Wilson,
Secretary;
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by delivering a proxy of a later date in the manner described
herein;
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by attending the special meeting and voting in person (your
attendance at the meeting will not, by itself, revoke your
proxy; you must vote in person at the meeting); or
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if you have instructed a broker or bank to vote your shares, by
following the directions received from your broker or bank to
change those instructions.
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Adjournments
and Postponements
Although it is not currently expected, the special meeting may
be adjourned or postponed for the purpose of soliciting
additional proxies. Any adjournment may be made without notice
(if the adjournment is not for more than four months), other
than by an announcement made at the special meeting of the time,
date and place of the adjourned meeting. Regardless of whether a
quorum exists, holders of a majority of the voting power of
common stock present in person or represented by proxy at the
special meeting and entitled to vote thereat may adjourn the
special meeting. Any signed proxies received by us in which no
voting instructions
14
are provided on such matter will be voted FOR an
adjournment or postponement of the special meeting, if necessary
or appropriate, to solicit additional proxies. Any adjournment
or postponement of the special meeting for the purpose of
soliciting additional proxies will allow our shareholders who
have already sent in their proxies to revoke them at any time
prior to their use at the special meeting as adjourned or
postponed.
Rights of
Shareholders Who Object to the Merger
Our shareholders do not have a right to dissent under the
Tennessee Business Corporation Act unless our common stock is
delisted from the NASDAQ Global Select Market prior to
consummation of the merger.
Solicitation
of Proxies
We will bear the expenses in connection with the solicitation of
proxies. Arrangements will also be made with brokerage houses
and other custodians, nominees and fiduciaries for the
forwarding of solicitation material to the beneficial owners of
common stock held of record by those persons, and we may
reimburse them for their reasonable transaction and
administrative expenses. Solicitation of proxies will be made
principally by mail. Proxies may also be solicited in person, or
by telephone, facsimile, telegram, electronic mail or other
means of communication, by our officers and regular employees.
These people will receive no additional compensation for these
services, but will be reimbursed for any transaction expenses
incurred by them in connection with providing these services. We
have retained D.F. King & Co., Inc., a proxy
solicitation firm, for assistance in connection with the
solicitation of proxies for the special meeting for a fee of
$7,500 plus reimbursement of reasonable
out-of-pocket
expenses for such items as mailing, copying, phone calls, faxes
and other related items.
Questions
and Additional Information
If you have more questions about the merger or how to submit
your proxy, or if you need additional copies of this proxy
statement or the enclosed proxy card or voting instructions,
please call our proxy solicitor, D.F. King & Co., Inc.,
toll-free at
1-800-859-8511
or collect at 1-212-269-5550, or contact Direct General in
writing at our principal executive offices at 1281 Murfreesboro
Road, Nashville, Tennessee 37217, Attention: Ronald F.
Wilson, Secretary, or by telephone at
(615) 399-0600.
15
THE
MERGER
Background
of the Merger
Our board of directors has periodically reviewed our strategic
plan and alternatives. From time to time since the
Companys initial public offering in August 2003,
representatives of the Company have received inquiries from
third parties expressing interest in discussing possible
transactions with the Company.
In late December 2005, representatives of Fremont Partners
contacted William C. Adair, Jr., the Companys
Chairman and Chief Executive Officer and a shareholder of the
Company to express a tentative interest in discussing an
acquisition of the Company. Thereafter, some very preliminary
discussions of the parties level of mutual interest in an
acquisition were held intermittently between Fremont Partners
and William Adair. On January 18, 2006, representatives of
Fremont Partners met at the Companys Nashville offices
with William Adair, Jacqueline C. Adair, a director and the
Companys Executive Vice President and Chief Operating
Officer, and Tammy R. Adair, the Companys President
(collectively, the Adairs). Fremont Partners
discussed with the Adairs the possibility of a transaction in
which an entity formed by Fremont Partners would acquire the
Company.
During the last few weeks of January, 2006, and at a meeting
held on February 10, 2006, Fremont Partners and management
held general discussions regarding a proposed transaction
between the Company and Fremont Partners. The Company determined
to allow Fremont Partners to conduct a limited due diligence
review of its organization, business and finances, and,
consequently, on February 16, 2006, entered into a
confidentiality agreement with Fremont Partners. On
February 21, 2006, the Company received a preliminary due
diligence request from Fremont Partners, and it continued its
discussions with Fremont Partners during the remainder of the
month.
During the week of February 13, 2006, Party B, a strategic
bidder, initiated contact with William Harter, the
Companys Senior Vice President Corporate
Development, Banking and Finance, to request a meeting with
representatives of the Company. Representatives of Party B and
Messrs. William Adair and Harter and Ms. Tammy Adair
met at the Companys Memphis offices on February 21,
2006. At that meeting, Party B asked whether the Company might
be interested in exploring a possible business combination, but
no details of any transaction were discussed.
In late February, 2006, the Company began providing Fremont
Partners and its advisors with confidential information in
response to Fremont Partners due diligence request, and on
March 2, 2006, representatives of Fremont Partners met with
members of the Companys executive management team in
Memphis, Tennessee to discuss a potential transaction and to
conduct in-person due diligence. Representatives of Fremont
Partners and the Company held a
follow-up
meeting by telephone conference on March 10, 2006, to
further discuss the Companys finances. J. Todd Hagely, the
Companys Senior Vice President and Chief Financial
Officer, and Mr. Harter participated in the
March 10th meeting.
Subsequent to the March 10, 2006 meeting, representatives
of Fremont Partners and the Company discussed generally the
proposed terms of a transaction between Fremont Partners and
Direct. As initially presented, the transaction described by
Fremont Partners contemplated, among other things, that the
Adairs roll over Company common stock held by them, including
Company common stock held by the Trust, into equity of the
acquiring entity. On or about March 27, 2006, Fremont
Partners delivered a form of term sheet that outlined generally
the proposed transaction with Direct. On March 27, 2006, at
a meeting in Memphis, Tennessee, representatives of Fremont
Partners and the Company met to discuss the proposed terms of a
transaction, as reflected in the form of term sheet. Shortly,
thereafter, the Company received a letter from Fremont Partners
proposing, on a confidential non-binding basis, to acquire the
Company through a merger at a price of $20 per common share in
cash. The proposal was subject to further due diligence and the
negotiation and execution of definitive agreements.
During April, 2006, the Companys management continued to
examine the Fremont Partners proposal and explored the
engagement of financial advisers to the Company.
On April 20, 2006, Party B met with representatives of the
Company at its Memphis offices to discuss further the
possibility of a transaction between the Company and Party B.
Party B requested the opportunity to
16
conduct a due diligence review of the Company. Shortly
thereafter, the Company began providing Party B with
non-confidential information to allow Party B to evaluate the
feasibility of a transaction with the Company.
On May 3, 2006, a previously scheduled meeting of the
Companys board of directors was held at the Companys
headquarters. Immediately prior to the meeting, the independent
members of the Companys board, Fred H. Medling, Raymond L.
Osterhout and Stephen L. Rohde, met in executive session and
were briefed on the Fremont Partners letter and the other recent
activities related to a potential transaction involving the
Company. The independent board members discussed the
desirability of establishing a special committee comprised of
directors independent of Fremont Partners, management and the
Adairs. A representative of the Companys outside legal
advisor, Baker, Donelson, Bearman, Caldwell &
Berkowitz, PC, which we refer to in this proxy statement as
Baker Donelson, was present at the executive session. The Baker
Donelson representative advised the independent board members as
to their fiduciary duties under the circumstances.
On May 11, 2006, representatives of Fremont Partners met
with management of the Company, including the Adairs and
Mr. Harter, to discuss the Fremont Partners proposal.
On May 15, 2006, at the suggestion of representatives of
the Company, Fremont Partners submitted a second written
proposal which improved Fremont Partners offer per share
from $20 to $21 in cash. The revised Fremont Partners proposal
required that the Adairs roll over an aggregate of at least one
million shares of the Companys common stock, including the
Companys common stock held in the Trust, into equity of
the acquiring entity. It also eliminated the previously proposed
requirement that a portion of the consideration payable to the
Company shareholders would be held in escrow pending resolution
of the securities and derivative actions filed against the
Company and certain of the Companys officers and
directors. These lawsuits, which we refer to in this proxy
statement as the shareholder lawsuits, and in which the
securities action SunTrust Robinson Humphrey is also a
defendant, are described in our annual report on
Form 10-K
for the year ended December 31, 2005.
On May 17, 2006, a representative of Party B telephoned
Mr. Harter and advised him that Party B had decided not to
proceed with an acquisition of the Company.
On May 19, 2006, the Companys board of directors held
a meeting. In view of a proposed equity rollover of the Company
shares owned by the Adairs that was contemplated by the Fremont
Partners proposal, the board determined at this time to form a
special committee composed entirely of independent directors to
evaluate the Companys strategic options, including the
Fremont Partners proposal, to engage independent financial and
legal advisors and to report to the entire board of directors
with respect to any acquisition of the Company and the special
committees evaluation. Messrs. Medling, Osterhout and
Rohde, the independent members of the Companys board, were
appointed to the special committee, and Mr. Rohde was
appointed chairman of the special committee.
On May 24, 2006, the special committee held a meeting to
discuss and authorize the engagement of a legal advisor to the
special committee. The results of preliminary interviews with
each of three law firms were discussed. After discussion, the
special committee authorized that Dorsey & Whitney LLP,
which we refer to in this proxy statement as Dorsey, be engaged
as independent counsel to the special committee. A formal
engagement letter was subsequently executed between the special
committee and Dorsey.
On May 26, 2006, the special committee held a meeting. A
representative of Dorsey briefed the special committee members
on their fiduciary duties in connection with the Fremont
Partners proposal and the exploration of strategic alternatives
for the Company generally. The special committee discussed the
status of the Fremont Partners proposal and discussed the
engagement of a financial advisor in connection with its
evaluation of the Companys strategic alternatives. The
special committee authorized a representative of Dorsey to
solicit proposals from investment banking firms.
On May 31, 2006, representatives of Party C contacted
Mr. Harter to request a meeting.
On June 2, 2006, the special committee held a meeting to
discuss the engagement of a financial advisor in connection with
its evaluation of the Companys strategic alternatives. The
special committee discussed the proposals submitted by the
investment banks and the qualifications of each of them. After
discussion, the
17
special committee authorized that SunTrust Robinson Humphrey be
engaged as financial adviser to the special committee. A formal
engagement letter was subsequently executed between the special
committee and SunTrust Robinson Humphrey on June 9, 2006.
The special committee directed that the due diligence materials
previously provided to Fremont Partners be provided to SunTrust
Robinson Humphrey for its review of the Companys business
and strategic alternatives.
On or about June 2, 2006, representatives of Party A
contacted Mr. Harter to express a tentative interest in
discussing an acquisition of the Company. The parties agreed to
meet on June 12, 2006 at the Companys Memphis offices
to engage in further discussions of a potential transaction
between the Company and Party A.
On June 7, 2006, representatives of Party C met at the
Companys Nashville offices with certain members of Company
management, including Ms. Tammy Adair, Messrs. Harter and Hagely
and the Companys General Counsel, Ronald F. Wilson. Very
preliminary discussions of a potential transaction between the
Company and Party C ensued. In these preliminary discussions,
Party C indicated that it was interested in a transaction that
did not involve a complete acquisition of the Company. Following
the preliminary discussions, Party C declined to submit a
written proposal for a transaction between the Company and Party
C.
On June 9, 2006, the special committee held a meeting at
Dorseys offices in Minneapolis, Minnesota. Representatives
of SunTrust Robinson Humphrey led a detailed discussion of a
situational overview that SunTrust Robinson Humphrey had
prepared for the special committee. The situational overview
included an analysis of the Companys business, a
preliminary evaluation analysis of the Fremont Partners proposal
and possible alternative courses of action for the special
committee to consider. The preliminary evaluation analysis
included a comparison of the Fremont Partners preliminary
proposal against various valuation metrics. The special
committee discussed SunTrust Robinson Humphreys
presentation in detail. The special committee also discussed at
length the Companys long-term prospects, the
Companys current market valuation, the time needed to
achieve a higher market valuation and the Companys
strategic alternatives, including the pursuit of the current
business plan and the potential sale of all or parts of the
Company. At the conclusion of this discussion, it was the
consensus of the special committee that the special committee,
with the assistance of its advisors, should proceed with a
process to explore the possible sale of the Company. The special
committee concluded that the valuation of the Company in Fremont
Partners preliminary proposal was credible and directed
SunTrust Robinson Humphrey to seek clarification from Fremont
Partners on certain aspects of the preliminary proposal. It also
considered Fremont Partners requests that the Company
agree to work exclusively with Fremont Partners and determined
to reject Fremont Partners request. The special committee
directed SunTrust Robinson Humphrey to commence the preparation
of a confidential information memorandum to be used in
connection with soliciting proposals from other potential buyers.
On June 12, 2006, representatives of Party A met at the
Companys Memphis offices with members of the
Companys executive management team, including
Messrs. Adair and Harter. During these meetings, Party A
indicated an interest in acquiring the Company. Thereafter, in
early June 2006, representatives of Party A contacted
representatives of the Company and orally indicated an interest
in making a proposal for an acquisition of the Company for
consideration comprised of shares of Party As common stock
and cash, having a combined value of $21.00 per common
share of the Company. Representatives of Party A subsequently
indicated to the Company that Party A was tentatively prepared
to increase the consideration, comprised of Party As
common stock and cash, to $21.60 per common share.
On June 15, 2006, the special committee held a meeting, at
which time representatives of SunTrust Robinson Humphrey updated
the special committee on recent discussions with Fremont
Partners and briefed the special committee on managements
discussions with Party A. The special committee held a
follow-up
meeting on June 19, 2006 at which representatives of
SunTrust Robinson Humphrey updated the special committee on
discussions with Fremont Partners and described the oral
indication of interest received from Party A. Representatives of
SunTrust Robinson Humphrey presented to the special committee a
list of public and private insurance companies and non-insurance
financial services companies identified by SunTrust Robinson
Humphrey as potentially having a strategic interest in an
acquisition of the Company. Representatives of SunTrust Robinson
Humphrey also presented to the special committee a list of
potential financial buyers. The special committee discussed the
SunTrust Robinson Humphrey presentation and suggested that an
18
additional non-insurance financial services company be added to
the list of potential acquirers. The special committee discussed
with its financial and legal advisors various sale processes
that might be undertaken, including the possibility of
conducting a public auction of the Company. The special
committee noted the risk of losing one or both of the current
proposals posed by conducting a public auction and also
discussed the limited ability of the Companys management
to conduct simultaneous due diligence with numerous potential
buyers. The special committee discussed with its financial and
legal advisors the efficacy of a private market check in
maximizing shareholder value. Accordingly, the special committee
decided to approach a targeted number of potential buyers
(including Fremont Partners, Party A, Party B and Party
C) based on the list suggested by SunTrust Robinson
Humphrey.
On June 21, 2006, the special committee held a meeting,
which was also attended by certain members of the Companys
executive management team, including Messrs. Adair, Harter,
Hagely and Wilson and Ms. Tammy Adair, and a representative
of Baker Donelson. Representatives of SunTrust Robinson Humphrey
updated management on the solicitation process to date and on
the status of discussions with Fremont Partners and Party A.
Representatives of SunTrust Robinson Humphrey led a discussion
concerning the parties on the list of potential buyers which had
been presented to the special committee at the June 19 meeting,
as subsequently expanded based on input from the special
committee. The special committee discussed the list of potential
buyers with members of management and solicited
managements views on how to prioritize contacting
potential buyers. In this discussion, members of the
Companys management gave their views of the respective
strategic fit with the certain of the potential strategic buyers
and the financial strength of certain potential financial
buyers. Some potential buyers were eliminated, on the grounds
that the chances of obtaining a viable proposal from such
potential buyers were remote, either because an acquisition of
the Company would not represent a good strategic fit for the
potential buyer or because the potential buyer did not possess
the financial resources to fund an acquisition of the Company.
Elimination of those potential buyers allowed the special
committee and SunTrust Robinson Humphrey to focus their efforts
on buyers more likely to lead to a successful sale. The special
committee discussed with the Companys management team that
negotiations with all potential buyers would be conducted
through the special committee and its financial advisor.
At this point, the members of the Companys management team
and the representative of Baker Donelson in attendance were
excused from the meeting. The special committee proceeded to
discuss with its financial and legal advisors the
recommendations of the Companys management regarding the
list of potential buyers to be contacted and, after discussion,
concluded that it agreed with managements recommendations
and directed that SunTrust Robinson Humphrey refine the contact
list based on a further analysis of strategic fit and financial
wherewithal. The special committee noted that, after giving
effect to the recommendations, the list of parties to be
contacted would contain at least 26 potential strategic parties
and 7 financial parties, with the potential for additions as the
process unfolded. The special committee instructed its financial
and legal advisors to prepare an appropriate form of non
disclosure agreement to be executed by potential buyers and
authorized SunTrust Robinson Humphrey to commence contacting all
33 potential buyers.
From mid June 2006 through late July 2006, SunTrust Robinson
Humphrey contacted each of the potential buyers on the list
formulated at the June 19 and 21 special committee meetings. A
form of non-disclosure agreement was sent to each of the
contacted parties, which included customary confidentiality,
standstill and non-solicitation provisions. Upon execution of
the non-disclosure agreement, SunTrust Robinson Humphrey
provided the contacted party with a copy of a confidential
information memorandum and granted the party access to limited
preliminary due diligence information in electronic form.
On June 26, 2006, Party A submitted to the special
committee a written non-binding indication of interest for an
acquisition of the Company. Party As proposal confirmed
Party As preliminary valuation of the Company at $21.60
per common share, payable in a combination of cash and Party
As common stock. Party As proposal required
that members of the Companys senior management roll over a
portion of the Companys common stock owned by them into
Party A common stock and that Party A be granted a
40-day
exclusivity period in which to complete due diligence and
execute definitive transaction agreements.
On June 27, 2006, Fremont Partners submitted to the special
committee a revised preliminary term sheet describing its
proposal to acquire the Company for $21.00 per common share
in cash. Fremont Partners
19
submitted the revised proposal in response to a special
committee request that Fremont Partners clarify several matters
of concern to the special committee. The revised Fremont
Partners proposal further provided that the definitive
transaction agreements would include a termination fee equal to
3.5% of the merger consideration in the event that the Company
exercised its fiduciary out to terminate the definitive
transaction agreement to accept a superior offer. The proposal
specifically rejected the special committees earlier
request that a reverse termination fee be paid by
Parent to the Company in the event of a termination of the
definitive transaction agreement due to Fremont Partners
failure to secure necessary financing or regulatory approvals.
The proposal reiterated Fremont Partners request that it
be granted an exclusivity period in which to complete due
diligence and negotiate definitive transaction agreements.
On June 27, 2006, the special committee met and discussed
at length with its financial and legal advisors the June 26
proposal made by Party A and the June 27 proposal made by
Fremont Partners, including the requests for an exclusivity
period made by of each of Fremont Partners and Party A. The
special committee concluded that, since SunTrust Robinson
Humphrey had only recently commenced contacting potential
buyers, it was not willing to grant exclusivity to either party
at this stage in the process.
At or about the same time that the special committee was
considering the proposals of Fremont Partners and Party A,
SunTrust Robinson Humphrey continued contacting other potential
bidders, and on June 28, 2006, the Company entered into a
non-disclosure agreement with Party B, one of the potential
bidders contacted by SunTrust Robinson Humphrey.
Shortly after the June 27 special committee meeting, Fremont
Partners submitted a revised proposal to the special committee
in which Fremont Partners increased the merger consideration
payable to the Companys shareholders to $22.00 per
share in cash, subject to its completion of due diligence and
negotiation of definitive agreements. The proposal also lowered
the termination fee payable by the Company from 3.5% of the
merger consideration to 3.0% of the merger consideration. In
this proposal, Fremont Partners reiterated its request that it
be granted exclusivity.
At or about the same time, representatives of Party A, during
discussions with representatives of SunTrust Robinson Humphrey,
indicated Party As willingness to raise the consideration
payable to the Companys shareholders under Party As
proposal to $22.00 per share, payable in a combination of
cash and shares of Party As common stock, subject to
completion of due diligence. During these discussions, Party A
also indicated that it was potentially willing to allow a
reverse termination fee in the definitive transaction agreements.
During the period between June 29, 2006 and July 5,
2006, in which the foregoing events were occurring, the special
committee held three meetings to receive updates from
representatives of SunTrust Robinson Humphrey on the status of
its contacts with potential bidders on the list formulated at
the June 21, 2006 special committee meeting. At these
meetings, the special committee also discussed with its legal
and financial advisors developments in the ongoing discussions
with Fremont Partners and Party A.
On June 30, 2006, the Companys management completed
work on an updated financial forecast for the 2006 fiscal year
and a financial forecast for the 2007 fiscal year. Subsequently,
representatives of SunTrust Robinson Humphrey distributed the
financial forecasts to each of Fremont Partners, Party A, Party
B and other parties that had executed a non-disclosure agreement
and had been provided the previous financial forecast for the
2006 fiscal year.
On July 6, 2006, Party B submitted to the special committee
a preliminary non-binding indication of interest for the
acquisition of the Company at a price of $22.00 per share
in cash, subject to completion of due diligence. Party Bs
indication of interest letter was accompanied by a highly
confident letter from Party Bs financial advisor
regarding the debt financing that would be required in
connection with Party Bs acquisition of the Company. In
its indication of interest, Party B requested that it be granted
a 30-day
exclusivity period in which to conduct further due diligence and
negotiate definitive transaction agreements.
On July 7, 2006, the special committee held a meeting that
was also attended by members of the Companys executive
management team, including Messrs. Adair, Harter, Hagely
and Wilson and Ms. Jacqueline Adair, and a representative
of Baker Donelson. The special committee discussed with
management the proposals
20
received from each of Fremont Partners, Party A and Party B. In
particular, the special committee solicited managements
views regarding the regulatory risk posed by each of the
respective proposals. The special committee directed SunTrust
Robinson Humphrey to prepare an analysis of the anticipated
post-closing capital structure under each of the proposals.
On July 11, 2006, the special committee held a meeting at
which representatives of SunTrust Robinson Humphrey presented
the special committee with an overview of the sale process to
date. SunTrust Robinson Humphrey had contacted 36 potential
buyers, including Fremont Partners, Party A, Party B and Party
C. Three potential buyers, Fremont Partners, Party A and Party
B, had submitted non-binding proposals. Representatives of
SunTrust Robinson Humphrey presented an overview of each of the
three non-binding proposals to the special committee. The
special committee discussed at length with its financial and
legal advisors the process to date and reconsidered other
options, including commencing a public auction, that might be
employed. After a thorough discussion of the options, including
a discussion of the risk that a public auction might drive the
three current bidders out of the process, the special committee
concluded that the process employed would provide an effective
means of maximizing shareholder value. The special committee
directed SunTrust Robinson Humphrey to contact each of the three
bidders and request that each party revise its proposal to
provide its best and final offer. The special committee
instructed SunTrust Robinson Humphrey to inform each of the
three bidders to include, in its revised proposal, the amount of
the termination fee that it proposed to include in the
definitive transaction agreement and whether it was willing to
include a reverse termination fee in the definitive transaction
agreement.
Pursuant to the instructions of the special committee, SunTrust
Robinson Humphrey contacted the three bidders to request their
best and final offer. Thereafter, on or about July 12,
2006, representatives of the three bidders contacted
representatives of SunTrust Robinson Humphrey concerning their
bids. Party A advised SunTrust Robinson Humphrey that Party A
would not raise its offer from $22.00 per common share,
payable in a combination of cash and Party A common stock. Party
B advised SunTrust Robinson Humphrey that Party B was
evaluating its ability to raise its offer of $22.00 per
common share in cash. Representatives of Party B subsequently
contacted SunTrust Robinson Humphrey and indicated that Party B
would not submit a revised proposal but that it was prepared to
raise its offer. Party B requested that the special committee
propose a price at which it would be prepared to enter into an
exclusivity agreement with Party B. Fremont Partners advised
SunTrust Robinson Humphrey that Fremont Partners was evaluating
its ability to raise its offer of $22.00 per common share in
cash. Representatives of Fremont Partners subsequently notified
SunTrust Robinson Humphrey that Fremont Partners would not be
able to respond to the special committees request to
provide a revised proposal until on or around July 17, 2006.
On July 13, 2006, the special committee held a meeting,
which it adjourned until July 14, 2006. At those July 13
and July 14 sessions, the special committee discussed with its
legal and financial advisors developments in the discussions
with each of Fremont Partners, Party A and Party B.
On or shortly after July 13, 2006, a representative of
Party A contacted Mr. Adair and informed him that Party A
would consider raising its offer price above $22.00 per
common share, payable in a combination of cash and Party A
common stock.
On July 17, 2006, the special committee held a meeting. The
special committee discussed with its legal and financial
advisors developments in the discussions with each of Fremont
Partners, Party A and Party B. Representatives of SunTrust
Robinson Humphrey advised the special committee on recent
discussions with the Companys management shareholders,
including that the Adairs had determined that they were not
willing to participate in the equity roll-over contemplated by
the Fremont Partners proposal. Members of the Companys
executive management team, including the Adairs, Mr. Harter
and a representative of Baker Donelson, were then invited to
address the special committee for the purpose of clarifying the
position of the Adair family on the equity roll-over contained
in the Fremont Partners proposal. The Adairs confirmed that they
would not participate in an equity roll-over. Mr. Adair
also described for the special committee his conversation with a
representative of Party A, in which Party A had indicated that
it would be willing to raise its offer. At this point, the
members of the Companys management team and the
representative from Baker Donelson in attendance were excused
from the meeting. The special committee directed SunTrust
Robinson Humphrey to
21
clarify Party As position on increasing the price of its
offer and to inform Fremont Partners of the position of the
Adair family regarding the equity roll-over.
Thereafter, on or about July 18, 2006, SunTrust Robinson
Humphrey contacted Party A to confirm its willingness to
increase its offer. A representative of Party A advised SunTrust
Robinson Humphrey that Party A was not prepared to increase its
offer, but that the offer would remain at $22.00 per share,
payable in a combination of cash and Party A common stock.
On July 18, 2006, the special committee held a meeting to
discuss with its financial and legal advisors developments in
discussions with each of Fremont Partners, Party A and Party B.
The special committee discussed alternative approaches for
advancing the process. Each of the three bidders had declined to
submit a revised proposal or increase its price. After
discussion, and with input from the financial and legal
advisors, the special committee directed SunTrust Robinson
Humphrey to inform each of the three bidders that the special
committee was willing to enter into an exclusivity arrangement
if the bidder would increase its offer to $22.75 per share.
The special committee also instructed SunTrust Robinson Humphrey
to communicate to each bidder the special committees views
regarding several key definitive transaction agreement terms.
The special committee directed SunTrust Robinson Humphrey to
instruct the bidders that the special committee would consider
the bidders positions on these issues in evaluating the
proposals and to set a deadline of 10:00 a.m., Eastern
Time, on July 19 for response.
Also on or about July 18, 2006, a representative of Party B
informed SunTrust Robinson Humphrey that it had increased its
offer to $22.50 per common share in cash. In this
discussion, Party B did not address the Companys preferred
definitive transaction agreement terms that had been proposed by
the special committee. At or about the same time, a
representative of Party A informed SunTrust Robinson Humphrey
that, despite its earlier indications to the contrary, it had
increased its offer to $22.25 per share, payable in a
combination of cash and Party A common stock.
The morning of July 19, 2006, the special committee held a
meeting to receive an update from its financial and legal
advisors on the status of the bidders responses to the
special committees July 18 proposal. At the request of the
special committee, representatives of SunTrust Robinson Humphrey
reviewed the analyses contained in the presentation made to the
special committee at the July 11 meeting, focusing on the
financing and regulatory risk posed by each proposal. The
special committee concluded, based primarily on the post-closing
capital structures of each proposal, that the proposal submitted
by Party B carried the least regulatory risk.
Following the morning meeting of the special committee, a
representative of Fremont Partners contacted SunTrust Robinson
Humphrey and indicated that it would increase its offer to
$22.75 per share in cash. The representative of Fremont
Partners indicated that it would remove the condition of its
offer that the Adairs participate in an equity roll-over. In
this discussion, Fremont Partners did not address the
Companys preferred definitive transaction agreement terms
that had been proposed by the special committee.
The special committee met again on July 19, 2006 to discuss
the responses of each of the bidders. The special committee
noted that Fremont Partners had reached the targeted valuation
level, while Party A and Party B had not. The special committee
again discussed the risk to completion of a transaction with
Fremont Partners, including financing and regulatory risk. The
special committee determined that, subject to Fremont Partners
indicating an acceptable position on the Companys
preferred definitive transaction agreement terms, it would enter
into an exclusivity period with Fremont Partners not to exceed
30 days. The special committee authorized SunTrust Robinson
Humphrey to inform Party A and Party B and directed Dorsey to
work with Fremont Partners and its counsel, Skadden, Arps,
Slate, Meagher & Flom LLP, which we refer to in this
proxy statement as Skadden Arps, on an exclusivity agreement
based on the draft exclusivity agreement previously provided by
Fremont Partners.
In the afternoon of July 19, 2006, following the early
afternoon meeting of the special committee, SunTrust Robinson
Humphrey contacted each of Party A and Party B to inform it that
another bidder had submitted a higher bid and that the special
committee intended to grant exclusivity to the other bidder. In
22
response to this information, and contrary to its previous
indications that it would not increase its price from $22.50,
Party B increased its offer to $23.00 per share in cash.
The special committee met again in the afternoon of
July 19, 2006, to discuss the revised Party B proposal and
the Fremont Partners proposal. The special committee again
discussed the risks to closing posed by each of the Party B and
Fremont Partners proposals. After discussion, the special
committee determined, subject to confirmation of an acceptable
position of Party B on the special committees preferred
definitive transaction agreement terms, to enter into an
exclusivity period not to exceed 30 days with Party B. The
special committee authorized SunTrust Robinson Humphrey to
advise Fremont Partners of the special committees decision.
Later in the afternoon of July 19, 2006, following the
afternoon meeting of the special committee, SunTrust Robinson
Humphrey contacted Fremont Partners to inform it that another
bidder had submitted a higher price and that the special
committee intended to grant exclusivity to the other bidder. In
response to this information, Fremont Partners increased its
offer to $23.10 per common share in cash. Separately, a
representative of Party B confirmed an acceptable position on
each of the preferred definitive transaction agreement terms and
indicated that it would shortly provide a form of exclusivity
agreement to the special committee.
The special committee met a third time on July 19, 2006 to
discuss the revised Fremont Partners proposal and the Party B
proposal. The special committee noted that the valuation of the
Fremont Partners proposal was only slightly higher than the
valuation of the Party B proposal. The special committee then
again discussed the respective risks of not completing a
transaction posed by the Fremont Partners proposal and the Party
B proposal on the terms proposed at that time, and determined to
proceed with the Party B proposal.
In the late afternoon of July 19, 2006, the special
committee, on behalf of the Company, and Party B entered into an
agreement which provided Party B an exclusive period of
30 days to complete due diligence and negotiate definitive
transaction agreements. Following execution of the exclusivity
agreement with Party B on July 19, 2006, Fremont Partners
submitted a revised proposal to the special committee in which
Fremont Partners increased its offer to $23.50 per share in
cash.
On July 20, 2006, the special committee held a meeting to
discuss the revised Fremont Partners proposal. The special
committee, with input from its financial and legal advisors,
discussed how to proceed with the revised Fremont Partners
proposal in light of the exclusivity agreement that had been
executed with Party B. Among the options considered were
requesting that Party B either increase its price or terminate
the exclusivity agreement. The special committee considered the
relatively short exclusivity period and the possibility that the
exclusivity period could expire without a definitive transaction
agreement having been reached. The special committee instructed
SunTrust Robinson Humphrey to advise Party B of the higher offer.
From July 21, 2006 throughout the
30-day
exclusivity period, representatives of Party B met frequently
with various members of management of, and with in-house and
outside legal counsel to, the Company to conduct due diligence,
both in person at the Companys Nashville offices and by
telephone. During this time, representatives of each of Fremont
Partners and Party A contacted members of the Companys
management and representatives of SunTrust Robinson Humphrey to
indicate each partys continued interest in an acquisition
of the Company. In each instance, Fremont Partners or Party A
acted on its own initiative in making contact and without any
solicitation from the special committee, the Company or their
respective advisors. Further, in each instance, Fremont Partners
or Party A was reminded that the Company had entered into an
exclusivity agreement with Party B.
Between July 28, 2006 and August 15, 2006, the special
committee held four meetings to discuss issues related to the
draft of the merger agreement provided by Party B in early
August, 2006, and the status of Party Bs due
diligence.
During the period between August 4, 2006 and
August 14, 2006, Party Bs legal advisor delivered to
Dorsey a draft of the merger agreement and representatives of
Dorsey, Party Bs legal counsel, Baker Donelson and the
Companys internal legal personnel reviewed, discussed and
negotiated terms of the merger agreement.
23
On or about August 16, 2006, a representative of Party B
contacted SunTrust Robinson Humphrey and indicated that Party B
had identified several matters during its due diligence review
of the Company. These matters were memorialized in a letter from
Party B to the special committee dated August 17, 2006.
On August 16, 2006, the special committee held a meeting,
which was also attended by members of the Companys
executive management team, including Messrs. Adair, Harter,
Hagely and Wilson, Ms. Jacqueline Adair and Ms. Tammy
Adair, and a representative of Baker Donelson. The due
diligence-related matters raised by Party B were discussed.
After discussion with the financial and legal advisors, the
special committee directed that SunTrust Robinson Humphrey work
with the Companys management to formulate a response to
Party B.
On August 17, 2006, the special committee held a meeting to
discuss in more detail the matters raised by Party B in
connection with its due diligence and how to respond to Party B.
Representatives of SunTrust Robinson Humphrey advised the
special committee that the Companys management was
formulating a response to Party B and that SunTrust Robinson
Humphrey would review the response and schedule a meeting with
Party B to discuss it. The special committee then discussed the
imminent expiration of the exclusivity period with Party B and
authorized SunTrust Robinson Humphrey, following the expiration,
to contact each of Fremont Partners and Party A to gauge their
respective continued interest in pursuing an acquisition of the
Company.
At midnight on August 17, 2006, Party Bs exclusivity
period expired.
On August 18, 2006, SunTrust Robinson Humphrey provided
Party B with the Companys response to the due diligence
matters raised by Party B.
On August 18, 2006, a representative of SunTrust Robinson
Humphrey contacted representatives of Party A to gauge
Party As continued interest in an acquisition of the
Company. Party A indicated that it would welcome the opportunity
to proceed on an exclusive basis with a transaction valued at
$23.00 per share in cash.
On August 18, 2006, a representative of SunTrust Robinson
Humphrey contacted representatives of Fremont Partners who
reiterated their interest in acquiring the Company in a
transaction valued at $23.50 per share in cash. Fremont
Partners indicated its desire to enter into an exclusivity
agreement with the Company and also requested that the Company
enter into an agreement to reimburse Fremont Partners
expenses in the event that the Company consummated a transaction
with another party.
On August 18, 2006, the special committee held a meeting to
discuss the Companys response to Party B and the status of
recent discussions with Party A.
On August 20, 2006, Fremont Partners delivered to the
special committee a draft merger agreement, a proposed due
diligence plan and a draft regulatory approval timeline.
On August 21, 2006, the special committee held a meeting at
which the special committee discussed a recent communication
from Party B that it was lowering its price to $18.50 per
share. The special committee also discussed recent
communications with Fremont Partners and considered Fremont
Partners exclusivity request and proposal for expense
reimbursement. After discussion, the special committee
authorized SunTrust Robinson Humphrey to contact Fremont
Partners and propose that Fremont Partners perform its initial
due diligence and confirm its valuation of $23.50 per
share. After completion of these items, the special committee
would reconsider Fremont Partners requests regarding
exclusivity and expense reimbursement. The special committee
also asked SunTrust Robinson Humphrey and Dorsey to confirm with
Fremont Partners that its proposal would not require
management shareholders to roll-over the Companys common
stock held by them into the acquiring entity.
On August 22, 2006, a representative of Fremont Partners
contacted SunTrust Robinson Humphrey and indicated that Fremont
Partners would commence initial due diligence without an
exclusivity agreement, but that it would require the Company to
enter into an exclusivity agreement before engaging outside
advisors to assist it with due diligence.
24
On August 23, 2006, Party B delivered to the special
committee a letter stating that, based on the due diligence
matters previously identified by it, and notwithstanding the
Companys response to those matters, it was no longer
prepared to move forward with an acquisition of the Company at
$23.00 per share. The letter reiterated Party Bs
earlier communication that it would be prepared to move forward
with a transaction valued at $18.50 per share in cash.
Also in mid-August 2006, representatives of Party A contacted
Company management, including Mr. Adair, to express Party
As continued interest in a transaction with the Company.
Between August 22, 2006 and September 5, 2006, the
special committee held four meetings to discuss the status of
discussions between the Company and each of Fremont Partners and
Party A. At the August 30 meeting, the special committee
discussed a proposal to circulate a letter to each party, other
than Fremont Partners and Party A, that had executed a
non-disclosure agreement with the Company. The letter would
waive the standstill provisions contained in the non-disclosure
agreement. After discussion, the special committee authorized
SunTrust Robinson Humphrey to prepare and distribute the waiver
letter. SunTrust Robinson Humphrey sent a letter to each party,
other than Fremont Partners and Party A, that had executed a
non-disclosure agreement with the Company waiving the standstill
provision contained in the non-disclosure agreements.
On August 23, 2006, Mr. Rohde contacted Party As
chief executive officer to discuss Party As continued
interest in an acquisition of the Company. During this
conversation, Mr. Rohde noted the existence of a higher
offer.
During the week of August 28, 2006, representatives of
Fremont Partners performed
on-site due
diligence on the Company at the Companys headquarters in
Nashville, Tennessee. During Fremont Partners
on-site due
diligence, representatives of Fremont Partners met with members
of the Companys senior management. Thereafter, from
August 28, 2006 through the signing of a definitive merger
agreement on December 4, 2006, Fremont Partners conducted
ongoing due diligence. During that period, as part of its due
diligence, Fremont Partners and its advisors met frequently,
both in person and by telephone, with members of Company
management and the Companys in-house and outside legal and
financial advisors.
On September 8, 2006, Fremont Partners delivered to the
special committee a letter in which it lowered its offer to
$21.00 per common share in cash. Fremont Partners
letter requested that Fremont Partners be granted exclusivity
and stated that the proposal would expire at 5:00 p.m.,
Pacific Time, on September 12, 2006.
On September 9, 2006, the special committee held a meeting
to discuss the September 8 letter from Fremont Partners. The
special committee also discussed the status of discussions with
Party A. The special committee discussed with its financial and
legal advisors Fremont Partners request for exclusivity.
The special committee concluded that, given Party As
previous oral indication of an offer higher than $21.00 per
share, the special committee would not consider Fremont
Partners request for exclusivity until the special
committee had an opportunity to assess Party As continued
level of interest. The special committee directed SunTrust
Robinson Humphrey to contact Party A to gauge Party As
continued interest in an acquisition of the Company.
On or about September 11, 2006, Mr. Rohde and a
representative of SunTrust Robinson Humphrey each contacted
Party As chief financial officer. During these
conversations, Party As chief financial officer indicated
that Party A remained interested in an acquisition of the
Company and that it would need to perform approximately two
weeks of due diligence in order to confirm the valuation
underlying its prior offer.
On September 11, 2006, the special committee held a meeting
to further discuss Fremont Partners September 8 letter and
receive an update on recent discussions with Party A. The
special committee, with input from its financial and legal
advisors, again discussed Fremont Partners request that it
be granted exclusivity. Given Party As continued interest
in a transaction and Party As oral indication of a
valuation of $22.25 per common share, the special committee
concluded that it would not grant Fremont Partners request
for exclusivity. The special committee directed SunTrust
Robinson Humphrey to inform Fremont Partners that
25
Fremont Partners would have to increase its offer materially in
order for the special committee to proceed on an exclusive basis
with Fremont Partners.
On or about September 12, 2006 a representative of Fremont
Partners contacted a representative of SunTrust Robinson
Humphrey and indicated that Fremont Partners would increase its
offer to $21.25 per common share in cash. The Fremont
Partners representative noted that $21.25 represented Fremont
Partners best and final offer.
On September 12, 2006, Fremont Partners sent to the special
committee a letter confirming that it had increased its offer to
$21.25 per common share in cash. Fremont Partners
letter reiterated its request that Fremont Partners be granted
exclusivity and stated that the proposal would expire at
5:00 p.m., Pacific Time, on September 12, 2006. Also
on that day, a representative of Party As financial
advisor contacted a representative of SunTrust Robinson Humphrey
to reiterate Party As continued interest in an acquisition
of the Company.
On September 12, 2006, the special committee held a meeting
to discuss the Fremont Partners September 12 letter and receive
an update on discussions with Party A. It was noted that Party
As last written proposal had indicated a valuation of the
Company at $21.60 per common share and that Party A had
subsequently orally indicated that it would raise its offer to
$22.25 per common share. The special committee discussed at
length alternative courses of action, including proceeding on an
exclusive basis with Fremont Partners. In considering the
Companys options, the special committee considered the
risk that Party A would lower its offer after completing further
due diligence and the risk that Fremont Partners would decline
to continue in the due diligence process if the special
committee did not grant Fremont Partners request for
exclusivity. However, given Party As indications that it
was willing to pay a higher price than Fremont Partners, the
special committee concluded that the best option was to
re-engage in intensive discussions with Party A on a
non-exclusive basis and encourage Party A to move quickly to
complete due diligence and to confirm its valuation of the
Companys stock. The special committee also agreed that
Fremont Partners would be informed that the special committee
had concluded that Fremont Partners would be encouraged to
continue its ongoing due diligence and the negotiation of
definitive transaction documents on a non-exclusive basis.
On September 12, 2006, a representative of SunTrust
Robinson Humphrey contacted representatives of each of Fremont
Partners and Party A to inform them of the special
committees determination. Shortly thereafter, Fremont
Partners indicated it would continue its due diligence without
an exclusivity agreement.
Between September 11, 2006 and September 15, 2006,
attorneys from Dorsey, Baker Donelson and the Companys
internal legal staff prepared a form of merger agreement to be
delivered to Party A. On September 15, 2006, SunTrust
Robinson Humphrey sent Party A a letter outlining the process
for submitting a written proposal for the acquisition of the
Company. The process letter instructed Party A to deliver its
proposal by September 27, 2006. The process letter included
the form of merger agreement prepared on behalf of the Company
and requested that Party A submit a
mark-up of
the merger agreement with its written proposal. In the interim,
Party A was allowed to conduct its due diligence to confirm its
valuation. Party A began conducting that stage of its due
diligence the week of September 18, 2006, and its due
diligence continued thereafter until the Company entered into a
definitive merger agreement on December 4, 2006.
