-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ACPEfbcAEAwvX762zDHITr8x6wxY424XIF+O30E2I723TMe6PIhATJIFwKW7rURv bfIZXrIEq+BJEiqi9WYZIw== 0000898822-01-500901.txt : 20020412 0000898822-01-500901.hdr.sgml : 20020412 ACCESSION NUMBER: 0000898822-01-500901 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20011130 GROUP MEMBERS: H&FEXECUTIVE FUND IV (BERMUDA), L.P. GROUP MEMBERS: H&FINTERNATIONAL PARTNERS IV-A (BERMUDA), L.P. GROUP MEMBERS: H&FINTERNATIONAL PARTNERS IV-B (BERMUDA), L.P. GROUP MEMBERS: H&FINVESTORS IV (BERMUDA), L.P. GROUP MEMBERS: HFCP IV (BERMUDA), L.P. SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: ARCH CAPITAL GROUP LTD CENTRAL INDEX KEY: 0000947484 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 061424716 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D SEC ACT: 1934 Act SEC FILE NUMBER: 005-45257 FILM NUMBER: 1804184 BUSINESS ADDRESS: STREET 1: 20 HORSENECK LANE CITY: GREENWICH STATE: CT ZIP: 06830 BUSINESS PHONE: 2038624300 MAIL ADDRESS: STREET 1: 20 HORSENECK LANE CITY: GREENWICH STATE: CT ZIP: 06830 FORMER COMPANY: FORMER CONFORMED NAME: RISK CAPITAL HOLDINGS INC DATE OF NAME CHANGE: 19950816 FORMER COMPANY: FORMER CONFORMED NAME: RISK CAPITAL RE INC DATE OF NAME CHANGE: 19950703 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: H&F CORP INVESTORS IV BERMUDA LTD CENTRAL INDEX KEY: 0001162958 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: D0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: WACHTELL LIPTON ROSEN & KATZ STREET 2: 51 WEST 52ND STREET CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2124031396 MAIL ADDRESS: STREET 1: ONE MARITIME PLAZA STREET 2: STE 1200 CITY: SAN FRANCISCO STATE: CA ZIP: 94111 SC 13D 1 hfschedule13d11-30.txt SCHEDULE 13D ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 13D UNDER THE SECURITIES EXCHANGE ACT OF 1934 ARCH CAPITAL GROUP LTD. ------------------------------------------ (Name of Issuer) COMMON SHARES, PAR VALUE $0.01 PER SHARE ------------------------------------------------ (Title of Class of Securities) 011576290 ----------------- (CUSIP Number) ------------------------------------------------------------------ RICHARD M. LEVINE, ESQ. HELLMAN & FRIEDMAN LLC ONE MARITIME PLAZA, SUITE 1200 SAN FRANCISCO, CALIFORNIA 94111 (415) 788-5111 ------------------------------------------------------------------ (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) WITH A COPY TO: PATRICIA A. VLAHAKIS, ESQ. WACHTELL, LIPTON, ROSEN & KATZ 51 WEST 52ND STREET NEW YORK, NEW YORK 10019 (212) 403-1000 NOVEMBER 20, 2001 ------------------------------------------------------------------ (Date of Event Which Requires Filing of This Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of ss.ss. 240.13d-1(e), 240.13d-1(f) or 240.13d-1(g), check the following box: [ ]. Page 1 of 18 Pages ================================================================================ - ----------------------- --------------------- CUSIP No. 011576290 SCHEDULE 13D Page 2 of 18 Pages - ----------------------- --------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS HFCP IV (BERMUDA), L.P. I.R.S. IDENTIFICATION NO. 94-3410224 - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY [ ] - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS WC - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e) [ ] - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION BERMUDA - -------------------------------------------------------------------------------- 7 SOLE VOTING POWER 9,376,497* NUMBER OF ------------------------------------------------------------------ 8 SHARES SHARED VOTING POWER -0- BENEFICIALLY ------------------------------------------------------------------ 9 OWNED BY SOLE DISPOSITIVE POWER 9,376,497* EACH ------------------------------------------------------------------ 10 REPORTING SHARED DISPOSITIVE POWER -0- PERSON WITH - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 9,376,497* - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ] - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 38.2%+ - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON PN - -------------------------------------------------------------------------------- - ---------------------- * Assumes full conversion and exercise of all Securities beneficially owned by such Reporting Person into Common Shares. Such Securities are subject to the limitations on voting and conversion described herein. + Gives effect to the new issuance of Common Shares upon the full conversion and exercise of all Securities beneficially owned by such Reporting Person into Common Shares. Such Securities are subject to the limitations on voting and conversion described herein. - ----------------------- --------------------- CUSIP No. 011576290 SCHEDULE 13D Page 3 of 18 Pages - ----------------------- --------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS H&F INTERNATIONAL PARTNERS IV-A (BERMUDA), L.P. I.R.S. IDENTIFICATION NO. 94-3410226 - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY [ ] - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS WC - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e) [ ] - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION BERMUDA - -------------------------------------------------------------------------------- 7 SOLE VOTING POWER 1,538,936* NUMBER OF ------------------------------------------------------------------ 8 SHARES SHARED VOTING POWER -0- BENEFICIALLY ------------------------------------------------------------------ 9 OWNED BY SOLE DISPOSITIVE POWER 1,538,936* EACH ------------------------------------------------------------------ 10 REPORTING SHARED DISPOSITIVE POWER -0- PERSON WITH - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 1,538,936* - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ] - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 9.2%+ - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON PN - -------------------------------------------------------------------------------- - ---------------------- * Assumes full conversion and exercise of all Securities beneficially owned by such Reporting Person into Common Shares. Such Securities are subject to the limitations on voting and conversion described herein. + Gives effect to the new issuance of Common Shares upon the full conversion and exercise of all Securities beneficially owned by such Reporting Person into Common Shares. Such Securities are subject to the limitations on voting and conversion described herein. - ----------------------- --------------------- CUSIP No. 011576290 SCHEDULE 13D Page 4 of 18 Pages - ----------------------- --------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS H&F INTERNATIONAL PARTNERS IV-B (BERMUDA), L.P. I.R.S. IDENTIFICATION NO. 94-3410228 - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY [ ] - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS WC - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e) [ ] - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION BERMUDA - -------------------------------------------------------------------------------- 7 SOLE VOTING POWER 508,367* NUMBER OF ------------------------------------------------------------------ 8 SHARES SHARED VOTING POWER -0- BENEFICIALLY ------------------------------------------------------------------ 9 OWNED BY SOLE DISPOSITIVE POWER 508,367* EACH ------------------------------------------------------------------ 10 REPORTING SHARED DISPOSITIVE POWER -0- PERSON WITH - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 508,367* - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ] - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 3.2%+ - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON PN - -------------------------------------------------------------------------------- - ---------------------- * Assumes full conversion and exercise of all Securities beneficially owned by such Reporting Person into Common Shares. Such Securities are subject to the limitations on voting and conversion described herein. + Gives effect to the new issuance of Common Shares upon the full conversion and exercise of all Securities beneficially owned by such Reporting Person into Common Shares. Such Securities are subject to the limitations on voting and conversion described herein. - ----------------------- --------------------- CUSIP No. 011576290 SCHEDULE 13D Page 5 of 18 Pages - ----------------------- --------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS H&F EXECUTIVE FUND IV (BERMUDA), L.P. I.R.S. IDENTIFICATION NO. 94-3410229 - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY [ ] - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS WC - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e) [ ] - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION BERMUDA - -------------------------------------------------------------------------------- 7 SOLE VOTING POWER 211,328* NUMBER OF ------------------------------------------------------------------ 8 SHARES SHARED VOTING POWER -0- BENEFICIALLY ------------------------------------------------------------------ 9 OWNED BY SOLE DISPOSITIVE POWER 211,328* EACH ------------------------------------------------------------------ 10 REPORTING SHARED DISPOSITIVE POWER -0- PERSON WITH - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 211,328* - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ] - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 1.4%+ - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON PN - -------------------------------------------------------------------------------- - ---------------------- * Assumes full conversion and exercise of all Securities beneficially owned by such Reporting Person into Common Shares. Such Securities are subject to the limitations on voting and conversion described herein. + Gives effect to the new issuance of Common Shares upon the full conversion and exercise of all Securities beneficially owned by such Reporting Person into Common Shares. Such Securities are subject to the limitations on voting and conversion described herein. - ----------------------- --------------------- CUSIP No. 011576290 SCHEDULE 13D Page 6 of 18 Pages - ----------------------- --------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS H&F INVESTORS IV (BERMUDA), L.P. I.R.S. IDENTIFICATION NO. 94-3410230 - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY [ ] - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS WC - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e) [ ] - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION BERMUDA - -------------------------------------------------------------------------------- 7 SOLE VOTING POWER 11,635,128* NUMBER OF ------------------------------------------------------------------ 8 SHARES SHARED VOTING POWER -0- BENEFICIALLY ------------------------------------------------------------------ 9 OWNED BY SOLE DISPOSITIVE POWER 11,635,128* EACH ------------------------------------------------------------------ 10 REPORTING SHARED DISPOSITIVE POWER -0- PERSON WITH - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 11,635,128* - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ] - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 43.4%+ - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON PN - -------------------------------------------------------------------------------- - ---------------------- * Assumes full conversion and exercise of all Securities beneficially owned by such Reporting Person into Common Shares. Such Securities are subject to the limitations on voting and conversion described herein. + Gives effect to the new issuance of Common Shares upon the full conversion and exercise of all Securities beneficially owned by such Reporting Person into Common Shares. Such Securities are subject to the limitations on voting and conversion described herein