Party As due diligence included numerous conferences
with Company management and senior employees, as well as with
the Companys internal and external financial and legal
advisors, both by telephone and at meetings held on site at the
Companys Nashville and Memphis offices.
Between September 13, 2006 and September 21, 2006, the
special committee held three meetings to receive updates on the
status of discussions with each of Fremont Partners and Party A.
On September 29, 2006, Party As chief executive
officer contacted Mr. Rohde to discuss Party As
proposal and indicated that Party A was preparing a term sheet
regarding its proposal that Party A expected to deliver to the
Company shortly.
On October 2, 2006, Party A delivered to the special
committee an indicative offer term sheet for the acquisition of
the Company at a price of $20.50 per common share in cash.
Party As proposal required that Party A be able to
terminate the definitive transaction agreement in the event of a
decrease in the price of
26
Party As stock of 20% or more. Party As proposal
also required that a portion of the merger consideration be
placed in escrow to cover certain settlement amounts or
litigation expenses incurred after closing in connection with
the shareholder lawsuits. Party As proposal also called
for a post-closing adjustment to the purchase price to reflect
any differences in the Companys June 30, 2006 balance
sheet and the Companys balance sheet on the closing date.
Party As proposal included a request for exclusivity.
Party As proposal did not include its
mark-up of
the form of merger agreement as had been requested in the
September 15 process letter.
Throughout October 2006, and from time to time thereafter until
December 4, 2006, Party A initiated numerous contacts with
senior Company management to discuss an indemnity or escrow for
the shareholder lawsuits and to conduct further due diligence on
the shareholder lawsuits to increase its comfort level
concerning that litigation.
On October 2, 2006, the special committee held a meeting to
discuss Party As indicative offer term sheet. The special
committee discussed at length with its financial and legal
advisors several aspects of Party As proposal, including
the walk-away right of Party A triggered by a 20% or greater
drop in Party As stock price, the proposed escrow of
merger consideration and the post-closing purchase price
adjustment. The special committee was advised that these
provisions were unusual for acquisitions of public companies,
and the special committee discussed the risks that would be
posed by entering into a definitive agreement containing these
provisions. The special committee also received an update from
SunTrust Robinson Humphrey on Fremont Partners progress on
its due diligence and in securing debt financing for an
acquisition of the Company. The special committee discussed
Party As request for exclusivity and concluded that, given
the proposed price and unusual and unfavorable terms of Party
As proposal, it would not grant the request. After
discussion, the special committee directed SunTrust Robinson
Humphrey to advise Party A of the special committees
concerns with Party As proposal and to request that Party
A revise its proposal in response to the special
committees concerns.
At that October 2 meeting, the special committee also directed
Dorsey to work with Baker Donelson and the Companys
internal legal staff to prepare a
mark-up of
the form of merger agreement previously delivered by Fremont
Partners. The Company and its outside counsel revised the merger
agreement, and Dorsey delivered it to Fremont Partners
counsel on October 8, 2006. Negotiation of the merger
agreement by management of, and in-house and outside counsel to,
the Company and Fremont Partners was conducted intermittently
during the period from October 8, 2006 until the signing of
that merger agreement on December 4, 2006.
Also on or about October 2, 2006, representatives of Party
As financial advisor contacted representatives of SunTrust
Robinson Humphrey to discuss Party As proposal. In these
discussions, Party As financial advisor indicated that
Party A was willing to discuss the deletion of the walk-away
right and the escrow from Party As proposal.
Mr. Rohde engaged in similar discussions with Party
As chief financial officer. During this conversation,
Party As chief financial officer indicated that Party
As proposed valuation of $20.50 per common share
represented Party As best price.
On October 3, 2006 and October 5, 2006, the special
committee held meetings to discuss the status of discussions
with each of Fremont Partners and Party A.
On October 9, 2006, Fremont Partners delivered to the
special committee a draft plan for the completion of due
diligence and negotiation of definitive transaction agreements,
a draft commitment letter for the debt financing required to
complete an acquisition of the Company and a form of expense
reimbursement agreement.
On October 10, 2006, the special committee held a meeting
to discuss the status of discussions with each of Fremont
Partners and Party A. The special committee also discussed the
documents delivered by Fremont Partners the previous day. The
special committee discussed the expense reimbursement agreement
under which Fremont Partners would be reimbursed for its
out-of-pocket
expenses in the event that the Company completed a transaction
with a party other than Fremont Partners. The special committee
noted Fremont Partners cooperation in the process to date,
despite Fremont Partners stated preference that the
special committee negotiate with it on an exclusive basis. The
special committee also noted that Fremont Partners had
27
demonstrated an understanding of the process and had delivered a
reasonable form of merger agreement. The special committee
directed Dorsey and SunTrust Robinson Humphrey to develop a
counter-proposal to Fremont Partners request.
On October 11, 2006, the special committee held a meeting
to discuss the status of discussions with each of Fremont
Partners and Party A. The special committee discussed the
expense reimbursement agreement requested by Fremont Partners.
After discussions with its financial and legal advisors, the
special committee authorized SunTrust Robinson Humphrey to
propose two modifications to Fremont Partners expense
reimbursement proposal. First the amount of expenses subject to
reimbursement would be capped at $1.5 million. Second, the
Company would have no obligation to Fremont Partners for expense
reimbursement in the event that the valuation of the Fremont
Partners proposal was lowered from $21.25 per share.
On October 16, 2006, representatives of Dorsey spoke with
Party As legal advisors to discuss the form of merger
agreement that the special committee had provided to Party A.
On October 16, 2006, representatives of Fremont Partners
informed SunTrust Robinson Humphrey that the special
committees proposals regarding the expense reimbursement
agreement were acceptable. Subsequently, Fremont Partners and
the special committee, on behalf of the Company, executed the
expense reimbursement agreement.
On October 16, 2006, the special committee held a meeting
to receive an update on the status of discussions with each of
Fremont Partners and Party A. The special committee also engaged
an insurance regulatory consultant to advise the special
committee on regulatory matters in connection with each of the
Fremont Partners and Party A proposals.
On October 23, 2006, the special committee held a meeting
to discuss the status of discussions with each of Fremont
Partners and Party A.
On October 24, 2006, representatives of the Company,
Fremont Partners and several advisors to Fremont Partners made a
presentation to A.M. Best concerning the proposed
transaction between the Company and Fremont, to allow evaluation
of the impact that such a transaction might have on the
A.M. Best ratings of the Companys insurance
subsidiaries.
On October 24, 2006, Party As legal advisor delivered
to the special committee Party As
mark-up of
the merger agreement that the special committee had supplied to
Party A.
On October 27, 2006, the special committee held a meeting
to discuss the status of discussions with each of Fremont
Partners and Party A. The insurance regulatory consultant
engaged by the special committee reported to the committee on
the results of his analysis of regulatory issues presented by
each of the proposals. His report included a summary of the
Companys regulatory history, the effects that various
states review process and the upcoming elections might
have on the timing of the review of a transaction by state
regulatory authorities. He also presented his analysis of each
of the proposals, including an analysis of the post-closing
capital structure of the Company under each of Fremont
Partners and Party As proposals. He concluded that
the regulatory approval process would be manageable under either
proposal and that he was of the opinion that neither proposal
posed significantly more regulatory risk than the other.
On October 30, 2006, a representative of Dorsey discussed
Party As
mark-up of
the merger agreement with Party As legal advisors. During
this discussion, Dorsey highlighted several areas that were of
concern to the special committee.
On October 31, 2006, the special committee held a meeting
to discuss the status of discussions with each of Fremont
Partners and Party A. The special committee also discussed with
Dorsey the
mark-up of
the merger agreement delivered to the special committee by Party
A, and Dorsey reported on the results of its October 30
discussion with Party As legal advisor.
On November 2, 2006, the special committee held a meeting
to discuss the status of discussions with each of Fremont
Partners and Party A. Representatives of Dorsey discussed with
the special committee issues raised during recent discussions
with Fremont Partners legal counsel and proposed
resolutions of such issues.
28
During the week of October 30, 2006, Mr. Rohde and
Mr. Adair each discussed with Party As chief
executive officer that Party A would condition closing any
acquisition of the Company on the shareholder lawsuits being
settled. Alternatively, Party A would insist that the Adairs
personally fund an escrow to indemnify Party A for expenses
incurred in settlement or defense of the shareholder lawsuits.
On November 7, 2006, the special committee held a meeting
to discuss the status of discussions with each of Fremont
Partners and Party A. The special committee discussed in detail
Party As requirement that the Adairs personally fund an
indemnity escrow in connection with the shareholder lawsuits. At
the request of the special committee Mr. Adair joined the
meeting. Mr. Adair stated that the Adairs would not fund an
escrow to support an indemnity for the shareholder lawsuits. The
special committee instructed its financial and legal advisors to
continue negotiating other aspects of the transaction with Party
A, and allowed Party A to continue its due diligence and
negotiation of other agreement terms.
On November 9, 2006, on behalf of the Company, Baker
Donelson provided Party A with comments to Party As
mark-up of
the merger agreement. Also, Dorsey forwarded to Skadden Arps the
Companys comments on various covenants then under
negotiation in the Fremont Partners merger agreement. On
November 10, 2006, Dorsey sent to Skadden Arps the
Companys draft disclosure schedule to the Fremont Partners
merger agreement. On November 10, 2006, Dorsey and Baker
Donelson received revisions to the Party A merger agreement from
counsel to Party A. On November 12 and 13, 2006, Dorsey
responded to Party A that the revised merger agreement did not
address the concerns with Party As proposal that Dorsey
had raised on behalf of the special committee. On
November 14, 2006, Dorsey provided Party A with written
comments to the Party A merger agreement, and on
November 17, 2006, Baker Donelson provided counsel to Party
A a draft of the Company disclosure schedule to the Party A
merger agreement. On November 15, 2006, the Company
reviewed and commented on Fremont Partners revisions to
the representations and warranties in the Fremont Partners
merger agreement. On November 16, 2006, the Company
received and commenced review of agreements ancillary to the
Fremont Partners merger agreement. Thereafter, throughout
the remainder of November 2006, and until the definitive merger
agreement was signed on December 4, 2006, management of,
and legal advisors to, the Company and Fremont Partners engaged
in frequent discussions and exchanges of revisions to the merger
agreement.
On November 10, 2006, representatives of the Company and
Fremont Partners made a presentation to representatives of the
lending group that provides the credit facility to finance
operations of the Companys premium finance subsidiaries.
The purpose was to discuss the potential impact of the proposed
transaction with Fremont Partners under the credit facility
terms and explore with the lending group what it would require
to consent to such a transaction.
On November 15, 2006, at the direction of the special
committee, SunTrust Robinson Humphrey sent letters to Fremont
Partners and Party A, requesting that Fremont Partners and Party
A submit their final proposals no later than November 20,
2006.
On November 20, 2006, Fremont Partners contacted SunTrust
Robinson Humphrey and confirmed that $21.25 was its best and
final offer and that it would not increase it offer. Also,
Fremont Partners informed the special committee that Texas
Pacific Group would be joining as an equity investor in Parent.
Also on November 20, 2006, Party A sent a letter to the
special committee confirming its continued interest in acquiring
the Company for $21.25 per share and including forms of a merger
agreement, a voting agreement, a shareholder indemnification
agreement and other documents.
Between November 10, 2006 and November 24, 2006, the
special committee held seven meetings to discuss developments in
discussions with Fremont Partners and Party A. Thereafter,
between November 27, 2006 and November 29, 2006, the
special committee held daily meetings to discuss developments in
discussions with Fremont Partners and Party A.
At the special committees November 27 meeting, SunTrust
Robinson Humphrey previewed for the special committee a
preliminary draft of materials that had been prepared in
connection with the preparation of the fairness opinion to be
delivered by SunTrust Robinson Humphrey. The presentation
contained various analyses that SunTrust Robinson Humphrey had
undertaken in connection with the preparation of the fairness
29
opinion. For a description of the analyses employed, see
The Merger Opinion of Direct Generals
Financial Advisor and Annex B to this proxy statement.
In addition, during the period from November 20, 2006
through December 4, 2006, certain members of management,
separate legal counsel for these members of management and
Fremont Partners negotiated the terms of arrangements with these
members of management that are described elsewhere in this proxy
statement.
On November 27, 2006, legal counsel to Fremont Partners and
the Company negotiated open issues in the Fremont Partners
merger agreement by telephone conference. Also on
November 27, 2006, representatives of Party A met in person
with Mr. Adair and Ms. Tammy Adair at the
Companys offices in Memphis primarily to discuss the
aspects of Party As proposal that, if a transaction with
Party A were to occur, would potentially require the Adairs to
incur personal obligations to Party A.
On November 28, 2006, representatives of and legal advisors
to Fremont Partners and the Company negotiated open provisions
in the Fremont Partners merger agreement and ancillary
agreements by telephone conference.
On November 29, 2006, Party A sent a letter to the special
committee confirming its continued interest in acquiring the
Company and affirming its offer of $21.25 per share. Party
A included with the letter revised draft forms of a merger
agreement, a shareholder indemnification agreement and other
documents. Also on November 29, 2006, the special committee
held a meeting at which open issues regarding Fremont
Partners proposed merger agreement were discussed.
On November 30, 2006, the special committee held a meeting
at the Companys headquarters in Nashville, Tennessee, to
discuss the Fremont Partners and Party A proposals. The special
committee discussed the letter and form of agreements received
from Party A and noted that there continued to be substantial
issues with Party As proposal that appeared to be
irresolvable. The special committee then turned to the Fremont
Partners proposal. SunTrust Robinson Humphrey described recent
communications with Fremont Partners in which Fremont Partners
had confirmed that $21.25 per common share was its best and
final offer. Dorsey discussed with the special committee the
open issues relating to Fremont Partners proposed merger
agreement, and the special committee determined that these
issues presented an unacceptable risk to closing. After
discussion, the special committee concluded that it was not
prepared to make a recommendation that the Companys board
of directors adopt the merger agreement proposed by Fremont
Partners.
On November 30, 2006, immediately following the meeting of
the special committee, the Companys board of directors
held a meeting at the Companys headquarters.
Representatives of SunTrust Robinson Humphrey, Dorsey and Baker
Donelson participated in the meeting. The board was advised that
the special committee did not have a recommendation at that
time. The Companys board discussed the open issues in the
merger agreement proposed by Fremont Partners. SunTrust Robinson
Humphrey presented a preliminary draft of the presentation it
had prepared in connection with the potential delivery of its
fairness opinion. The Companys board of directors
instructed management and legal counsel to continue discussions
with Fremont Partners in an effort to resolve the outstanding
open issues.
On December 1, 2006, Mr. Rohde spoke with Party
As chief financial officer to discuss the remaining open
issues with Party As recent proposal. Party As chief
financial officer confirmed that it would not agree to modify
its requirements concerning an indemnification escrow and
resolution of the shareholder lawsuits.
On December 1, 2006, the special committee held a meeting
to discuss the status of discussions with each of Party A and
Fremont Partners. SunTrust Robinson Humphrey reported that there
had been no change in Party As position regarding the
other issues. SunTrust Robinson Humphrey and representatives of
Dorsey reported to the special committee the progress made in
negotiating the open issues in the Fremont Partners
proposed merger agreement.
On December 2, 2006, Mr. Rohde spoke with Party
As chief executive officer. Party As chief executive
officer confirmed that Party A would not raise its offer nor
would it drop its requirements regarding the
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shareholder lawsuits. Also, a representative of Fremont Partners
again confirmed that Fremont Partners would not raise its price
from $21.25 per common share in cash.
On December 2, 2006, the special committee held a meeting
to discuss the status of the Fremont Partners proposal.
Representatives of Dorsey briefed the special committee on
recent developments in negotiating the final issues in the
definitive transaction agreements. The special committee then
discussed the valuation of the Fremont Partners proposal. The
special committee noted the absence of a higher offer despite a
rigorous process to solicit alternative proposals. The special
committee also noted that Fremont Partners had on multiple
occasions rejected the special committees request that
Fremont Partners improve its offer. SunTrust Robinson Humphrey
then updated the special committee on the presentation that it
had prepared in connection with the preparation of its fairness
opinion. After fielding questions from the special committee,
SunTrust Robinson Humphrey advised that it was prepared to
deliver to the special committee and the Companys board of
directors its oral opinion that, as of that date and subject to
the factors and assumptions to be set forth in its written
opinion, a price of $21.25 per share in cash to be received
by the holders of common shares pursuant to the merger agreement
was fair, from a financial point of view, to the holders of the
Companys common stock other than the continuing investors.
Following additional discussion and deliberation, the special
committee resolved by unanimous vote to recommend that the
Companys board of directors adopt the merger agreement,
and approve the merger and other transactions contemplated by
the merger agreement and recommend that the Companys
shareholders vote to approve the merger agreement.
On December 4, 2006, a meeting of the Companys board
of directors was held by teleconference. Representatives of
SunTrust Robinson Humphrey, Dorsey and Baker Donelson
participated in the meeting. The board was advised that the
purpose of the meeting was to consider the special committee
recommendation of a transaction whereby the Company would be
acquired by merger with an entity to be owned by Fremont
Partners and Texas Pacific Group, pursuant to which each of the
holders of the Companys common shares would receive a
price of $21.25 per share in cash and to consider
definitive approval of the transaction. The Companys legal
advisors advised the board as to its fiduciary duties under the
circumstances. SunTrust Robinson Humphrey then reviewed the
financial terms of the Fremont Partners proposal and the status
of the Companys process involving Party A. Following
discussion, it was the consensus of the board that $21.25 per
common share was a fair price, that Party As proposal
continued to contain serious impediments to consummation, that
Party A would not be able to enter into a definitive agreement
within the near future, that there was a significant risk of
losing the Fremont Partners and Texas Pacific Group offer if the
process were to be delayed, and that the Companys
relatively low termination fee would not preclude another bidder
from making a superior offer in the manner to be permitted by
the merger agreement. SunTrust Robinson Humphrey then delivered
its oral opinion that, as of that date and subject to the
factors and assumptions to be set forth in its written opinion,
a price of $21.25 per share in cash to be received by the
holders of common shares pursuant to the merger agreement was
fair, from a financial point of view, to the holders of the
Companys common stock other than the continuing investors
(see The Merger Opinion of Direct
Generals Financial Advisor and Annex B to this
proxy statement). Baker Donelson then reviewed with the board
the terms of the proposed definitive merger agreement and
ancillary documents, including the resolution of several open
issues in the merger agreement, in particular with respect to
closing conditions, Parents agreement to pay to the
Company a termination fee of $13.0 million as liquidated
damages if the failure to close the merger was due to
Parents inability to finance the transaction and the
agreement of Fremont Partners and Texas Pacific Group to
guarantee Parents obligation to pay the termination fee.
Following additional discussion and deliberation, the board of
directors adopted, by unanimous vote, the merger agreement, and
approved the merger and other transactions contemplated by the
merger agreement and recommended that the Companys
shareholders vote to approve the merger agreement.
Thereafter, Skadden Arps, Dorsey, Baker Donelson and the
Companys in-house counsel finalized the merger agreement
and ancillary documents and SunTrust Robinson Humphrey delivered
its written fairness opinion as described at the December 4
board meeting. Thereafter, the Company, Parent and Sub finalized
and executed the merger agreement and ancillary documents, and
the Company and Fremont Partners issued press releases
announcing the transaction prior to the opening of trading on
December 5, 2006.
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Reasons
for the Merger
The
Special Committee
In reaching its decision to recommend that our board of
directors approve the merger and the other transactions
contemplated by the merger agreement and the limited guarantee,
and that our board of directors authorize the Company to enter
into the merger agreement and the limited guarantee, and
recommending that our shareholders vote to approve the merger
agreement, the special committee, in consultation with its
financial and legal advisors, considered a number of potentially
positive factors, including the following material factors:
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the current and historical market prices of our common shares,
and the fact that the $21.25 per share to be paid for each
common share in the merger represents a premium of approximately
29% over the closing price of the Companys common stock on
December 4, 2006 and a premium of approximately 39% over
the average closing price for the last 30 trading days ending on
December 4, 2006;
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the possible strategic alternatives to the sale of the Company,
including continuing to operate on a stand-alone basis at a time
when the industry in which it operates is under significant,
long-term competitive pressures, is subject to complex and
multi-jurisdictional regulation and is under intense regulatory
scrutiny for sales and agent/broker compensation practices;
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the risks associated with such strategic alternatives (including
the risk associated with our ability to meet our projections for
the future results of our operations), compared with the
opportunity for our shareholders to realize in cash a fair value
as contemplated by the merger agreement;
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as part of the sale process conducted by the special committee
and SunTrust Robinson Humphrey, more than 30 potential strategic
and financial buyers were contacted based on a judgment as to
the likelihood that they might be interested in purchasing the
Company;
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as part of the sale process conducted by the special committee
and SunTrust Robinson Humphrey, two strategic bidders and
Fremont Partners completed full due diligence and engaged in
substantive negotiation with the special committee and its
financial and legal advisors on a definitive agreement;
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the only proposals with prices in excess of $21.25 per
common share submitted by bidders during the sale process were
subsequently withdrawn or modified by the respective bidder to
materially lower the desirability of such proposals;
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the price agreed to by Fremont Partners and Texas Pacific Group
is equal to the highest price that any party formally proposed
in the sale process that was not subsequently withdrawn or
lowered to a price below $21.25 per common share;
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the fact that the merger consideration is all cash, so that the
transaction will allow the Companys shareholders to
immediately realize a fair value, in cash, for their investment
and will provide our shareholders certainty of value for their
shares;
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continuing or expanding the sale process would subject the
Company to the risk that Fremont Partners and Texas Pacific
Group would terminate negotiations and withdraw their offer;
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the financial analyses of SunTrust Robinson Humphrey and its
opinion that, as of the date of its opinion and based upon and
subject to the factors and assumptions set forth in such
opinion, the price of $21.25 per share in cash to be
received by the holders of our common shares other than the
continuing investors pursuant to the merger agreement was fair,
from a financial point of view, to such holders (see The
Merger Opinion of Direct Generals Financial
Advisor and Annex B to this proxy statement);
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the terms of the merger agreement and the related agreements,
including:
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our ability, under certain limited circumstances, to furnish
information to and conduct negotiations with third parties
regarding other proposals;
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our ability and the ability of the board to change the
recommendation in favor of the merger and to terminate the
merger agreement in the exercise of our boards fiduciary
duties, including in order to accept a financially superior
proposal, subject to paying Parent a $13.0 million
termination fee (which amount the special committee and the
board of directors considers to be relatively low and not
preclusive);
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although the merger agreement is conditioned on the availability
of debt financing to the Parent, the debt financing commitment
letters contain limited conditions, and Fremont Partners and
Texas Pacific Group are obligated to use their reasonable best
efforts to obtain the debt financing;
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the obligation of Parent to pay us $13.0 million, if we
elect to terminate the merger agreement for its failure to
obtain the required debt financing or its breach of its
covenants in the merger agreement to use reasonable best efforts
to obtain the debt financing; and
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the limited guarantees of Parents obligations under the
merger agreement provided by funds of Fremont Partners and Texas
Pacific Group.
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The special committee also considered a number of factors
relating to the procedural safeguards involved in the
negotiation of the merger agreement, the limited guarantee and
the related documents including those discussed below, each of
which it believed supported its decision and provided assurance
of the fairness of the merger to our shareholders:
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the fact that the special committee is comprised solely of
independent and disinterested directors who are not the
Companys employees and who have no financial interest in
the merger that is different from that of our shareholders;
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the fact that the special committee had ultimate authority to
decide whether or not to proceed with a transaction or any
alternative thereto, subject to our board of directors
approval of the merger agreement;
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the fact that the financial and other terms and conditions of
the merger agreement were the product of arms-length
negotiations between the special committee and its advisors, on
the one hand, and Fremont Partners and Texas Pacific Group and
their respective advisors, on the other hand; and
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the fact that the special committee retained and received advice
from its own independent legal counsel, financial advisor and
insurance regulatory consultant in evaluating, negotiating and
recommending the terms of the merger agreement.
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The special committee also considered and balanced against the
potentially positive factors a number of potentially negative
factors concerning the merger, including the following material
factors:
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the risk that the merger might not be completed, including as a
result of a failure by Parent to obtain its debt financing or
obtain necessary approvals from applicable insurance regulatory
bodies;
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the fact that our common shareholders will not participate in
any future earnings or growth of the Company;
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the fact that the merger consideration consists of cash and will
therefore be taxable to our shareholders that are
U.S. persons for U.S. federal income tax purposes;
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the restrictions on our ability to solicit or freely engage in
discussions or negotiations with a third party regarding other
proposals and the requirement that we pay Parent a
$13.0 million termination fee if our board of directors
changes its recommendation or accepts a superior proposal;
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our recourse against the funds of Fremont Partners and Texas
Pacific Group for breaches of the merger agreement is generally
capped at $13.0 million and we cannot seek specific
performance to require Parent and Sub to close even if all
conditions to closing are satisfied;
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the contractual restrictions on the conduct of our business
prior to the merger, requiring it to operate in the ordinary
course, subject to specific limits, and thereby possibly forgo
attractive business opportunities; and
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the possibility of disruption to our operations associated with
the merger, including the diversion of management and employee
attention and possible employee attrition, and the resulting
effect thereof on us if the merger does not close.
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During its consideration of the transaction with the Fremont
Partners, the special committee was also aware that certain of
our directors and our executive officers have interests in the
merger that are, or may be, different from, or in addition to,
those of our shareholders generally, as described under
The Merger Interests of Directors and
Executive Officers in the Merger.
After taking into account all of the factors set forth above, as
well as others, the special committee determined that the
potentially positive factors outweighed the potentially negative
factors. Furthermore, the special committee determined that the
merger agreement is advisable and that the terms of the merger
and the other transactions to be performed or consummated by the
Company are fair to and in the best interests of the Company and
our shareholders. The special committee recommended that the
board of directors adopt the merger agreement, the merger and
the other transactions contemplated by the merger agreement and
that the board of directors recommend that our shareholders vote
to approve the merger agreement at the special meeting.
The special committee did not assign relative weights to the
above factors or the other factors considered by it. In
addition, the special committee did not reach any specific
conclusion on each factor considered, but conducted an overall
analysis of these factors. Individual members of the special
committee may have given different weights to different factors.
Our
Board of Directors
Our board of directors, acting in large part upon the unanimous
recommendation of the special committee, and after careful
deliberation, at a meeting described above on December 4,
2006, by unanimous vote (i) determined that the merger, the
merger agreement and the transactions contemplated thereby, are
advisable, fair to and in the best interests of the Company and
the Companys shareholders; (ii) adopted the merger
agreement and approved the transactions contemplated thereby and
(iii) recommended that our shareholders approve the merger
agreement. In reaching these determinations, our board
considered (i) the financial presentation of SunTrust
Robinson Humphrey that was prepared for the special committee
and which was delivered to the board of directors at the request
of the special committee, as well as the fact that the special
committee and the board of directors received an opinion
delivered by SunTrust Robinson Humphrey as to the fairness, from
a financial point of view, to our shareholders, other than the
continuing investors, of the merger consideration to be received
by such shareholders in the merger and (ii) the unanimous
recommendation and analysis of the special committee, as
described above, and adopted such recommendation and analysis in
reaching its determinations.
The foregoing discussion summarizes the material factors
considered by our board of directors in its consideration of the
merger. Our board of directors did not assign relative weights
to the above factors or the other factors considered by it. In
addition, the board of directors did not reach any specific
conclusion on each factor considered, but conducted an overall
analysis of these factors. Individual board members may have
given different weights to different factors.
Recommendation
of Our Board of Directors
After careful consideration and upon unanimous recommendation of
the special committee, our board of directors unanimously:
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approved the acquisition of Direct General by Elara Holdings,
Inc. on the terms and subject to the conditions set forth in the
merger agreement;
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adopted the merger agreement and approved the transactions
contemplated thereby; and
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determined that the merger and the terms of the other
transactions contemplated by the merger agreement are fair to,
and in the best interests of, Direct General and our
shareholders, and unanimously recommends that our shareholders
approve the merger agreement and each of the transactions
contemplated thereby, including the merger.
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Our board of directors recommends that you vote
FOR the proposal to approve the merger agreement and
the transactions contemplated thereby, including the merger at
the special meeting.
Opinion
of Direct Generals Financial Advisor
The special committee of the board of directors retained
SunTrust Robinson Humphrey to act as its financial advisor in
connection with the merger. In connection with SunTrust Robinson
Humphreys engagement, the special committee requested that
SunTrust Robinson Humphrey evaluate the fairness of the merger
consideration, from a financial point of view, to Direct
Generals shareholders other than affiliates of Parent or
the continuing investors. On December 4, 2006, the special
committee and the board of directors met to review the proposed
merger and the terms of the proposed merger agreement. During
this meeting, SunTrust Robinson Humphrey reviewed with the
special committee and the board of directors certain financial
analyses, as described below, and rendered its oral opinion to
the special committee and the board of directors, which was
subsequently confirmed in writing, that, as of December 4,
2006, and based upon and subject to the various considerations
and assumptions described in the opinion, the merger
consideration was fair, from a financial point of view, to
Direct Generals shareholders other than affiliates of
Parent or the continuing investors. In addition, the special
committee requested and received a bring down opinion as of the
date of this proxy statement.
The full text of SunTrust Robinson Humphreys opinion,
dated December 4, 2006, which sets forth the procedures
followed, assumptions made, matters considered and limitations
on the review undertaken, is attached as Annex B and is
incorporated into this proxy statement by reference. Holders of
Direct General common stock are encouraged to read this opinion
carefully in its entirety. SunTrust Robinson Humphreys
opinion was provided to the special committee and the board of
directors in connection with its evaluation of the merger
consideration to Direct Generals shareholders (other than
affiliates of Parent or the continuing investors). It does not
address any other aspect of the proposed merger, relates only to
the fairness, from a financial point of view, of the merger
consideration and does not constitute a recommendation to any
shareholder as to how such shareholder should vote or act with
respect to any matters relating to the merger. The following is
a summary of the SunTrust Robinson Humphrey opinion and is
qualified by reference to the full text of the opinion attached
as Annex B, which you are encouraged to read in its
entirety.
In arriving at its opinion, SunTrust Robinson Humphrey, among
other things:
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reviewed the December 4, 2006 form of the merger agreement
and certain related documents;
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reviewed certain publicly available business and historical
financial information and other data relating to the business
and financial prospects of Direct General, including certain
publicly available financial forecasts and estimates;
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reviewed internal financial and operating information and
forecasts with respect to the business, operations and prospects
of Direct General furnished to SunTrust Robinson Humphrey by
Direct General that is not publicly available;
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discussed the business, operations, assets, present condition
and future prospects of Direct General with the management of
Direct General and undertook such other studies, analyses and
investigations as SunTrust Robinson Humphrey deemed appropriate;
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reviewed the reported prices and trading activity of Direct
Generals common stock, and compared those prices and
activity with other publicly traded companies which SunTrust
Robinson Humphrey deemed relevant;
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compared the historical financial results and present financial
condition of Direct General with those of other publicly traded
companies which SunTrust Robinson Humphrey deemed relevant;
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compared the financial terms of the merger with the publicly
available financial terms of certain other recent transactions
which SunTrust Robinson Humphrey deemed relevant;
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reviewed and analyzed historical data relating to percentage
premiums paid in recent acquisitions of selected publicly traded
companies; and
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reviewed other financial statistics and undertook such other
analyses and investigations as SunTrust Robinson Humphrey deemed
appropriate.
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In arriving at its opinion, SunTrust Robinson Humphrey assumed
and relied upon, without independent verification, the accuracy
and completeness of the financial and other information
discussed with or reviewed by SunTrust Robinson Humphrey. With
respect to the financial forecasts of Direct General provided to
or discussed with SunTrust Robinson Humphrey, SunTrust Robinson
Humphrey assumed, without independent verification or
investigation, that such forecasts had been reasonably prepared
on bases reflecting the best currently available information,
estimates and judgments of the management of Direct General as
to the future financial performance of Direct General. In
arriving at its opinion, SunTrust Robinson Humphrey did not
conduct a physical inspection of the properties and facilities
of Direct General and did not make or obtain any evaluations or
appraisals of the assets or liabilities (including any
contingent, derivative or off-balance-sheet assets or
liabilities), contingent or otherwise, of Direct General.
SunTrust Robinson Humphrey was not furnished with any actuarial
analyses or reports, except for certain analyses and reports
prepared by Direct Generals actuarial advisors. SunTrust
Robinson Humphrey is not an actuarial firm and its services did
not include actuarial determinations or evaluations or an
attempt to evaluate any actuarial assumptions. In that regard,
SunTrust Robinson Humphrey made no analysis of, and expressed no
opinion as to, the adequacy of Direct Generals losses and
loss adjustment expense reserves. SunTrust Robinson Humphrey
also assumed that the merger would be consummated in accordance
with the terms of the merger agreement and related agreements.
SunTrust Robinson Humphreys opinion was necessarily based
upon market, economic and other conditions as they existed on,
and could be evaluated as of, December 4, 2006. SunTrust
Robinson Humphrey expressed no opinion as to the underlying
valuation, future performance or long-term viability of Direct
General. Developments occurring after December 4, 2006 may
affect SunTrust Robinson Humphreys opinion, and SunTrust
Robinson Humphrey did not assume any obligation to update or
revise its opinion, other than in connection with the issuance
of its bring down opinion on February 2, 2007.
The special committee retained SunTrust Robinson Humphrey to act
as its financial advisor and render a fairness opinion in
connection with the merger. The special committee selected
SunTrust Robinson Humphrey based on SunTrust Robinson
Humphreys qualifications, expertise and reputation.
SunTrust Robinson Humphrey is a nationally recognized investment
banking firm with substantial experience in transactions similar
to the merger and is continuously engaged in the valuation of
businesses and their securities in connection with mergers and
acquisitions, leveraged buyouts, negotiated underwritings,
secondary distributions of listed and unlisted securities and
private placements. SunTrust Robinson Humphrey and its
affiliates, including SunTrust Banks, Inc., in the future may
provide investment banking and other financial services to
Direct General. In the ordinary course of SunTrust Robinson
Humphreys trading and brokerage business, SunTrust
Robinson Humphrey or its affiliates actively trade in the equity
securities of Direct General for its own account and for the
account of customers and, accordingly, may at any time hold a
long or short position in such securities. SunTrust Robinson
Humphrey provided brokerage services to Direct General in
connection with its 2005 stock repurchase program. During the
past two years, SunTrust Robinson Humphrey has not provided
financial advisory and financing services to Direct General or
its affiliates other than with respect to the services rendered
in connection with the proposed merger.
Under the terms of its engagement letter entered into with the
special committee, SunTrust Robinson Humphrey will receive a fee
of $500,000 in connection with the delivery of its fairness
opinion, which is not contingent on the consummation of the
merger. SunTrust Robinson Humphrey is entitled to an additional
fee of $410,000 contingent upon the consummation of the merger
at the current price. SunTrust Robinson Humphrey would also earn
additional compensation, subject to a maximum amount, if the
merger is
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consummated at a price higher than the current merger price.
SunTrust Robinson Humphrey will also receive a performance
payment of $250,000, payable at the closing of the merger. In
addition, SunTrust Robinson Humphrey received a bring down
opinion fee of $250,000. Direct General has also agreed to
reimburse SunTrust Robinson Humphrey for
out-of-pocket
fees and expenses, including attorneys fees, incurred in
connection with its engagement and to indemnify SunTrust
Robinson Humphrey and related parties against certain
liabilities, including certain liabilities under the federal
securities laws, arising out of its engagement.
Financial
Analyses
In preparing its opinion, SunTrust Robinson Humphrey performed a
variety of financial and comparative analyses, a summary of
which is described below. The summary of the analyses described
below is not a complete description of the analyses underlying
SunTrust Robinson Humphreys opinion. The preparation of a
fairness opinion is a complex analytic process involving various
determinations as to the most appropriate and relevant methods
of financial analysis and the application of those methods to
the particular circumstances and, therefore, a fairness opinion
is not readily susceptible to partial analysis or summary
description. In arriving at its opinion, SunTrust Robinson
Humphrey made qualitative judgments as to the significance and
relevance of each analysis and factor that it considered.
SunTrust Robinson Humphrey arrived at its ultimate opinion based
on the results of all analyses undertaken and assessed as a
whole and did not draw, in isolation, conclusions from or with
regard to any one factor or method of analysis. Accordingly,
SunTrust Robinson Humphrey believes that its analyses must be
considered as an integrated whole and that selecting portions of
its analyses and factors, without considering all analyses and
factors, could create a misleading or incomplete view of the
processes underlying such analyses and SunTrust Robinson
Humphreys opinion.
In performing its analyses, SunTrust Robinson Humphrey made
numerous assumptions with respect to Direct General, industry
performance and general business, economic, market and financial
conditions, many of which are beyond the control of Direct
General. No company, transaction or business used in SunTrust
Robinson Humphreys analyses as a comparison is identical
to Direct General, its business or the proposed merger, and an
evaluation of the results of those analyses is not entirely
mathematical. Rather, the analyses involve complex
considerations and judgments concerning financial and operating
characteristics and other factors that could affect the
acquisition, public trading or other values of the companies,
business segments or transactions analyzed. The estimates
contained in the analyses of SunTrust Robinson Humphrey and the
valuation ranges resulting from any particular analysis are not
necessarily indicative of actual values or predictive of future
results or values, which may be significantly more or less
favorable than those suggested by such analyses. In addition,
analyses relating to the value of businesses or securities do
not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly,
these analyses and estimates are inherently subject to
substantial uncertainty.
The merger consideration was determined through
arms-length negotiations between the special committee and
Fremont Partners and Texas Pacific Group and was recommended by
the special committee for approval by Direct Generals
board of directors and was approved by the board of directors.
SunTrust Robinson Humphrey provided advice to the special
committee. SunTrust Robinson Humphrey did not recommend any
specific merger consideration to the special committee or that
any specific merger consideration constituted the only
appropriate merger consideration for the merger. The opinions
and financial analyses of SunTrust Robinson Humphrey were only
one of many factors considered by the special committee in its
evaluation of the proposed merger and should not be viewed as
determinative of the views of the special committee, the board
of directors or management with respect to the merger or the
merger consideration.
The following is a summary of the material financial analyses
underlying the opinion of SunTrust Robinson Humphrey, the
material substance of which were reviewed with the special
committee on December 4, 2006. The financial analyses
summarized below include information presented in tabular
format. In order to fully understand SunTrust Robinson
Humphreys financial analyses, the tables must be read
together with the text of each summary. The tables alone do not
constitute a complete description of the
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financial analyses. Considering the data in the tables below
without considering the full narrative description of the
financial analyses, including the methodologies and assumptions
underlying the analyses, could create a misleading or incomplete
view of SunTrust Robinson Humphreys financial analyses.
Analysis
of Transaction Price
SunTrust Robinson Humphrey analyzed the value of the
consideration of $21.25 per share to be received pursuant
to the merger agreement based on the premium to Direct
Generals historical stock prices, including Direct
Generals
52-week high
and low closing stock price, and Direct Generals average
stock price for the
10-day,
20-day and
30-day
trading periods preceding December 5, 2006, the assumed
announcement date of the merger. The results of this analysis
are summarized below.
|
|
|
|
|
|
|
|
|
Metric
|
|
Statistic
|
|
|
Premium[1]
|
|
|
52-week
High Closing Price
|
|
$
|
18.79
|
|
|
|
13.09
|
%
|
52-week
Low Closing Price
|
|
|
11.51
|
|
|
|
84.62
|
|
Average Price[2]:
|
|
|
|
|
|
|
|
|
One Day
|
|
$
|
16.51
|
|
|
|
28.71
|
%
|
10 Days
|
|
|
16.23
|
|
|
|
30.92
|
|
20 Days
|
|
|
16.01
|
|
|
|
32.73
|
|
30 Days
|
|
|
15.26
|
|
|
|
39.22
|
|
|
|
|
[1] |
|
Premiums based on the merger price of $21.25 per share. |
|
[2] |
|
Assumes announcement date of December 5, 2006. |
Market
Analysis of Selected Publicly Traded Reference
Companies
SunTrust Robinson Humphrey reviewed and compared publicly
available financial data, market information and trading
multiples for Direct General with other selected publicly traded
reference companies that possess characteristics similar to
Direct Generals with respect to industry of operation,
product profile, size or financial results. These companies are:
Affirmative Insurance Holdings, Inc. (AFFM)
Bristol West Holdings, Inc. (BRW)
First Acceptance Corporation (FAC)
Infinity Property and Casualty Corporation (IPCC)
Kingsway Financial Services Inc. (KFS)
Mercury General Corporation (MCY)
Progressive Corporation (PGR)
State Auto Financial Corporation (STFC)
21st Century
Insurance Group (TW)
38
For the selected publicly traded companies, SunTrust Robinson
Humphrey analyzed, among other things, equity value (or market
capitalization) as a multiple of: total shareholders equity and
total shareholders equity adjusted to exclude the impact of
unrealized gains and losses on securities, which SunTrust
Robinson Humphrey refers to as book value and book value (excl.
FAS-115),
respectively. SunTrust Robinson Humphrey also compared stock
price as a multiple of last twelve months, which SunTrust
Robinson Humphrey refers to as LTM, projected 2006 and projected
2007 operating earnings per share, which is calculated by
adjusting earnings per share to exclude the net gain or loss on
investment securities. All multiples were based on closing stock
prices as of December 4, 2006. Historical results were
based on financial information available in public filings.
Projected operating earnings per share (EPS) estimates were
based on research reports and consensus estimates provided by
FactSet Research Systems Inc. or Thomson Financial. FactSet
Research Systems Inc. and Thomson Financial are publishers of
compilations of information including estimates of projected
financial performance for publicly traded companies produced by
equity research analysts at investment banking firms. The
following table sets forth the median multiples indicated by the
market analysis of selected publicly traded reference companies:
|
|
|
|
|
|
|
Average of
|
|
|
|
Selected Reference
|
|
|
|
Companies
|
|
|
Equity Value to:
|
|
|
|
|
Book Value
|
|
|
1.63
|
x
|
Book Value (Excl.
FAS-115)
|
|
|
1.70
|
|
Price to:
|
|
|
|
|
LTM Operating Earnings
|
|
|
12.5
|
x
|
2006E Operating Earnings
|
|
|
12.0
|
|
2007E Operating Earnings
|
|
|
10.9
|
|
Based upon the multiples derived from this analysis, Direct
Generals historical results and estimates of Direct
Generals projected results provided by Direct General,
SunTrust Robinson Humphrey calculated a range of implied equity
values for Direct General between $17.22 and $22.19 per
share, with an average equity value of $19.43 per share.
SunTrust Robinson Humphrey noted that none of the companies used
in the market analysis of selected publicly traded reference
companies was identical to Direct General and that, accordingly,
the analysis necessarily involved complex considerations and
judgments concerning differences in financial and operating
characteristics of the companies reviewed and other factors that
would affect the market values of the selected publicly traded
reference companies.
Analysis
of Selected Merger and Acquisition Reference
Transactions
SunTrust Robinson Humphrey reviewed and analyzed the
consideration paid and implied transaction multiples in 19
selected completed and pending mergers and acquisitions in the
insurance sector since November 1996 that SunTrust Robinson
Humphrey deemed relevant.
For the selected transactions, SunTrust Robinson Humphrey
analyzed, among other things, equity value as a multiple of last
twelve months net income, which SunTrust Robinson Humphrey
refers to as LTM net income and total shareholders equity, which
SunTrust Robinson Humphrey refers to as book value. LTM net
income and book value values were based on historical financial
information available in public filings or other publicly
available information sources. The following table sets forth
the multiples indicated by this analysis:
|
|
|
|
|
|
|
Average of
|
|
|
|
Reference
|
|
|
|
Transactions
|
|
|
Equity Value to:
|
|
|
|
|
LTM Net Income
|
|
|
11.0
|
x
|
Book Value
|
|
|
1.68
|
|
39
Based upon the multiples derived from this analysis, Direct
Generals historical results, SunTrust Robinson Humphrey
calculated a range of implied equity values for Direct General
between $16.43 and $21.39 per share, with an average equity
value of $18.91 per share.
SunTrust Robinson Humphrey noted that no transaction considered
in the analysis of selected merger and acquisition reference
transactions is identical to the merger. All multiples for the
selected transactions were based on public information available
at the time of announcement of such transaction, without taking
into account differing market and other conditions during the
period during which the selected transactions occurred.
Discounted
Cash Flow Analysis
SunTrust Robinson Humphrey performed a discounted cash flow
analysis of Direct General based upon projections provided by
Direct General for the fiscal years ending December 31,
2007 through 2011 to estimate the net present equity value per
share of Direct General. SunTrust Robinson Humphrey calculated a
range of net present values for Direct General based on its free
cash flow (net income adjusted to exclude interest expense from
Direct Generals trust debentures minus capital
expenditures and estimated increases to Direct Generals
insurance subsidiaries capital) over the projected time period
using a weighted average cost of capital for Direct General
ranging between 14.0% and 16.0%, based on Direct Generals
weighted-average cost of capital of 15.0% calculated by SunTrust
Robinson Humphrey, and terminal value multiples of 2011E net
income ranging from 10.5x to 11.5x, based on the foregoing
analysis of selected merger and acquisition reference
transactions. The analysis indicated the following per share
equity valuations of Direct General:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Implied Equity Value per Share
|
|
Discount Rate
|
|
10.5x
|
|
|
11.0x
|
|
|
11.5x
|
|
|
14.0%
|
|
$
|
20.22
|
|
|
$
|
20.82
|
|
|
$
|
21.43
|
|
15.0%
|
|
|
19.52
|
|
|
|
20.10
|
|
|
|
20.69
|
|
16.0%
|
|
|
18.86
|
|
|
|
19.42
|
|
|
|
19.98
|
|
Premiums
Paid Analysis
SunTrust Robinson Humphrey analyzed the transaction premiums
paid in all merger and acquisition transactions of publicly
traded companies with deal values between $200 million and
$700 million, announced since June 30, 2006, based on
the target companys stock price one day, five days and
30 days prior to public announcement of the transaction.
Additionally, SunTrust Robinson Humphrey analyzed the
transaction premiums paid in all transactions of publicly traded
companies in the financial services sector with transaction
values between $200 million and $700 million,
announced since December 4, 2005, based on the target
companys stock price one day, five days and 30 days
prior to public announcement of the transaction. This analysis
indicated the following premiums paid in the selected
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium Paid
|
|
|
|
Prior to Announcement
|
|
|
|
1 Day
|
|
|
5 Days
|
|
|
30 Days
|
|
|
Average Premium for All
Transactions
|
|
|
16.14%
|
|
|
|
17.76%
|
|
|
|
23.88%
|
|
Average Premium for Transactions
in the Financial Services Sector
|
|
|
15.51%
|
|
|
|
18.05%
|
|
|
|
21.12%
|
|
Based upon the premiums paid for all transactions analysis and
an announcement date of December 5, 2006, SunTrust Robinson
Humphrey calculated a range of implied equity values for Direct
General between $16.72 and $19.18 per share with an average
implied equity value of $18.18 per share. Based upon the
premiums paid for all transactions in the financial services
sector analysis and an announcement date of December 5,
2006, SunTrust Robinson Humphrey calculated a range of implied
equity values for Direct General between $16.35 and
$19.07 per share with an average implied equity value of
$18.04 per share.
40
Summary
Valuation Analysis
The following table sets forth a summary of the values indicated
by SunTrust Robinson Humphreys analyses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Low
|
|
|
Average
|
|
|
High
|
|
|
Market Analysis of Selected
Publicly Traded Reference Companies:
|
|
$
|
17.22
|
|
|
$
|
19.43
|
|
|
$
|
22.19
|
|
Analysis of Selected Merger and
Acquisition Reference Transactions:
|
|
$
|
16.43
|
|
|
$
|
18.91
|
|
|
$
|
21.39
|
|
Discounted Cash Flow Analysis:
|
|
$
|
18.86
|
|
|
$
|
20.10
|
|
|
$
|
21.43
|
|
Premiums Paid Analysis:
|
|
|
|
|
|
|
|
|
|
|
|
|
All Transactions since 6/30/2006
|
|
$
|
16.72
|
|
|
$
|
18.18
|
|
|
$
|
19.18
|
|
Financial Services Transactions
since 12/04/2005
|
|
$
|
16.35
|
|
|
$
|
18.04
|
|
|
$
|
19.07
|
|
Other
Factors and Analyses
SunTrust Robinson Humphrey took into consideration various other
factors and analyses, including historical market prices and
trading volumes for Direct Generals common stock,
movements in the common stock of selected publicly traded
companies, movements in the S&P 500 Index and the S&P
500-P&C Insurance Index and an analysis of the weighted
average cost of capital of Direct General.
Antitrust
Approvals
Under the HSR Act and the rules promulgated thereunder by the
FTC, the merger cannot be completed until we and Parent file a
notification and report form under the HSR Act and the
applicable waiting period has expired or been terminated. Direct
General and Parent plan to file notification and report forms
under the HSR Act with the FTC and the Antitrust Division of the
Department of Justice on a date sufficient to allow expiration
or termination of the applicable waiting period prior to
closing. At any time before or after completion of the merger,
notwithstanding the early termination of the waiting period
under the HSR Act, the Antitrust Division or the FTC could take
such action under the antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin
the completion of the merger or seeking divestiture of
substantial assets of Direct General or Parent. At any time
before or after the completion of the merger, and
notwithstanding the early termination of the waiting period
under the HSR Act, any state could take such action under its
antitrust laws as it deems necessary or desirable in the public
interest. Such action could include seeking to enjoin the
completion of the merger or seeking divestiture of substantial
assets of Direct General or Parent. Private parties may also
seek to take legal action under the antitrust laws under certain
circumstances.
While there can be no assurance that the merger will not be
challenged by a governmental authority or private party on
antitrust grounds, we and Parent believe that the merger can be
effected in compliance with federal and state antitrust laws.
Under the terms of the merger agreement, however, Parent is not
required to consummate the merger if there is any pending or
threatened governmental action seeking to (i) prohibit or
limit the operation or ownership by Direct General or Parent of
any portion of its business or assets, (ii) compel Direct
General or Parent to divest or hold separate any portion of its
business or assets or (iii) impose any obligations on
Direct General or Parent to maintain facilities, operations,
places of business, employment levels, products or businesses.
We cannot assure you that the merger agreement would not be
terminated if Direct General or Parent were required to comply
with any of the foregoing. See The Merger
Agreement Efforts to Complete the Merger.
Insurance,
Premium Finance and Other Regulatory Approvals
The insurance laws and regulations of all the states in which we
operate generally require that, prior to the acquisition of an
insurance company, either through the acquisition of or merger
with the insurance company or a holding company of that
insurance company, domiciled in that jurisdiction, the acquiring
company must obtain the approval of the insurance commissioner
of that jurisdiction. In connection with this
41
state approval process, the necessary applications have been or
will be made with the insurance commissioners of Arkansas,
Florida, Georgia, Louisiana, Mississippi, South Carolina, and
Tennessee, the domiciliary (or commercially
domiciliary in the case of Florida) states of Direct
Generals insurance company subsidiaries. In addition, the
insurance laws and regulations of Texas require the filing of a
pre-acquisition notice and the expiration or termination of a
waiting period prior to an acquiring companys acquisition
of an entity licensed to do business in Texas as an insurance
agency. In connection with this requirement, the necessary
filing has been or will be made with the insurance commissioner
of Texas.
Our subsidiaries that carry out premium finance operations must
obtain approval from or otherwise notify the regulators of the
premium finance business in certain U.S. states of a change
in control. In connection with that process, the necessary
applications or notices have been or will be filed with the
appropriate regulatory authorities in Florida, Louisiana,
Mississippi, Missouri, Tennessee and Texas.
In addition, the applicable regulators in certain states in
which we conduct our payday loan operations require
that certain filings be made. Such notices and requests for
approvals have been filed in Florida, Kentucky, Louisiana,
Mississippi, Missouri, and Tennessee. The applicable regulators
of our payday loan operations have significant
authority in regulating and conditioning the continuation of
such business upon the occurrence of a change in control.
Although we do not expect these regulatory authorities to raise
any significant concerns in connection with their review of the
merger, there is no assurance that we will obtain all required
regulatory approvals, or that those approvals will not include
terms, conditions or restrictions that may have an adverse
effect on us.
Other than the filings described above, we are not aware of any
regulatory approvals required to be obtained, or waiting periods
to expire, to complete the merger. If we discover that other
approvals or waiting periods are necessary, we will seek to
obtain or comply with them. If any additional approval or action
is needed, however, we may not be able to obtain it, as is also
the case with respect to the other necessary approvals. Even if
we could obtain all necessary approvals, and the merger
agreement is approved by our shareholders, conditions may be
placed on any such approval that could cause either Parent or us
to abandon the merger.
Financing
of the Merger
The merger is being financed by equity, debt, and the issuance
of trust preferred securities. The total merger consideration
needed to pay our shareholders if the merger is completed is
approximately $433,600,000. The financing methods described are
not binding upon us if the merger agreement is not approved by
our shareholders. Parent has received commitments for financing
for up to approximately $479,565,000, including:
|
|
|
|
|
Equity Commitments. A commitment from each of
Fremont Investors X L.L.C., Fremont Partners III, L.P.,
Fremont Partners III
Side-by-Side,
L.P., each an affiliate of Fremont Partners, and TPG
Partners V, L.P., an affiliate of Texas Pacific Group, to
purchase a portion of the equity of Parent for an aggregate
amount of $356,800,000, solely for the purpose of funding the
merger consideration. Funding will occur simultaneously with,
and is conditioned on, the closing of the merger. Each of the
equity commitments will terminate upon the termination of the
merger agreement or if the Company or any of our affiliates
assert any claim under any limited guarantee of any guarantor.
Each party that delivered an equity commitment letter may assign
its obligations to one or more persons.
|
|
|
|
Trust Preferred Notes. A commitment from
Cohen & Company to arrange the placement of trust
preferred notes in the aggregate amount equal to $30,000,000.
The closing of the trust preferred offering is conditioned upon
receipt of the necessary regulatory approvals, approval of the
merger agreement by our shareholders, and completion of the
merger. The trust preferred notes will not be registered under
the Securities Act of 1933 and may not be offered in the United
States absent registration or an applicable exemption from
registration requirements.
|
|
|
|
Senior Secured Credit Commitments. A
commitment from Bear, Stearns & Co. Inc., which will
act as exclusive advisor, sole lead arranger and sole bookrunner
for $95,000,000 senior secured credit
|
42
|
|
|
|
|
facilities, comprised of approximately $75,000,000 under a term
loan and a $20,000,000 revolving credit facility, which will be
provided by Bear Stearns Corporate Lending Inc. The facility may
be syndicated to a group of financial institutions. The senior
secured credit facilities commitments expire on June 30,
2007. The documentation governing the senior credit facilities
has not been finalized and, accordingly, their actual terms may
differ from those described in this proxy statement. Parent has
agreed to use its reasonable best efforts to arrange the debt
financing on the terms and conditions described in the debt
commitment letters and the merger agreement. If any portion of
the debt financing becomes unavailable on the terms and
conditions contemplated in the debt commitment letters, Parent
must use its reasonable best efforts to arrange to obtain any
such portion from alternative sources; provided, that Parent
shall not be required to obtain the debt financing, giving
effect to the portion obtained from alternative sources,
(i) on terms, which are, taken as a whole, materially less
advantageous to Parent or (ii) on economic terms less
advantageous to Parent in any event, in each case, than those of
the debt financing contemplated by the debt commitment letters
(taking into account any market flex provisions thereof).
|
Conditions Precedent to the Senior Secured Credit
Facilities. The availability of the senior
secured credit facilities are subject, among other things, to
satisfaction that there shall not have occurred any
Material Adverse Effect (as defined in the merger
agreement), consummation of the merger in accordance with the
merger agreement (without giving effect to any amendments or
waivers by Parent that are materially adverse to the lenders
under the senior credit facilities without the consent of Bear
Stearns Corporate Lending Inc., as administrative agent),
payment of required fees and expenses and the negotiation,
execution and delivery of definitive documentation.
General. The borrower under the senior secured
credit facilities will be Sub initially, and the Company, upon
consummation of the merger (the Borrower). The
senior secured credit facilities will be comprised of a
$75 million term loan facility with a term of seven years
and a $20 million revolving loan facility with a term of
five years. The revolving credit facility will include sublimits
for the issuance of letters of credit and swingline loans and
will be available in dollars. No alternative financing
arrangements or alternative financing plans have been made in
the event that the senior secured credit facilities are not
available as anticipated. The senior secured credit facilities
will permit the Borrower to add one or more incremental term
loan facilities
and/or
increase commitments under the revolving loan facility in an
aggregate amount up to $20 million.
Interest Rate and Fees. Loans under the senior
secured credit facilities are expected to bear interest, at the
Borrowers option, at a rate equal to the London interbank
offer rate or base rate, in each case plus a spread. In
addition, the Borrower will pay customary commitment fees and
letter of credit fees under the senior secured credit facilities.
Prepayments and Amortization. The Borrower
will be permitted to make voluntary prepayments at any time,
without premium or penalty, and will be required to make
mandatory prepayments of term loans under certain circumstances.
The term loans are expected to be repaid in equal quarterly
installments, commencing with the first quarter end to occur
after the closing of the senior secured credit facilities, in an
aggregate annual amount equal to 1% of the original principal
amount thereof, with the balance payable on the final maturity
date of the term loans.
Guarantors. All obligations under the senior
secured credit facilities will be unconditionally guaranteed by
Parent and each of the existing and future domestic subsidiaries
of Parent (other than Borrower, any subsidiary of Borrower that
is an insurance company and which is prohibited from providing a
guarantee under applicable regulations, and certain immaterial
subsidiaries to be agreed upon).
Security. The obligations of the Borrower and
the guarantors under the senior secured credit facilities and
the guarantees, and under any interest rate protection or other
hedging arrangement entered into with a lender or any of its
affiliates, will be secured, subject to permitted liens and
other agreed upon exceptions, by all the capital stock of the
Borrower and its subsidiaries (limited, in the case of foreign
subsidiaries, to 65% of the capital stock of such subsidiaries)
directly held by the Borrower or any guarantor and substantially
all present and future assets of Parent, the Borrower and each
subsidiary
43
guarantor excluding vehicles and owned leased real property and
subject to customary intercreditor arrangements, with an
exception to allow security interests in respect of accounts
receivable, among other things, under an existing facility of
the Company which shall remain outstanding upon consummation of
the merger.
Other Terms. The senior secured credit
facilities will contain customary representations and warranties
and customary affirmative and negative covenants, including,
among other things, restrictions on indebtedness, investments,
sales of assets, mergers and consolidations, prepayments of
subordinated indebtedness, liens and dividends and other
distributions. The senior secured facilities will also include
customary events of defaults, including a change of control to
be defined.
Limited
Guarantees of Certain of Parents Obligations
In connection with the merger, we entered into a limited
guarantee with the guarantors. Each of the guarantors has agreed
to irrevocably and unconditionally guarantee, severally and not
jointly, a portion of Parents obligation in the event that
the merger agreement is terminated and Parent is obligated to
pay a termination fee, as further explained in The Merger
Agreement Termination Fees. In the event that
Parent is obligated to pay a termination fee, the guarantors
have each guaranteed such guarantors pro rata portion of
such obligation, such that the aggregate amount guaranteed by
all guarantors shall be an amount up to $13.0 million. Each
guarantee will remain in full force and effect until the earlier
of (i) the effective time of the merger, (ii) the
termination of the merger agreement in accordance with its terms
by mutual consent or in a manner such that neither Parent nor
Sub would have payment obligations thereunder, (iii) three
months after the termination of the Merger Agreement in
accordance with its terms, and (iv) December 4, 2008.
Each guarantee will also immediately terminate in the event that
Direct General or any of our subsidiaries challenges in any
litigation, among other things, the validity of the limitations
upon such guarantee and the liability of such guarantor
thereunder. Other than for fraud in the inducement, each limited
guarantee is the Companys sole recourse against the
respective guarantor.
Material
U.S. Federal Income Tax Consequences of the Merger to Our
Shareholders
The following is a summary of United States federal income tax
consequences of the merger to U.S. shareholders whose
shares of our common stock are converted into the right to
receive cash in the merger. The discussion does not purport to
consider all aspects of United States federal income taxation
that might be relevant to our shareholders. The discussion is
based on current law, which is subject to change, possibly with
retroactive effect. The discussion applies only to shareholders
who hold shares of our common stock as capital assets, and may
not apply to shares of our common stock received in connection
with the exercise, or the acceleration of vesting and cashing
out, of employee stock options or otherwise as compensation, or
to certain types of shareholders (such as insurance companies,
banks, tax-exempt organizations, financial institutions and
broker-dealers) who may be subject to special rules. This
discussion also does not address the tax consequences to any
shareholder who, for United States federal income tax purposes,
is a non-resident alien individual, foreign corporation, foreign
partnership or foreign estate or trust, and does not address any
aspect of state, local or foreign tax laws.
The exchange of cash for shares of our common stock in the
merger will be a taxable transaction for United States federal
income tax purposes and may be subject to tax under applicable
state, local and other tax laws. In general, a shareholder whose
shares of our common stock are converted into the right to
receive cash in the merger will recognize capital gain or loss
for United States federal income tax purposes equal to the
difference, if any, between $21.25 and the shareholders
adjusted tax basis in the shares of our common stock
surrendered. Gain or loss will be determined separately for each
block of shares (i.e., shares acquired at the same cost in a
single transaction). Such gain or loss will be long-term capital
gain or loss provided that a shareholders holding period
for such shares is more than 12 months at the time of the
consummation of the merger. Long-term capital gains of
individuals are eligible for reduced rates of taxation. There
are limitations on the deductibility of capital losses.
44
Backup withholding will apply to all cash payments to which a
shareholder is entitled under the merger agreement, unless the
shareholder or other payee provides a taxpayer identification
number (social security number, in the case of individuals, or
employer identification number, in the case of other
shareholders), certifies that such number is correct, and
otherwise complies with the backup withholding tax rules. Each
of our shareholders should complete and sign the Substitute
Form W-9
included as part of the letter of transmittal and return it to
the paying agent, in order to provide the information and
certification necessary to avoid backup withholding tax, unless
an exemption applies and is established in a manner satisfactory
to the paying agent.
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules will be allowable as
a refund or a credit against a shareholders United States
federal income tax liability provided the required information
is furnished to the Internal Revenue Service.
The United States federal income tax consequences set forth
above are not intended to constitute a complete description of
all tax consequences relating to the merger. Because individual
circumstances may differ, each shareholder should consult its
tax advisor regarding the applicability of the rules discussed
above to it and the particular tax effects to it of the merger,
including shareholders subject to special rules (such as foreign
persons, employees, insurance companies, etc.), as well as the
application of state, local and foreign tax laws.
Interests
of Directors and Executive Officers in the Merger
Certain members of our board of directors and our executive
officers have various interests in the merger described in this
section that may be in addition to, or different from, the
interests of our shareholders generally. The members of our
board of directors were aware of these interests and considered
them at the time they adopted the merger agreement. You should
keep this in mind when considering the recommendation of our
board of directors for the proposal to approve the merger
agreement.
Stock Options. Upon consummation of the
merger, all stock options held by our directors and executive
officers (other than certain options held by certain members of
management) will vest, and all vested and unexercised stock
options will generally be cashed out in an amount equal to the
excess (if any) of $21.25 over the option exercise price.
Certain of our executive officers (such officers, together with
such other employees who are permitted to invest in the Parent,
are sometimes referred to herein collectively as the
continuing investors) have also made commitments to
rollover certain of their options into options to purchase
common stock of Parent. Parent may also grant new stock options
to certain of the continuing investors to purchase common stock
of Parent.
The following table summarizes the vested and unvested options
with exercises prices of less than $21.25 per share held by
our executive officers as of December 29, 2006 that will be
accelerated, vested and cancelled in exchange for the cash
consideration pursuant to the merger agreement. Our non-employee
directors do not hold any options.
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Options That Will Vest as a
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Vested Options
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Result of the Merger
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Totals
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Payment (Net
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Payment (Net
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Total Payment
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of per Share
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of per Share
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(Net of per Share
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Name
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Shares
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Exercise Price)
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Shares
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Exercise Price)
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Total Shares
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Exercise Price)
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Executive Officers:
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William C. Adair, Jr.
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180,000
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$
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45,000
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120,000
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$
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30,000
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300,000
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$
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75,000
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Jacqueline C. Adair
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144,000
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$
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36,000
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96,000
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$
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24,000
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240,000
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$
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60,000
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William J. Harter
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24,000
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$
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445,000
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0
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$
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0
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24,000
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$
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445,000
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Ronald F. Wilson
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12,000
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$
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3,000
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12,000
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$
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3,000
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24,000
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$
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6,000
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Resignation and Restrictive Covenants
Agreements. William C. Adair, Jr., our
Chairman and Chief Executive Officer, and Jacqueline C. Adair,
one of our directors and our Executive Vice President and Chief
Operating Officer, have entered into resignation and restrictive
covenants agreements that will become effective upon the
consummation of the merger, pursuant to which both
Mr. Adairs and Ms. Jacqueline
45
Adairs employment will terminate upon consummation of the
merger. Mr. Adair will, however, remain a member of our
board of directors following consummation of the merger.
Pursuant to Mr. Adairs resignation and restrictive
covenants agreement, upon termination of his employment
Mr. Adair will be entitled to receive severance in the
amount of $41,666.67 per month for 24 months. Pursuant
to Ms. Jacqueline Adairs resignation and restrictive
covenants agreement, upon termination of her employment,
Ms. Jacqueline Adair will be entitled to receive severance
in the amount of $17,250.00 per month for 24 months. In
addition, upon termination of his or her employment, each will
be entitled to receive payment of earned but unpaid annual bonus
or incentive amounts, payment of bonus amounts that would have
been paid in respect of the current year had each remained
employed through the end of such year, pro-rated based on the
actual number of days each worked prior to his or her
termination of employment, payment of accrued and unused paid
time off, and continued coverage under benefit plans and
continued fringe benefits for 24 months to the extent such
continued coverage complies with the Consolidated Omnibus Budget
Reconciliation Act of 1986 (COBRA). In addition,
under Mr. Adairs resignation and restrictive
covenants agreement, as a part of severance, he will be entitled
to retain as his personal property both the 2004 Cadillac
Deville DTS and the 2006 Ford F150 vehicles specifically
identified in such agreement, as well as all cellular telephones
initially provided by Direct General for Mr. Adairs
use during his employment. Similarly, Ms. Jacqueline Adair
will be entitled to retain as her personal property the 2006
Lincoln Navigator specifically identified in her resignation and
restrictive covenants agreement as well as any cellular phones
provided to her by Direct General. Under Mr. Adairs
resignation and restrictive covenant agreement, he has agreed to
waive severance payments to which he may have become entitled
upon the termination of his employment in connection with a
change of control of Direct General, pursuant to his existing
employment agreement with Direct General. Under their respective
resignation and restrictive covenants agreements, each of
Mr. Adair and Ms. Jacqueline Adair are subject to a
number of restrictive covenants, including non-solicitation,
non-competition and non-interference with business covenants, in
each case for a period of five years following termination of
their employment.
Employment Agreements. Tammy R. Adair, our
President, J. Todd Hagely, our Senior Vice President and Chief
Financial Officer, William J. Harter, our Senior Vice
President Corporate Development Banking and Finance
and Brian G. Moore, our President of our premium finance
subsidiaries, have each entered into employment and
non-competition agreements with the Company that will become
effective upon the consummation of the merger and at such time
will supersede and replace each of their current employment
agreements with the Company. Ms. Tammy Adair will be
entitled to base salary in the amount of $300,000 per year,
and Messrs. Hagely, Harter, and Moore will be entitled to
base salary in the amount of $215,000, $200,000, and
$125,000 per year, respectively. In addition, each will be
eligible to participate in a company bonus plan and a Parent
stock option plan, provided that in the event any of
Ms. Tammy Adair or Messrs. Hagely, Harter, and Moore
exercises any options to purchase shares of Parent stock, at the
time of such exercise he or she will be required to execute and
be bound by a management stockholders agreement.
Furthermore, in the event Direct General terminates any of their
employment without cause (as defined in the employment and
non-competition agreements) or any of Ms. Tammy Adair or
Messrs. Hagely, Harter, and Moore terminates his or her
employment for good reason (as defined in the employment and
non-competition agreements), each would be entitled to the
following: 12 months salary (24 months for
Ms. Tammy Adair and 18 months for Mr. Hagely)
payable in bi-weekly installments in accordance with Direct
Generals regular payroll; a lump sum payment of the annual
bonus to which the executive would have received had the
executive remained employed through the end of the year,
pro-rated based on the actual number of days the executive
worked prior to his or her termination of employment; and
12 months (24 months for Ms. Tammy Adair and
18 months for Mr. Hagely) continuation of health
insurance coverage or payment of the insurance premiums related
to such health coverage. The executives are subject to
non-competition, non-solicitation and non-interference
restrictions for varying periods of time following termination
of their employment.
Continuing Investors. William J. Harter, our
Senior Vice President Corporate Development Banking
and Finance, and a member of management who is not an executive
officer have agreed to invest in Parent upon consummation of the
merger. Mr. Harter and the member of management have agreed
to purchase 200 and 50 shares of common stock of
Parent, respectively, for $200,000 and $50,000, respectively.
46
In addition, each of Ms. Tammy Adair, Messrs. Hagely,
Moore and Harter will rollover options to purchase 72,000,
50,000, 24,000 and 18,000 shares of our common stock,
respectively, into options to purchase common stock of Parent.
These Parent options will be on substantially the same vesting
terms and conditions as contained in the original grant
instruments. The number of shares of common stock of Parent
purchasable upon the exercise of the rolled over options will be
equal to the number of shares of our common stock that were
purchasable under the rolled over options, times 0.02125. The
exercise price of the Parent options will be adjusted by
dividing the per share exercise price of the rolled over options
by 0.02125.
Indemnification and Insurance. The merger
agreement provides that the surviving corporation will fulfill
and honor the obligations of Direct General regarding indemnity
pursuant to our charter and bylaws as in effect as of
December 4, 2006. Further, the merger agreement provides
that the surviving corporation will fulfill and honor the
indemnification agreements between Direct General and its
directors and officers in effect as of December 4, 2006.
The merger agreement also requires Parent to cause the surviving
corporation to maintain directors and officers
liability insurance covering the persons who were covered by
Direct Generals directors and officers
liability insurance policies in effect as of December 4,
2006. The terms of such insurance must be on terms and
conditions that are, in the aggregate, no less favorable to the
insured than those applicable to the directors and officers
under policies that we maintained as of December 4, 2006,
provided that in no event shall the amount that Parent is
obligated to expend in any one year in connection therewith
exceed 225% of the annual premium currently paid by us for such
coverage. Parent may satisfy its obligations by purchasing a
tail policy that has an effective term of 6 years from the
date of consummation of the merger and that has terms and
conditions that are, in the aggregate, no less favorable to the
insured than those applicable to the directors and officers
under policies that we maintained as of December 4, 2006.
Shareholder Voting Agreement. Although Direct
General is not a party to the agreement, our President, Tammy R.
Adair, solely in her capacity as trustee of the Trust, entered
into a Shareholder Voting Agreement in connection with the
transaction. Under the terms of the agreement, Ms. Tammy
Adair must vote shares held by the Trust in favor of the merger
with Parent and against any proposal that would impede or
prevent approval of the merger agreement or consummation of the
merger.
Effects
of the Merger
Subject to the terms and conditions set forth in the merger
agreement and in accordance with Tennessee law, at the effective
time of the merger, Sub, a wholly owned subsidiary of Parent
formed for purposes of the merger, will be merged with and into
Direct General, and Direct General will survive the merger as a
subsidiary of Parent and will continue its corporate existence
under Tennessee law.
Delisting
and Deregistration of Our Common Stock
If the merger is completed, our common stock will be delisted
from the NASDAQ Global Select Market and will be deregistered
under the Securities Exchange Act of 1934.
Rights of
Shareholders Who Object to the Merger
Our shareholders do not have a right to dissent under the
Tennessee Business Corporation Act unless our common stock is
delisted from the NASDAQ Global Select Market prior to
consummation of the merger.
Shareholder
Litigation Related to the Merger
Direct General, our directors and certain of our officers were
named in three federal shareholder derivative actions filed in
the first quarter of 2005, which have been consolidated into one
action entitled In Re: Direct General, Inc.
Derivative Litigation, United States District Court for the
Middle District of Tennessee,
No. 3:05-0158.
On December 6, 2006, the plaintiffs in this action filed a
motion for leave to amend the complaint to, among other things,
add Parent, Sub, Texas Pacific Group and Fremont Partners as
defendants in the action. The amended complaint alleges, among
other things, that the consideration to be paid
47
in the merger is unfair and is the result of an unfair process
and that the merger was agreed to by the directors and officers
of the Company in order to discharge their alleged personal
liability. The amended complaint further alleges that the
directors and officers of Direct General breached their
fiduciary duty by agreeing to a structure that is designed to
deter higher offers from other bidders, for failing to obtain
the highest and best price for Direct Generals
shareholders and for structuring the merger so that the
individuals would receive undeserved change in control benefits,
including the immediate vesting of unvested options. The amended
complaint further alleges that Parent, Sub, Fremont Partners and
Texas Pacific Group aided and abetted the officers and
directors breach of fiduciary duty. The amended complaint
seeks, among other relief, with respect to the merger, class
certification of the lawsuit, an injunction preventing
consummation of the merger unless and until Direct General
adopts a procedural process designed to obtain the highest price
for shareholders, an order declaring that the officers and
directors have breached their fiduciary duty and declaring that
the merger be void and rescission ordered if consummated, an
award of money damages, punitive damages, attorneys fees
and expenses and such other relief as the court might find just
and proper. Direct General believes that the claims made in the
amended complaint, including those relating to the merger, are
without merit and intends to continue vigorously defending this
amended lawsuit.
Also in the first quarter of 2005, we, our directors and certain
of our officers were named in three state shareholder derivative
actions filed in the Chancery Court of Davidson County,
Tennessee, which actions have been consolidated into one action
entitled The Direct General Derivative Litigation, No.
05-619-II. On January 29, 2007, the plaintiffs in this
action filed a motion for leave to amend the complaint. The
amended complaint adds Parent as a defendant in the action. The
amended complaint alleges, among other things, that the
directors and officers of Direct General breached their
fiduciary duty by agreeing to a merger structure that is
designed to obtain indemnification for their alleged prior
misdeeds, to permit them to continue to receive benefits from
Direct General and to circumvent plaintiffs derivative
claims by depriving the shareholders of Direct General standing
to maintain a lawsuit against the defendants. The amended
complaint further alleges that the officers and directors
breached their fiduciary duty by failing to disclose all
material information that would permit Direct General
shareholders to cast a fully informed vote on the merger and by
agreeing to an unfair price, and that Parent aided and abetted
the actions of the Direct General officers and directors in
breaching their fiduciary duty to the shareholders of Direct
General. The amended complaint seeks, among other relief, a
declaration that the officers and directors of Direct General
breached their fiduciary duty to the shareholders of Direct
General and that Parent aided and abetted such fiduciary duty
breach, an injunction preventing the conduct of the special
meeting of shareholders to vote on the merger until corrective
disclosures are made, an award of money damages, including
punitive damages, and such other relief as the court may find
just and proper. Direct General believes that the claims in the
amended complaint, including those relating to the merger, are
without merit and intends to continue vigorously defending this
amended lawsuit.
On January 4, 2007, a putative class action complaint was
filed in the Circuit Court of Davidson County, Tennessee. The
lawsuit purports to be brought on behalf of all Direct General
public shareholders and names Direct General and all of our
directors as the Direct General defendants and Parent, Sub,
Texas Pacific Group and Fremont Partners as the Parent
defendants. The complaint alleges that our board of directors
violated its fiduciary duties to Direct General shareholders by
entering into the merger agreement and that the Parent
defendants aided and abetted the alleged violation. Furthermore,
the complaint alleges, among other things, that the
consideration to be paid to the shareholders of Direct General
is grossly inadequate. The lawsuit seeks an injunction to
prevent us from consummating the merger with Sub until we
implement a process or procedure to obtain the highest
possible price for Direct General shareholders. The
lawsuit is in its preliminary stage. Direct General believes the
claims made in this lawsuit are without merit and intends to
vigorously defend this lawsuit.
Additional amendments to the pending shareholder lawsuits or new
lawsuits pertaining to the merger could be filed in the future.
In the event that holders of a majority of shares of our common
stock vote to approve the merger agreement, Direct General and
the other defendants in the consolidated federal and state
shareholder derivative and class actions may rely upon the
approval of the merger agreement in defense of the claims
related to the merger. Specifically, Direct General and the
other defendants may argue, among other things, that such
48
approval operates as a ratification and acceptance of the
merger related conduct challenged in the litigation, and a
waiver by each Direct General shareholder of any and all claims
that have been, or could have been, asserted in the litigation
or any later-filed lawsuit (or amendment to any pending lawsuit)
seeking damages relating to the merger agreement or the
transactions related to the merger agreement.
Market
Price of Direct General Common Stock
The closing sale price of our common stock on the NASDAQ Global
Select Market on December 4, 2006, the last trading day
prior to public announcement of the Merger, was $16.51 per
share. The $21.25 per share to be paid for each share of
Direct General common stock in the Merger represents a premium
of approximately 29% over the closing price on December 4,
2006, and a premium of approximately 39% over the average
closing price for the last 30 trading days ending
December 4, 2006.
Certain
Relationships Between Parent and Direct General
Other than as described above, there are no material
relationships between Parent and Sub or any of their respective
affiliates, on the one hand, and Direct General or any of its
affiliates, on the other hand, other than in respect of the
merger agreement. See Interests of Directors and Executive
Officers in the Merger.
49
THE
MERGER AGREEMENT
(PROPOSAL NO. 1)
The merger agreement is the legal document that governs the
merger. This section of the proxy statement describes the
material provisions of the merger agreement but may not contain
all of the information about the merger agreement that is
important to you. The merger agreement is included as
Annex A to this proxy statement and is incorporated into
this proxy statement by reference. We encourage you to read the
merger agreement in its entirety. The merger agreement is a
commercial document that establishes and governs the legal
relations between us and Parent and Sub with respect to the
transactions described in this proxy statement. The
representations, warranties and covenants made by us and Parent
and Sub are qualified and subject to important limitations
agreed to by us and Parent and Sub in connection with
negotiating the terms of the merger agreement. Furthermore, the
representations and warranties may be subject to standards of
materiality applicable to us and Parent and Sub.
The
Merger
The merger agreement provides for the merger of Sub with and
into Direct General upon the terms, and subject to the
conditions, of the merger agreement. Direct General will survive
the merger and continue to exist as a wholly owned subsidiary of
Parent. The merger will become effective at the time the
articles of merger are filed with the Secretary of State of the
State of Tennessee. We expect to complete the merger as promptly
as practicable after our shareholders approve the merger
agreement and the transactions contemplated thereby.
We or Parent may terminate the merger agreement prior to the
completion of the merger in some circumstances, whether before
or after the approval of the merger agreement by shareholders.
Additional details on termination of the merger agreement are
described in The Merger Agreement Termination
of the Merger Agreement.
Merger
Consideration
Each share of our common stock issued and outstanding
immediately before the merger will automatically be cancelled
and will cease to exist and will be converted into the right to
receive $21.25 in cash, without interest and less applicable
withholding tax. After the merger is effective, each holder of a
certificate representing shares of our common stock will no
longer have any rights with respect to the shares, except for
the right to receive the merger consideration.
Stock
Options
Upon consummation of the merger, all outstanding options to
purchase our common stock will become fully vested and
immediately exercisable, other than certain options held by
certain members of management as described under The
Merger Interests of Directors and Executive Officers
in the Merger Continuing Investors. All such
stock options, excluding certain options held by certain members
of our management, will be cancelled in exchange for a cash
payment of an amount equal to the excess of $21.25 over the
exercise price per share of common stock subject to the option
multiplied by the number of shares of common stock issuable upon
exercise of the option, without interest and less any applicable
withholding taxes.
Payment
for the Shares
Upon the effective time of the merger, Parent will designate a
paying agent reasonably satisfactory to us to act as paying
agent of the merger consideration. Upon the effective time of
the merger, Parent will, or will cause the surviving corporation
to, make available to the paying agent the aggregate merger
consideration payable to our shareholders pursuant to the merger
agreement. All such consideration deposited will be held for the
benefit of our shareholders as of immediately prior to the
effective time of the merger.
Upon the effective time of the merger, we will close our stock
ledger. After that time, there will be no further registration
of transfer of shares of our common stock.
50
As soon as reasonably practicable following the effective time
of the merger, Parent will instruct the paying agent to mail you
a letter of transmittal and instructions advising you how to
surrender your certificates in exchange for the merger
consideration. Upon receipt of your certificates and such
completed letter of transmittal and such other documents as may
reasonably be required by the paying agent, the paying agent
will pay you your merger consideration. Interest will not be
paid or accrue in respect of the merger consideration. The
surviving corporation will reduce the amount of any merger
consideration paid to you by any applicable withholding taxes.
YOU SHOULD NOT FORWARD YOUR STOCK CERTIFICATES TO THE PAYING
AGENT WITHOUT A LETTER OF TRANSMITTAL, AND YOU SHOULD NOT RETURN
YOUR STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
If the paying agent is to pay some or all of your merger
consideration to a person other than you, as the registered
owner of a stock certificate, you must have your certificates
properly endorsed or otherwise in proper form for transfer, and
you must pay any transfer or other taxes payable by reason of
the transfer or establish to the surviving corporations
satisfaction that the taxes have been paid or are not required
to be paid.
The transmittal instructions will tell you what to do if you
have lost your certificate, or if it has been stolen or
destroyed. You will have to provide an affidavit to that fact
and, if required by Parent, deliver a bond in an amount that the
surviving corporation reasonably directs as indemnity against
any claim that may be made against it, us, or the paying agent
with respect to the certificates alleged to have been lost,
stolen or destroyed.
Initial
Directors and Officers of the Surviving Corporation
Upon completion of the merger, and unless otherwise determined
by Parent prior to the effective time of the merger, or unless
otherwise required by state insurance or premium finance
regulatory laws, the directors of Sub immediately prior to the
effective time of the merger will be the initial directors of
the surviving corporation. In addition, unless otherwise
determined by Parent prior to the effective time of the merger,
the officers of Sub immediately prior to the effective time of
the merger will hold the same offices with the surviving
corporation.
Representations
and Warranties
In the merger agreement, we made certain customary
representations and warranties to matters related to our
business as of December 4, 2006. They are not intended to
provide factual information about us and were made only for
purposes of the merger agreement and as of specific dates. They
were agreed to solely for the benefit of the parties to the
merger agreement and may be subject to limitations agreed upon
by the contracting parties, including being qualified by
confidential disclosures exchanged between the parties in
connection with the execution of the merger agreement or
qualified as to materiality. Investors are not
third-party
beneficiaries under the merger agreement and should not rely on
the representations and warranties or any descriptions thereof
as characterizations of the actual state of facts or condition
of us or Parent. By way of summary, we made representations and
warranties concerning the following matters:
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the organization, good standing, corporate power and capital
structure of Direct General and our subsidiaries;
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our authority to enter into the merger agreement and consummate
the transactions contemplated thereby, including the lack of
conflicts and the need to obtain consents;
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our filings made to the United States Securities and Exchange
Commission, financial statements prepared in accordance with
generally accepted accounting principles, statutory financial
statements, and certain controls required by the Securities
Exchange Act of 1934;
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the absence of certain changes or events since
September 30, 2006;
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taxes, including federal, state, local and foreign taxes or
assessments;
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our interests in real properties;
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our interests in intellectual property;
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our insurance policies;
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litigation, whether pending, threatened or reasonably
anticipated;
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compliance with law, including environmental laws;
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the absence of undisclosed brokers and finders fees;
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the absence of certain types of transactions with our affiliates;
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employee plans and benefits and other employee matters;
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certain material contracts;
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the accuracy of this proxy statement;
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the fairness opinion delivered by SunTrust Robinson Humphrey;
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the operation of Tennessee takeover statutes on the transaction;
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our board of directors approval of the merger agreement
and the transactions contemplated thereby;
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our insurance business, including our authorization to operate
as an insurance company, underwriting management
and/or
administration agreements in connection therewith, reinsurance,
insurance ratings provided by A.M. Best Co., our agents and
brokers, finite risk insurance, and any agreements with
regulators;
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any restrictions that exist that would limit us in operating our
business; and
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the existence and accuracy of our corporate records and books.
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In addition, Parent and Sub made certain customary
representations and warranties concerning the following matters:
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the organization, good standing, corporate power and capital
structure of Parent and Sub;
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Parents and Subs authority to enter into the merger
agreement and consummate the transactions contemplated thereby,
including the lack of conflicts and the need to obtain consents;
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the type and amounts of financing for the merger and the
commitments of the sources of the financing for the merger;
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the accuracy of certain information submitted to us for
inclusion in this proxy statement; and
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the activities of Sub other than entering the merger agreement
and consummating the merger.
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Conduct
of Business Pending the Merger
We have agreed to conduct our business in the usual, regular and
ordinary course between December 4, 2006 and the
effectiveness of the merger. Specifically, we have agreed that,
except as consented to in writing by Parent, we will:
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conduct our business in the usual, regular and ordinary course
and in compliance with all applicable laws and regulations;
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pay our debts, including taxes, when due and pay or perform
other material obligations when due;
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file all reports with the SEC that are required by the SEC;
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use all reasonable efforts consistent with past practice to
preserve intact our present business organization, keep
available the services of our current employees, consultants,
independent contractors, and directors and preserve our
relationships with customers, suppliers, licensors, licensees,
and others with which we have business dealings; and
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promptly notify Parent in writing of any occurrence of a
material adverse effect. See page 57 for a description of
the term material adverse effect.
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In addition, we have agreed in the merger agreement that, until
termination of the merger agreement or the effectiveness of the
merger, we will not take or permit our subsidiaries to take
certain actions. Except as expressly contemplated or permitted
by the merger agreement, we will not, nor permit our
subsidiaries to, without the prior written consent of Parent:
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enter into any new line of business;
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declare, set aside or pay any dividends on or make any other
distributions in respect of any capital stock or split, combine
or reclassify any capital stock or issue authorize the issuance
of any other securities in respect of, in lieu of or in
substitution for any capital stock other than transactions
involving certain intracompany entities, in the ordinary course
of business consistent with past practice;
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purchase, redeem or otherwise acquire any shares of our capital
stock or the capital stock of our subsidiaries;
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issue, deliver, sell, authorize, pledge or otherwise encumber
any shares of our capital stock, voting debt or other voting
securities, or other securities exercisable into or convertible
into or evidencing the right to acquire our capital stock,
voting debt or other voting securities, enter into agreements
obligating us to issue such securities or rights or grant such
securities or rights, other than issuances of our common stock
upon the exercise of stock options existing as of
December 4, 2006 or upon the exercise, conversion or
exchange of any other securities issued by us prior to
December 4, 2006 that are exercisable, convertible or
exchangeable into our common stock;
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cause, permit or propose any amendments to our charter or bylaws
or adopt any amendments to any of the charters or bylaws of our
subsidiaries, except as necessary to comply with any law, rule,
regulation or requirement of any governmental entity;
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acquire or agree to acquire any business of any person or
division thereof;
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acquire or agree to acquire any assets that are material,
individually or in the aggregate, to our business, or in any
event, for consideration in excess of $250,000 in any one case
or in the aggregate, or solicit or participate in negotiations
with respect to the foregoing, other than expenditures for the
remaining portion of fiscal year 2006 and any portion of fiscal
year 2007 prior to the effectiveness of the merger as provided
for in our budget;
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enter into any agreement pursuant to which we are a party to any
joint venture or strategic partnership;
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sell, lease, license, encumber or otherwise dispose of any
properties or assets that are material, individually or in the
aggregate, to our business, except in the ordinary course of
business and in a manner consistent with past practice, or in
any event, for consideration in excess of $250,000 in any one
case or in the aggregate;
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effect any material restructuring activities by us;
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make any loans, extensions of credit or financing, advances or
capital contributions to, or investments in, or grant extended
payment terms to any other person, other than certain
intracompany loans or investments, employee loans or advances
for travel and entertainment expenses made in the ordinary
course of business consistent with past practice, commercial
loans or advances made in the ordinary course of business and
consistent with past practice, or investments made in the
ordinary course of business consistent with past practice for
the purposes of managing risk and return and which comply with
our investment guidelines;
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except as required by concurrent changes in generally accepted
accounting principles or statutory accounting principles, alter
in any material respect our existing underwriting, claim
handling, loss control, actuarial, financial reporting or
accounting practices, guidelines or policies or any material
assumption underlying an actuarial practice or policy;
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fail to timely file all tax returns required to be filed by or
with respect to us for taxable years or periods ending on or
before the closing date of the merger and due on or prior to the
closing date of the merger, or fail to timely pay or remit any
taxes due in respect of such tax returns;
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amend any tax returns, make any or change any already made
election relating to taxes, adopt any or change any already
adopted accounting method relating to taxes, change any
accounting method relating to taxes unless required by a change
in the internal revenue code, or settle, consent, enter into any
closing agreement relating to any tax audit or consent to any
waiver or extension of the statutory period of limitations in
respect of any tax audit, except for such tax returns, taxes or
tax audit that are not material to us;
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cancel, terminate or allow any material insurance policy to go
ineffective without a reasonable substitute policy or amend in
any material respect or enter into any material insurance policy
other than renewing our existing policies on substantially the
same terms;
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commence or settle any lawsuit, threat of any lawsuit or
material proceeding or other investigation by or against, or
related to, us, other than settlements:
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with prejudice entered into in the ordinary course of business
and requiring us to pay monetary damages not exceeding $250,000,
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involving ordinary course collection claims for accounts
receivable due and payable to us; or
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entered into in the ordinary course of business in response to
routine state regulatory exams;
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except as provided by laws or by agreements currently binding us,
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materially increase in any manner the amount of compensation or
pension, welfare or fringe benefits of, pay or grant any bonus,
change of control, severance or termination pay to any of our
current or former employees, consultants, independent
contractors, or directors other than any non-officer employees
in the ordinary course of business and consistent with past
practice,
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adopt or amend any company employee plan or make any
contribution, other than regularly scheduled contributions, to
any company employee plan,
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waive any stock repurchase rights, accelerate, amend or change
the period of vesting or exercisability of options to purchase
our common stock or reprice any options to purchase our common
stock or authorize cash payments in exchange for any options to
purchase our common stock (other than as contemplated by the
merger agreement),
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enter into, modify or amend any employee agreement or
indemnification agreement with or on behalf of any current or
former employee, independent contractor or director (other than
offer letters and letter agreements entered into in the ordinary
course of business consistent with past practice with employees
who are terminable at will or modifications whereby
a current or former employee, independent contractor or director
waives the right to acceleration, or agrees to the cancellation
of, any company stock option or other award), or
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enter into any collective bargaining agreement;
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provide any material refund, credit, rebate or other allowance
to any customer or sales agent, other than in the ordinary
course of business consistent with past practice or except as
required to comply with any law, rule, regulation, or
governmental entity, or except to remedy any error that resulted
in an overcharge requiring a refund;
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enter into any agreements that will subject us, the surviving
corporation or Parent to any non-competition, exclusivity or
other material restrictions, except such agreements entered into
with vendors in the ordinary course of business and consistent
with past practice that have standard non-competition clauses or
restrictions;
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hire any non-executive officer employees other than in the
ordinary course of business consistent with past practice or
hire, elect or appoint any executive officers;
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incur any indebtedness for borrowed money or guarantee any
indebtedness of another person in excess of $250,000 in the
aggregate, issue or sell any debt securities or options,
warrants, calls or other rights to acquire any debt securities
of, guarantee any debt securities of another person, enter into
any keep well or other agreement to maintain any
financial statement condition of any other person or enter into
any arrangement having the economic effect of any of the
foregoing, other than the financing of ordinary-course trade
payables consistent with past practice, in connection with
borrowings or repayments with respect to our credit facilities
in the ordinary course of business and consistent with past
practice or intracompany guarantees of obligations;
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enter into any agreement to purchase or sell any interest in
real property or grant any security interest in any real
property, or enter into any lease, sublease, license or other
occupancy agreement with respect to any real property or alter,
amend, modify or terminate any of the terms of any of our
current leases, other than the opening and closing of sales
offices in the ordinary course of business;
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enter into, modify or amend in a manner adverse in any material
respect to us, or terminate, any of our material contracts, or
waive, release or assign any material rights or claims
thereunder, in each case, in a manner adverse in any material
respect to us;
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enter into, modify or amend any material reinsurance,
coinsurance, modified coinsurance or any similar agreement,
whether as reinsurer or reinsured;
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except in the ordinary course of business consistent with past
practice, enter into any agreement that relates to or otherwise
affects any material intellectual property or material
intellectual property rights of us;
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dispose of, grant, transfer, or obtain, or permit to lapse any
rights to, any intellectual property or intellectual property
rights, except as necessary in the ordinary course of business
consistent with past practice, or dispose of or disclose to any
person, other than representatives of Parent, any trade
secrets; or
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take, commit, or agree or announce the intention to take, any of
the actions described above, or take any other action that could
reasonably be expected to result in any of the conditions to the
merger to not be satisfied.
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Efforts
to Obtain Parent Financing
We have agreed to reasonably cooperate in connection with the
arrangement of Parents financing of the merger as may be
requested by Parent, provided that such requested cooperation
does not unreasonably interfere with our ongoing operations.
Specifically, we have agreed to:
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enter into such agreements, and to use reasonable best efforts
to deliver such officers certificates and opinions, as are
customary in financings of such type and as are, in the good
faith determination of the persons executing such officers
certificates or opinions, accurate, and to pledge, grant
security interests in, and otherwise grant liens on, our assets
pursuant to such agreements as may be reasonably requested;
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participate in meetings, drafting sessions, due diligence
sessions, management presentation sessions, road
shows and sessions with rating agencies;
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use commercially reasonable efforts to prepare or participate in
the preparation of business projections and financial statements
for inclusion in offering memoranda, private placement
memoranda, prospectuses and similar documents;
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instruct our independent accountants to provide reasonable
assistance to Parent; and
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provide to lenders financial and other information in our
possession with respect to the merger, and make our senior
officers available to assist the lenders.
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Efforts
to Complete the Merger
Under the terms of the merger agreement, we have agreed to use
all reasonable best efforts to take all actions and to assist
and cooperate with Parent in doing all things necessary or
advisable to consummate the merger in the most expeditious
manner practicable. Specifically, we have agreed to:
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take all acts necessary to cause the conditions to the merger to
have been satisfied (see The Merger Agreement
Conditions to the Merger);
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obtain all necessary approvals or authorizations from
governmental entities and make all necessary filings and take of
all steps as may be necessary to avoid any suit, investigation
or proceeding by any governmental entity;
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file such notifications and forms as required by the HSR Act;
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file any other pre-merger notification forms reasonably
determined by Parent to be required by the laws of any
applicable jurisdiction;
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file the necessary notices, applications, and filings with the
insurance departments and departments regulating premium
financing in the states in which we are domiciled or where the
conduct of our business requires the approval by such
departments;
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file any filings required by state and federal securities laws
relating to the merger;
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obtain all necessary consents, approvals or waivers from third
parties;
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defend any suits, investigations or proceedings, whether
judicial or administrative, challenging the merger agreement or
consummation of the merger; and
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execute or deliver additional instruments necessary to
consummate the transactions contemplated by the merger agreement.
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In addition, we have agreed to use commercially reasonable
efforts to obtain such material consents, waivers and approvals
under any of our contracts and insurance contracts required to
be obtained in connection with the consummation of the merger as
may be reasonably requested by Parent after consultation with
us. In connection with seeking such consents, waivers, and
approvals, we will keep Parent informed of all material
developments and shall, at Parents request, include Parent
in any discussions or communications with any parties whose
consent, waiver, and approval is sought.
In the event the Merger does not close for any reason, Parent
shall not have any liability to us or our shareholders for any
costs, claims, liabilities or damages resulting from our efforts
to obtain such consents, waivers, and approvals.
Conditions
to the Merger
The completion of the merger depends on the satisfaction of a
number of conditions, including the following:
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the merger agreement must have been approved by the affirmative
vote of the holders of a majority of all outstanding shares of
our common stock;
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no statute, rule, regulation, executive order, decree,
injunction or other order may be enacted, issued, promulgated,
enforced or entered by any governmental entity that is in effect
and has the effect of making the merger illegal or otherwise
prohibits or prevents consummation of the merger;
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all waiting periods (and any extension thereof) under the HSR
Act relating to the merger must have expired or terminated
early; and
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Direct General, Parent and each subsidiary of Direct General or
Parent must have received, with no conditions or restrictions,
all authorizations, consents and approvals required from any
department of insurance or department of financing in the states
in which Direct General and our subsidiaries are domiciled or
where the conduct of our business requires the approval by such
departments and all such authorizations, consents and approvals
shall be in full force and effect.
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Our obligations to complete the merger are subject to the
satisfaction of the following conditions at or prior to the
closing date, unless waived by us:
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the representations and warranties of Parent and Sub contained
in the merger agreement must have been true and correct in all
material respects as of December 4, 2006, and true and
correct in all material respects as of the closing date except
as do not materially impede the authority of Parent or Sub to
consummate the transactions contemplated by the merger agreement;
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Parent and Sub must have performed or complied with their
agreements and covenants required by the merger agreement prior
to the closing date; and
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Parent and Sub must have submitted to Company an officers
certificate dated as of the closing date certifying that the
above conditions have been satisfied.
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The obligations of Parent and Sub to complete the merger are
subject to the satisfaction of the following conditions at or
prior to closing date, unless waived by Parent and Sub:
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our representations and warranties contained in the merger
agreement must have been true and correct as of December 4,
2006, and true and correct as of the closing date as if made on
the closing date, except, for certain representations and
warranties as described in the merger agreement, in each case or
in the aggregate as does not constitute a material adverse
effect; and for the other representations and warranties
as described in the merger agreement, which must be true and
correct in all material respects;
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we must have performed or complied in all material respects with
the agreements and covenants required by the merger agreement
prior to the closing date;
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no change, event, violation, inaccuracy, circumstance or effect
that has or could reasonably be expected to have a material
adverse effect on us has occurred since December 4, 2006,
and is continuing;
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no pending or threatened suit, action or other proceeding can
have been filed by a governmental entity challenging or seeking
to restrain or prohibit the merger or other transactions
contemplated by the merger agreement that would result in an
order, decree, or injunction with the effect of making the
merger illegal or otherwise prohibiting consummation of the
merger;
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we must have submitted to Parent and Sub an officers
certificate dated as of the closing date certifying that the
above conditions have been satisfied; and
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Parent or Sub shall have received the proceeds of the debt
financing contemplated by the financing commitments on the terms
and conditions set forth therein or on terms and conditions
reasonably acceptable to Parent or proceeds in the same
aggregate amount from other financing sources as provided in the
merger agreement.
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The merger agreement defines material adverse effect
as to any entity as a change, event, violation, inaccuracy,
circumstance or effect, individually or when taken together with
all other such changes, events, violations, inaccuracies,
circumstances or effects that have occurred prior to the time of
determination of whether a material adverse effect has occurred,
that:
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is or could reasonably be expected to be materially adverse to
the business, assets, liabilities, capitalization, financial
condition or results of operations of such entity and its
subsidiaries taken as a
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whole. Certain changes, events, violations, inaccuracies,
circumstances or effects will not be considered when determining
whether a material adverse effect has occurred, including:
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changes that affect the United States or world economy, but do
not disproportionately adversely affect the entity for which the
determination is being made;
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the announcement of the execution of the merger agreement, the
transactions contemplated thereby, or the pendency or
consummation of the merger;
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compliance with the terms of the merger agreement;
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changes in generally accepted accounting principles or statutory
accounting principles;
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any failure to meet published projections, forecasts, or revenue
or earnings predictions (although the underlying cause of such
failure may be considered); or
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any shareholder litigation arising from allegations of a breach
of fiduciary duty relating to the merger agreement.
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materially impedes or could reasonably be expected to materially
impede the authority of such entity to consummate the merger and
other transactions contemplated by the merger agreement.
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For the purposes of determining whether a material adverse
effect has occurred with regard to us, any material adverse
development with regard to the legal proceedings arising out of,
or related to, the purported securities fraud class action
lawsuit, the purported federal and state shareholder derivative
action lawsuits and the purported Florida class action lawsuit
alleging excessive premium finance charges and improper sales
practices will be considered a change, event, violation,
inaccuracy, circumstance or effect.
No
Solicitations of Other Offers
Under the terms of the merger agreement, we have agreed that
none of our employees, officers or directors will solicit any
inquiry with respect to the making of any acquisition proposal,
participate in any discussions or take any other actions that
would facilitate or encourage any inquiries or a third party to
make an acquisition proposal, approve or recommend another
acquisition proposal, withdraw or modify our recommendation that
you vote in favor of the merger agreement, except as required by
our board of directors fiduciary duties to our
shareholders. Upon entering the merger agreement, we were
required to cease all discussions or negotiations with any third
parties with respect to any acquisition proposal.
If we receive an acquisition proposal or a request for nonpublic
information or an inquiry that could reasonably be expected to
lead to an acquisition proposal or from any person seeking to
have discussion with us relating to a possible acquisition
proposal, we must provide Parent with notice of such acquisition
proposal and provide and update details of the acquisition
proposal, including a copy of all written materials provided by
the person that has made an acquisition proposal or inquiry.
Under certain circumstances we may provide nonpublic information
to third parties making acquisition proposals and engage in
negotiations with such persons, provided that we have complied
with our obligations to not solicit acquisition proposals,
entered into a confidentiality agreement with the third party,
provided any information to Parent that is provided to the third
party, and our board of directors determines in good faith,
after consultation with our outside legal counsel, that the
failure to provide such information or enter into such
discussions or negotiations would result in a breach of our
board of directors fiduciary duties to our shareholders.
Although our board of directors agreed to not withdraw or modify
its recommendation that you vote in favor of the merger
agreement, our board of directors may change its recommendation
if we receive a superior offer and the following conditions are
met:
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our board of directors determines in good faith, after
consultation with our financial advisors and outside legal
counsel, that the board is required by its fiduciary duty to
withdraw or modify its recommendation;
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our shareholders have not yet approved the merger agreement;
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we have delivered to Parent a change of recommendation notice at
least five business days prior to publicly effecting the
boards change of recommendation, which states the terms
and conditions of the superior offer; that the board intends to
change its recommendation; and whether we intend to terminate
the merger agreement;
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we have provided Parent a reasonable opportunity to make
adjustments to the terms and conditions of the merger agreement
and have negotiated the merger agreement with Parent in good
faith for a period of 5 business days;
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our board of directors determines, after the merger agreement is
adjusted, if applicable, after consultation with our financial
advisor and outside legal counsel, that it is required to change
its recommendation by its fiduciary duties; and
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we have not breached certain provisions of the merger agreement
regarding the special meeting of shareholders, the
recommendation of our board of directors, and other acquisition
proposals.
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If our board of directors changes its recommendation and Parent
terminates the merger agreement, we must pay to Parent a
termination fee of $13.0 million. See The Merger
Agreement Termination Fees.
Termination
of the Merger Agreement
The merger agreement may be terminated at any time prior to the
effectiveness of the merger, whether before or after our
shareholders have approved the merger agreement:
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by mutual written consent duly authorized by Parents and
our board of directors;
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by either Parent or us if the merger is not consummated by
March 31, 2007, provided that Parent may extend that date
to June 30, 2007 if the only condition to our obligations
not yet satisfied is receipt of the required insurance and
finance regulatory authorizations, consents and approvals. This
right to terminate the merger agreement will not be available to
a party whose action or omission has been a principal cause of
or resulted in the failure of the merger to occur on or before
March 31, 2007, or June 30, 2007, as the case may be,
and that act or failure to act constitutes a breach of the
merger agreement;
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by either Parent or us if any governmental entity has entered
any order, decree, or ruling that has the effect of making the
merger illegal or otherwise prohibits consummation of the
merger, and such order, decree, or injunction is final and
nonappealable;
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by either Parent or us if we convene a special meeting of our
shareholders to approve the merger agreement as contemplated in
the merger agreement, but our shareholders do not approve the
merger agreement;
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by Parent if:
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our board of directors or a committee thereof withdraws or
amends or modifies in a manner adverse to Parent its
recommendation that you vote in favor of the merger agreement
and transactions contemplated thereby;
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our board of directors fails to reaffirm its recommendation that
you vote in favor of the merger agreement and transactions
contemplated thereby within 5 calendar days after Parent
requests in writing that it reaffirm its recommendation;
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our board of directors or a committee thereof fails to reject or
approves or recommends any acquisition proposal other than the
merger agreement;
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in the case of a tender or exchange offer by a third party that
is not affiliated with Parent, our board of directors fails to
recommend to our shareholders that they reject such tender or
exchange offer;
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we breach our obligations related to calling this special
meeting of shareholders or our board of directors fails to
recommend that our shareholders approve the merger agreement;
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we breach of our obligations regarding third party acquisition
proposals more fully described in The Merger
Agreement No Solicitations of Other Offers;
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our board of directors resolves to do any of the above;
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we breach any of our representations, warranties, covenants, or
agreements under the merger agreement and have been given an
opportunity to cure, but have not cured such breach; or
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any change, event, violation, inaccuracy, circumstance or
effect, individually or in the aggregate, has occurred that has
or would reasonably be expected to have a material adverse
effect on us. See page 57 for a description of the term
material adverse effect.
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Parent has breached or failed to perform any of its
representations, warranties, covenants or agreements under the
merger agreement which would give rise to the failure to satisfy
certain of our conditions to close if such breach or failure to
perform cannot be cured within a
20-day
period after receipt of written notice of such breach from us to
Parent; or
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prior to obtaining the vote of shareholders at the special
meeting, we receive a superior offer and enter into a definitive
agreement with respect to such superior offer provided that we
have complied with our obligations under the merger agreement
and have paid to Parent the termination fee. See The
Merger Agreement Termination Fees.
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Termination
Fees
If the merger agreement is terminated, in some circumstances
either Parent or Direct General must pay to the other party a
termination fee of $13.0 million, which represents
approximately 3% of the transaction equity value. The
termination fee must be paid:
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by Direct General, if Parent terminates the merger agreement
after:
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our board of directors or a committee thereof withdraws or
amends or modifies in a manner adverse to Parent its
recommendation that you vote in favor of the merger agreement
and transactions contemplated thereby;
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our board of directors fails to reaffirm its recommendation that
you vote in favor of the merger agreement and transactions
contemplated thereby within 5 calendar days after Parent
requests in writing that it reaffirms its recommendation;
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our board of directors or a committee thereof fails to reject or
approves or recommends any acquisition proposal other than the
merger agreement;
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in the case of a tender or exchange offer by a third party that
is not affiliated with Parent, our board of directors fails to
recommend to our shareholders that they reject such tender or
exchange offer;
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we breach our obligations related to calling this special
meeting of shareholders or our board of directors fails to
recommend that our shareholders approve the merger agreement;
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we breach of our obligations regarding third party acquisition
proposals more fully described in The Merger
Agreement No Solicitations of Other Offers;
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our board of directors resolves to do any of the above; or
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we willfully or intentionally breach any of our representations,
warranties, covenants or agreements that gives rise to
termination by Parent and an acquisition proposal has been made
by a third party before termination of the merger agreement and
within 12 months following the termination of the
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merger agreement Direct General enters into a definitive
agreement with a third party with respect to Direct General.
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by Direct General, if we terminate the merger agreement in order
to enter into a definitive agreement with a third party for a
superior acquisition offer.
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by Direct General, if either Parent or we terminate the merger
agreement after March 31, 2007 or June 30, 2007, if
the date is so extended in accordance with the terms of the
merger agreement, because our shareholders shall have not
approved the merger agreement and an acquisition proposal has
been made by a third party before termination of the merger
agreement and within 12 months following the termination of
the merger agreement Direct General enters into a definitive
agreement with respect to Direct General.
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by Direct General, if either Parent or we terminate the merger
agreement after March 31, 2007 or June 30, 2007, if
the date is so extended in accordance with the terms of the
merger agreement, because the merger shall not have been
completed and an acquisition proposal has been made by a third
party before termination of the merger agreement and within
12 months following the termination of the merger agreement
Direct General enters into a definitive agreement with respect
to Direct General.
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by Parent, if we are not in material breach of the merger
agreement and either:
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we or Parent terminate the merger agreement and all conditions
of Parent and Sub to consummate the merger have been met, except
Parent has not obtained financing for the merger, and the merger
has not been consummated on or before March 31, 2007 or
June 30, 2007 if the date is so extended in accordance with
the terms of the merger agreement, or
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we terminate the merger agreement because Parent materially
breaches its covenant to use its reasonable best efforts to
obtain the debt financing upon the terms and conditions provided
in the merger agreement.
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In the event that we hold the special meeting of our
shareholders and our shareholders do not approve the merger
agreement, we must pay Parents
out-of-pocket
expenses that it incurred while pursuing the transactions
contemplated by the merger agreement in addition to the
$13.0 million termination fee.
Parent
Liability Cap
In no event other than for fraud in the inducement to enter into
the merger agreement, regardless of whether we are entitled to
seek injunctions or specific performance or if the merger
agreement has been terminated, will we be entitled to monetary
damages in excess of $13.0 million, including payment by
Parent of the termination fee, if applicable, for all losses and
damages arising from or in connection with breaches by Parent
and Merger Sub of their obligations under the merger agreement
or arising from any other claim or cause of action under the
merger agreement.
Employee
Benefits
Parent has agreed to provide or cause the surviving corporation,
or its subsidiaries as the case may be, to provide to
individuals that we employed immediately before the merger, for
a one-year period commencing at the time of consummation of the
merger, compensation and benefits that are in the aggregate not
materially less favorable than those provided by us or our
subsidiaries immediately prior to the effectiveness of the
merger. However, the merger agreement does not limit Parent or
the surviving corporations, or their subsidiaries,
right to terminate the employment of any of our employees after
consummation of the merger.
Amendment,
Extension and Waiver
The parties may amend the merger agreement at any time, even
after shareholder approval, by an action taken by each
partys board of directors. However, after we have obtained
our shareholders approval of the merger, no amendment may
be made that would require approval of our shareholders under
law without such further shareholder approval.
61
At any time before the consummation of the merger, each of the
parties to the merger agreement may, by written instrument
authorized by such partys board of directors:
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extend the time for the performance of any of the obligations or
other acts of the other parties;
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waive any inaccuracies in the representations and warranties of
the other parties contained in the merger agreement or in any
document delivered pursuant to the merger agreement; or
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waive compliance with any of the agreements or conditions for
the benefit of such party contained in the merger agreement.
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OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
FOR THE PROPOSAL TO APPROVE THE MERGER AGREEMENT AND
THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER.
62
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of
February 2, 2007 concerning the common stock of Direct
General beneficially owned by (1) each person who is known
to us to own beneficially more than 5% of our outstanding common
stock, (2) each of our directors, (3) our chief
executive officer and our four most highly compensated executive
officers other than the chief executive officer and (4) all
officers and directors as a group. Beneficial ownership is
determined in accordance with the rules of the Securities and
Exchange Commission. The number of shares beneficially owned
includes shares of common stock that the named person has the
right to acquire, through option exercise, within 60 days
of February 2, 2007. Beneficial ownership calculations for
5% shareholders are based solely on publicly filed
Schedule 13Ds or Schedule 13Gs that 5% shareholders
are required to file with the Securities and Exchange
Commission. The address of each of our directors and executive
officers listed below is c/o Direct General Corporation,
1281 Murfreesboro Road, Nashville, Tennessee 37217.
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Percent of
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Amount and Nature of
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Direct General
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Name of Beneficial Owner
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Beneficial Ownership
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Common Stock
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Tammy R. Adair
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4,852,229
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(1)
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23.85
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%
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William C. Adair, Jr.
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671,240
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(2)
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3.30
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Jacqueline C. Adair
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635,240
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(3)
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3.12
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Raymond L. Osterhout
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149,566
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(4)
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*
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William J. Harter
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99,050
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(5)
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*
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J. Todd Hagely
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31,294
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(6)
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*
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Fred H. Medling
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2,000
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*
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Stephen L. Rohde
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1,428
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*
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Directors and Executive
Officers as a Group
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6,482,547
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(7)
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31.86
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William C. Adair, Jr. Trust
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4,323,149
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(8)
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21.25
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2813 Business Park Drive
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Airport Business Park, Bldg I
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Memphis, TN 38118
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Wasatch Advisors, Inc.
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2,190,455
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(9)
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10.77
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150 Social Hall Avenue
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Salt Lake City, UT 84111
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FMR Corp
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2,169,500
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(10)
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10.66
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82 Devonshire Street
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Boston, MA 02109
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Snow Capital Management, L.P.
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1,675,927
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(11)
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8.24
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2100 Georgetowne Drive, Suite 400
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Sewickley, PA 15143
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Brandywine Asset Management, LLC
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1,310,757
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(12)
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6.44
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Three Christina Centre,
Suite 1200
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201 N. Walnut Street
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Wilmington, DE 19801
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GMT Capital Corp
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1,200,600
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(13)
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5.90
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2100 Riveredge Parkway,
Suite 840
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Atlanta, GA 30328
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Dimensional Fund Advisors LP
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1,150,100
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(14)
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5.65
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1299 Ocean Avenue
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Santa Monica, CA 90401
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First Wilshire Securities
Management, Inc.
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1,140,649
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(15)
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5.61
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1224 East Green Street,
Suite 200
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Pasadena, CA 91106
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63
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* |
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Less than one percent. |
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(1) |
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Includes 4,323,149 shares held by the William C.
Adair, Jr. Trust, of which Ms. Tammy Adair is the sole
trustee and has sole voting and investment control and
42,725 shares held by TA Investments, LP of which
Ms. Adair is a general partner and 18,000 shares
underlying options. Ms. Adair disclaims any beneficial
interest in the shares held by the limited partnership. |
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(2) |
|
Includes 448,195 shares held by Jacqueline C. Adair,
Mr. Adairs spouse, 200 shares held by Lacey L.
Adair, Mr. Adairs daughter, 42,725 shares held
by WA Investments, LP of which Ms. Adair is a general
partner and 180,000 shares underlying options.
Mr. Adair disclaims any beneficial interest in the shares
held by his spouse, daughter and the limited partnership. |
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(3) |
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Includes 120 shares held by William C. Adair, Jr.,
Ms. Jacqueline Adairs spouse, 200 shares held by
Lacey L. Adair, Ms. Adairs step-daughter,
42,725 shares held by WA Investments, LP of which
Ms. Adair is a general partner and 144,000 shares
underlying options. Ms. Adair disclaims any beneficial
interest in the shares held by her spouse, step-daughter and the
limited partnership. |
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(4) |
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Includes 45,952 shares held by Wanda S. Osterhout,
Mr. Osterhouts spouse. |
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(5) |
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Includes 34,800 shares underlying options. |
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(6) |
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Includes 22,000 shares underlying options. |
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(7) |
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Includes 425,200 shares underlying options. |
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(8) |
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Beneficial ownership information was obtained from the
Schedule 13G filed by the William C. Adair, Jr. Trust
on January 27, 2006. |
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(9) |
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Beneficial ownership information was obtained from the
Schedule 13G filed by Wasatch Advisors, Inc. on
April 8, 2005. |
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(10) |
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Beneficial ownership information was obtained from the
Schedule 13G filed by FMR Corp. on September 12, 2005. |
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(11) |
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Beneficial ownership information was obtained from the
Schedule 13G filed by Snow Capital Management, L.P. on
January 23, 2006. |
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(12) |
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Beneficial ownership information was obtained from the
Schedule 13G filed by Brandywine Asset Management, LLC on
February 15, 2006. |
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(13) |
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Beneficial ownership information was obtained from the
Schedule 13G filed by GMT Capital Corp. on
September 12, 2005. |
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(14) |
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Beneficial ownership information was obtained from the
Schedule 13G filed by Dimensional Fund Advisors LP on
February 2, 2007. |
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(15) |
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Beneficial ownership information was obtained from the
Schedule 13G filed by First Wilshire Securities Management,
Inc. on March 21, 2006. |
64
ADJOURNMENT
OF THE SPECIAL MEETING
(PROPOSAL NO. 2)
The special meeting may be adjourned or postponed, if necessary
or appropriate, to solicit additional proxies if there are
insufficient votes at the time of the special meeting to approve
the merger agreement, as may be amended from time to time, and
the transactions contemplated thereby. Any adjournment may be
made without notice (if the adjournment is not for more than
four months), other than by an announcement made at the special
meeting of the time, date and place of the adjourned meeting.
Regardless of whether a quorum exists, holders of a majority of
the voting power of common stock present in person or
represented by proxy at the special meeting and entitled to vote
thereat may adjourn the special meeting. Any signed proxies
received by us in which no voting instructions are provided on
such matter will be voted FOR an adjournment or
postponement of the special meeting, if necessary or
appropriate, to solicit additional proxies. Any adjournment or
postponement of the special meeting for the purpose of
soliciting additional proxies will allow our shareholders who
have already sent in their proxies to revoke them at any time
prior to their use at the special meeting as adjourned or
postponed.
OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
FOR THE ADJOURNMENT OF THE SPECIAL MEETING, IF
NECESSARY OR APPROPRIATE, TO SOLICIT ADDITIONAL PROXIES.
65
OTHER
MATTERS
Other
Matters for Action at the Special Meeting
As of the date of this proxy statement, our board of directors
knows of no matters that will be presented for consideration at
the special meeting other than as described in this proxy
statement.
When considering a motion to adjourn or postpone the special
meeting to another time
and/or place
(including, without limitation, for the purpose of soliciting
additional proxies or allowing additional time for the
satisfaction of conditions to the merger), the persons named in
the enclosed form of proxy and acting by the authority in the
proxy generally will have discretion to vote on adjournment or
postponement using their best judgment. However, the persons
named in the proxies will not use their discretionary authority
to use proxies voting against the merger agreement to vote in
favor of adjournment or postponement of the special meeting.
Shareholder
Proposals
If the merger is consummated we will not have public
shareholders, and there will be no public participation in any
future meetings of shareholders. However, if the merger is not
completed, we expect to hold a 2007 annual meeting of
shareholders. Shareholders may present proposals for action at
the 2007 annual meeting, if held, only if they comply with the
requirements of the proxy rules established by the Securities
and Exchange Commission and our bylaws. For a shareholder
proposal to be presented at the 2007 annual meeting, if held, it
must have been received by us at our principal executive offices
not later than December 4, 2006, in order to be included in
the proxy statement and proxy card for any such 2007 annual
meeting.
66
WHERE YOU
CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange
Commission. You may read and copy any document we file at the
Securities and Exchange Commissions public reference room
located at 100 F. Street, NE, Room 1580,
Washington, D.C. 20549. Please call the Securities and
Exchange Commission at
1-800-SEC-0330
for further information on the public reference room. Our
Securities and Exchange Commission filings are also available to
the public at the Securities and Exchange Commissions
website at http://www.sec.gov. You also may obtain free copies
of the documents that Direct General files with the Securities
and Exchange Commission by clicking the Investors
tab under the Company Info heading of our website at
www.directgeneral.com which is provided as a textual reference
only.
The Securities and Exchange Commission allows us to
incorporate by reference, into this proxy statement
documents we file with the Securities and Exchange Commission.
This means that we can disclose important information to you by
referring you to another document filed separately with the
Securities and Exchange Commission. We incorporate by reference
any documents that may be filed with the Securities and Exchange
Commission between the date of this proxy statement and prior to
the date of the special meeting of our shareholders. These
include periodic reports, such as Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q
and Current Reports on
Form 8-K,
as well as proxy statements (except for information furnished to
the Securities Exchange Commission that is not deemed to be
filed for purposes of the Exchange Act). Information
that we file later with the Securities Exchange Commission,
prior to the closing of the merger, will automatically update
and supersede the previously filed information and be
incorporated by reference into this proxy statement.
Any person, including any beneficial owner, to whom this proxy
statement is delivered, may request copies of such reports,
proxy statements or other publicly available information
concerning us, without charge, by written or telephonic request
direct to:
Direct General Corporation
1281 Murfreesboro Road
Nashville, Tennessee 37217
Telephone:
(615) 399-0600
Attention: Ronald F. Wilson
If you would like to request any such documents from us, please
do so at least five business days before the date of the special
meeting in order to receive timely delivery of those documents
prior to the special meeting.
This proxy statement does not constitute the solicitation of a
proxy in any jurisdiction to or from any person to whom or from
whom it is unlawful to make such proxy solicitation in that
jurisdiction. You should rely only on the information contained
or incorporated by reference in this proxy statement to vote
your shares at the special meeting. We have not authorized
anyone to provide you with information that is different from
what is contained in this proxy statement. This proxy statement
is dated February 5, 2007. You should not assume that the
information contained in this proxy statement is accurate as of
any date other than that date, and the mailing of this proxy
statement to shareholders does not create any implication to the
contrary.
67
ANNEX A
AGREEMENT
AND PLAN OF MERGER
AGREEMENT
AND PLAN OF MERGER
BY AND AMONG
ELARA HOLDINGS, INC.
ELARA MERGER CORPORATION
AND
DIRECT GENERAL CORPORATION
Dated as of December 4, 2006
TABLE OF
CONTENTS
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Page
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ARTICLE I
THE MERGER
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1.1
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The Merger
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A-2
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1.2
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Effective Time; Closing
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A-2
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1.3
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Effect of the Merger
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A-2
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1.4
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Charter; Bylaws
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A-2
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1.5
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Directors and Officers
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A-2
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ARTICLE II
CONVERSION AND EXCHANGE OF SECURITIES
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2.1
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Effect of Merger on Capital Stock
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A-3
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2.2
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Surrender of Certificates
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A-3
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2.3
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Further Action
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A-5
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
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3.1
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Organization; Standing and Power;
Governing Documents; Subsidiaries
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A-5
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3.2
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Capital Structure
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A-6
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3.3
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Authority; No Conflict; Necessary
Consents
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A-7
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3.4
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SEC Filings; Financial Statements;
Internal Controls
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A-8
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3.5
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Absence of Certain Changes or
Events
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A-11
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3.6
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Taxes
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A-13
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3.7
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Real Properties
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A-15
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3.8
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Intellectual Property
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A-16
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3.9
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Company Insurance
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A-17
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3.10
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Litigation
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A-17
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3.11
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Compliance with Law
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A-18
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3.12
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Environmental Matters
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A-19
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3.13
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Brokers and Finders
Fees
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A-19
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3.14
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Transactions with Affiliates
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A-20
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3.15
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Employee Benefit Plans and
Compensation
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A-20
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3.16
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Contracts
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A-24
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3.17
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Information in the Proxy Statement
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A-25
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3.18
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Fairness Opinion
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A-25
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3.19
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Takeover Statutes
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A-25
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3.20
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Board Approval
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A-25
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3.21
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Insurance Matters
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A-25
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3.22
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Restrictions on Business Activities
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A-27
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3.23
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Books and Records
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A-28
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
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4.1
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Organization; Capitalization
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A-28
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4.2
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Authority; No Conflict; Necessary
Consents
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A-28
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4.3
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Financing
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A-29
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4.4
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Information in Proxy Statement
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A-29
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4.5
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Interim Operations of Merger Sub
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A-30
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A-i
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Page
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ARTICLE V
CONDUCT PRIOR TO THE EFFECTIVE TIME
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5.1
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Conduct of Business by the Company
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A-30
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5.2
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Assistance with Financing
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A-33
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ARTICLE VI
ADDITIONAL AGREEMENTS
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|
6.1
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Proxy Statement
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A-34
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6.2
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Meeting of Company Shareholders;
Board Recommendation
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A-34
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6.3
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|
|
Acquisition Proposals
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|
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A-35
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|
6.4
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|
|
Confidentiality; Access to
Information; No Modification of Representations, Warranties or
Covenants
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|
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A-38
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|
|
6.5
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Public Disclosure
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A-39
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|
|
6.6
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Regulatory Filings; Reasonable
Best Efforts
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A-39
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|
6.7
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Notification of Certain Matters
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|
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A-41
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|
|
6.8
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|
|
Third-Party Consents
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|
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A-41
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|
|
6.9
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|
|
Employee Matters
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|
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A-41
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|
|
6.10
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|
|
Indemnification
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|
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A-42
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|
|
6.11
|
|
|
Company Options
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|
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A-42
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6.12
|
|
|
Section 16 Matters
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|
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A-43
|
|
|
ARTICLE VII
CONDITIONS TO THE MERGER
|
|
7.1
|
|
|
Conditions to the Obligations of
Each Party to Effect the Merger
|
|
|
A-43
|
|
|
7.2
|
|
|
Additional Conditions to the
Obligations of Parent and Merger Sub
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|
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A-44
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|
7.3
|
|
|
Additional Conditions to the
Obligations of the Company
|
|
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A-44
|
|
|
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
|
|
8.1
|
|
|
Termination
|
|
|
A-45
|
|
|
8.2
|
|
|
Notice of Termination; Effect of
Termination
|
|
|
A-47
|
|
|
8.3
|
|
|
Fees and Expenses
|
|
|
A-47
|
|
|
8.4
|
|
|
Amendment
|
|
|
A-48
|
|
|
8.5
|
|
|
Extension; Waiver
|
|
|
A-48
|
|
|
ARTICLE IX
GENERAL PROVISIONS
|
|
9.1
|
|
|
Non-Survival of Representations
and Warranties
|
|
|
A-49
|
|
|
9.2
|
|
|
Notices
|
|
|
A-49
|
|
|
9.3
|
|
|
Interpretation; Knowledge
|
|
|
A-50
|
|
|
9.4
|
|
|
Counterparts
|
|
|
A-51
|
|
|
9.5
|
|
|
Entire Agreement; Third-Party
Beneficiaries
|
|
|
A-51
|
|
|
9.6
|
|
|
Severability
|
|
|
A-52
|
|
|
9.7
|
|
|
Other Remedies
|
|
|
A-52
|
|
|
9.8
|
|
|
Governing Law
|
|
|
A-52
|
|
|
9.9
|
|
|
Rules of Construction
|
|
|
A-52
|
|
|
9.10
|
|
|
Assignment
|
|
|
A-52
|
|
|
9.11
|
|
|
Waiver of Jury Trial
|
|
|
A-52
|
|
A-ii
INDEX OF
DEFINED TERMS
|
|
|
Defined Term
|
|
Section
|
|
Acquisition
|
|
8.3(b)(iii)
|
Acquisition Proposal
|
|
6.3(h)(i)
|
Affiliate
|
|
9.3(d)
|
Agreement
|
|
Preamble
|
Articles of Merger
|
|
1.2(a)
|
Assumed Option
|
|
6.11(b)
|
Audit
|
|
3.6(a)
|
Budget
|
|
3.5(q)
|
Business Day
|
|
1.2(b)
|
Certificates
|
|
2.2(b)
|
Change of Recommendation
|
|
6.3(d)
|
Change of Recommendation Notice
|
|
6.3(d)(iii)
|
Closing
|
|
1.2(b)
|
Closing Date
|
|
1.2(b)
|
COBRA
|
|
3.15(a)
|
Code
|
|
2.2(e)
|
Company
|
|
Preamble
|
Company Balance Sheet
|
|
3.4(b)
|
Company Common Stock
|
|
2.1(a)
|
Company Disclosure Schedule
|
|
ARTICLE III
|
Company Employee Plan
|
|
3.15(a)
|
Company Financials
|
|
3.4(d)
|
Company Governing Documents
|
|
3.1(b)
|
Company Material Contract
|
|
3.16(a)
|
Company Options
|
|
3.2(b)
|
Company Preferred Stock
|
|
3.2(a)
|
Company SEC Reports
|
|
3.4(a)
|
Companys Insurance Policies
|
|
3.5(dd)
|
Confidentiality Agreement
|
|
6.4(a)
|
Continuing Investor
|
|
6.11(b)
|
Contract
|
|
3.1(a)
|
Credit Facilities
|
|
3.5(k)
|
Customer Information
|
|
3.8(f)
|
Debt Financing
|
|
4.2(c)
|
Development Bond Property
|
|
3.7(c)
|
DOJ
|
|
3.3(c)
|
DOL
|
|
3.15(a)
|
Effect
|
|
9.3(c)
|
Effective Time
|
|
1.2(a)
|
Employee Agreement
|
|
3.15(a)
|
employee benefit plan
|
|
3.15(a)
|
Employee/Service Provider
|
|
3.15(a)
|
Employment and Non-Competition
Agreements
|
|
Preamble
|
End Date
|
|
8.1(b)
|
Environmental Claim
|
|
3.12
|
Environmental Laws
|
|
3.12
|
A-iii
|
|
|
Defined Term
|
|
Section
|
|
Equity Financing
|
|
4.2(c), 4.2(c)
|
ERISA
|
|
3.15(a)
|
ERISA Affiliate
|
|
3.15(a)
|
Exchange Act
|
|
3.3(c)
|
Exchange Fund
|
|
2.2(a)
|
Exchange Ratio
|
|
6.11(b), 6.11(b)
|
Executive Agreements
|
|
Preamble
|
Expense Reimbursement Agreement
|
|
3.16(a)(xii)
|
Finance and Banking Laws
|
|
3.11(b)
|
Financing
|
|
4.2(c)
|
Financing Commitments
|
|
4.2(c)
|
Financing Departments
|
|
3.3(c)
|
Finite Insurance Agreement
|
|
3.21(f)
|
FTC
|
|
3.3(c)
|
GAAP
|
|
3.4(b)
|
GAAP Financials
|
|
3.4(b)
|
Government Agreements
|
|
3.7(c)
|
Governmental Entity
|
|
3.3(c)
|
HIPAA
|
|
3.15(a)
|
HSR Act
|
|
3.3(c)
|
Indemnified Parties
|
|
6.10(a)
|
Information
|
|
6.4(a)
|
Initial Regulatory Submissions
|
|
8.1(b)
|
Insurance Contracts
|
|
3.5(dd)
|
Insurance Departments
|
|
3.3(c)
|
Insurance Subsidiary
|
|
3.4(c)(i)
|
Intellectual Property
|
|
3.8(a)
|
IP Contracts
|
|
3.8(a)
|
IRS
|
|
3.15(a)
|
Knowledge
|
|
9.3(b)
|
Laws
|
|
2.2(d)
|
Leased Documents
|
|
3.7(b)
|
Leased Real Property
|
|
3.7(b)
|
License Agreement
|
|
Preamble
|
Liens
|
|
3.1(c)
|
Litigation Matters
|
|
9.3(g)
|
Management Stockholders
Agreement
|
|
Preamble
|
Material Adverse Effect
|
|
9.3(c)
|
Materials of Environmental Concern
|
|
3.12
|
Merger
|
|
Preamble
|
Merger Consideration
|
|
2.1(a)
|
Merger Sub
|
|
Preamble
|
Necessary Consents
|
|
3.3(c)
|
off-balance sheet arrangements
|
|
3.4(b)
|
Option Consideration
|
|
6.11(a)
|
Option Plans
|
|
3.2(b)
|
Owned Real Property
|
|
3.7(a)
|
A-iv
|
|
|
Defined Term
|
|
Section
|
|
Parent
|
|
Preamble
|
Parent Common Stock
|
|
4.1
|
Parent Disclosure Schedule
|
|
ARTICLE IV
|
Parent Liability Cap
|
|
8.3(c)(ii)
|
Parent Termination Fee
|
|
8.3(c)(i)
|
Paying Agent
|
|
2.2(a)
|
Pension Plan
|
|
3.15(a)
|
Permits
|
|
3.11(a)
|
Permitted Liens
|
|
9.3(d)
|
Person
|
|
9.3(d)
|
Premium Facility
|
|
3.5(k)
|
Privacy Policy
|
|
3.8(f)
|
Producer
|
|
3.21(e)
|
Proxy Statement
|
|
3.17
|
Real Property
|
|
3.7(c)
|
Recommendation
|
|
6.2(b)
|
Regulatory Material Adverse Effect
|
|
6.6(a)
|
Reinsurance Contracts
|
|
3.21(c)(i)
|
road shows
|
|
5.2(b)
|
SAP
|
|
3.4(c)(ii)
|
SEC
|
|
3.3(c)
|
Securities Act
|
|
3.4(a)
|
Special Committee
|
|
Preamble
|
Statutory Statements
|
|
3.4(c)(i)
|
Stockholders Meeting
|
|
6.2(a)
|
Subscription Agreements
|
|
Preamble
|
Subsidiary
|
|
3.1(a)
|
Subsidiary Governing Documents
|
|
3.1(b)
|
Superior Offer
|
|
6.3(h)(ii)
|
Surviving Corporation
|
|
1.1
|
tail
|
|
6.10(b)
|
Tax
|
|
3.6(a)
|
Tax Authority
|
|
3.6(a)
|
Tax Returns
|
|
3.6(a)
|
Taxes
|
|
3.6(a)
|
Tennessee Law
|
|
Preamble
|
Termination Fee
|
|
8.3(b)(i)
|
Trademarks
|
|
3.8(a)
|
Triggering Event
|
|
8.1(i)
|
Voting Agreement
|
|
Preamble
|
Voting Debt
|
|
3.2(c)
|
WARN
|
|
3.15(a)
|
A-v
AGREEMENT
AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER made as of December 4, 2006
(this Agreement) by and among Elara Holdings, Inc.,
a Delaware corporation (Parent), Elara Merger
Corporation, a Tennessee corporation and a wholly-owned
subsidiary of Parent (Merger Sub), and Direct
General Corporation, a Tennessee corporation (the
Company).
WHEREAS, the board of directors of Merger Sub has determined
that it is advisable and in the best interests of Merger Sub to
enter into a business combination with the Company upon the
terms and subject to the conditions set forth herein; and
WHEREAS, in furtherance of such combination, the board of
directors of Merger Sub has adopted this Agreement, and Parent,
as the sole shareholder of Merger Sub, has approved this
Agreement and the Merger, upon the terms and subject to the
conditions set forth herein, in accordance with applicable Law;
and
WHEREAS, the board of directors of the Company has established a
special committee, the members of which are not affiliated with
Parent or Merger Sub and are not members of the Companys
management, which has reviewed this Agreement and the
transactions contemplated hereby (the Special
Committee); and
WHEREAS, the board of directors of the Company (acting upon the
unanimous recommendation of the Special Committee) has adopted,
in accordance with applicable provisions of the Tennessee
Business Corporation Act (Tennessee Law), this
Agreement and approved the transactions contemplated hereby,
including the merger of Merger Sub with and into the Company
upon the terms and subject to the conditions set forth herein
(the Merger); and has determined to unanimously
recommend that its shareholders approve this Agreement and each
of the transactions contemplated hereby, including the
Merger; and
WHEREAS, concurrently with the execution of this Agreement, and
as a condition and inducement to Parents willingness to
enter into this Agreement, one certain shareholder of the
Company signatory thereto is entering into a Voting Agreement
(the Voting Agreement); and
WHEREAS, concurrently with the execution of this Agreement, and
as a condition and inducement to Parents willingness to
enter into this Agreement, certain of the key employees of the
Company are executing and delivering subscription agreements
subscribing to purchase shares of Parent Common Stock (the
Subscription Agreements), and a management
stockholders agreement in respect of such shares of Parent
Common Stock (the Management Stockholders
Agreement); and
WHEREAS, concurrently with the execution of this Agreement, and
as a condition and inducement to Parents willingness to
enter into this Agreement, certain of the Continuing Investors
and key employees of the Company
and/or its
Subsidiaries are executing and delivering employment and
non-competition agreements (the Employment and
Non-Competition Agreements); and
WHEREAS, concurrently with the execution of this Agreement, and
as a condition and inducement to Parents willingness to
enter into this Agreement, each of two certain senior executives
is entering into a Resignation and Restrictive Covenants
Agreement (the Executive Agreements); and
WHEREAS, concurrently with the execution of this Agreement, and
as a condition and inducement to Parents willingness to
enter into this Agreement, one certain senior executive is
entering into a License Agreement (the License
Agreement); and
WHEREAS, as an inducement to the Company to enter into this
Agreement and consummate the transactions contemplated hereby,
Fremont Partners III, L.P., Fremont Partners III
Side-by-Side,
L.P. and TPG Partners V, L.P. have on the date hereof
delivered to Seller a guarantee of Parents obligations
under Section 8.3(c); and
WHEREAS, Parent, Merger Sub and the Company desire to make
certain representations, warranties and agreements in connection
with the Merger and also to prescribe certain conditions to the
Merger.
A-1
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and
valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties, intending to be legally bound,
do hereby agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the
Effective Time and subject to and upon the terms and conditions
of this Agreement and the applicable provisions of Tennessee
Law, Merger Sub shall be merged with and into the Company, the
separate corporate existence of Merger Sub shall cease and the
Company shall continue as the surviving corporation and as a
wholly owned subsidiary of Parent. The surviving corporation
after the Merger is hereinafter sometimes referred to as the
Surviving Corporation.
1.2 Effective Time; Closing.
(a) Subject to the provisions of this Agreement, Parent,
Merger Sub and the Company shall cause the Merger to be
consummated by filing as soon as practicable on the Closing Date
Articles of Merger (the Articles of Merger) with the
Secretary of State of the State of Tennessee in accordance with
the provisions of Tennessee Law. The Merger shall become
effective upon the filing of Articles of Merger with the
Secretary of State of the State of Tennessee (the time of such
filing being the Effective Time).
(b) The closing of the Merger (the Closing)
shall take place at the offices of Skadden, Arps, Slate,
Meagher & Flom LLP, located at 525 University Avenue,
Suite 1100, Palo Alto, California, at the earlier of
(i) 6:00 am Palo Alto, California time on the End Date and
(ii) a time and date to be specified by Parent, which shall
be no earlier than the third (3rd) Business Day after the
satisfaction or waiver of the conditions set forth in
Article VII (other than those that by their terms are to be
satisfied or waived at the Closing), or at such other time, date
and location as the parties hereto agree in writing. The date on
which the Closing occurs is referred to herein as the
Closing Date. Business Day shall mean
each day that is not a Saturday, Sunday or other day on which
Parent is closed for business or banking institutions located in
New York, New York, are authorized or obligated by Law to close.
1.3 Effect of the Merger. At
the Effective Time, the effect of the Merger shall be as
provided in this Agreement, the Articles of Merger and the
applicable provisions of Tennessee Law. Without limiting the
generality of the foregoing, and subject thereto, at the
Effective Time all the property, rights, privileges, powers and
franchises of Company and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of Company
and Merger Sub shall become the debts, liabilities and duties of
the Surviving Corporation.
1.4 Charter; Bylaws.
(a) Charter. At the Effective
Time, the charter of the Company shall be amended and restated
in its entirety to be identical to the charter of Merger Sub, as
in effect immediately prior to the Effective Time, and subject
to Section 6.10(a), until thereafter amended in accordance
with Tennessee Law and as provided in such charter, except that
the name of the Surviving Corporation as stated in such charter
shall be Direct General Corporation.
(b) Bylaws. At the Effective Time,
the bylaws of the Company shall be amended and restated in their
entirety to be identical to the bylaws of Merger Sub, as in
effect immediately prior to the Effective Time, and subject to
Section 6.10(a), until thereafter amended in accordance
with Tennessee Law and such bylaws, except that the name of the
Surviving Corporation on the face of such bylaws shall be
Direct General Corporation.
1.5 Directors and
Officers. Unless otherwise determined by
Parent prior to the Effective Time, or unless otherwise required
by state insurance or premium finance regulatory Laws, the
directors of Merger Sub immediately prior to the Effective Time
shall be the initial directors of the Surviving Corporation,
each to hold office in accordance with the charter and bylaws of
the Surviving Corporation, and the officers of Merger Sub
A-2
immediately prior to the Effective Time shall be the initial
officers of the Surviving Corporation, in each case until their
respective successors are duly elected or appointed and
qualified, or their earlier death, resignation or removal. In
addition, unless otherwise determined by Parent prior to the
Effective Time, Parent, the Company and the Surviving
Corporation shall cause the directors and officers of Merger Sub
immediately prior to the Effective Time to be the directors and
officers, respectively, of each of the Companys
Subsidiaries immediately after the Effective Time, each to hold
office of each such Subsidiary in accordance with the provisions
of the Laws of the respective jurisdiction of organization and
the respective charters, bylaws or equivalent organizational
documents of each such Subsidiary.
ARTICLE II
CONVERSION
AND EXCHANGE OF SECURITIES
2.1 Effect of Merger on Capital
Stock. At the Effective Time and upon the
terms and subject to the conditions of this Agreement, by virtue
of the Merger and without any action on the part of Parent,
Merger Sub, the Company or the holders of any shares of capital
stock of the Company:
(a) Company Common Stock. Each
share of the common stock, no par value per share, of the
Company (Company Common Stock) issued and
outstanding immediately prior to the Effective Time, other than
any shares of Company Common Stock to be canceled pursuant to
Section 2.1(b), will be canceled and extinguished and
automatically converted into the right to receive an amount of
cash equal to twenty-one dollars and twenty-five cents ($21.25),
without interest (such amount of cash hereinafter referred to as
the Merger Consideration) upon surrender of the
certificate representing such share of Company Common Stock in
the manner provided in Section 2.2 (or in the case of a
lost, stolen or destroyed certificate, upon delivery of an
affidavit (and bond, if required) in the manner provided in
Section 2.2(e)).
(b) Cancellation. Each share of
Company Common Stock owned by Parent or Merger Sub or any direct
or indirect wholly owned subsidiary of Parent immediately prior
to the Effective Time shall, by virtue of the Merger and without
any action on the part of the holder thereof, cease to be
outstanding, be canceled and retired without payment of any
consideration therefor and cease to exist.
(c) Capital Stock of Merger
Sub. Each share of common stock of Merger Sub
issued and outstanding immediately prior to the Effective Time
shall be converted into and become, and shall represent, one
fully paid and nonassessable share of common stock of the
Surviving Corporation with the same rights, powers and
privileges as the shares so converted and shall constitute the
only outstanding shares of capital stock of the Surviving
Corporation.
(d) Adjustments to Merger
Consideration. The Merger Consideration shall
be adjusted to reflect fully the appropriate effect of any stock
split, reverse stock split, stock dividend (including any
dividend or distribution of securities convertible into Company
Common Stock), reorganization, recapitalization,
reclassification or other like change with respect to Company
Common Stock having a record date on or after the date hereof
and prior to the Effective Time.
2.2 Surrender of
Certificates.
(a) Paying Agent. Parent shall
designate a bank or trust company reasonably satisfactory to the
Company to act as the paying agent (the Paying
Agent) in the Merger. Upon the Effective Time, Parent
shall, or shall cause the Surviving Corporation to, make
available to the Paying Agent for exchange in accordance with
this Article II, the Merger Consideration payable pursuant
to Section 2.1(a) in exchange for outstanding shares of
Company Common Stock. Any cash deposited with the Paying Agent
(Exchange Fund) shall be held for the benefit of the
Companys shareholders as of immediately prior to the
Effective Time. The Paying Agent shall invest the cash included
in the Exchange Fund on a daily basis as directed by Parent
pending payment thereof by the Paying Agent to the Company
shareholders. Earnings from such investments shall become part
of the Exchange Fund, and any amounts in excess of the amounts
payable to Company shareholders pursuant to this Article II
shall be promptly paid to Parent.
A-3
(b) Surrender Procedures. As soon
as reasonably practicable following the Effective Time, Parent
shall instruct the Paying Agent to mail to each holder of record
(as of the Effective Time) of a certificate or certificates (the
Certificates) which immediately prior to the
Effective Time represented outstanding shares of Company Common
Stock whose shares were converted into the right to receive the
cash constituting the Merger Consideration pursuant to
Section 2.1(a): (i) a letter of transmittal in
customary form (which shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Paying Agent
and shall be in such form and have such other provisions as
Parent may reasonably specify) and (ii) customary
instructions for use in effecting the surrender of the
Certificates in exchange for cash constituting the Merger
Consideration. Upon surrender of Certificates for cancellation
to the Paying Agent or to such other agent or agents as may be
appointed by Parent, together with such letter of transmittal,
duly completed and validly executed in accordance with the
instructions thereto and such other documents as may reasonably
be required by the Paying Agent, the holder of record of such
Certificates shall be entitled to receive in exchange therefor
the cash constituting the Merger Consideration, and the
Certificates so surrendered shall forthwith be canceled. Until
so surrendered, outstanding Certificates will be deemed from and
after the Effective Time, for all corporate purposes, to
evidence the ownership of the Merger Consideration into which
such shares of Company Common Stock shall have been so converted.
(c) Transfer Books; No Further Ownership Rights in
Company Common Stock. At the Effective Time,
the stock transfer books of the Company shall be closed, and
thereafter there shall be no further registration of transfers
of the shares of Company Common Stock on the records of the
Company. All Merger Consideration paid upon the surrender of
Certificates representing shares of Company Common Stock in
accordance with the terms hereof shall be deemed to have been
paid in full satisfaction of all rights pertaining to such
shares of Company Common Stock. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this
Article II, subject to Section 2.2(d).
(d) Termination of Exchange Fund; No
Liability. Any portion of the Exchange Fund
which remains undistributed to the holders of Certificates
twelve (12) months after the Effective Time shall, at the
request of Parent, be delivered to Parent or otherwise according
to the instruction of Parent, and any holders of the
Certificates who have not surrendered such Certificates in
compliance with this Section 2.2 shall after such delivery
to Parent look only to the Parent (subject to abandoned
property, escheat or other similar Laws) solely as general
creditors for the cash constituting the Merger Consideration
(which shall not accrue interest) pursuant to
Section 2.1(a) with respect to the shares of Company Common
Stock formerly represented thereby. Notwithstanding anything to
the contrary in this Section 2.2, none of Parent, the
Surviving Corporation or the Paying Agent shall be liable to any
holder of shares of Company Stock for any amounts delivered to a
public official pursuant to any applicable abandoned property,
escheat or similar Law. Any amounts remaining unclaimed by
Company shareholders two (2) years after the Effective Time
(or such earlier date, immediately prior to such time when the
amounts would otherwise escheat to or become the property of any
Governmental Entity) shall become, to the extent permitted by
Law, the property of Parent, free and clear of any claims or
interest of any Person previously entitled thereto. For purposes
of this Agreement, Laws shall mean any law
(including common law), statute, ordinance, code, regulation,
rule, judgment, order, decree, injunction, arbitration award,
decision, ruling or other pronouncement, of any Governmental
Entity.
(e) Withholding Rights. Each of
the Paying Agent and the Surviving Corporation shall be entitled
to deduct and withhold from any consideration payable or
otherwise deliverable pursuant to this Agreement to any holder
or former holder of Company Common Stock or Company Options such
amounts as may be required to be deducted or withheld therefrom
under the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder (the
Code) or under any provision of state, local or
foreign Tax Law or under any other applicable Law. To the extent
such amounts are so deducted or withheld, the amount of such
consideration shall be treated for all purposes under this
Agreement as having been paid to the Person to whom such
consideration would otherwise have been paid.
(f) Lost, Stolen or Destroyed
Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Paying Agent
shall issue in exchange for such lost, stolen or destroyed
Certificates, upon the making of an affidavit of that fact by
the holder thereof, such cash constituting Merger Consideration;
provided, however, that Parent may, in its sole
discretion and as a condition precedent to the issuance thereof,
A-4
require the owner of such lost, stolen or destroyed Certificates
to deliver a bond in such sum as it may reasonably direct as
indemnity against any claim that may be made against Parent, the
Company or the Paying Agent with respect to the Certificates
alleged to have been lost, stolen or destroyed.
2.3 Further Action. At and
after the Effective Time, the officers and directors of Parent
and the Surviving Corporation will be authorized to execute and
deliver, in the name and on behalf of the Company and Merger
Sub, any deeds, bills of sale, assignments or assurances and to
take and do, in the name and on behalf of the Company and Merger
Sub, any other actions and things to vest, perfect or confirm of
record or otherwise in the Surviving Corporation any and all
right, title and interest in, to and under any of the rights,
properties or assets acquired or to be acquired by the Surviving
Corporation as a result of, or in connection with, the Merger.
ARTICLE III
REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Merger Sub,
subject to the exceptions specifically disclosed in writing in
the disclosure schedule (referencing the appropriate section or
subsection but subject to Section 9.3(h) of this Agreement)
supplied by the Company to Parent dated as of the date hereof
(the Company Disclosure Schedule), as follows:
3.1 Organization; Standing and Power; Governing
Documents; Subsidiaries.
(a) Organization; Standing and
Power. Each of the Company and its
Subsidiaries is a corporation or other organization duly
organized, validly existing and in good standing under the Laws
of the jurisdiction of its incorporation or organization and
each has the requisite power and authority to own, lease and
operate its properties and to carry on its business as currently
conducted and as proposed to be conducted, except for such
failures as could not reasonably be expected to be material to
any of the Company or its Subsidiaries. Each of the Company and
its Subsidiaries is duly qualified to do business as a foreign
corporation and is in good standing in every jurisdiction where
the properties, owned, leased or operated, or the business
conducted by it requires such qualification, except for such
failures as could not reasonably be expected to be material to
any of the Company or its Subsidiaries. For purposes of this
Agreement, Subsidiary, when used with respect to any
party, shall mean any corporation, association, business entity,
partnership, limited liability company or other Person of which
such party, either alone or together with one or more
Subsidiaries or by one or more Subsidiaries (i) directly or
indirectly owns or controls securities or other interests
representing more than fifty percent (50%) of the voting power
of such Person or (ii) is entitled, by Contract or
otherwise, to elect, appoint or designate directors constituting
a majority of the members of such Persons board of
directors or other governing body. For purposes of this
Agreement, Contract shall mean any written, oral or
other agreement, contract, subcontract, settlement agreement,
lease, binding understanding, instrument, note, option,
warranty, purchase order, license, sublicense, insurance policy,
benefit plan or legally binding commitment, arrangement or
undertaking of any nature, as in effect as of the date hereof or
as may hereinafter be enforceable against the Company or its
Subsidiaries.
(b) Governing Documents. The
Company has delivered to Parent (i) a true and correct copy
of the charter and bylaws of the Company, each as amended to
date (collectively, the Company Governing Documents)
and (ii) the charter and bylaws, or like organizational
documents (collectively, Subsidiary Governing
Documents), of each of its Subsidiaries, and each such
instrument is in full force and effect. The Company is not in
violation of any of the provisions of the Company Governing
Documents and each of its Subsidiaries is not in violation of
its respective Subsidiary Governing Documents.
(c) Subsidiaries. Section 3.1(c)
of the Company Disclosure Schedule sets forth the name of each
Subsidiary of the Company. Except as set forth in
Section 3.1(c) of the Company Disclosure Schedule, the
Company is the direct or indirect owner of all of the
outstanding shares of capital stock of, or other equity or
voting interests in, each such Subsidiary and all such shares
have been duly authorized, validly issued and are fully paid and
nonassessable, free and clear of all pledges, claims, liens,
charges, encumbrances, options and security interests of any
kind or nature whatsoever (collectively, Liens),
except for Permitted Liens and
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restrictions imposed by applicable securities Laws. Other than
the Subsidiaries of the Company and securities in its investment
portfolio, neither the Company nor any of its Subsidiaries owns
any capital stock of, or other equity or voting interests of any
nature in, or any interest convertible, exchangeable or
exercisable for, capital stock of, or other equity or voting
interests of any nature in, any other Person.
3.2 Capital Structure.
(a) Capital Stock. The authorized
capital stock of the Company consists of:
(i) 100,000,000 shares of Company Common Stock, no par
value per share and (ii) 10,000,000 shares of
undesignated preferred stock, no par value per share (the
Company Preferred Stock). As of the close of
business on the day immediately preceding the date hereof:
(i) 20,347,675 shares of Company Common Stock were
issued and outstanding and (ii) no shares of Company
Preferred Stock were issued or outstanding. No shares of Company
Common Stock are owned or held by any Subsidiary of the Company.
All outstanding shares of Company Common Stock are duly
authorized, validly issued, fully paid and non-assessable and
are not subject to preemptive rights created by statute, the
Company Governing Documents, or any agreement to which the
Company is a party or by which it is bound.
(b) Company Options. As of the
close of business on the date hereof:
(i) 45,000 shares of Company Common Stock are issuable
upon the exercise of outstanding options, vested and unvested,
to purchase Company Common Stock under the Companys 1996
Employee Stock Incentive Plan (the 1996 Plan) and
907,200 shares of Company Common Stock are issuable upon
the exercise of outstanding options, vested and unvested, to
purchase Company Common Stock under the Companys 2003
Equity Incentive Plan (the 2003 Plan and together
with the 1996 Plan, the Option Plans) (such options,
whether payable in cash, shares or otherwise granted under or
pursuant to the Option Plans are referred to in this Agreement
as Company Options), the weighted average exercise
price of such Company Options is nineteen dollars and ninety-one
cents ($19.91), and 45,000 of such Company Options under the
1996 Plan and 484,700 of such Company Options under the 2003
Plan are vested and exercisable; (ii) no shares of Company
Common Stock are available for future grant under the 1996 Plan
and 744,000 shares of Company Common Stock are available
for future grant under the 2003 Plan; and (iii) no shares
of Company Common Stock were subject to issuance pursuant to
outstanding Company Options outside of the Option Plans.
Section 3.2(b)(i) of the Company Disclosure Schedule sets
forth a list of each outstanding Company Option, including:
(a) the number of shares of Company Common Stock subject to
such Company Option, (b) the exercise price of such Company
Option, (c) the date on which such Company Option was
granted or issued, (d) the Option Plan under which such
Company Option was issued and whether such Company Option is an
incentive stock option (as defined in
Section 422 of the Code) or a nonqualified stock option,
(e) for each Company Option, whether such Company Option is
held by a Person who is not an employee of the Company or any of
its Subsidiaries, (f) the applicable vesting schedule, if
any, and the extent to which such Company Option is vested and
exercisable as of the date hereof; and (g) the date on
which such Company Option expires. The Company has delivered to
Parent a correlated list of names of the holders of such Company
Options. All shares of Company Common Stock subject to issuance
under the Option Plans, upon issuance on the terms and
conditions specified in the instruments pursuant to which they
are issuable, would be duly authorized, validly issued, fully
paid and nonassessable. Except as set forth in
Section 3.2(b)(iii) of the Company Disclosure Schedule,
there are no commitments or agreements of any character to which
the Company is bound obligating the Company to accelerate the
vesting or exercisability of any Company Option as a result of
the Merger (whether alone or upon the occurrence of any
additional or subsequent events). There are no outstanding or
authorized stock appreciation, phantom stock, profit
participation or other similar rights with respect to the
Company. The per share exercise price of each Company Option is
not (and is not deemed to be) less than the fair market value of
a share of Company Common Stock as of the date of grant of such
Company Option. All grants of Company Options were properly
approved by the board of directors of the Company (or a duly
authorized committee or subcommittee thereof) in compliance with
all Laws and recorded on the Company Financials in accordance
with GAAP, and no such grants involved any back
dating, forward dating or similar practices
that date any Company Option as of any date other that the date
of its actual grant.
(c) Voting Debt. Except as set
forth in Section 3.2(c) of the Company Disclosure Schedule,
no bonds, debentures, notes or other indebtedness of the Company
or any of its Subsidiaries (i) having the right to vote
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on any matters on which shareholders may vote (or which is
convertible into, or exchangeable for, securities having such
right) or (ii) the value of which is any way based upon or
derived from capital or voting stock of the Company, are issued
or outstanding as of the date hereof (collectively, Voting
Debt).
(d) Other Securities. Except as
otherwise set forth in Section 3.2(b), Section 3.2(c)
or Section 3.2(d) of the Company Disclosure Schedule, as of
the date hereof, there are no securities, options, warrants,
calls, rights, contracts, commitments, agreements, instruments,
arrangements, understandings, obligations or undertakings of any
kind to which the Company or any of its Subsidiaries is a party
or by which any of them is bound obligating (or purporting to
obligate) the Company or any of its Subsidiaries to (including
on a deferred basis) issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of capital stock,
Voting Debt, other voting securities or any securities
convertible into shares of capital stock, Voting Debt or other
voting securities of the Company or any of its Subsidiaries, or
obligating the Company or any of its Subsidiaries to issue,
grant, extend or enter into any such security, option, warrant,
call, right, commitment, agreement, instrument, arrangement,
understanding, obligation or undertaking. There are no
outstanding Contracts to which the Company or any of its
Subsidiaries is a party or by which any of them is bound
obligating (or purporting to obligate) the Company or any of its
Subsidiaries to (i) repurchase, redeem or otherwise acquire
any shares of capital stock of, or other equity or voting
interests in, the Company or any of its Subsidiaries or
(ii) dispose of any shares of the capital stock of, or
other equity or voting interests in, any of its Subsidiaries.
The Company is not a party to any voting agreement with respect
to shares of the capital stock of, or other equity or voting
interests in, the Company or any of its Subsidiaries and, to the
Companys Knowledge, other than the Voting Agreement, there
are no irrevocable proxies and no voting agreements, voting
trusts, rights plans, anti-takeover plans or registration rights
agreements with respect to any shares of the capital stock of,
or other equity or voting interests in, the Company or any of
its Subsidiaries to which the Company or any of its Subsidiaries
is a party or by which any of them are bound.
3.3 Authority; No Conflict; Necessary
Consents.
(a) Authority. The Company has all
requisite corporate power and authority to enter into this
Agreement and to consummate the transactions contemplated
hereby, subject, in the case of consummation of the Merger, to
obtaining the approval of this Agreement by the Companys
shareholders as contemplated in Section 6.2. The execution
and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of the Company and no
further corporate action is required on the part of the Company
to authorize the execution and delivery of this Agreement or to
consummate the Merger and the other transactions contemplated
hereby, subject only to the approval of this Agreement by the
Companys shareholders as contemplated by Section 6.2
and the filing of the Articles of Merger pursuant to Tennessee
Law. The affirmative vote of the holders of a majority of the
outstanding shares of Company Common Stock is the only vote of
the holders of any class or series of Company capital stock
necessary to approve this Agreement and consummate the Merger
and the other transactions contemplated hereby. The board of
directors of the Company has, by resolution adopted by unanimous
vote at a meeting of all Directors duly called and held and not
subsequently rescinded or modified in any way (except as is
permitted pursuant to Section 6.3(d) hereof), duly
(i) determined that the Merger is fair to, and in the best
interests of, the Company and its shareholders,
(ii) adopted this Agreement and approved the transactions
contemplated hereby, including the Merger, and
(iii) recommended that the shareholders of the Company
approve this Agreement and directed that such matter be
submitted to the Companys shareholders at the
Shareholders Meeting. This Agreement has been duly
executed and delivered by the Company and assuming due
authorization, execution and delivery by Parent and Merger Sub,
constitutes the valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization,
moratorium or other Laws relating to or affecting the rights and
remedies of creditors generally and to general principles of
equity.
(b) No Conflict. The negotiation,
execution, delivery and performance by the Company of this
Agreement and the consummation of the transactions contemplated
hereby, have not, do not and will not (i) conflict with or
violate any provision of the Company Governing Documents or any
Subsidiary Governing Documents of any Subsidiary of the Company,
(ii) subject to obtaining the approval of this Agreement by
the Companys shareholders as contemplated in
Section 6.2 and compliance with the requirements set forth
in Section 3.3(c),
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conflict with or violate any Law applicable to the Company or
any of its Subsidiaries or by which the Company or any of its
Subsidiaries or any of their respective properties or assets
(whether tangible or intangible) is bound or affected or
(iii) result in any material breach of or constitute a
material default (or an event that with notice or lapse of time
or both would become a material default) under, or materially
impair the Companys rights or to the Companys
Knowledge, alter the rights or obligations of any third party
under, or give to others any rights of termination, amendment,
acceleration or cancellation of any Company Material Contract,
or result in the creation of a Lien on any of the properties or
assets of the Company or any of its Subsidiaries other than
Permitted Liens. Section 3.3(b) of the Company Disclosure
Schedule lists all consents, waivers and approvals required to
be obtained in connection with the consummation of the
transactions contemplated hereby under any Contract to which the
Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound or any of their
properties or assets is bound or affected, which, if not
obtained, individually or in the aggregate, could reasonably be
expected to be material to the Company and its Subsidiaries
taken as a whole or result in the Company or any of its
Subsidiaries incurring any material penalties or other financial
obligations or to materially and adversely affect the ability of
the parties hereto to consummate the Merger within the time
frame in which the Merger would otherwise be consummated in the
absence of the need for such consent, waiver or approval.
(c) Necessary Consents. No
consent, waiver, approval, order or authorization of, or
registration, declaration or filing with any supranational,
national, state, municipal, local or foreign government, any
instrumentality, subdivision, court, arbitral body,
administrative agency or commission or other governmental
authority or instrumentality or any quasi-governmental or
private body exercising any regulatory, taxing, importing or
other governmental or quasi-governmental authority, including,
without limitation, any Insurance Department or Financing
Department (each a Governmental Entity) or any other
Person is required to be obtained or made by the Company in
connection with the execution and delivery of this Agreement or
the consummation of the Merger and other transactions
contemplated hereby, except for (i) the filing of the
Articles of Merger pursuant to Tennessee Law and appropriate
documents with the relevant authorities of other states in which
the Company or Parent are qualified to do business,
(ii) the filing of the Proxy Statement with the United
States Securities and Exchange Commission (the SEC)
in accordance with the requirements of the Securities Exchange
Act of 1934, as amended (the Exchange Act), and the
rules and regulations promulgated thereunder, (iii) the
filing of the Notification and Report Forms with the United
States Federal Trade Commission (FTC) and the
Antitrust Division of the United States Department of Justice
(DOJ) required by the
Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (HSR
Act) and the expiration or termination of the applicable
waiting period under the HSR Act, (iv) approval of the
Companys shareholders as contemplated in Section 6.2,
(v) the necessary filings, applications and notices to and
approvals and consents, if any, of the departments of the states
charged with the regulation of the business of insurance (the
Insurance Departments) and the financing or
regulation of insurance premiums or the lending of money or
regulation of deferred presentment transactions (the
Financing Departments) in the states in which the
Company or its Subsidiaries are licensed or authorized or where
the conduct of their business requires the approval by such
departments (each of which is separately identified on
Section 3.3(c) of the Company Disclosure Schedule) of the
transactions contemplated hereby, (vi) such other filings
and notifications as may be required to be made by the Company
under federal, state or foreign securities Laws or the rules and
regulations of the Nasdaq Global Select Market and
(vii) such other consents, waivers, approvals, orders,
authorizations, registrations, declarations and filings which if
not obtained or made could not, individually or in the
aggregate, reasonably be expected to materially affect the
ability of the Company to consummate the Merger or have a
Material Adverse Effect on the Company. The consents, approvals,
orders, authorizations, registrations, declarations and filings
set forth in (i) through (vii) are referred to herein
as the Necessary Consents.
3.4 SEC Filings; Financial Statements; Internal
Controls.
(a) SEC Filings. The Company has
timely filed all required registration statements, prospectuses,
reports, schedules, forms, statements and other documents
(including exhibits and all other information incorporated by
reference) required to be filed by it with the SEC since
August 12, 2003. All such required registration statements,
prospectuses, reports, schedules, forms, statements and other
documents, as each of the
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foregoing have been amended since the time of their filing,
(including those that the Company may file subsequent to the
date hereof) are referred to herein as the Company SEC
Reports. As of their respective dates of filing, the
Company SEC Reports (i) were prepared in accordance with,
and complied in all material respects with, the requirements of
the Securities Act of 1933, as amended (the Securities
Act), or the Exchange Act, as the case may be, and, in
each case, the rules and regulations promulgated thereunder
applicable to such Company SEC Reports and (ii) did not at
the time they were filed (or if amended or superseded by a
filing prior to the date of this Agreement then on the date of
such filing) contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
None of the Companys Subsidiaries is subject to the
reporting requirements of Sections 13(a) or 15(d) of the
Exchange Act. The Company has delivered to Parent complete and
correct copies of all amendments and modifications to the
Company SEC Reports drafted prior to the date of this Agreement
that have not yet been filed by the Company with the SEC, but
which are required to be filed and all Contracts and other
documents that previously had been filed by the Company with the
SEC and are currently in effect. The Company has delivered or
provided access to Parent true, correct and complete copies of
all correspondence between the SEC, on the one hand, and the
Company and any of its Subsidiaries, on the other, since
August 12, 2003, including all SEC comment letters and
responses to such comment letters by or on behalf of the
Company. To the Companys Knowledge, as of the date hereof
and except as described in Section 3.4(a) of the
Companys Disclosure Schedule, none of the Company SEC
Reports is the subject of ongoing SEC review or outstanding SEC
comment. Each of the principal executive officer of the Company
and the principal financial officer of the Company (or each
former principal executive officer of the Company and each
former principal financial officer of the Company, as
applicable) has made all certifications required by
Rule 13a-14
or
Rule 15d-14
under the Exchange Act or Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002 with respect to the Company SEC
Reports.
(b) GAAP Financial
Statements. Each of the consolidated
financial statements (including, in each case, any related notes
thereto) contained in the Company SEC Reports (the
GAAP Financials), including each Company SEC
Report filed after the date hereof until the Closing:
(i) complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto,
(ii) was prepared in accordance with United States
generally accepted accounting principles (GAAP)
applied on a consistent basis throughout the periods involved
(except as may be indicated in the notes thereto or, in the case
of unaudited interim financial statements, as may be permitted
by the SEC on
Form 10-Q,
8-K or any
successor form under the Exchange Act) and (iii) fairly and
accurately presented in all material respects the consolidated
financial position of the Company and its consolidated
Subsidiaries as at the respective dates thereof and the
consolidated results of the Companys operations and cash
flows for the periods indicated (except that unaudited, interim
financial statements were or will be subject to normal,
recurring year end adjustments). The consolidated balance sheet
of the Company and its consolidated Subsidiaries as of
September 30, 2006 contained in the Company SEC Reports is
hereinafter referred to as the Company Balance
Sheet. Except as disclosed in the Company Financials,
since the date of the Company Balance Sheet, neither the Company
nor any of its Subsidiaries has incurred any liabilities
(absolute, accrued, contingent or otherwise) of a nature
required to be disclosed on a consolidated balance sheet or in
the related notes to the consolidated financial statement
prepared in accordance with GAAP, except for
(i) liabilities incurred since the date of the Company
Balance Sheet in the ordinary course of business consistent with
past practice and (ii) liabilities incurred in connection
with this Agreement or the transactions contemplated hereby. The
Company has not had any material dispute with any of its
auditors regarding accounting matters or policies during any of
its past three (3) full fiscal years or during the current
fiscal
year-to-date.
The books and records of the Company and each Subsidiary have
been, and are being, maintained in accordance with applicable
legal and accounting requirements in all material respects, and
the Company Financials are consistent with such books and
records in all material respects. Neither the Company nor any of
its Subsidiaries is a party to, or has any commitment to become
a party to, any joint venture, off-balance sheet partnership or
any similar off-balance sheet Contract relating to any
transaction or relationship between or among the Company or any
of its Subsidiaries, on the one hand, and any unconsolidated
affiliate, including any structured finance, special purpose or
limited purpose
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Person, on the other hand, or any off-balance sheet
arrangements (as defined in Item 303(a) of
Regulation S-K
of the SEC).
(c) Statutory Financial Statements
(i) Except as described in Section 3.4(c)(i) of the
Company Disclosure Schedule, the Company has delivered to Parent
true, correct and complete copies of (i) the statutory
financial statements (including the annual reports filed with
the domiciliary states of each Insurance Subsidiary) for each
Subsidiary of the Company that is licensed to or that conducts
an insurance or reinsurance business (each an Insurance
Subsidiary) for the years ended December 31, 2002,
2003, 2004 and 2005 and (ii) the statutory financial
statements (including quarterly reports filed with the
domiciliary states of each Insurance Subsidiary) for each
Insurance Subsidiary for the first three quarters in the year
2006, and the Company will deliver to Parent true, correct and
complete copies of such statements for all quarters which are
filed prior to the Effective Time (collectively, the
Statutory Statements).
(ii) The Statutory Statements each present (or will
present, with respect to the Statutory Statements which are
filed following the date hereof and prior to the Effective Time)
fairly and in accordance with the statutory accounting
principles and practices prescribed or permitted by the
appropriate regulatory agencies of each state in which the
Statutory Statements have been or may be required to be filed
(SAP), the financial position of the related
Insurance Subsidiary at the date of each such statement and the
results of the related Insurance Subsidiarys operations
for each such referenced period.
(iii) The amounts shown in the Statutory Statements as
reserves and liabilities for past and future Insurance Contract
claims and expenses under Insurance Contracts, were computed
(i) in all material respects in accordance with generally
accepted actuarial standards consistently applied as in effect
on their respective dates, (ii) on the basis of actuarial
assumptions that were in accordance with those called for in
policy provisions, (iii) in compliance with applicable Law
in all material respects; and (iv) on the basis of
actuarial assumptions and methods consistent in all material
respects with those used to compute the corresponding items in
the Statutory Statements. Such amounts shown on Statutory
Statements filed after the date hereof and on or prior to the
Effective Time will be so computed and based on the same
principles used in prior periods.
(d) Company Financials. The
GAAP Financials and the Statutory Statements are
collectively referred to as the Company Financials.
(e) Internal Controls. The Company
has established and maintains a system of internal controls over
financial reporting required by
Rules 13a-15(f)
or 15d-15(f)
of the Exchange Act regarding the reliability of financial
reporting and the preparation of its consolidated financial
statements in accordance with GAAP, including policies and
procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company and
its Subsidiaries, (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with GAAP, and that receipts
and expenditures of the Company and its Subsidiaries are being
made only in accordance with appropriate authorizations of
management and the board of directors of the Company and
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of the assets of the Company and its Subsidiaries. The Company
has disclosed, based on its most recent evaluation of internal
control over financial reporting prior to the date of this
Agreement, to the Companys independent auditors and the
audit committee of the Companys board of directors
(x) all significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
Companys ability to record, process, summarize and report
financial information and (y) any fraud, whether or not
material, that involves the Companys management or other
employees who have a significant role in the Companys
internal control over financial reporting. There does not exist
any fraud, whether or not material, that involved the
Companys management or other employees who have a
significant role in the Companys internal control over
financial reporting.
(f) The Company has established and maintains disclosure
controls and procedures required by
Rules 13a-15(f)
or 15d-15(f)
of the Exchange Act to ensure that all material information
relating to the
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Company and its Subsidiaries required to be disclosed by the
Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SECs rules and
forms and is accumulated and communicated to the Companys
management to allow timely decisions regarding required
disclosure.
3.5 Absence of Certain Changes or
Events. Since the date of the Company Balance
Sheet through the date hereof and except as disclosed on
Schedule 3.5 of the Company Disclosure Schedule, there has
not been, accrued or arisen:
(a) any Material Adverse Effect on the Company;
(b) any acquisition of any business by the Company or any
Subsidiary by merging or consolidating with, or by purchasing
any assets for an amount in excess of $250,000 or equity
securities of, or by any other manner, any corporation,
partnership, association or other business organization or
division thereof, whether by asset purchase, stock purchase,
merger or otherwise;
(c) any entry into, amendment or termination by the Company
or any of its Subsidiaries of any Contract, agreement in
principle, letter of intent, memorandum of understanding or
similar agreement with respect to a joint venture or strategic
partnership;
(d) any declaration, setting aside or payment of any
dividend on, or other distribution (whether in cash, stock or
property) in respect of, any of the Companys or any of its
Subsidiaries capital stock, or any purchase, redemption or
other acquisition by the Company or any of its Subsidiaries of
any of the Companys or any of its Subsidiaries
capital stock or any other securities of the Company or any of
its Subsidiaries or any options, warrants, calls or rights to
acquire any such shares or other securities, except for any
dividends received by the Company or any of its wholly-owned
direct or indirect Subsidiaries;
(e) any split, combination or reclassification of any of
the Companys or any of its Subsidiaries capital
stock;
(f) any granting by the Company, or any of its Subsidiaries
or ERISA Affiliates, whether orally or in writing, of any
increase in compensation or pension, welfare or fringe benefits
payable or otherwise due (i) to current or former executive
officers or directors of the Company or any Subsidiary,
(ii) to any current or former employees of the Company
whose annual base salary is in excess of $75,000 other than in
the ordinary course of business consistent with past practice,
or (iii) to any other employees other than as would not
result in increases to such other employees that in the
aggregate exceed five percent (5%) of the Companys payroll
as of the date of this Agreement; (g) any change by the
Company or any of its Subsidiaries of severance, termination or
bonus policies and practices (excluding sales commissions) or
any entry by the Company or any of its Subsidiaries into, or
amendment of, any currently effective employment, severance,
termination or indemnification agreement or any agreement the
benefits of which are contingent or the terms of which are
materially altered upon the occurrence of a transaction
involving the Company of the nature contemplated hereby (either
alone or upon the occurrence of additional or subsequent events);
(h) any material amendment, termination or consent with
respect to any Company Material Contract;
(i) any Contract entered into by the Company or any
Subsidiary relating to its assets or business (including the
acquisition or disposition of any assets or property) or any
relinquishment by the Company or any of its Subsidiaries of any
Contract or other right, in each case having a stated contract
amount or involving obligations or entitlements with a value of
more than $100,000 in each individual case (other than Contracts
with customers, distributors and representatives entered into in
the ordinary course of business, consistent with past practice);
(j) any change by the Company in its accounting or
reserving methods, principles or practices, except as required
by concurrent changes in GAAP or SAP;
(k) any debt, capital lease or other debt or equity
financing transaction by the Company or any of its Subsidiaries
or entry into any agreement by the Company or any of its
Subsidiaries in connection with
A-11
any such transaction, except for (x) capital leases entered
into in the ordinary course of business consistent with past
practice which are not, individually or in the aggregate,
material to the Company and its Subsidiaries taken as a whole
and (y) borrowings by the Company under (1) the Eighth
Amended and Restated Loan Agreement dated as of October 31,
2002 (the Premium Facility), by and among the
Company, First Tennessee Bank, N.A. and the other parties
thereto, as amended through the Eighth Amendment thereto, dated
June 30, 2006 and (2) the Third Amended and Restated
Loan Agreement dated as of October 31, 2002 (and together
with the Premium Facility, the Credit Facilities),
by and among the Company, First Tennessee Bank, N.A. and the
other parties thereto, as amended through September 30,
2006;
(l) any grants of any material refunds, credits, rebates or
other allowances by the Company or any of its Subsidiaries to
any end user, customer, reseller or distributor, in each case,
other than in the ordinary course of business consistent with
past practice;
(m) any material change in the amount of, or the policies
relating to, accounts receivable or reserves, bad debts or
rights to accounts receivable experienced by the Company or any
of its Subsidiaries;
(n) any material restructuring activities by the Company or
any of its Subsidiaries, including any material reductions in
force or similar actions other than the opening and closing of
sales offices in the ordinary course of business;
(o) any sale, lease, license, encumbrance or other
disposition of any properties or assets with a value of more
than $100,000 excluding salvage sales of insured vehicles or the
license of current Company Products, in each case, in the
ordinary course of business and in a manner consistent with past
practice;
(p) any loan, extension of credit, advance or grant of
extended payment terms by the Company or any of its Subsidiaries
to, or investment in, any Person other than (A) loans or
advances to Employees/Service Providers in connection with
business related travel and expenses, in each case in the
ordinary course of business consistent with past practice,
(B) loans, advances or capital contributions or investments
by the Company to or in any wholly-owned Subsidiary, by any
wholly-owned Subsidiary in the Company, or by a wholly-owned
Subsidiary of the Company in any other wholly-owned Subsidiary
of the Company or (C) commercial loans or advances made in
the ordinary course of business and consistent with past
practice;
(q) any material purchases of fixed assets or other long
term assets for a purchase price of more than $100,000 other
than as provided in the Companys budget, a complete copy
of which has been provided to Parent before the date hereof (the
Budget), and other than in the ordinary course of
business and in a manner consistent with past practice;
(r) any amendment of any material Tax Returns, any adoption
of or change in any election in respect of Taxes, adoption or
change in any accounting method in respect of Taxes, agreement
or settlement of any claim or assessment in respect of Taxes or
closing agreement relating to an Audit, or consent to any waiver
or extension of the statutory period of limitations in respect
of any Audit or any claim or assessment in respect of any Taxes;
(s) any material revaluation, or any indication that such a
revaluation is required under GAAP or SAP, by the Company or any
of its Insurance Subsidiaries of any of their assets, including,
without limitation, materially writing down the value of long
term or short-term investments, fixed assets, goodwill,
intangible assets, deferred tax assets, or writing off notes or
accounts receivable other than in the ordinary course of
business consistent with past practice;
(t) to the Knowledge of the Company, any significant
deficiency or material weakness identified in the system of
internal controls utilized by the Company and its Subsidiaries;
(u) any commencement or settlement of any material lawsuit,
any threat of any material lawsuit or other material proceeding
by or against the Company or any Subsidiary which could
reasonably be expected to result in losses to the Company in
excess of $50,000, other than defense of claims under insurance
policies issued by the Company and its Subsidiaries;
A-12
(v) any granting by the Company or any of its Subsidiaries
of any material Lien with respect to any of its or their
properties or assets except for Permitted Liens;
(w) any granting by the Company or any of its Subsidiaries
of forgiveness, cancellation or waiver under or in respect of
any debts owed to or claims of or by any of them except for
write-offs of accounts receivable from customers in the ordinary
course of business provided that such accounts receivable are
not material individually or in the aggregate;
(x) any material claim or, to the Knowledge of the Company,
any potential material claim of ownership, interest or right by
any person other than the Company or any of its Subsidiaries of
the Intellectual Property owned by or developed or created by it
or them or of infringement by the Company or any of its
Subsidiaries of any rights of any third Person in respect of any
Intellectual Property;
(y) any Contract with any union, labor organization or
other organization representing any employee of the Company or
any of its subsidiaries;
(z) any material change in its underwriting (other than
adjustments to underwriting policies made in light of loss
experience in the ordinary course of business), reinsurance,
marketing, claim processing and payment, except as required by
concurrent changes in applicable Law, or reduced the amount of
any reserves and other liability accruals held in respect of
losses or loss adjustment expenses arising under or relating to
Insurance Contracts, other than as required by concurrent
changes in applicable Law;
(aa) any abandonment, modification, waiver, termination or
otherwise change to any insurance Permit, except (i) as is
required in order to comply with concurrent changes in
applicable Law, (ii) such modifications, changes or waivers
of insurance Permits as would not, individually or in the
aggregate, restrict the business or operations of the Company or
any of its Subsidiaries in any material respect or
(iii) such modifications or changes that would expand the
insurance Permits in a way favorable to the Company;
(bb) except in the ordinary course of business, or in
connection with geographical or product expansion, or as
required to comply with applicable Law, any material
modifications to any Insurance Contract or form thereof;
(cc) any failure to keep in full force and effect any of
the Companys Insurance Policies (other than the
Companys Insurance Policies that are replaced immediately
by comparable insurance coverage), or reduce the amount of any
insurance coverage provided by existing Company Insurance
Policies; or
(dd) any agreement, whether in writing or otherwise, to
take any action described in this Section 3.5.
For all purposes of this Agreement, the following terms shall
have the following respective meanings:
Insurance Contracts means all contracts,
treaties, policies, binders, slips, certificates or other
written arrangements to which the Company or any of its
Subsidiaries is a party or by or to which any of them is bound
or subject providing for insurance, assumptions of reinsurance,
excess insurance or retrocessions, including, without
limitation, all insurance policies, reinsurance policies, and
retrocession agreements, in each case as such contract, treaty,
policy or other written arrangement may have been amended,
modified or supplemented, other than the Companys
Insurance Policies.
Companys Insurance Policies means all
policies of insurance (excluding retrocession agreements and
similar agreements) maintained by the Company or by any of its
Subsidiaries as of the date hereof with respect to their
respective properties, assets, business, operations, employees,
officers or directors or managers.
3.6 Taxes.
(a) Definitions. Tax
or Taxes means all Federal, state, local and foreign
taxes, and other assessments of a similar nature (whether
imposed directly or through withholding), including any
interest, additions to tax, or penalties applicable thereto,
imposed by any taxing authority of any Governmental Entity.
Tax Authority means the IRS and any other domestic
or foreign governmental authority responsible for the
A-13
administration of any Taxes. Audit means any audit,
assessment, claim, examination or other inquiry relating to
Taxes by any Tax Authority or any judicial or administrative
proceeding relating to Taxes. Tax Returns mean all
federal, state, local, and foreign tax returns, declarations,
statements, reports, schedules, forms, and information returns
and any amendments thereto.
(b) Tax Returns and Audits.
(i) The Company and each of its Subsidiaries has timely
filed (or has had timely filed on its behalf) with the
appropriate Tax Authorities all material Tax Returns required to
be filed by the Company and each of its Subsidiaries. Such filed
Tax Returns are true, correct, and complete in all material
respects.
(ii) All material Taxes for which the Company or any of its
Subsidiaries is or may be liable in respect of taxable periods
(or portions thereof) ending on or before the Closing Date,
whether or not shown (or required to be shown) on a Tax Return,
have been timely paid, or in the case of Taxes not yet due and
payable, an adequate accrual in accordance with GAAP
specifically in respect of such Taxes has been established on
the GAAP Financials. All liabilities for Taxes attributable
to the period commencing on the date following the date of the
Company Balance Sheet were incurred in the ordinary course of
business and are consistent in type and amount with Taxes
attributable to similar prior periods.
(iii) Except for Permitted Liens, there are no liens for
Taxes upon any property or assets of the Company or any of its
Subsidiaries.
(iv) Except as described in Section 3.6(b)(iv) of the
Company Disclosure Schedule, no Federal, state, local or foreign
Audits are presently pending with regard to any material Taxes
or material Tax Returns of the Company and its Subsidiaries and
to the Knowledge of the Company, no such Audit is threatened. No
material issue has been raised by any Tax Authority in any
completed Audit which, by application of the same or similar
principles, could reasonably be expected to recur in a
subsequent Tax period.
(v) There are no outstanding requests, agreements, consents
or waivers to extend the statutory period of limitations
applicable to the assessment of any Taxes or deficiencies
against the Company or any of its Subsidiaries, and no power of
attorney granted by the Company or any of its Subsidiaries with
respect to any Taxes is currently in force.
(vi) Neither the Company nor any of its Subsidiaries is a
party to any agreement providing for the allocation,
indemnification or sharing of Taxes, other than the agreements
described in Section 3.6(b)(vi) of the Company Disclosure
Schedule.
(vii) Except as described in Section 3.6(b)(vii) of
the Company Disclosure Schedule, neither the Company nor any of
its Subsidiaries has (i) been a member of an affiliated
group (within the meaning of Section 1504 of the Code) or
an affiliated, combined, consolidated, unitary, or similar group
for state, local or foreign Tax purposes, other than the group
of which the Company is the common parent or (ii) any
liability for or in respect of the Taxes of, or determined by
reference to the Tax liability of, another Person (other than
the Company or any of its Subsidiaries) under Treasury
Regulation Section 1.1502-6
(or any similar provision of state, local or foreign Law), as a
transferee or successor, by Contract or otherwise.
(viii) The Company has not received any claim from a Taxing
Authority in any jurisdiction where the Company or its
Subsidiaries does not file a Tax Return asserting that it is or
may be subject to Taxation in that jurisdiction.
(ix) None of the Company or any of its Subsidiaries has
participated in any way (i) in any tax shelter
within the meaning of Section 6111 (as in effect prior to
the enactment of P.L.
108-357 or
any comparable Laws of jurisdictions other than the United
States) of the Code or (ii) in any reportable
transaction within the meaning of Treasury
Regulation Section 1.6011-4 (as in effect at the
relevant time) (or any comparable regulations of jurisdictions
other than the United States).
(x) Each Insurance Contract complies with the requirements
of section 72 of the Code, each Insurance Contract which
was issued as a life insurance contract meets the requirements
of section 7702(a) of the Code,
A-14
and the Company does not issue any modified endowment contracts
within the meaning of Section 7702A of the Code.
3.7 Real Properties.
(a) Section 3.7(a) of the Company Disclosure Schedule
contains a current, complete and correct list of all real
property owned by the Company or any Subsidiary (Owned
Real Property), and copies of all vesting deeds have been
provided to Parent. Except as set forth in Section 3.7(a)
of the Company Disclosure Schedule, the Company
and/or its
Subsidiaries have good, valid and marketable title to the Owned
Real Property, free and clear of all Liens, tenancies,
subtenancies, licenses, defects, restrictive covenants or other
encumbrances other than the Permitted Liens.
(b) Section 3.7(b) of the Company Disclosure Schedule
sets forth a list of all material real property currently
leased, licensed or subleased by the Company or any of its
Subsidiaries or otherwise used or occupied by the Company or any
of its Subsidiaries (the Leased Real Property),
including all amendments, assignments and modifications thereto,
whether as lessor or lessee. The Company has delivered or made
available to Parent true, correct and complete copies of all
material Contracts under which the Leased Real Property is
currently leased, licensed, subleased, used or occupied by the
Company or any of its Subsidiaries (Lease Documents)
and the Company has delivered or provided access to Parent a
true, correct and complete list of all Contracts under which the
Leased Real Property is currently leased, licensed, subleased or
occupied. Except as set forth on Section 3.7(b) of the
Company Disclosure Schedule, the Lease Documents for the Leased
Real Property have not been modified, amended, changed or
altered in any material way. All Lease Documents are in full
force and effect, are valid, binding, enforceable and effective
in accordance with their respective terms, and there is not,
under any of the Lease Documents, any existing breach, default
or event of default (or event which with notice or lapse of
time, or both, would constitute a default) by the Company or its
Subsidiaries or, to the Companys Knowledge, any third
party under any of the Lease Documents.
(c) Section 3.7(c) of the Company Disclosure Schedule
sets forth a list of all real property affected by agreements
(Government Agreements) with Government Entities
(Development Bond Property and together with the
Owned Real Property and Leased Real Property, the Real
Property). The Government Agreements are in full force and
effect, and are valid, binding, enforceable and effective in
accordance with their respective terms. The transactions
contemplated by this Agreement will not result in a breach of or
a default under any of the Government Agreements, and will not
cause such agreements to cease to be legal, valid, binding,
enforceable and in full force and effect following the Closing.
(d) Except as set forth on Section 3.7(d) of the
Company Disclosure Schedule:
(i) no parties other than the Company or any of its
Subsidiaries have a right to occupy, use or own any Real
Property;
(ii) the Real Property is used only for the current
operation of the business of the Company and its Subsidiaries,
and includes all real property necessary for the business of the
Company
and/or
Subsidiaries as currently conducted;
(iii) the Real Property and the physical assets of the
Company and the Subsidiaries are, in all material respects, in
good condition and repair and regularly maintained in accordance
with standard industry practice;
(iv) neither the Company nor any Subsidiary is currently or
could in the future be obligated under any option, right of
first refusal or other contractual right to sell, dispose of,
lease or sublease its interest in any of the Real Properties or
any material portion thereof or any material interest therein to
any Person other than Merger Sub; and
(v) with respect to the Leased Property and to the
Development Bond Property, there are no superior interests to
those of the Company or its Subsidiaries.
A-15
3.8 Intellectual Property.
(a) Sufficiency of Intellectual
Property. Section 3.8(a) of the Company
Disclosure Schedule identifies all of the following:
(i) all trademarks, service marks, trade names, domain
names, trade dress and the like which the Company or any of its
Subsidiaries own or purport to own, including those registered
with the United States Patent and Trademark Office (the
Trademarks); (ii) all copyrights and all
registrations of and applications to register copyrights which
the Company or any Subsidiary own or purport to own;
(iii) all licenses of rights in Trademarks, patents,
copyrights and other intellectual property, whether to or by the
Company or any of its Subsidiaries (IP Contracts);
and (iv) all software developed by the Company that is
currently in use or held for future use in its or its
Subsidiaries business. The rights required to be so
identified, together with all licenses of rights in computer
software and all proprietary know how and trade secrets which
are material to the Company, any of its Subsidiaries or its or
their business, are referred to herein collectively as the
Intellectual Property. The Intellectual Property and
other licensed software of the type generally available to the
public is all of the intellectual property used or held for use
in, or necessary to conduct, the business. Neither the Company
nor any of its Subsidiaries owns any patents or pending
applications to patent any technology or design.
(b) Ownership of Intellectual
Property. The Company or one of its
Subsidiaries is the owner of, or duly licensed to use (and
immediately following the Closing will continue to own or have a
valid right to use), free and clear of all Liens, the
Intellectual Property, and the Intellectual Property owned by
the Company exists and has been maintained in good standing.
Except as set forth on Section 3.8(b) of the Company
Disclosure Schedule, no third party has asserted ownership
rights in any of the intellectual property (except to the extent
that such intellectual property has been properly licensed to or
by the Company or one of its Subsidiaries). The conduct of the
business of the Company and its Subsidiaries does not (and to
the Companys Knowledge, the conduct of the business when
conducted immediately following the Closing at such time will
not) infringe, misappropriate or otherwise violate any right of
any third party, and since January 1, 2004, neither the
Company nor any of its Subsidiaries has received written notice
(or, to the Companys Knowledge, any other notice) from any
Person alleging such infringement, misappropriation, or other
violation. To the Companys Knowledge, no third party is
infringing, misappropriating or otherwise violating the
Companys or its Subsidiaries rights in the
Intellectual Property and within the past three (3) years,
except as set forth in Section 3.8(b) of the Company
Disclosure Schedule, neither the Company nor any of its
Subsidiaries have asserted or threatened any claim against any
Person alleging any such infringement, misappropriation or
violation.
(c) Computer Software. The Company
has heretofore furnished Parent with a list of all software. The
Company or one of its Subsidiaries currently owns or licenses,
or otherwise has the legal right to use, all of the software
currently in use (and all software held for future use by the
Company or its Subsidiaries (including any upgrade, alteration
or enhancement with respect thereto), and to the Companys
Knowledge, all of such software is being used in compliance with
applicable licenses or other agreements.
(d) Transaction. Except as
described in Section 3.8(d) of the Company Disclosure
Schedule, the consummation of transactions will not result in
the loss or impairment of or payment of any additional amounts
with respect to, nor require the consent of any other Person in
respect of, the Companys and its Subsidiaries right
to own, use, or hold for use any of the Intellectual Property as
owned, used, or held for use in the conduct of the business as
currently conducted.
(e) Trade Secrets. The Company and
its Subsidiaries take reasonable measures under the
circumstances to protect the confidentiality of their respective
trade secrets.
(f) Data Protection; Privacy. The
Company has a privacy policy (the Privacy Policy)
that discloses (i) the manner and methods by which the
Company and each of its Subsidiaries collects information from
its customers or other parties (the Customer
Information), (ii) the manners in which they use such
Customer Information and (iii) to whom and under what
circumstances the Company or any of its Subsidiaries may
disclose Customer Information to any third party. Neither the
Company nor any of its Subsidiaries uses any of the Customer
Information it receives through its web site or otherwise in an
unlawful manner, or in a manner that in any way violates the
Privacy Policy, any contractual obligations or the privacy
rights of their customers or other third parties. The Company
and each of its Subsidiaries have not collected any Customer
Information
A-16
in an unlawful manner or in violation of the Privacy Policy, any
contractual obligations, or any applicable Laws relating to
privacy, data protection, and the collection and use of personal
information. The Company and each of its Subsidiaries have
adequate security measures in place to (i) protect the
Customer Information they receive and which they store in their
computer systems from unauthorized or illegal use, access or
modification by third parties or use by third parties in a
manner violative of the rights of privacy of their customers and
other third parties and (ii) restrict access to Customer
Information to those employees who require such access to
perform their primary job functions. The Company and each of its
Subsidiaries conduct their business in material compliance with
applicable Laws relating to privacy, data protection, and the
collection and use of personal information.
3.9 Company Insurance. To
the Companys Knowledge, each of the Company and its
Subsidiaries has policies of insurance and bonds of the type and
in amounts customarily carried by Persons conducting businesses
or owning assets similar to those of the Company and its
Subsidiaries. Except as set forth in Section 3.9(a) of the
Company Disclosure Schedule, there is no claim pending under any
of such policies or bonds as to which coverage has been
questioned, denied or disputed by the underwriters of such
policies or bonds. All premiums due and payable under all such
policies and bonds have been paid and the Company and its
Subsidiaries are otherwise in compliance in all material
respects with the terms of such policies and bonds. To the
Companys Knowledge, there is no threatened termination of,
or material premium increase with respect to, any such policies
and bonds. Section 3.9(b) of the Company Disclosure
Schedule contains an accurate and complete description of all
material policies of fire, liability, products liability,
workers compensation, and other forms of insurance owned
or held by the Company and each subsidiary. Section 3.9(c)
of the Company Disclosure Schedule identifies all risks that the
Company and its Subsidiaries, and their respective board of
directors or officers, have designated as being self-insured.
The Company has delivered or made available to Parent the claims
history for the Company during the past five (5) years and
in the Companys possession, including with respect to
insurance obtained but not currently maintained. Each insurance
policy (or binder), fidelity or surety bond, and self-insurance
arrangement in effect and maintained by or on behalf of the
Company and any of its Subsidiaries and any of their respective
properties, assets, employees, officers or directors is set
forth in Section 3.9(d) of the Company Disclosure Schedule
(including for each policy the policy number, insurer, policy
period, limit and deductible). Except as described in
Section 3.9(d) of the Company Disclosure Schedule, each
such insurance policy, binder or bond is legally valid, binding
and enforceable in accordance with its terms and in full force
and effect, and will not terminate or lapse by reason of any of
the transactions contemplated by this Agreement. The Company has
provided or made available to Parent each expired or ineffective
insurance policy (or binder), fidelity or surety bond and
self-insurance arrangement in the Companys possession and
maintained by or on behalf of the Company and any of its
Subsidiaries and any of their respective properties, assets,
employees, officers or directors since January 1, 2004.
Except as set forth in Section 3.9(e) of the Company
Disclosure Schedule, with respect to insurance policies covering
the Business since January 1, 2001: (i) all
occurrences, litigation and circumstances that could lead to a
claim that would be covered by insurance policies have been
properly reported to and accepted by the applicable insurer,
(ii) no policy limits have been exhausted or materially
eroded or reduced and there have been no gaps in the periods of
coverage, and (iii) to the Knowledge of the Company, all
insurance carriers with respect to each such policy are solvent
and there are no open claims against any insolvent insurance
carriers.
3.10 Litigation. Except as
set forth in Section 3.10 of the Company Disclosure
Schedule and for claims under Insurance Contracts issued by the
Companys Insurance Subsidiaries in the ordinary course of
business, which claims are and are reasonably expected to remain
for amounts less than $50,000, there is no action, suit, claim
or proceeding pending or, to the Companys Knowledge,
threatened or reasonably anticipated against the Company, any of
its Subsidiaries or any of their respective properties (tangible
or intangible). There is no material investigation or other
material proceeding pending or, to the Companys Knowledge,
threatened or reasonably anticipated against the Company, any of
its Subsidiaries or any of their respective properties (tangible
or intangible) by or before any Governmental Entity. There are
not currently, nor, to the Companys Knowledge, have there
been since January 1, 2003, any material internal
investigations or inquiries being conducted by the Company, the
Companys board of directors (or any committee thereof) or
any third party at the request of any of the foregoing
concerning any alleged financial, accounting, Tax,
A-17
conflict of interest, illegal activity, fraudulent or deceptive
conduct or other misfeasance or malfeasance issues. There is no
action, suit, proceeding, arbitration or, to the Companys
Knowledge, investigation involving the Company, which the
Company presently intends to initiate.
3.11 Compliance with Law.
(a) General. Neither the Company nor any of its
Subsidiaries since January 1, 2001, is or has been in
violation or default in any material respect of any Laws
applicable to the Company or any of its Subsidiaries or by which
the Company or any of its Subsidiaries is bound or any of their
respective properties is bound or affected. There is no
agreement, judgment, injunction, order or decree binding upon
the Company or any of its Subsidiaries which has or would
reasonably be expected to have the effect of prohibiting or
impairing any business practice of the Company or any of its
Subsidiaries in such a way as to be material and adverse to the
Company and its Subsidiaries, taken as a whole. Except as set
forth in Section 3.11(a) of the Company Disclosure
Schedule, the Company and its Subsidiaries and their respective
employees, hold all permits, licenses, certificates, waivers,
exemptions, grants, authorizations and approvals of all
Governmental Entities, including, without limitation, those
responsible for regulating insurance companies, insurance
agencies, lenders and financers, necessary to own, lease or
operate all of the assets and properties of the Company and its
Subsidiaries, as appropriate, and to carry on the business of
the Company and its Subsidiaries as presently and historically
conducted (the Permits). All such Permits are in
full force and effect and, except as set forth in
Section 3.11(a) of the Company Disclosure Schedule, the
Company and its Subsidiaries are not operating under any
agreement, order or understanding with any Governmental Entity
that restricts its authority to do business or requires the
Company or any of its Subsidiaries to take, or refrain from
taking, any action relating to the conduct of the business
otherwise permitted by applicable Law, except as set forth in
the written documentation evidencing such Permit. Except as set
forth in Section 3.11(a) of the Company Disclosure
Schedule, the Company and its Subsidiaries are in compliance in
all material respects with (i) all applicable Laws, and
regulations applicable to the business (including, without
limitation, all usury and similar Laws), (ii) the terms of
the Permits, and (iii) the applicable listing and corporate
governance rules and regulations of the Nasdaq Global Select
Market. Neither of the Company nor any of its Subsidiaries have
received, at any time since January 1, 2003, any notice
(written or otherwise) from any Governmental Entity regarding
(i) any actual or alleged violation of, or failure on the
part of the Company or any of its Subsidiaries to comply with,
any material term or requirement of any Permit or applicable Law
(including Finance and Banking Laws) or (ii) any actual or
potential revocation, withdrawal, suspension, cancellation,
termination, modification, qualification or impairment of any
material Permit or (iii) material violation of Law. The
Permits, and each jurisdiction in which the any of the Insurance
Subsidiaries is licensed to write insurance, are listed in
Section 3.11(b) of the Company Disclosure Schedule. True
and complete copies of all Permits previously have been
delivered to Parent.
(b) Premium Finance. Without
limiting the scope of the representations and warranties made by
the Company pursuant to Section 3.11(a), and except as set
forth in Section 3.11(a) of the Company Disclosure
Schedule, (i) the business and operations of the Company
and/or its
Subsidiaries in making insurance premium financing loans have
been conducted in compliance in all material respects with all
applicable statutes, laws and regulations of all states in which
the Company
and/or its
Subsidiaries conduct such business, (ii) the business and
operations of the Company
and/or its
Subsidiaries have been conducted in compliance in all material
respects with all applicable Laws regulating the business of
consumer lending and banking, including state usury and similar
Laws, the Truth in Lending Act, the Real Estate Settlement
Procedures Act, the Consumer Credit Protection Act, the Equal
Credit Opportunity Act, the Fair Credit Reporting Act, the
Homeowners Ownership and Equity Protection Act, the Fair Debt
Collection Practices Act and other federal, state, local and
foreign Laws regulating lending and banking (Finance and
Banking Laws) and (iii) the business and operations
of the Company
and/or its
Subsidiaries have complied in all material respects with all
applicable collection practices in seeking payment under any
loan or credit extension of such subsidiaries.
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3.12 Environmental
Matters. Definitions. For all purposes of
this Agreement, the following terms shall have the following
respective meanings:
Environmental Claim means any claim, action,
cause of action, suit, proceeding, investigation, order, demand
or notice by any Person alleging potential liability (including,
without limitation, potential liability for investigatory costs,
cleanup costs, governmental response costs, natural resources
damages, property damages, personal injuries, or penalties)
arising out of, based on or resulting from (a) the
presence, or release into the environment, of, or exposure to,
any Material of Environmental Concern at any location, whether
or not owned or operated by the Company or any of its
Subsidiaries or (b) circumstances forming the basis of any
violation, or alleged violation, of any Environmental Law.
Environmental Laws mean all applicable
federal, state, local and foreign Laws of any Governmental
Entity and common law relating to pollution or protection of
human health or protection of the environment (including,
without limitation, ambient air, surface water, ground water,
land surface or subsurface strata, and natural resources),
including, without limitation, Laws relating to emissions,
discharges, releases or threatened releases of, or exposure to,
Materials of Environmental Concern, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Materials of Environmental
Concern.
Materials of Environmental Concern means
hazardous chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum and petroleum
products, asbestos or
asbestos-containing
materials or products, polychlorinated biphenyls, lead or
lead-based paints or materials, radon, toxic fungus, toxic mold,
mycotoxins or other hazardous substances that would reasonably
be expected to have an adverse effect on human health or the
environment.
(a) Environmental Compliance. The
Company and its Subsidiaries are in material compliance with the
Environmental Laws, which compliance includes, but is not
limited to, the possession by the Company and its Subsidiaries
of all material Permits required under the Environmental Laws,
and compliance with the terms and conditions thereof. Neither
the Company nor any of its Subsidiaries has received any written
communication, whether from a Governmental Entity, citizens
group, employee or otherwise, that alleges that the Company or
any of its Subsidiaries are not in such compliance.
(b) Environmental
Liabilities. There is no material
Environmental Claim pending or, to the Companys Knowledge,
threatened against the Company, any of its Subsidiaries or
against any Person whose liability for any Environmental Claim
the Company or any of its Subsidiaries have contractually
retained or assumed. In addition, there has been no past or
present release, emission, discharge, presence or disposal of
any Material of Environmental Concern, that would reasonably be
expected to form the basis of any material Environmental Claim
against the Company, any of its Subsidiaries or against any
Person whose liability for any Environmental Claim the Company
or any of its Subsidiaries have contractually retained or
assumed, or otherwise result in any material costs or
liabilities under Environmental Laws.
(c) Environmental Information. The
Company has provided to Parent all material assessments,
reports, data, results of investigations or audits that are in
the possession or control of or reasonably available to the
Company or its Subsidiaries regarding environmental matters
pertaining to or the environmental condition of the business of
the Company and its Subsidiaries, or the compliance (or
noncompliance) by the Company and its Subsidiaries with any
Environmental Laws.
(d) Environmental
Obligations. Neither the Company nor any of
its Subsidiaries is required under any Environmental Law by
virtue of the transactions set forth herein and contemplated
hereby or as a condition to the effectiveness of any
transactions contemplated hereby, (i) to perform a site
assessment for Materials of Environmental Concern, (ii) to
remove or remediate Materials of Environmental Concern,
(iii) to give notice to or receive approval from any
Governmental Entity or (iv) to record or deliver to any
Person any disclosure document or statement pertaining to
environmental matters.
3.13 Brokers and Finders
Fees. Except for fees payable to SunTrust
Robinson Humphrey pursuant to an engagement letter dated
June 9, 2006, as amended on November 16, 2006 by that
certain letter from SunTrust Robinson Humphrey dated
November 15, 2006, a copy of which has been provided to
Parent, neither
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the Company nor any of its Subsidiaries has incurred, nor will
it incur, directly or indirectly, any liability for brokerage or
finders fees or agents commissions, fees related to
investment banking or similar advisory services or any similar
charges in connection with this Agreement or any transaction
contemplated hereby. Except as set forth on Section 3.13(a)
of the Company Disclosure Schedule, none of the Company or any
of its Subsidiaries has entered into any indemnification
agreement or arrangement with any Person specifically in
connection with this Agreement and the transactions contemplated
hereby except as provided for in the engagement letter described
above. Section 3.13(b) of the Company Disclosure Schedule
sets forth an itemized good faith estimate of the fees and
expenses of any accountant, broker, financial advisor,
consultant, legal counsel or other Person retained by the
Company or any of its Subsidiaries expected to be incurred by
the Company or any of its Subsidiaries in connection with the
negotiation and effectuation of the terms and conditions of this
Agreement and the transactions contemplated hereby.
3.14 Transactions with
Affiliates. Except as set forth in the
Company SEC Reports, since the date of the Companys last
proxy statement filed with the SEC, no event has occurred as of
the date hereof that would be required to be reported by the
Company pursuant to Item 404 (Certain Relationships and
Related Transactions) of
Regulation S-K
promulgated by the SEC.
3.15 Employee Benefit Plans and
Compensation.
(a) Definitions. For all purposes
of this Agreement, the following terms shall have the following
respective meanings:
Company Employee Plan shall mean any plan,
program, policy, practice, contract, agreement or other
arrangement providing for compensation, severance, termination
pay, deferred compensation, performance awards, stock or
equity-related awards, welfare benefits, retirement benefits,
fringe benefits or other employee benefits or remuneration of
any kind, whether written, unwritten or otherwise, funded or
unfunded, including each employee benefit plan,
within the meaning of Section 3(3) of ERISA which is or has
been, maintained, contributed to, or required to be contributed
to, by the Company, any of its Subsidiaries or any ERISA
Affiliate for the benefit of any Employee/Service Provider, or
with respect to which the Company, any of its Subsidiaries or
any ERISA Affiliate has or may have any liability or obligation.
COBRA shall mean the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended.
DOL shall mean the United States Department
of Labor.
Employee/Service Provider shall mean any
current or former employee, including officers, agents,
employee-agents, consultant (but not including any entity
consultant that is not an alter ego for a natural person
consultant), independent contractor or director of the Company,
any of its Subsidiaries or any ERISA Affiliate, excluding
consultants and independent contractors who are not individuals.
Employee Agreement shall mean each
management, employment, severance, separation, employee
settlement, consulting, contractor, change of control, benefits,
compensation, relocation, repatriation, expatriation, loan,
visa, work permit or other agreement, or contract (including,
any offer letter, any agreement providing for acceleration of
Company Options or any other agreement providing for
compensation or benefits) between the Company, any of its
Subsidiaries or any ERISA Affiliate and any director or any
Employee/Service Provider pursuant to which the Company or any
of its Subsidiaries has or may have any current or future
liabilities or obligations.
ERISA shall mean the Employee Retirement
Income Security Act of 1974, as amended.
ERISA Affiliate shall mean any other Person
under common control with the Company or any of its Subsidiaries
within the meaning of Section 414(b), (c), (m) or
(o) of the Code, and the regulations issued thereunder.
HIPAA shall mean the Health Insurance
Portability and Accountability Act of 1996, as amended.
IRS shall mean the United States Internal
Revenue Service.
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Pension Plan shall mean each Company Employee
Plan that is an employee pension benefit plan,
within the meaning of Section 3(2) of ERISA.
WARN shall mean the Worker Adjustment and
Retraining Notification Act of 1988, as amended.
(b) Schedule. Section 3.15(b)(i)
of the Company Disclosure Schedule contains an accurate and
complete list of each Company Employee Plan and each Employee
Agreement. Section 3.15(b)(ii) of the Company Disclosure
Schedule sets forth a table setting forth the salary of each
employee of the Company and each of its Subsidiaries whose base
salary currently exceeds $100,000 per year as of the date
hereof. The Company has provided Parent a separate list of the
names of such employees. To the Companys Knowledge, no
employee listed on Section 3.15(b)(ii) of the Company
Disclosure Schedule intends to terminate his or her employment
for any reason. Section 3.15(b)(iii) of the Company
Disclosure Schedule contains an accurate and complete list of
all Persons that have a consulting or advisory relationship with
the Company or any of its Subsidiaries that is subject to
ongoing obligations that could reasonably be expected to exceed
$100,000 per year, excluding those corporations,
partnerships, limited liability companies and other entities
that are owned or controlled, directly or indirectly, by third
parties who are not otherwise employees, officers, consultants
or directors of the Company.
(c) Documents. The Company and
each of its Subsidiaries have delivered to Parent
(i) correct and complete copies of all documents embodying
each Company Employee Plan and each Employee Agreement including
all amendments thereto and all related trust documents,
(ii) the three most recent annual reports
(Form Series 5500 and all schedules and financial
statements attached thereto), if any, required under ERISA or
the Code in connection with each Company Employee Plan,
(iii) if the Company Employee Plan is funded, the most
recent annual and periodic accounting of Company Employee Plan
assets, (iv) the most recent summary plan description
together with the summary(ies) of material modifications
thereto, if any, required under ERISA with respect to each
Company Employee Plan, (v) all material written agreements
and contracts relating to each Company Employee Plan, including
administrative service agreements and group insurance contracts,
(vi) all communications material to any Employee/Service
Provider or Employees/Service Providers relating to any Company
Employee Plan or any proposed Company Employee Plan, in each
case, relating to any amendments, terminations, establishments,
increases or decreases in benefits, acceleration of payments or
vesting schedules or other events which could result in any
liability to the Company or any of its Subsidiaries,
(vii) all material correspondence to or from any
Governmental Entity relating to any Company Employee Plan,
(viii) forms of COBRA notices and related outsourcing
contracts, (ix) all policies pertaining to fiduciary
liability insurance covering the fiduciaries for each Company
Employee Plan, (x) all discrimination tests for each
Company Employee Plan for the three most recent plan years,
(xi) all registration statements, annual reports
(Form 11-K
and all attachments thereto) and prospectuses prepared in
connection with each Company Employee Plan, (xii) forms of
HIPAA Privacy Notices and forms of Business Associate Agreements
to the extent required under HIPAA and (xiii) the most
recent IRS determination or opinion letter issued with respect
to each Company Employee Plan.
(d) Employee Plan Compliance. The
Company Employee Plans are in, and have been administered in,
compliance with all applicable requirements of ERISA, the Code,
and other applicable Laws in all material respects and have been
administered in accordance with their terms. Each Company
Employee Plan that is intended to be qualified within the
meaning of Section 401 of the Code has received a current
favorable determination letter as to its qualification, and, to
the Companys Knowledge, nothing has occurred that could
reasonably be expected to adversely affect such qualification.
No prohibited transaction, within the meaning of
Section 4975 of the Code or Sections 406 and 407 of
ERISA, and not otherwise exempt under Section 408 of ERISA,
has occurred with respect to any Company Employee Plan. The
Company and each of its Subsidiaries have timely made all
contributions and other payments required by and due under the
terms of each Company Employee Plan. Neither the Company nor any
Subsidiary is party to any contract, agreement or arrangement
that is a nonqualified deferred compensation plan
subject to Section 409A of the Code.
(e) Claims.
(i) There are no pending or, to the Companys
Knowledge, threatened actions, suits, charges, complaints,
claims or investigations against, concerning or with respect to
any Company Employee Plans, other than
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ordinary and usual claims for benefits by participants and
beneficiaries. Each Company Employee Plan can be amended,
terminated or otherwise discontinued after the Effective Time in
accordance with its terms, without liability to Parent, the
Company, any of its Subsidiaries or any ERISA Affiliate (other
than ordinary administration expenses or with respect to
benefits previously earned, vested or accrued thereunder).
(ii) There are no audits, inquiries, investigations or
other proceedings of any nature pending or to the Companys
Knowledge, threatened by the IRS, DOL, or any other Governmental
Entity with respect to any Company Employee Plan. Neither the
Company, any of its Subsidiaries nor any ERISA Affiliate is
subject to any penalty or Tax with respect to any Company
Employee Plan under Section 502(i) of ERISA or
Sections 4975 through 4980 (including 4980B) of the Code.
(f) No Pension Plan. Neither the
Company, nor any of its Subsidiaries nor any current or former
ERISA Affiliate has ever maintained, established, sponsored,
participated in or contributed to, any Pension Plan subject to
Part 3 of Subtitle B of Title I of ERISA,
Title IV of ERISA or Section 412 of the Code.
(g) No Self-Insured Plan. Except
as described in Section 3.15(g) of the Company Disclosure
Schedule, neither the Company, nor any of its Subsidiaries nor
any ERISA Affiliate has ever maintained, established, sponsored,
participated in or contributed to any self-insured plan that
provides benefits to Employees/Service Providers (including any
such plan pursuant to which a stop-loss policy or contract
applies).
(h) Effect of Transaction; Parachute Payments;
Executive Compensation Tax. Except as set
forth in Section 3.15(h) of the Company Disclosure
Schedule, no Company Employee Plan exists that, as a result of
the execution of this Agreement, shareholder approval of this
Agreement, or the transactions contemplated by this Agreement
(whether alone or in connection with any subsequent event(s)),
will entitle any Employee/Service Provider to
(i) compensation or benefits or any increase in
compensation or benefits upon any termination of employment
after the date of this Agreement, (ii) accelerate the time
of payment or vesting or result in any payment or funding
(through a grantor trust or otherwise) of compensation or
benefits under, increase the amount payable or result in any
other material obligation pursuant to, any of the Company
Employee Plans, (iii) limit or restrict the right of the
Company to merge, amend or terminate any of the Company Employee
Plans, (iv) cause the Company to record additional
compensation expense on its income statement with respect to any
outstanding stock option or other equity-based award, or
(v) result in payments under any of the Company Employee
Plans that would not be deductible under Sections 280G of
the Code. Except as set forth in Section 3.15(h) of the
Company Disclosure Schedule, there is no agreement, plan,
arrangement or other contract covering any Employee/Service
Provider that, considered individually or considered
collectively with any other such agreements, plans, arrangements
or other contracts, will, or could reasonably be expected to,
give rise directly or indirectly to the payment of any amount
that would be characterized as a parachute payment
within the meaning of Section 280G(b)(2) of the Code.
Except as set forth in Section 3.15(h) of the Company
Disclosure Schedule, there is no contract, agreement, plan or
arrangement to which the Company or any of its Subsidiaries is a
party, including the provisions of this Agreement, covering any
Employee/Service Provider of the Company or any of its
Subsidiaries, which, individually or collectively, could give
rise to the payment of any amount that would not be deductible
pursuant to Sections 404 or 162(m) of the Code.
(i) Employment Matters. The
Company and each of its Subsidiaries are and have been in
compliance in all material respects with all applicable Laws
respecting employment, employment practices, terms and
conditions of employment, employment discrimination, employee
safety and health, classification of Employees/Service
Providers, immigration, employee whistleblowing, plant closures
and layoffs, employee leave issues, loans or advances to
employees, disability rights or benefits, affirmative action,
employee privacy and wages and hours, and in each case, with
respect to Employees/Service Providers (i) are not liable
for any arrears of wages, severance pay (except as set forth in
Section 3.15(i) of the Company Disclosure Schedule) or any
Taxes or any penalty for failure to comply with any of the
foregoing and (ii) are not liable for any payment to any
trust or other fund governed by or maintained by or on behalf of
any Governmental Entity, with respect to unemployment
compensation benefits, social security or other benefits or
obligations for Employees/Service Providers (other than routine
payments to be made in the normal course of business and
consistent with past practice), except as would not reasonably
be expected to result in material liability. Except
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as set forth in Section 3.15(i) of the Company Disclosure
Schedule, there are no actions, grievances, investigations,
complaints, suits, claims, charges or administrative matters
pending, or, to the Companys Knowledge, threatened or
reasonably anticipated against the Company, any of its
Subsidiaries, or any of their Employees/Service Providers
relating to any Employee/Service Provider, Employee Agreement or
Company Employee Plan. There are no pending or, to the
Companys Knowledge, threatened or reasonably anticipated
claims or actions against the Company, any of its Subsidiaries,
any Company trustee or any trustee of any Subsidiary under any
workers compensation policy or long-term disability
policy. Except as set forth in Section 3.15(i) of the
Company Disclosure Schedule, the services provided by each of
the Companys, each of the Companys Subsidiarys
and each of their respective ERISA Affiliates current
employees based in the United States are terminable at the will
of the Company, the Companys Subsidiary or their
respective ERISA Affiliates. No employee of the Company or any
of the Companys Subsidiaries is based outside of the
United States.
(j) No Post-Employment
Obligations. No Company Employee Plan or
Employee Agreement provides post-termination or retiree life
insurance, health or other employee welfare benefits to any
person for any reason, except as may be required by COBRA or
other applicable statute, and neither the Company nor any of its
Subsidiaries has ever represented, promised or contracted
(whether in oral or written form) to any Employee/Service
Provider (either individually or to Employees/Service Providers
as a group) or any other Person that such Employee(s)/Service
Provider(s) or other Person would be provided with
post-termination or retiree life insurance, health or other
employee welfare benefits, except to the extent required by
statute or as set forth in Section 3.15(j) of the Company
Disclosure Schedule.
(k) No Violation of Employment
Obligations. To the Companys Knowledge,
no employee of the Company or any of its Subsidiaries is in
material violation of any term of any employment agreement,
nondisclosure agreement, common law nondisclosure obligation,
fiduciary duty or other legal duty under any Law,
non-competition agreement, restrictive covenant or other
obligation to a former employer of any such employee relating
(i) to the right of any such employee to be employed by
such Company or any of its Subsidiaries or (ii) to the
knowledge or use of trade secrets or proprietary information.
(l) No Plans to Terminate
Employment. Except for such officers that
have entered into the Executive Agreements, to the
Companys Knowledge, no current officer or key employee of
the Company or any of its Subsidiaries intends to terminate his
or her employment, whether on account of the transactions
contemplated by this Agreement or for any other reason.
(m) Labor. No work stoppage,
slowdown, lockout or labor strike against the Company or any of
its Subsidiaries is pending or, to the Companys Knowledge,
threatened as of the date of this Agreement, nor has there been
any such occurrence for the past three (3) years. To the
Companys Knowledge, there are no activities or proceedings
by any labor union to organize any Employees/Service Providers.
Except as would not reasonably be expected to result in a
material liability or obligation, there are no actions, suits,
claims, labor disputes or grievances pending or, to the
Companys Knowledge, threatened by or on behalf of any
Employee/Service Provider against the Company or its
Subsidiaries, including charges of unfair labor practices.
Neither the Company nor any of its Subsidiaries is presently,
nor has it been in the past, a party to, or bound by, any
collective bargaining agreement or union contract with respect
to Employees/Service Providers, and no collective bargaining
agreement is being negotiated as of the date of this Agreement
by the Company or any of its Subsidiaries. Within the past year,
neither the Company nor any of its Subsidiaries has incurred any
liability or obligation under WARN or any similar state or local
Law that remains unsatisfied, and no terminations prior to the
Closing Date shall result in unsatisfied liability or obligation
under WARN or any similar state or local Law.
Section 3.15(m) of the Company Disclosure Schedule contains
a true and complete list of the names and the sites of
employment or facilities of any such employees who suffered an
employment loss (as defined in the WARN Act or any
similar state, local or foreign Law) at any site of employment
or facility of the Company or any of its Subsidiaries during the
ninety (90)-day period ending on the date of this Agreement.
Section 3.15(m) of the Company Disclosure Schedule shall be
updated immediately prior to the Closing Date with respect to
the ninety (90)-day period ending on the Closing Date.
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3.16 Contracts.
(a) Material Contracts. For
purposes of this Agreement, Company Material
Contract shall mean any of the following to which the
Company or any of its Subsidiaries is a party or by which it or
its assets are bound and which is in effect on the date hereof:
(i) any material contract (as such term is
defined in Item 601(b)(10) of
Regulation S-K
of the SEC) with respect to the Company and its Subsidiaries;
(ii) any Contract or series of related Contracts which
(x) requires aggregate future expenditures by the Company
and its Subsidiaries (in the aggregate) in excess of $250,000 or
which is reasonably expected to result in payments to the
Company or any of its Subsidiaries (in the aggregate) in excess
of $250,000, (y) relates to the disposition or acquisition
by the Company or any of its Subsidiaries of assets for
consideration in excess of $250,000 or any interest in excess of
$250,000 in any other Person or business enterprise, in each
case, other than in the ordinary course of business and
(z) concerns a partnership, joint venture, joint
development, merger, acquisition, tender offer, exchange offer
or similar arrangement with one or more Persons;
(iii) any employment, contractor or consulting Contract
with any executive officer or other Employee/Service Provider of
the Company or any of its Subsidiaries providing for annual
compensation in excess of $100,000 or member of the
Companys board of directors, other than those that are
terminable by the Company or any of its Subsidiaries on no more
than thirty (30) days notice without liability or financial
obligation to the Company or any of its Subsidiaries, or any
collective bargaining agreement or contract with any labor union
or other employee organization;
(iv) any agreement of indemnification or any guaranty
(other than (1) guarantees by the Company of obligations of
any of its wholly-owned direct or indirect Subsidiaries or
(2) any such agreement or guarantee entered into in the
ordinary course of business of the Company and its Subsidiaries);
(v) any Contract and any Company Employee Plan or Employee
Agreement, any of the benefits of which will be increased, or
the vesting of benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this
Agreement (either alone or upon the occurrence of additional or
subsequent events) or the value of any of the benefits of which
will be calculated on the basis of any of the transactions
contemplated by this Agreement (either alone or upon the
occurrence of additional or subsequent events);
(vi) any Lease Document in respect of real property leased,
licensed or subleased by the Company or any of its Subsidiaries
with a square footage equal to or in excess of 2,000 square
feet;
(vii) any Contract required to be disclosed pursuant to
Section 3.14 or 3.22;
(viii) any hedging, futures, options or other derivative
Contract;
(ix) any mortgages, indentures, guarantees, loans or credit
agreements, security agreements or other Contracts relating to
the borrowing of money or extension of credit in excess of
$250,000, other than accounts receivable and payable in the
ordinary course of business;
(x) any settlement agreement which contains continuing
material obligations of the Company or any of its Subsidiaries;
(xi) any Contract or group of related Contracts with a
Person (or group of affiliated Persons), the termination or
breach of which could reasonably be expected to have a Material
Adverse Effect on the Company; or
(xii) any Contract pursuant to which the Company is
obligated to reimburse any expenses incurred by a Person in
connection with an Acquisition Proposal other than the expense
reimbursement agreement dated November 15, 2006 (the
Expense Reimbursement Agreement), by and between the
Company and an Affiliate of Parent in respect of the
reimbursement of expenses incurred by any Affiliates of Parent
in connection with the Merger as more fully set forth therein.
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(b) Schedule.
Section 3.16(b) of the Company Disclosure Schedule sets
forth a list of all Company Material Contracts to which the
Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound or by which any of
their respective properties is bound or affected as of the date
hereof.
(c) No Breach. All Company
Material Contracts are valid and in full force and effect except
to the extent they have previously expired in accordance with
their terms or if the failure to be in full force and effect,
individually or in the aggregate, would not reasonably be
expected to be material to the Company and its Subsidiaries,
taken as a whole. Neither the Company nor any of its
Subsidiaries have violated any provision of, or committed or
failed to perform any act which, with or without notice, lapse
of time or both would constitute a default under the provisions
of, any Company Material Contract, except in each case for those
violations and defaults which, individually or in the aggregate,
would not reasonably be expected to be material to the Company
and its Subsidiaries, taken as a whole.
3.17 Information in the Proxy
Statement. None of the information supplied
or to be supplied by or on behalf of the Company for inclusion
or incorporation by reference in the preliminary and definitive
proxy statements to be filed by the Company with the SEC in
connection with the Merger (collectively, the Proxy
Statement) will, on each relevant filing date, on the date
of mailing to the Companys shareholders and at the time of
the Shareholders Meeting, contain any untrue statement of
a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are
made, not misleading. The Proxy Statement will comply as to form
in all material respects with the provisions of the Exchange Act
and the rules and regulations promulgated thereunder. If at any
time prior to the Effective Time any event relating to the
Company or any of its Affiliates, officers or directors should
be discovered by the Company which is required to be set forth
in a supplement to the Proxy Statement, the Company shall
promptly inform Parent. Notwithstanding the foregoing, the
Company makes no representation or warranty with respect to any
information supplied by or on behalf of Parent or Merger Sub for
inclusion or incorporation by reference in the Proxy Statement.
3.18 Fairness Opinion. The
Company has received the written opinion of SunTrust Robinson
Humphrey dated the date hereof, to the effect that, as of such
date, the Merger Consideration is fair to the Companys
shareholders, other than shareholders that are
(i) affiliates of Parent or (ii) the Continuing
Investors, from a financial point of view, and a copy of such
opinion has been delivered to Parent and Merger Sub. The Company
has been authorized by SunTrust Robinson Humphrey to permit the
inclusion of such opinion in its entirety in the Proxy Statement.
3.19 Takeover Statutes. The
board of directors of the Company has taken all actions so that
any restrictions contained in Chapter 103 of Title 48
of Tennessee Law will not apply to Parent or Merger Sub,
including the execution, delivery or performance of this
Agreement and the consummation of the Merger and the other
transactions contemplated hereby.
3.20 Board Approval. The
Companys board of directors, at a meeting duly called and
held at which all Directors were present, has unanimously
(i) duly and validly approved and taken all corporate
action required to be taken by the Companys board of
directors to authorize the consummation of the Merger and the
transactions contemplated hereby, (ii) resolved that the
Merger is fair to, and in the best interests of, the Company and
its shareholders and declared the Merger to be advisable, and
(iii) resolved to recommend that the shareholders of the
Company approve this Agreement and the transactions contemplated
hereby, and directed that such matter be submitted to the
Companys shareholders at the Shareholders Meeting.
None of the aforesaid actions by the Company board of directors
has been amended, rescinded or modified.
3.21 Insurance Matters.
(a) Authorization; Policy Forms;
Rates. Each Insurance Subsidiary is
(i) duly licensed or authorized as an insurance company in
its jurisdiction of incorporation, (ii) duly licensed or
authorized, or otherwise eligible to act, as an insurance
company in each other jurisdiction where it is required to be so
licensed, authorized or eligible, and (iii) duly licensed,
authorized or eligible in its jurisdiction of incorporation and
each other applicable jurisdiction to write each line of
business reported as being written in the Statutory Statements.
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Each jurisdiction in which any Insurance Subsidiary is licensed
or authorized under (i) through (iii) of the foregoing
sentence is set forth on Section 3.21(a)(1) of the Company
Disclosure Schedule. Except as set forth on
Section 3.21(a)(2) of the Company Disclosure Schedule, to
the extent required by Law, each Insurance Contract issued or
distributed by any Insurance Subsidiary in any jurisdiction
since January 1, 2003, is, to the extent required by Law,
on a form approved by the applicable Insurance Departments or
has been filed and not objected to by such Insurance Departments
within the period provided for objection, and such form complies
in all material respects with applicable Laws. Any premium
rates, to the extent required by Law, with respect to Insurance
Contracts currently issued by the Company or any Insurance
Subsidiary which are required to be filed with or approved by
any Governmental Entity have been so filed or comply in all
material respects with applicable Laws, and such premiums
charged thereon conform thereto.
(b) Underwriting Management and Administration
Agreements. All underwriting management
and/or
administration agreements entered into by the Company and any
Insurance Subsidiary as now in force are, to the extent required
by Law, in forms acceptable in all material respects to the
applicable Insurance Departments (or have been submitted for
approval which is pending, or have been filed and not objected
to by such Insurance Departments within the period provided for
objection).
(c) Reinsurance and Retrocession.
(i) Each reinsurance contract, treaty or arrangement
(including any facilitative agreements, indemnity agreements, or
terminated or expired treaty or agreement under which there
remains any outstanding material liability with respect to paid
or unpaid case reserves regarding ceding or assumption of
reinsurance, coinsurance, excess insurance, or retrocessions)
(Reinsurance Contracts) to which any Insurance
Subsidiary is a party or by or to which any of them are bound or
subject, as each such Reinsurance Contract may have been
amended, modified or supplemented is a valid and binding
obligation of the parties thereto, is in full force and effect
and is enforceable in accordance with its terms, and each such
Reinsurance Contract is listed on Section 3.21(c) of the
Company Disclosure Schedule. Neither any Insurance Subsidiary
nor, to the Companys Knowledge, any other party thereto is
in default in any material respect with respect to any such
Reinsurance Contract. There are no material disputes as to
reinsurance or retrocessional coverage pending or, to the
Companys Knowledge, threatened with respect to any such
Reinsurance Contract.
(ii) Each Insurance Subsidiary is entitled under applicable
Law to take full credit in its Statutory Statements for all
amounts recoverable by it pursuant to any Reinsurance Contract,
and all such amounts recoverable have been properly recorded in
the books and records of account of the Company and its
Insurance Subsidiaries and are properly reflected in the
Statutory Statements. To the Companys Knowledge, all such
amounts recoverable by the Company or any of its Insurance
Subsidiaries are fully collectible in due course. Neither the
Company nor any of its Insurance Subsidiaries has received
notice that any other party to any Reinsurance Contracts intends
not to perform under any such Reinsurance Contracts, and, to the
Companys Knowledge, the financial condition of each other
party to each Reinsurance Contract pursuant to which any
Insurance Subsidiary has ceded any premiums is not impaired to
the extent that a default thereunder is reasonably anticipated.
(d) Insurance Ratings. As of the
date of this Agreement, three of the Companys property and
casualty Insurance Subsidiaries have been assigned a
B insurer financial strength rating with a positive
outlook by A. M. Best Co. In addition, one of the
Companys property and casualty Insurance Subsidiaries has
been assigned a B insurer financial strength rating
with a stable outlook by A. M. Best Co. Except as set forth on
Section 3.21(d) of the Company Disclosure Schedule, since
December 31, 2005 the Company has not been downgraded and,
to the Knowledge of the Company as of the date of this
Agreement, A. M. Best Co. has not indicated that it intends to
lower its rating or put the Company on an under
review status.
(e) Agents and Brokers. Except as
set forth on Section 3.21(e) of the Company Disclosure
Schedule, no single agent, broker, intermediary, manager or
producer employed or engaged by the Company or any of its
Subsidiaries (Producer) generated more than one
percent (1%) of the aggregate gross written premium of the
Company or any of its Insurance Subsidiaries during either of
the years ended December 31, 2004 or December 31,
2005. To the Companys Knowledge, except as set forth in
Schedule 3.21(e) of the Company
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Disclosure Schedule, each Producer complies in all material
respects with applicable Laws regarding such Producers
authority to engage in the type of insurance activities in which
such Producer is engaged and each Producer is duly licensed
(including, without limitation, the marketing, sale or issuance
of any Insurance Contracts) in each jurisdiction in which such
Producer places or sells Insurance Contracts on behalf of the
Company
and/or any
of its Insurance Subsidiaries, and each such Producer is duly
authorized and appointed by the applicable Insurance Subsidiary
pursuant to applicable Laws in all material respects. All
contracts between any Producer, on the one hand, and the Company
or any Insurance Subsidiary, on the other hand, are in
compliance in all material respects with all applicable Laws. To
the Companys Knowledge, no Producer or Producers who
individually accounted for more than one percent (1%) of the
aggregate gross written premiums of the Company or its Insurance
Subsidiaries during the year ended December 31, 2005, or in
the aggregate accounted for more than five percent (5%) of the
aggregate gross premium during the year ended December 31,
2005, have given or been given written notice of termination or,
to the Companys Knowledge, threatened or been threatened
with termination, or threatened or been threatened with a
substantial reduction in the amount of premiums to be written by
such Person on behalf of the Company or its Insurance
Subsidiaries. There is no dispute material to the Company
pending or, to the Companys Knowledge, threatened against
the Company or any of its Subsidiaries by any Producer.
(f) Finite Risk Insurance or
Reinsurance. Except as set forth in
Section 3.21(f) of the Company Disclosure Schedule, none of
the Company or any of its Subsidiaries is currently or has ever
been a party to a Finite Insurance Agreement. Except as set
forth in Section 3.21(f) of the Company Disclosure
Schedule, none of the Company or any of its Subsidiaries is now
or has ever been a party to any Reinsurance Contract that would
under any circumstances reduce, limit, mitigate or otherwise
affect any actual or potential loss to the parties under the
Reinsurance Contract, other than the inuring contracts that are
explicitly defined in such Reinsurance Contract. As used herein,
the term Finite Insurance Agreement means any
contract of financial reinsurance, finite risk insurance or
reinsurance contracts (or multiple contracts with the same
reinsurer or its affiliates) that include any of the following
features:
(i) Features that limit the amount of insurance risk that
is transferred to the reinsurer, including: (1) a limited
or conditional cancellation provision under which cancellation
triggers the obligation by the Company or any of its
Subsidiaries or an affiliate of the Company or any of its
Subsidiaries, to enter into a new reinsurance contract with the
reinsurer, or an affiliate of the reinsurer; (2) a contract
term longer than two (2) years when the contract is
non-cancelable by the Company or any of its Subsidiaries during
the contract term; (3) an unconditional unilateral right by
either party to commute the reinsurance contract; or
(4) aggregate stop loss reinsurance coverage.
(ii) Features that result in a delayed or untimely
reimbursement of claims by the reinsurer, including:
(1) reporting of losses less frequently than on a quarterly
basis; or (2) a payment schedule accumulating retentions
from multiple years.
(iii) Risks ceded during the period covered by a financial
statement and either (1) accounted for by the ceding entity
as reinsurance under SAP and as a deposit under GAAP, or as
reinsurance under GAAP and as a deposit under SAP.
(g) Agreements with Regulators.
Except as set forth in Schedule 3.21(g) of the Company
Disclosure Schedule, neither the Company nor any of its
Subsidiaries is a party to any written agreement, consent decree
or memorandum of understanding with, or a party to any
commitment letter or similar undertaking to, or is subject to
any
cease-and-desist
or other order or directive by, or has adopted any policies,
procedures or board resolutions at the request of, any
Governmental Entity which restricts the conduct of the business
of Company or any of its Subsidiaries, or relates to the
Companys or any of its Subsidiaries capital adequacy
or risk management policies, nor has the Company or any of its
Subsidiaries been advised in writing by any Governmental Entity
that it is contemplating any such undertakings.
3.22 Restrictions on Business
Activities. Except as set forth in
Section 3.22 of the Company Disclosure Schedule, neither
the Company nor any of its Subsidiaries is party to or bound by
any Contract containing any covenant limiting in any material
respect the right of the Company or any of its Subsidiaries to
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engage or compete in any line of business, to make use of any
material Company Intellectual Property or to compete with any
Person.
3.23 Books and Records. The
minute books of the Company and each Subsidiary contain, in all
material respects, complete and accurate records of all meetings
and other corporate actions of their respective shareholders and
the board of directors and committees thereof. Except as set
forth in Section 3.23(a) of the Company Disclosure
Schedule, the Company, in all material respects, has made
available to Parent true and complete copies of (a) the
Company Governing Documents, (b) the Subsidiary Governing
Documents (c) all minute books (containing the records of
meetings of shareholders, the board of directors and any
committees of the board of directors to date) of each of the
Company and each Subsidiary, (c) all stock certificate and
stock record books of the Company and each Subsidiary except to
the extent such records are maintained by the Companys
outside transfer agent and registrar and (d) any similar
records or documents of each of the Company and each Subsidiary.
Except as set forth in Section 3.23(b) of the Company
Disclosure Schedule, the Company does not have any prior names,
and since the date of its incorporation and has not conducted
business under any name other than the current name of the
Company and its Subsidiaries.
ARTICLE IV
REPRESENTATIONS
AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub represent and warrant to the Company,
subject to the exceptions specifically disclosed in writing in
the disclosure schedule (referencing the appropriate section or
subsection without cross references, such that any information
set forth in one section of the disclosure schedule shall not be
deemed to apply to any other section or subsection thereof)
supplied by the Company to Parent dated as of the date hereof
(the Parent Disclosure Schedule), as follows:
4.1 Organization;
Capitalization. Merger Sub is a wholly-owned
direct subsidiary of Parent. Each of Parent and Merger Sub is a
corporation duly organized, validly existing and in good
standing under the Laws of the jurisdiction in which it is
organized, except for such failures as could not reasonably be
expected to adversely effect the ability of any of them to
consummate the transactions contemplated hereby. Parent has
delivered to the Company a true and correct copy of the charter
and bylaws, each as amended to the date of this Agreement, of
Merger Sub, and such charter and bylaws contain such provisions
regarding exculpation, indemnification and advancement of
expenses as required by Section 6.10(a) hereof. The
authorized capital stock of Parent consists of
1,000,000 shares of common stock, par value $0.01 per
share (Parent Common Stock). Other than in
connection with the equity financing as described on
Section 4.1 of the Parent Disclosure Schedule (the
Equity Financing), and pursuant to
Section 6.11(b), Parent is not obligated to issue, deliver
or sell any shares of Parent Common Stock or any security,
option, warrant, call, right, commitment, agreement, instrument
or arrangement by its terms convertible into or exchangeable for
any shares of Parent Common Stock.
4.2 Authority; No Conflict; Necessary
Consents.
(a) Authority. Each of Parent and
Merger Sub has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery by each of
Parent and Merger Sub of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Parent and
Merger Sub and no other action is required on the part of Parent
or Merger Sub to authorize the execution and delivery of this
Agreement or to consummate the Merger and the other transactions
contemplated hereby, subject only to the filing of the Articles
of Merger with the Secretary of State of the State of Tennessee
in accordance with applicable provisions of Tennessee Law. This
Agreement has been duly executed and delivered by Parent and
Merger Sub and, assuming due execution and delivery of this
Agreement by the Company, constitutes the valid and binding
obligations of Parent and Merger Sub, enforceable against each
of Parent and Merger Sub in accordance with its terms, subject
to applicable bankruptcy, insolvency, reorganization, moratorium
or other Laws relating to or affecting the rights and remedies
of creditors generally and to general principles of equity.
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(b) No Conflict. The execution
and delivery by Parent and Merger Sub of this Agreement and the
consummation of the transactions contemplated hereby will not
(i) conflict with or violate any provision of their
respective certificates of incorporation or bylaws,
(ii) subject to compliance with the requirements set forth
in Section 4.2(c), conflict with or violate any material
Laws applicable to Parent or Merger Sub or by which Parent or
Merger Sub or any of their respective properties or assets
(whether tangible or intangible) is bound or affected or
(iii) result in any breach of or constitute a default (or
an event that with notice or lapse of time or both would become
a default) under, or materially impair Parents or Merger
Subs rights or, to the Knowledge of Parent or Merger Sub,
alter the rights or obligations of any third party under, or
give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a
Lien on any of the properties or assets of Parent or Merger Sub
pursuant to, any material contract of Parent or Merger Sub;
except, in the case of each of the preceding clauses (i),
(ii) and (iii), for any conflict, violation, beach,
default, impairment, alteration, giving of rights or Lien which
would not materially adversely affect the ability of the parties
hereto to consummate the Merger within the time frame in which
the Merger would otherwise be consummated in the absence of such
conflict, violation, beach, default, impairment, alteration,
giving of rights or Lien.
(c) Necessary Consents. No
consent, approval, order, authorization, registration,
declaration or filing with any Governmental Entity, or any third
party, is required to be made or obtained by Parent or Merger
Sub in connection with the execution and delivery of this
Agreement by Parent and Merger Sub or the consummation of the
Merger and the transactions contemplated hereby, except for
(i) the Necessary Consents and (ii) such consents,
waivers, approvals, orders, authorizations, registrations,
declarations and filings which, if not obtained or made, would
not materially adversely affect the ability of Parent and Merger
Sub to consummate the Merger within the time frame in which the
Merger would otherwise be consummated in the absence of the need
for such consent, approval, order, authorization, registration,
declaration or filing.
4.3 Financing. The
financing of the transactions contemplated hereby will consist
of a combination of Equity Financing and debt financing (which
includes (x) amending the Premium Facility to allow the
Merger and the transactions contemplated in connection therewith
and (y) funds loaned to the Company upon the Closing) (the
Debt Financing, and together with the Equity
Financing, the Financing). Section 4.3 of the
Parent Disclosure Schedule sets forth true, accurate and
complete copies of executed commitment letters and amendment to
the Premium Facility (the Financing Commitments)
pursuant to which, and subject to the terms and conditions
thereof, the parties thereto have committed to provide Parent
with the Financing. As of the date hereof, the Financing
Commitments are in full force and effect and have not been
withdrawn or terminated or otherwise amended or modified in any
respect. Each of the Financing Commitments, in the form so
delivered, is a legal, valid and binding obligation of Parent
and, to the Knowledge of Parent and Merger Sub, the other
parties thereto. No event has occurred which, with or without
notice, lapse of time or both, would constitute a default or
breach on the part of Parent or Merger Sub under any term or
condition of the Financing Commitments. Parent
and/or
Merger Sub have fully paid any and all commitment fees or other
fees required by the Financing Commitments to be paid on or
before the date of this Agreement. The proceeds from the
Financing as contemplated by the Financing Commitments, together
with cash on hand of the Company and its Subsidiaries
anticipated to be available at the Effective Time, constitute
all of the financing required to be provided by Parent for the
consummation of the transactions contemplated hereby, and are
sufficient for the satisfaction of all of Parents and
Merger Subs obligations under this Agreement, including
the payment of the Merger Consideration and the payment of all
associated costs and expenses (including any refinancing of
indebtedness of Parent or the Company required in connection
therewith). The Financing Commitments contain all of the
conditions precedent to the obligations of the parties
thereunder to make the Financing available to Parent on the
terms therein.
4.4 Information in Proxy
Statement. The information supplied or to be
supplied by or on behalf of Parent and Merger Sub in writing
expressly for inclusion or incorporation by reference in the
Proxy Statement will not contain, on the date of the mailing to
the Companys shareholders and at the time of the
Shareholders Meeting, any untrue statement of a material
fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not
misleading. If at any time prior to the Effective Time, any
event relating to Parent or any of its Affiliates,
A-29
officers or directors should be discovered by Parent which is
required to be set forth in a supplement to the Proxy Statement,
Parent shall promptly inform the Company. Notwithstanding the
foregoing, Parent makes no representation or warranty with
respect to any information supplied by or on behalf of the
Company which is contained in the Proxy Statement.
4.5 Interim Operations of Merger
Sub. Merger Sub was formed solely for the
purpose of consummating the Merger pursuant to Section 1.1
hereof and has not conducted and will not conduct any activities
other than the execution of this Agreement and the consummation
of the Merger.
ARTICLE V
CONDUCT
PRIOR TO THE EFFECTIVE TIME
5.1 Conduct of Business by the
Company.
(a) Ordinary Course. During the
period from the date hereof and continuing until the earlier of
the termination of this Agreement pursuant to its terms or the
Effective Time, the Company and each of its Subsidiaries shall,
except to the extent that an authorized officer of Parent shall
otherwise consent in writing, (i) carry on their business
in the usual, regular and ordinary course, in substantially the
same manner as heretofore conducted and in compliance with all
applicable Laws and regulations, (ii) pay their debts
(including, without limitation, Taxes) when due, pay or perform
other material obligations when due, (iii) file all reports
required to be filed by it with the SEC and (iv) use all
reasonable efforts consistent with past practice to
(x) preserve intact their present business organization,
(y) keep available the services of their present
Employees/Service Providers and (z) preserve their
relationships with customers, suppliers, licensors, licensees,
and others with which they have business dealings. In addition,
the Company shall promptly notify Parent in writing of any
occurrence of a Material Adverse Effect.
(b) Required Consent. Without
limiting the generality of Section 5.1(a), except as
provided in Section 5.1(b) of the Company Disclosure
Schedule, without the prior written consent of Parent, during
the period from the date hereof and continuing until the earlier
of the termination of this Agreement pursuant to its terms or
the Effective Time, the Company shall not do any of the
following, and shall not permit any of its Subsidiaries to do
any of the following:
(i) Enter into any new line of business;
(ii) Declare, set aside or pay any dividends on or make any
other distributions (whether in cash, stock, equity securities
or property) in respect of any capital stock or split, combine
or reclassify any capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in
substitution for any capital stock, other than any such
transaction between the Company or any wholly-owned direct or
indirect Subsidiary of the Company and the Company or any a
wholly-owned direct or indirect Subsidiary of the Company, as
the case may be, which wholly-owned direct or indirect
Subsidiary remains a wholly-owned direct or indirect Subsidiary
of the Company after consummation of such transaction, in the
ordinary course of business consistent with past practice;
(iii) Purchase, redeem or otherwise acquire, directly or
indirectly, any shares of its capital stock or the capital stock
of its Subsidiaries;
(iv) Issue, deliver, sell, authorize, pledge or otherwise
encumber any shares of capital stock, Voting Debt, other voting
securities or any securities convertible into shares of capital
stock, Voting Debt or other voting securities, or subscriptions,
rights (including stock appreciation rights whether settled in
cash or shares of Company Common Stock), warrants or options to
acquire any shares of capital stock, Voting Debt, other voting
securities or any securities convertible into shares of capital
stock, Voting Debt or other voting securities, enter into other
agreements or commitments of any character obligating it to
issue any such securities or rights, or grant any restricted
stock, restricted stock units, performance shares, performance
share units or other equity based awards other than:
(A) issuances of Company Common Stock upon the exercise of
Company Options existing on the date hereof in accordance with
their present terms or (B) the issuances of Company Common
Stock issuable upon the exercise, conversion or
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exchange of any other securities issued by the Company prior to
the date of this Agreement which securities are exercisable,
convertible or exchangeable into Company Common Stock;
(v) Cause, permit or propose any amendments to the Company
Governing Documents or adopt any amendments to any of the
Subsidiary Governing Documents of the Companys
Subsidiaries, except as necessary to comply with any law, rule,
regulation or requirement of any Governmental Entity;
(vi) Except for the Merger, acquire or agree to acquire by
merging or consolidating with, or by purchasing any equity or
voting interest in or any assets of, or by any other manner, any
business or any Person or division thereof;
(vii) Acquire or agree to acquire any assets that are
material, individually or in the aggregate, to the business of
the Company and its Subsidiaries, or in any event, for
consideration in excess of $250,000 in any one case or in the
aggregate or solicit or participate in any negotiations with
respect to the foregoing other than expenditures for the
remaining portion of fiscal year 2006 and any portion of fiscal
year 2007 prior to the Effective Time as provided for in the
Budget, provided that the Company shall not amend or
otherwise modify the Budget without Parents prior consent;
(viii) Enter into any agreement, agreement in principle,
letter of intent, memorandum of understanding or similar
agreement pursuant to which the Company or any of its
Subsidiaries is party to any joint venture or strategic
partnership;
(ix) Sell, lease, license, encumber or otherwise dispose of
any properties or assets that are material, individually or in
the aggregate, to the business of the Company and its
Subsidiaries except in the ordinary course of business and in a
manner consistent with past practice, or in any event, for
consideration in excess of $250,000 in any one case or in the
aggregate;
(x) Effect any material restructuring activities by the
Company or any of its Subsidiaries, including any material
reductions in force, lease terminations, restructuring of
contracts or similar actions;
(xi) Make any loans, extensions of credit or financing,
advances or capital contributions to, or investments in, or
grant extended payment terms to any other Person, other than:
(a) loans or investments by the Company or a wholly owned
Subsidiary of the Company to or in the Company or any wholly
owned Subsidiary of the Company, (b) subject to applicable
Law, employee loans or advances for travel and entertainment
expenses made in the ordinary course of business consistent with
past practice, (c) commercial loans or advances made in the
ordinary course of business and consistent with past practice or
(d) investments made in the ordinary course of business
consistent with past practice for the purposes of managing risk
and return and provided that any such investment shall
comply with the Companys investment guidelines, of or to
which Parent has been provided a copy or access before the date
hereof;
(xii) Except as required by concurrent changes in GAAP or
SAP, alter or amend in any material respect their existing
underwriting, claim handling, loss control, actuarial, financial
reporting or accounting practices, guidelines or policies or any
material assumption underlying an actuarial practice or policy;
(xiii) Fail to file, on a timely basis, including allowable
extensions, with the appropriate Governmental Entities or Tax
Authorities, all Tax Returns required to be filed by or with
respect to the Company and each of its Subsidiaries for taxable
years or periods ending on or before the Closing Date and due on
or prior to the Closing Date, or fail to timely pay or remit (or
cause to be paid or remitted) any Taxes due in respect of such
Tax Returns; provided that all such Tax Returns shall be
true, correct and complete, except for such Tax Returns or Taxes
that are not material to the Company and its Subsidiaries, taken
as a whole;
(xiv) (A) Amend any Tax Returns, make any election
relating to Taxes, change any election relating to Taxes already
made, adopt any accounting method relating to Taxes, change any
accounting method relating to Taxes unless required by a change
in the Code, or (B) settle, consent, enter into (or agree
to settle, consent or enter into) any closing agreement relating
to any Audit or consent to any waiver or
A-31
extension of the statutory period of limitations in respect of
any Audit, except for such Tax Returns, Taxes or Audits that are
not material to the Company and its Subsidiaries, taken as a
whole;
(xv) Cancel or terminate or allow to lapse without
reasonable substitute policy therefor, or amend in any material
respect or enter into, any material Company Insurance Policy,
other than the renewal of existing Company Insurance Policies on
substantially the same terms as in effect on the date hereof;
(xvi) Commence or settle any lawsuit, threat of any lawsuit
or material proceeding or other investigation by or against the
Company or any Subsidiary or relating to any of their
businesses, properties or assets, other than settlements
(A) with prejudice entered into in the ordinary course of
business and requiring of the Company and its Subsidiaries only
the payment of monetary damages not exceeding $250,000,
(B) involving ordinary course collection claims for
accounts receivable due and payable to the Company or
(C) entered into in the ordinary course of business in
response to routine state regulatory exams; provided,
however, neither the Company nor any of its Subsidiaries
shall be permitted to settle any lawsuit, threat of any lawsuit,
claim, proceeding or other investigation with respect to the
matters set forth in Section 5.1(b)(xvi) of the Company
Disclosure Schedule without the express written consent of
Parent;
(xvii) Except as required by Laws or Contracts currently
binding on the Company or any of its Subsidiaries,
(1) materially increase in any manner the amount of
compensation or pension, welfare or fringe benefits of, pay or
grant any bonus, change of control, severance or termination pay
to any Employee/Service Provider or director of the Company or
any Subsidiary of the Company other than any non-officer
employees in the ordinary course of business and consistent with
past practice, (2) adopt or amend any Company Employee Plan
or make any contribution, other than regularly scheduled
contributions, to any Company Employee Plan, (3) waive any
stock repurchase rights, accelerate, amend or change the period
of vesting or exercisability of Company Options, or reprice any
Company Options or authorize cash payments in exchange for any
Company Options other than as contemplated hereby in connection
with the Merger, or (4) enter into, modify or amend any
Employee Agreement or indemnification agreement with or on
behalf of any Employee/Service Provider (other than offer
letters and letter agreements entered into in the ordinary
course of business consistent with past practice with employees
who are terminable at will or modifications whereby
an Employee/Service Provider waives the right to acceleration,
or agrees to the cancellation of, any Company Option or other
award) or (5) enter into any collective bargaining
agreement;
(xviii) Provide any material refund, credit, rebate or
other allowance to any customer or sales agent, in each case,
other than in the ordinary course of business consistent with
past practice or except as required to comply with any law rule,
regulation or Governmental Entity, or except to remedy any error
that resulted in an overcharge requiring a refund;
(xix) Enter into any Contracts containing, or otherwise
subjecting the Surviving Corporation or Parent to, any
non-competition, exclusivity or other material restrictions on
the Company or the Surviving Corporation or Parent, or any of
their respective businesses, following the Closing, except such
Contracts entered into with vendors in the ordinary course of
business and consistent with past practice that have standard
non-competition clauses or restrictions;
(xx) Hire any non-executive officer employees other than in
the ordinary course of business consistent with past practice or
hire, elect or appoint any executive officers;
(xxi) Incur any indebtedness for borrowed money or
guarantee any indebtedness of another Person in excess of
$250,000 in the aggregate, issue or sell any debt securities or
options, warrants, calls or other rights to acquire any debt
securities of the Company or any of its Subsidiaries, guarantee
any debt securities of another Person, enter into any keep
well or other agreement to maintain any financial
statement condition of any other Person or enter into any
arrangement having the economic effect of any of the foregoing,
other than (a) the financing of ordinary-course trade
payables consistent with past practice, (b) in connection
with borrowings or repayments with respect to Credit Facilities
in the ordinary
A-32
course of business and consistent with past practice or
(c) Company or Subsidiary guarantees of Company or
Subsidiary obligations;
(xxii) (A) Enter into any agreement to purchase or
sell any interest in real property or grant any security
interest in any real property, or (B) enter into any lease,
sublease, license or other occupancy agreement with respect to
any real property or alter, amend, modify or terminate any of
the terms of any Lease Document, other than the opening and
closing of sales offices in the ordinary course of business;
(xxiii) Enter into, modify or amend in a manner adverse in
any material respect to the Company or any of its Subsidiaries,
or terminate, any Company Material Contract, or waive, release
or assign any material rights or claims thereunder, in each
case, in a manner adverse in any material respect to the Company
or any of its Subsidiaries;
(xxiv) Enter into, modify or amend any material
reinsurance, coinsurance, modified coinsurance or any similar
Contract (including any surplus relief or financial reinsurance
contract), whether as reinsurer or reinsured;
(xxv) Except in the ordinary course of business consistent
with past practice, enter into any Contract that relates to or
otherwise affects any material Intellectual Property or material
Intellectual Property rights of the Company and its Subsidiaries;
(xxvi) Dispose of, grant, transfer, or obtain, or permit to
lapse any rights to, any Intellectual Property or Intellectual
Property rights, except as necessary in the ordinary course of
business consistent with past practice, or dispose of or
disclose to any Person, other than representatives of Parent,
any trade secrets; or
(xxvii) Take, commit, or agree (in writing or otherwise) or
announce the intention to take, any of the actions described in
this Section 5.1(b), or take any other action that could
reasonably be expected to result in any of the conditions to the
Merger set forth in Article VII not to be satisfied.
5.2 Assistance with
Financing.
(a) Parent shall use its reasonable best efforts to obtain
the Financing on the terms and conditions described in the
Financing Commitments (provided that Parent and Merger Sub may
replace or amend the Financing Commitments to add lenders, lead
arrangers, bookrunners, syndication agents or similar entities
who had not executed the Financing Commitments as of the date
hereof, so long as any such amendment or replacement does not
adversely affect the ability of Parent to consummate the
transactions contemplated by this Agreement without unreasonable
delay) including using its reasonable best efforts to
(i) negotiate the Financing Agreements on the terms and
conditions contained in the Financing Commitments and
(ii) reasonably satisfy on a timely basis all conditions
applicable to Parent in the Financing Agreements. If any portion
of the Financing becomes unavailable in the manner or from the
sources contemplated in the Financing Commitments, Parent shall
promptly notify the Company and shall use its reasonable best
efforts to arrange to obtain any such portion from alternative
sources; provided, that Parent shall not be
required to obtain the Financing, giving effect to the portion
obtained from alternative sources, (i) on terms, which are,
taken as a whole, materially less advantageous to Parent or
(ii) on economic terms less advantageous to Parent in any
event, in each case, than those of the Financing contemplated by
the Financing Commitments (taking into account any market flex
provisions thereof).
(b) The Company shall, and shall cause its Subsidiaries and
its and their representatives to, reasonably cooperate in
connection with the arrangement of the Financing as may be
requested by Parent (provided that such requested cooperation
does not unreasonably interfere with the ongoing operations of
the Company and its Subsidiaries). Such cooperation by the
Company shall include, at the reasonable request of Parent and
if reasonably necessary to obtain the Financing or obtain any
portion thereof from alternative sources pursuant to
subsection (a) above, (i) agreeing to enter into
such agreements, and to use reasonable best efforts to deliver
such officers certificates and opinions, as are customary
in financings of such type and as are, in the good faith
determination of the persons executing such officers
certificates or opinions, accurate, and agreeing to pledge,
grant security interests in, and otherwise grant liens on, the
Companys assets pursuant to such agreements as may be
reasonably requested (provided that no obligation of the Company
under any such
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agreement, pledge or grant shall be effective until the
Effective Time), (ii) participating in meetings, drafting
sessions, due diligence sessions, management presentation
sessions, road shows and sessions with rating
agencies, (iii) using commercially reasonable efforts to
prepare or participate in the preparation of business
projections and financial statements for inclusion in offering
memoranda, private placement memoranda, prospectuses and similar
documents, (iv) instructing its independent accountants to
provide reasonable assistance to Parent (including to provide
consent to Parent to prepare and use their audit reports
relating to the Company and any necessary comfort
letters in connection with the Financing) and
(v) providing to the lenders specified in the Financing
Commitments financial and other information in the
Companys possession with respect to the Merger, making the
Companys senior officers available to assist the lenders
specified in the Financing Commitments and otherwise reasonably
cooperating in connection with the consummation of the
Financing; provided, however, that none of the
Company or any of its Subsidiaries shall be required to pay any
commitment or other similar fee or incur any other cost or
expense that is not simultaneously reimbursed by Parent in
connection with the Financing prior to the Effective Time.
Parent shall, promptly upon request by the Company, reimburse
the Company for all reasonable and documented
out-of-pocket
costs incurred by the Company or any of its Subsidiaries in
connection with such cooperation and shall indemnify and hold
harmless the Company, its Subsidiaries and their respective
representatives for and against any and all losses suffered or
incurred by them in connection with the arrangement of the Debt
Financing and any information utilized in connection therewith
(other than information provided by the Company or its
Subsidiaries).
ARTICLE VI
ADDITIONAL
AGREEMENTS
6.1 Proxy Statement. As
promptly as reasonably practicable after the execution of this
Agreement, the Company, in consultation with Parent, will
prepare and file with the SEC preliminary proxy materials that
will constitute the Proxy Statement. As promptly as reasonably
practicable after any comments are received from the SEC thereon
(or upon notice from the SEC that no such comments will be
made), the Company shall, in consultation with Parent, prepare
and file any required amendments to, and the definitive, Proxy
Statement with the SEC. The Company will notify Parent promptly
upon the receipt of any comments from the SEC or its staff in
connection with the filing of, or amendments or supplements to,
the Proxy Statement and shall supply Parent with copies of all
correspondence between the Company or any of its
representatives, on the one hand, and the SEC, or its staff or
any other government officials, on the other hand, with respect
to the Proxy Statement. Whenever any event occurs which is
required to be set forth in an amendment or supplement to the
Proxy Statement, the Company will promptly inform Parent of such
occurrence and will, in consultation with Parent, file with the
SEC or its staff,
and/or mail
to shareholders of the Company, such amendment or supplement.
The Company shall provide Parent (and its counsel) with a
reasonable opportunity to review and comment on the preliminary
Proxy Statement and any amendment or supplement thereto prior to
filing such with the SEC, and will provide Parent with a copy of
all such filings made with the SEC. The Company will cause the
Proxy Statement to be mailed to its shareholders at the earliest
practicable time after the definitive Proxy Statement is filed
with the SEC.
6.2 Meeting of Company Shareholders; Board
Recommendation.
(a) Meeting of Company
Shareholders. The Company will take all
action necessary in accordance with Tennessee Law and the
Company Governing Documents to call, hold, convene and complete
a meeting of its shareholders, promptly following the mailing of
the Proxy Statement to such shareholders, to consider approval
of this Agreement and the transactions contemplated hereby (the
Shareholders Meeting) to be held as promptly
as reasonably practicable, and in any event (to the extent
permissible under applicable Law) within forty-five
(45) days after the mailing of the Proxy Statement to the
Companys shareholders. Subject to Section 6.3(d), the
Company will use all reasonable efforts to solicit from its
shareholders proxies in favor of the approval of this Agreement
and the transactions contemplated hereby and will take all other
action necessary or advisable to secure the vote or approval of
its shareholders required by the rules of the Nasdaq Global
Select Market or Tennessee Law or any other applicable Laws to
obtain such approvals. Notwithstanding anything to the contrary
contained in this Agreement, the Company may adjourn or postpone
the
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Shareholders Meeting (x) to the extent necessary to
ensure that any necessary supplement or amendment to the Proxy
Statement is provided to its shareholders in advance of a vote
on such approval or (y) if as of the time for which the
Shareholders Meeting is originally scheduled (as set forth
in the Proxy Statement), there are insufficient shares of
Company Common Stock represented (either in person or by proxy)
to constitute a quorum necessary to conduct the business of such
Shareholders Meeting. The Company shall ensure that the
Shareholders Meeting is called, noticed, convened, held
and conducted, and that all proxies solicited by it in
connection with the Shareholders Meeting are solicited in
compliance with Tennessee Law, the Company Governing Documents,
the rules of the Nasdaq Global Select Market and all other
applicable Laws.
(b) Board Recommendation. Except
to the extent expressly permitted by Section 6.3(d):
(i) the board of directors of the Company shall unanimously
recommend (the Recommendation) that the
Companys shareholders vote to approve this Agreement and
the transactions contemplated hereby at the Shareholders
Meeting; (ii) the Proxy Statement shall include a statement
to the effect that the board of directors of the Company has
unanimously recommended that the Companys shareholders
vote to approve this Agreement and the transactions contemplated
hereby at the Shareholders Meeting; and (iii) neither
the board of directors of the Company nor any committee thereof
shall withdraw, amend or modify, or propose or resolve to
withdraw, amend or modify in a manner adverse to Parent, the
Recommendation.
6.3 Acquisition Proposals.
(a) No Solicitation. The Company
agrees that none of the Company, any of its Subsidiaries or any
of the Companys or any of its Subsidiaries
employees, officers or directors shall, and that it shall use
all reasonable efforts to cause the Companys and its
Subsidiaries employees, agents and representatives
(including any investment banker, attorney or accountant
retained by the Company or any of its Subsidiaries) not to (and
shall not authorize or permit any of them to), directly or
indirectly: (i) solicit, initiate, encourage, facilitate or
induce any inquiry with respect to, or the making, submission or
announcement of, any Acquisition Proposal; (ii) participate
or engage in any discussions or negotiations regarding, or
furnish to any Person any nonpublic information with respect to,
or take any other action to facilitate or encourage any
inquiries or the making of any proposal that constitutes or
could reasonably be expected to lead to, any Acquisition
Proposal; (iii) approve, endorse, recommend or make or
authorize any statement, recommendation or solicitation in
support of any Acquisition Proposal; (iv) withdraw, amend
or modify, or propose to withdraw, amend or modify the
Recommendation; or (v) execute or enter into, or propose to
execute or enter into, any letter of intent or similar document
or any contract, agreement or commitment contemplating or
otherwise relating to any Acquisition Proposal or transaction
contemplated thereby, except in the case of clauses (ii),
(iii), (iv) or (v) to the extent specifically
permitted pursuant to Sections 6.3(c) or 6.3(d). The
Company and its Subsidiaries will immediately cease and cause to
be terminated any and all existing activities, discussions or
negotiations (including, without limitation, any such
activities, discussions or negotiations conducted by affiliates,
directors, officers, employees, agents and representatives
(including any investment banker, financial advisor, attorney,
accountant or other representative) of the Company or any of its
Subsidiaries) with any third parties conducted heretofore with
respect to consideration of any Acquisition Proposal. The
Company will, within two (2) days after the date hereof,
exercise any rights under any confidentiality or non-disclosure
agreements with any such third parties to require the return or
destruction of non-public information provided by the Company,
its Subsidiaries or their agents and representatives to any such
third parties.
(b) Notification of Unsolicited Acquisition
Proposals. As promptly as practicable after
receipt of any (x) Acquisition Proposal, (y) request
for nonpublic information or (z) inquiry (A) that
could reasonably be expected to lead to an Acquisition Proposal
or (B) from any Person seeking to have discussions or
negotiations with the Company relating to a possible Acquisition
Proposal, the Company shall provide Parent with notice of such
Acquisition Proposal, request or inquiry, including:
(i) the material terms and conditions of such Acquisition
Proposal, request or inquiry; (ii) the identity of the
Person or group making any such Acquisition Proposal, request or
inquiry; and (iii) a copy of all written materials and a
written summary of all oral information provided by or on behalf
of such Person or group in connection with such Acquisition
Proposal, request or inquiry. The Company shall provide Parent
with 48 hours prior notice (or such lesser prior notice as
is provided to the members of the Companys board of
directors) of any meeting of the Companys board of
directors at which the Companys board of directors could
reasonably be expected to consider any Acquisition
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Proposal or any such inquiry or to consider providing nonpublic
information to any Person. The Company shall notify Parent, in
writing, of any decision of the Companys board of
directors as to whether to consider such Acquisition Proposal,
request or inquiry or to enter into discussions or negotiations
concerning any Acquisition Proposal or to provide nonpublic
information or data to any Person, which notice shall be given
as promptly as practicable after such meeting. The Company
agrees that it shall promptly provide Parent with oral and
written notice setting forth all such information as is
reasonably necessary to keep Parent currently informed in all
material respects of the status and material terms of any such
Acquisition Proposal, request or inquiry (including any
negotiations contemplated by Section 6.3(c)) and shall
promptly provide Parent a copy of all written materials and a
written summary of all oral information subsequently provided
to, by or on behalf of such Person or group in connection with
such Acquisition Proposal, request or inquiry.
(c) Superior Offers.
Notwithstanding anything to the contrary contained in
Section 6.3(a), in the event that the Company receives
prior to the approval of this Agreement by the shareholders of
the Company in accordance with applicable Law an unsolicited,
bona fide written Acquisition Proposal from a third party that
did not result from a breach of this Section 6.3 and that
the Companys board of directors has in good faith
concluded, after consultation with its outside legal counsel and
its financial advisor, that such Acquisition Proposal is, or is
reasonably likely to result in, a Superior Offer, the Company
may then (1) furnish nonpublic information to the third
party making such Acquisition Proposal and (2) engage in
negotiations with the third party with respect to such
Acquisition Proposal; provided that:
(i) the Company complies with all of the terms of this
Section 6.3;
(ii) prior to furnishing any nonpublic information or
entering into any negotiations or discussions with such third
party, (1) the Company receives from such third party an
executed confidentiality and standstill agreement containing
customary limitations on the use and disclosure of all nonpublic
written and oral information furnished to such third party on
the Companys behalf in substantially the form of the
Confidentiality Agreement and, in any event, no less restrictive
to such third party than the Confidentiality Agreement is with
respect to Parent, and (2) contemporaneously with
furnishing any such nonpublic information to such third party,
the Company furnishes such nonpublic information to Parent (to
the extent such nonpublic information has not been previously so
furnished); and
(iii) the board of directors of the Company reasonably
determines in good faith, after consultation with outside legal
counsel, that the failure to provide such information or enter
into such discussion or negotiations would result in a breach of
the board of directors fiduciary duties to the
shareholders of the Company under applicable Law.
(d) Change of Recommendation.
Notwithstanding anything to the contrary contained in
Section 6.3(a), (x) the board of directors of the
Company may withhold, withdraw, amend or modify its
Recommendation, and, in the case of a Superior Offer that is a
tender or exchange offer made directly to the shareholders of
the Company, may recommend that the shareholders of the Company
accept the tender or exchange offer (any of the foregoing
actions, whether by the board of directors of the Company or a
committee thereof, a Change of Recommendation),
(y) the board of directors of the Company, the Company or
its Subsidiaries (including each of their respective directors,
officers, employees, agents or other representatives) may
approve, endorse, or recommend a Superior Offer, and
(z) the Company may, after payment of the Termination Fee
pursuant to Section 8.3(b), terminate this Agreement
pursuant to Section 8.1(h) and the Company or any of its
Subsidiaries may concurrently with such termination execute or
enter into a binding definitive agreement with respect to a
Superior Offer, if and only if, prior to any such action
described in clauses (x), (y) and (z) hereof, all
of the following conditions in clauses (i) through
(vi) are met:
(i) the board of directors of the Company determines in
good faith, after consultation with the Companys financial
advisors and outside legal counsel, that it may be required by
its fiduciary duties to do so;
(ii) the shareholders of the Company have not approved this
Agreement in accordance with applicable Law;
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(iii) the Company shall have delivered to Parent written
notice (a Change of Recommendation Notice) at least
five (5) Business Days prior to publicly effecting such
Change of Recommendation which shall state expressly (A), if
applicable, that the Company has received a Superior Offer, the
final terms and conditions of the Superior Offer and the
identity of the Person or group making the Superior Offer,
(B) that the Company intends to effect a Change of
Recommendation and (C) if applicable, that the Company
intends to terminate this Agreement pursuant to
Section 8.1(h);
(iv) after delivering the Change of Recommendation Notice,
the Company shall (A) provide Parent with a reasonable
opportunity to make such adjustments in the terms and conditions
of this Agreement during such five (5) Business Day period
and (B) negotiate in good faith with respect thereto during
such five (5) Business Day period, in each case as would
enable the Company to proceed with the Recommendation without
making a Change of Recommendation;
(v) the board of directors of the Company shall have
determined after considering the terms of the Merger (as they
may be adjusted pursuant to paragraph (iv) above),
after consultation with the Companys financial advisor and
outside legal counsel, that it is required by its fiduciary
duties to do so; and
(vi) the Company shall not have breached any of the
provisions set forth in Section 6.2 or this
Section 6.3.
(e) Compliance with Disclosure
Obligations. Nothing contained in this
Agreement shall prohibit the Company or its board of directors
from complying with
Rules 14a-9
(False or Misleading Statements),
14d-9
(Recommendation or Solicitation by the Subject Company and
Others) and
14e-2(a)
(Position of Subject Company) promulgated under the Exchange
Act; provided, however, that the content of any
such disclosure thereunder shall be governed by the terms of
this Agreement. Without limiting the foregoing, the Company
shall not effect a Change of Recommendation unless specifically
permitted pursuant to the terms of Section 6.3(d).
(f) State Takeover Statutes and Company Rights
Plan. The board of directors of the Company
shall not, in connection with any Change of Recommendation, take
any action to change the approval of the board of directors of
the Company for purposes of causing any state takeover statute
or other state Law to be applicable to or triggered by the
transactions contemplated hereby. For the avoidance of doubt,
this Section 6.3(f) shall not prohibit the Company from
effecting a Change of Recommendation under the circumstances and
subject to the conditions set forth in this Section 6.3.
(g) Continuing Obligation to Call, Hold and Convene
Shareholders Meeting; No Other Vote.
Notwithstanding anything to the contrary contained in this
Agreement, the obligation of the Company to call, give notice
of, convene and hold the Shareholders Meeting shall not be
limited or otherwise affected by (A) the commencement,
disclosure, announcement or submission to it of any Acquisition
Proposal or (B) any Change of Recommendation. The Company
shall not submit to the vote of its shareholders any Acquisition
Proposal, or propose to do so, at any time prior to sixty
(60) days after the Shareholders Meeting.
(h) Certain Definitions. For
purposes of this Agreement, the following terms shall have the
following meanings:
(i) Acquisition Proposal, with respect
to the Company, shall mean any offer or proposal relating to any
transaction or series of related transactions involving:
(a) any purchase from any party or acquisition by any
Person or group (as defined under Section 13(d)
of the Exchange Act and the rules and regulations thereunder),
including the Company or any of its Subsidiaries, of more than a
ten percent (10%) interest in the total outstanding voting
securities of the Company or any of its Subsidiaries or any
tender offer or exchange offer that if consummated would result
in any Person or group beneficially owning ten percent (10%) or
more of the total outstanding voting securities of the Company
or any of its Subsidiaries, (b) any merger, consolidation,
business combination or similar transaction involving the
Company or any of its Subsidiaries, (c) any sale, lease
(other than in the ordinary course of business consistent with
past practice), exchange, transfer, license (other than in the
ordinary course of business consistent with past practice),
acquisition or disposition of more than ten percent (10%) of the
assets of the Company (including its Subsidiaries taken as a
whole), (d) any recapitalization, reclassification, share
A-37
repurchase, restructuring or similar transaction by the Company
or any of its Subsidiaries that if consummated would increase
the percentage interest of the total outstanding voting
securities of the Company or any of its Subsidiaries
beneficially owned by any Person or group or (e) any
liquidation or dissolution of the Company; provided,
however, that the transactions between Parent and the
Company contemplated by this Agreement shall not be deemed an
Acquisition Proposal); and
(ii) Superior Offer, with respect to the
Company, shall mean an unsolicited, bona fide written
Acquisition Proposal by a third party to acquire, directly or
indirectly, pursuant to a tender offer, exchange offer, merger,
consolidation or other business combination, all or
substantially all of the assets of the Company and its
Subsidiaries or all of the outstanding voting securities of the
Company as a result of which the shareholders of the Company
immediately preceding such transaction would hold less than
forty percent (40%) of the equity interests in the surviving or
resulting entity of such transaction and any direct or indirect
parent or subsidiary thereof, on terms that the board of
directors of the Company has in good faith concluded, after
consultation with its current financial advisor or another
financial advisor of nationally recognized reputation, taking
into account, among other things, all legal, financial,
regulatory and other aspects of the offer (including any terms
thereof relating to
break-up
fees, expense reimbursement and conditions to consummation) and
the Person making the offer, to be more favorable, from a
financial point of view, to the Companys shareholders (in
their capacities as shareholders) than the terms of the Merger
(which shall require that such Acquisition Proposal must provide
to the Companys shareholders (in their capacities as
shareholders) consideration with a value per share of Company
Common Stock that is greater than the Merger Consideration) and
is reasonably capable of being consummated on the terms so
proposed prior to the End Date and for which financing, to the
extent required, is then fully committed or reasonably
determined by the board of directors of the Company to be
available.
(i) Specific Performance. The
parties hereto agree that irreparable damage would occur in the
event that the provisions of this Section 6.3 were not
performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed by the parties
hereto that Parent shall be entitled to an immediate injunction
or injunctions, without the necessity of proving the inadequacy
of money damages as a remedy and without the necessity of
posting any bond or other security, to prevent breaches of the
provisions of this Section 6.3 and to enforce specifically
the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition
to any other remedy to which Parent may be entitled at law or in
equity. Without limiting the foregoing, it is understood that
any violation of the restrictions set forth above by any
officer, director, employee, agent, representative or affiliate
of the Company, acting within the scope of his or her
employment, or in his or her capacity as an officer, director or
shareholder, or otherwise at the direction of and on behalf of
the Company shall be deemed to be a breach of this Agreement by
the Company.
6.4 Confidentiality; Access to Information; No
Modification of Representations, Warranties or
Covenants.
(a) Confidentiality. The parties
acknowledge that the Company and Parent have previously executed
a confidentiality agreement, dated February 16, 2006 (the
Confidentiality Agreement), which Confidentiality
Agreement will continue in full force and effect in accordance
with its terms and each of Parent and the Company will hold, and
will cause its respective Representatives (as defined in the
Confidentiality Agreement) to hold and keep confidential, any
Information (as defined in the Confidentiality
Agreement) confidential in accordance with the terms of the
Confidentiality Agreement.
(b) Access to Information.
Subject to the Confidentiality Agreement and applicable Law, the
Company shall afford Parent and its accountants, counsel and
other representatives, reasonable access during normal business
hours to the properties, books, analysis, projections, plans,
systems, contracts, commitments, records, personnel offices and
other facilities of the Company and its Subsidiaries during the
period prior to the Effective Time to obtain all information
concerning the business of the Company and its Subsidiaries,
including the status of product development efforts, properties,
results of operations and personnel of the Company and its
Subsidiaries and use all reasonable efforts to make available at
all reasonable times during normal business hours to Parent and
its representatives, the appropriate individuals (including
management,
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personnel, attorneys, accountants and other professionals) for
discussion of the Company and its Subsidiaries business,
properties, prospects and personnel as Parent may reasonably
request. During such period, the Company shall (and shall cause
its Subsidiaries to), subject to any limitations imposed by Law
with respect to records of employees, furnish promptly to Parent
(a) a copy of each report, schedule, registration statement
and other document filed or received by it during such period
pursuant to the requirements of federal securities Laws and
(b) all other information concerning its business,
properties and personnel as Parent may reasonably request.
Without limitation of the foregoing, the Company agrees to
promptly provide to Parent and its accountants, counsel and
other advisors copies of such internal financial statements
(including Tax Returns and supporting documentation) as may be
reasonably requested. Any information obtained from the Company
or any of its Subsidiaries pursuant to the access contemplated
by this Section 6.4 shall be subject to the Confidentiality
Agreement.
(c) No Modification of Representations and Warranties
or Covenants. No information or knowledge
obtained in any investigation or notification pursuant to this
Section 6.4, Section 6.6, Section 6.7 or
otherwise shall affect or be deemed to modify any representation
or warranty contained herein, the covenants or agreements of the
parties hereto or the conditions to the obligations of the
parties hereto under this Agreement.
6.5 Public Disclosure.
Without limiting any other provision of this Agreement, Parent
and the Company will consult with each other before issuing, and
provide each other the opportunity to review and comment upon
and use all reasonable efforts to agree on any press release or
public statement with respect to this Agreement and the
transactions contemplated hereby, including the Merger, and will
not issue any such press release or make any such public
statement prior to such consultation and (to the extent
practicable) agreement, except as may be required by Law or any
requirement of the Nasdaq Global Select Market or any other
applicable national or regional securities exchange, market or
securities quotation system. The parties have agreed to the text
of the joint press release announcing the signing of this
Agreement.
6.6 Regulatory Filings; Reasonable Best
Efforts.
(a) Reasonable Best Efforts.
Subject to the express provisions of Section 6.2 and
Section 6.3 hereof and upon the terms and subject to the
conditions set forth herein, each of the parties agrees to use
all reasonable best efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, and to assist and
cooperate with the other parties in doing, all things necessary,
proper or advisable to consummate and make effective, in the
most expeditious manner practicable, the Merger and the other
transactions contemplated by this Agreement, including the
following: (i) the taking of all acts necessary to cause
the conditions precedent set forth in Article VII to be
satisfied; (ii) the obtaining of all necessary actions or
non-actions, waivers, consents, approvals, orders and
authorizations from Governmental Entities and the making of all
necessary registrations, declarations, submissions and filings
(including registrations, declarations, and filings with
Governmental Entities, if any) and the taking of all steps as
may be necessary to avoid any suit, claim, action, investigation
or proceeding by any Governmental Entity; (iii) the filing
of Notification and Report Forms with the FTC and the DOJ as and
in such form as required by the HSR Act; (iv) filings under
any other comparable pre-merger notification forms reasonably
determined by Parent to be required by the merger notification
or control Laws of any applicable jurisdiction; (v) the
filing of the necessary applications and notices to and
approvals and consents, if any, of the Insurance Departments and
Financing Departments in the states in which the Company or its
Subsidiaries are domiciled or where the conduct of their
business requires the approval by such departments of the
transactions contemplated hereby; (vi) any filings required
under the Securities Act, the Exchange Act, any applicable state
or securities or blue sky Laws and the securities
Laws of any foreign country, or any other Law relating to the
Merger; (vii) obtaining of all necessary consents,
approvals or waivers from third parties, (viii) the
defending of any suits, claims, actions, investigations or
proceedings, whether judicial or administrative, challenging
this Agreement or the consummation of the transactions
contemplated hereby; and (ix) the execution or delivery of
any additional instruments necessary to consummate the
transactions contemplated by, and to fully carry out the
purposes of, this Agreement. Each of Parent and the Company will
cause all documents that it is responsible for filing with any
Governmental Entity under this Section 6.6(a) to comply in
all material respects with all applicable Laws. Parent, Merger
Sub and the Company each shall promptly supply the other with
any information that may be required in
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order to effectuate any filings or application pursuant to this
Section 6.6(a). Without limiting the foregoing, the Company
and its board of directors shall, if any takeover statute or
similar Law is or becomes applicable to the Merger, this
Agreement or any of the transactions contemplated by this
Agreement, use reasonable best efforts to ensure that the Merger
and the other transactions contemplated by this Agreement may be
consummated as promptly as practicable on the terms contemplated
by this Agreement and otherwise to minimize the effect of such
Law on the Merger, this Agreement and the transactions
contemplated hereby. Notwithstanding the foregoing, in no event
shall this Section 6.6(a) require Parent or its Subsidiaries
(i) to (A) take any action that would be reasonably
expected to adversely affect Parent or its affiliates (other
than the Company) following the consummation of the Merger in
any material respect or (B) invest, contribute or loan
capital or assets to, or guarantee or pledge capital or assets
for the benefit of, the Insurance Subsidiaries; or
(ii) if it would or would reasonably be expected to have
(x) a Material Adverse Effect on the Company or (y) a
material adverse effect on the benefits, taken as a whole,
Parent reasonably expected to derive from the transactions
contemplated hereby, including the Merger, (A) sell,
divest, hold separate, or otherwise dispose of any of their or
of the Companys or any of its Subsidiaries
respective businesses, product lines or assets or
(B) conduct their or the Companys or any of its
Subsidiaries respective businesses in a specified manner; or
(iii) agree to take any of the actions set forth in the
immediately preceding clauses (i) or (ii) (the actions
set forth in the immediately preceding clauses (i) and
(ii) and in this clause (iii), individually and
collectively a Regulatory Material Adverse Effect).
The Company shall agree if, but solely if, requested by Parent
in writing to divest, hold separate or otherwise take or commit
to take any action with respect to the businesses, services or
assets of the Company or any of its Subsidiaries in furtherance
of this Section 6.6(a); provided, however,
that any such action shall be conditioned upon the consummation
of the Merger and other transactions contemplated hereby.
(b) Notification. Each of Parent,
Merger Sub and the Company will notify the others orally and in
writing upon the receipt of (i) any comments from any
officials of any Governmental Entity in connection with any
filings made pursuant hereto and (ii) any request by any
officials of any Governmental Entity for amendments or
supplements to any filings made pursuant to, or information
provided to comply in all material respects with, any Laws.
Whenever any event occurs that is required to be set forth in an
amendment or supplement to any filing made pursuant to
Section 6.6(a), Parent, Merger Sub or the Company, as the
case may be, will promptly inform the others of such occurrence
and cooperate in filing with the applicable Governmental Entity
such amendment or supplement.
(c) Advance Review. Each of
Parent, Merger Sub and the Company shall have the right to
review in advance with respect to all the information relating
to itself and its Subsidiaries, and each will consult with the
others in advance (in each case subject to applicable Laws
relating to the exchange of information) with respect to all the
information relating to the others and any of its or their
respective Subsidiaries, any information which appears in any
filing made with, or materials submitted to, any third party or
any Governmental Entity with respect to this Agreement or the
transactions contemplated hereby.
(d) Meetings. Each of Parent,
Merger Sub and the Company shall to the extent practicable
consult with the others prior to participating in any
substantive meeting, conference call, discussion or
communication, whether or not through representatives, with any
Governmental Entity in respect of any filings, submissions,
investigation or inquiry, with respect to this Agreement or the
transactions contemplated hereby.
(e) Status. Each of Parent,
Merger Sub and the Company shall keep the others apprised of the
status of matters relating to completion of the transactions
contemplated hereby, shall inform the others of the substance of
any material oral communications with any Governmental Entity
for which it was not practicable to have advance consultation or
participation and shall respond to inquiries and requests
received from any Governmental Entity or third party, in each
case with respect to this Agreement or the transactions
contemplated hereby as promptly as practicable. Without limiting
the rights of the parties in this Section 6.6, each of
Parent, Merger Sub and the Company shall furnish in advance to
the others copies of all
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correspondence, filings, submissions and written communications
between it or its representatives, on the one hand, and any
Governmental Entity, on the other hand, with respect to this
Agreement or the transactions contemplated hereby and consult
with the others on and reasonably take into account any
reasonable comments they may have to such correspondence,
filings, submissions and written communications prior to them
being made.
6.7 Notification of Certain
Matters.
(a) By the Company. The Company
shall promptly give oral and written notice to Parent and Merger
Sub of (i) any representation or warranty made by it
contained in this Agreement being or becoming untrue or
inaccurate, (ii) any failure of the Company to comply with
or satisfy in any material respect any covenant, condition or
agreement to be complied with or satisfied by it under this
Agreement or (iii) the occurrence or non-occurrence of any
event the occurrence or non-occurrence of which could reasonably
be expected to cause the failure of any conditions to the
obligations of Parent and Merger Sub under Section 7.2;
provided, however, that no such notification shall
affect the representations or warranties of the Company or the
conditions to the obligations of the parties under this
Agreement; provided, further, that the delivery of
any notice pursuant to this Section 6.7(a) shall not limit
or otherwise affect the remedies available hereunder.
(b) By Parent. Parent and Merger
Sub shall give prompt notice to the Company of (i) any
representation or warranty made by it contained in this
Agreement being or becoming untrue or inaccurate, (ii) any
failure of Parent to comply with or satisfy in any material
respect any covenant, condition or agreement to be complied with
or satisfied by it under this Agreement or (iii) the
occurrence or non-occurrence of any event the occurrence or
non-occurrence of which could reasonably be expected to cause
the failure of any conditions to the obligations of the Company
under Section 7.3; provided, however, that no
such notification shall affect the representations, warranties
of Parent and Merger Sub or the conditions to the obligations of
the parties under this Agreement; provided,
further, that the delivery of any notice pursuant to this
Section 6.7(b) shall not limit or otherwise affect the
remedies available hereunder.
6.8 Third-Party Consents.
As soon as practicable following the date hereof, the Company
will use commercially reasonable efforts to obtain such material
consents, waivers and approvals under any of its or its
Subsidiaries respective Contracts and Insurance Contracts,
including without limitation any Contracts related to the
Government Agreements and Development Bond Property, required to
be obtained in connection with the consummation of the
transactions contemplated hereby as may be reasonably requested
by Parent after consultation with the Company, including all
consents, waivers and approvals set forth in Section 3.3(b)
of the Company Disclosure Schedule and consents or landlord and
subtenant estoppel certificates, as applicable, with respect to
those Lease Documents listed in Section 3.3(b) of the
Company Disclosure Schedule. In connection with seeking such
consents, waivers, approvals and estoppel certificates, the
Company shall keep Parent informed of all material developments
and shall, at Parents request, include Parent in any
discussions or communications with any parties whose consent,
waiver, approval and estoppel certificates is sought hereunder.
Such consents, waivers, approvals and estoppel certificates
shall be in a form acceptable to Parent. In the event the Merger
does not close for any reason, Parent shall not have any
liability to the Company, its shareholders or any other Person
for any costs, claims, liabilities or damages resulting from the
Company seeking to obtain such consents, waivers, approvals and
estoppel certificates.
6.9 Employee Matters. For a
period commencing on the Effective Time and ending the first
anniversary of the Effective Time, or if sooner, the date the
applicable Employee/Service Providers employment or
service terminates with the Company or its Subsidiaries, as
applicable, Parent agrees to cause the Company and its
Subsidiaries to provide to the employees who remain employed
with the Company or any of its Subsidiaries from and following
the Effective Time, compensation and benefits that are in the
aggregate not materially less favorable than those provided by
the Company or such Subsidiary immediately prior to the
Effective Time, but not taking into account for purposes of
valuing benefits provided immediately prior to the Effective
Time, any stock options or other equity based compensation.
Nothing in this Agreement shall be construed to limit any rights
that any party may have to amend, modify or terminate any
Company Employee Plan or Employee Agreement.
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6.10 Indemnification.
(a) Indemnity. From and after the
Effective Time, the Surviving Corporation will fulfill and honor
in all respects the obligations of the Company pursuant to the
Company Governing Documents and the indemnification agreements
between the Company and its directors and officers in effect as
of the date hereof and listed in Section 6.10(a) of the
Company Disclosure Schedule (including, to the extent
indemnifiable thereunder, for acts or omissions occurring in
connection with the approval of this Agreement and the
consummation of the transactions contemplated hereby) (the
Indemnified Parties), subject to applicable Law. The
charter and bylaws of the Surviving Corporation will contain
provisions with respect to exculpation, indemnification and the
advancement of expenses that are at least as favorable to the
Indemnified Parties as those contained in the Company Governing
Documents as in effect on the date hereof, which provisions will
not, except as required by Law, be amended, repealed or
otherwise modified for a period of six (6) years from the
Effective Time in any manner that would adversely affect the
rights thereunder of Indemnified Parties.
(b) Insurance. For a period of
six (6) years after the Effective Time, Parent will cause
the Surviving Corporation to maintain directors and
officers liability insurance with one or more reputable
unaffiliated third-party insurers covering those persons who are
covered by the Companys directors and officers
liability insurance policy as of the date hereof for events
occurring prior to the Effective Time on terms and conditions
that are, in the aggregate, no less favorable to the insured
than those applicable to the current directors and officers of
the Company under policies maintained by the Company;
provided, however, that in no event will the
Surviving Corporation be required to expend in any one
(1) year in excess of two hundred twenty-five percent
(225%) of the annual premium currently paid by the Company for
such coverage (and to the extent annual premium would exceed two
hundred twenty-five percent (225%) of the annual premium
currently paid by the Company for such coverage, the Surviving
Corporation shall use all reasonable efforts to cause to be
maintained the maximum amount of coverage as is available for
such two hundred twenty-five percent (225%) of such annual
premium); and provided further, however,
that notwithstanding the foregoing, Parent may satisfy its
obligations under this Section 6.10(b) by purchasing a
tail policy under the Companys existing
directors and officers insurance policy which
(i) has an effective term of six (6) years from the
Effective Time, (ii) covers those persons who are currently
covered by the Companys directors and officers
insurance policy in effect as of the date hereof for actions and
omissions occurring on or prior to the Effective Time and
(iii) contains terms and conditions that are, in the
aggregate, no less favorable to the insured than those of the
Companys directors and officers insurance
policy in effect as of the date hereof.
(c) Third Party
Beneficiaries. This Section 6.10 is
intended to be for the benefit of, and shall be enforceable by
each of the Indemnified Parties and their respective heirs and
personal representatives and shall be binding on Parent and the
Surviving Corporation and their respective successors and
assigns. In the event Parent or the Surviving Corporation or its
successor or assign (i) consolidates with or merges into
any other Person and shall not be the continuing or surviving
corporation or entity in such consolidation or merger or
(ii) transfers all or substantially all of its properties
and assets to any Person, then, and in each case, proper
provision shall be made so that the successor and assign of
Parent or the Surviving Corporation, as the case may be, honor
the obligations set forth with respect to Parent or the
Surviving Corporation, as the case may be, in this
Section 6.10.
6.11 Company Options.
(a) Each Company Option other than any Assumed Option,
whether vested or unvested, that is outstanding immediately
prior to the Effective Time shall, as of the Effective Time, be
cancelled at the Effective Time in exchange for the right to
receive an amount in cash in U.S. dollars, equal to
(x) the total number of shares of Company Common Stock
subject to such Company Option multiplied by (y) the
excess, if any, of the amount of the Merger Consideration over
the per share exercise price of the Company Common Stock subject
to such Company Option, with the aggregate amount of such
payment rounded down to the nearest cent (the aggregate amount
of such cash hereinafter referred to as the Option
Consideration) less such amounts as are required to be
withheld or deducted in accordance with Section 2.2(e).
(b) Notwithstanding the terms of Section 6.11(a)
above, each Company Option that (i) is held by a Person
listed on 6.11(b) of the Parent Disclosure Schedule (each such
Person, a Continuing Investor), (ii) is
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outstanding and unexercised as of the Effective Time, and
(iii) has a per share exercise price greater than two
dollars and seventy-one cents ($2.71) (each, an Assumed
Option) shall not be treated pursuant to the terms of
Section 6.11(a) but instead, effective as of the Effective
Time, each Assumed Option, whether vested or unvested, shall, as
of the Effective Time, be cancelled at the Effective Time shall
cease to represent a right to acquire shares of Company Common
Stock at that time, and in exchange therefor, shall be converted
automatically into an option to purchase shares of Parent Common
Stock; provided, however, that (x) the number
of shares of Parent Common Stock purchasable upon the exercise
of such Assumed Option shall be equal to the number of shares of
Company Common Stock that were purchasable under such Assumed
Option immediately prior to the Effective Time multiplied by the
Exchange Ratio as defined below, rounded down to the
nearest whole share, and (y) the per share exercise price
of such Assumed Option shall be adjusted by dividing the per
share exercise price of such Assumed Option by the Exchange
Ratio, rounding up to the nearest whole cent and (z) except
as provided in this Section 6.11(b), and with respect only
to the vesting terms and conditions (which shall not be
accelerated as a result of the Merger) and the terms of the
Assumed Options, the Assumed Options shall be on the same terms
and conditions, regarding those matters as set forth in the
respective grant instruments evidencing the Assumed Options. For
the avoidance of doubt, in no event will any Company Option
assumed pursuant to this Section 6.11(b) be exchanged for
Option Consideration pursuant to Section 6.11(a) and
Company Options covered under Section 6.11(a) will not be
assumed pursuant to this Section 6.11(b). For purposes of
this Section 6.11(b), the Exchange Ratio shall
be equal to 0.02125
(c) The board of directors of the Company or the
compensation committee thereof, to the extent duly authorized,
shall make such adjustments and amendments to or make such
determinations with respect to the Company Options as may be
necessary or appropriate to implement the foregoing provisions
of this Section 6.11. If and to the extent necessary or
required by the terms of the Option Plans and any other plan,
program, agreement or arrangement or pursuant to the terms of
any Company Option granted thereunder, the Company shall use its
reasonable best efforts to obtain the necessary consents to
implement the foregoing provisions of this Section 6.11.
The board of directors of the Company or the compensation
committee thereof, to the extent duly authorized, shall take all
actions necessary or appropriate to terminate, as of the
Effective Time, the Option Plans and any other plan, program,
agreement or arrangement under which equity-based rights of the
Company have been granted.
(d) Notices. With respect to
matters described in this Section 6.11, the Company will
use all reasonable efforts to consult with Parent (and consider
in good faith the advice of Parent) prior to sending any notices
or other communication materials to its employees.
6.12 Section 16
Matters. Prior to the Effective Time, the
Company shall take all such steps as may be required or
appropriate (to the extent permitted under applicable Law) to
cause any dispositions of Company Common Stock (including
derivative securities with respect to Company Common Stock)
resulting from the transactions contemplated by Article I
of this Agreement by each individual who is subject to the
reporting requirements of Section 16(a) of the Exchange Act
with respect to the Company to be exempt under
Rule 16b-3
promulgated under the Exchange Act.
ARTICLE VII
CONDITIONS
TO THE MERGER
7.1 Conditions to the Obligations of Each Party
to Effect the Merger. The respective
obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing
Date of the following conditions:
(a) Company Shareholder Approval.
This Agreement and the transactions contemplated hereby shall
have been approved by the requisite vote under applicable Law,
by the shareholders of the Company.
(b) No Order. No Governmental
Entity of competent jurisdiction shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation,
executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) which (i) is in effect
and (ii) has the effect of making the Merger illegal or
otherwise prohibiting or preventing consummation of the Merger.
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(c) HSR Act. All waiting periods
(and any extension thereof) under the HSR Act relating to the
transactions contemplated hereby will have expired or terminated
early.
(d) Insurance Department and Finance Department
Approvals. The Company, Parent and each
Subsidiary of either of them shall have received and there shall
be in full force and effect all authorizations, consents and
approvals required from any Insurance Department or Financing
Department in the states in which the Company or its
Subsidiaries are domiciled or where the conduct of their
business requires the approval by such departments of the
transactions contemplated hereby, without any conditions or
restrictions attached thereto which, in the reasonable judgment
of Parent, would reasonably be expected to have a Regulatory
Material Adverse Effect.
7.2 Additional Conditions to the Obligations of
Parent and Merger Sub. The obligations of
Parent and Merger Sub to consummate and effect the Merger shall
be subject to the satisfaction at or prior to the Closing Date
of each of the following conditions, any of which may be waived,
in writing, exclusively by Parent and Merger Sub:
(a) Representations and
Warranties. The representations and
warranties of the Company contained in this Agreement shall have
been true and correct as of the date hereof and shall be true
and correct as of the Closing Date with the same force and
effect as if made on the Closing Date (except that those
representations and warranties which address matters only as of
a particular date shall have been true and correct only on such
date), except, in each case or in the aggregate as does not
constitute a Material Adverse Effect on the Company, other than
the representations and warranties of the Company contained in
Sections 3.1, 3.2, 3.3, 3.13 and 3.14, which shall be true
and correct in all material respects (it being understood that,
for purposes of determining the accuracy of the representations
and warranties of the Company, any materiality or Material
Adverse Effect qualifier and any update of or modification to
the Company Disclosure Schedule made or purported to have been
made after the execution of this Agreement shall be disregarded
unless expressly accepted in writing by Parent as an amendment
or modification to this Agreement).
(b) Agreements and Covenants. The
Company shall have performed or complied in all material
respects with all agreements and covenants required by this
Agreement to be performed or complied with by it at or prior to
the Closing Date.
(c) Material Adverse Effect. No
Effect that has or could reasonably be expected to have a
Material Adverse Effect on the Company shall have occurred since
the date hereof and be continuing.
(d) No Governmental Restriction.
There shall not be any pending or threatened suit, action or
proceeding asserted by any Governmental Entity challenging or
seeking to restrain or prohibit the consummation of the Merger
or any of the other transactions contemplated by this Agreement,
the effect of which restraint or prohibition if obtained would
cause the condition set forth in Section 7.1(b) to not be
satisfied.
(e) Officers Certificate.
Parent and Merger Sub shall have received a certificate dated as
of the Closing Date to the effect that each of the conditions
set forth in Sections 7.2(a), (b), (c) and
(d) have been satisfied signed on behalf of the Company by
an authorized executive officer of the Company.
(f) Debt Financing. Parent or
Merger Sub shall have received the proceeds of the Debt
Financing contemplated by the Financing Commitments on the terms
and conditions set forth therein (and, with respect to terms and
conditions not so set forth, on terms and conditions reasonably
acceptable to Parent) or proceeds in the same aggregate amount
as contemplated by the Debt Financing from other financing
sources as provided in Section 5.2(a).
7.3&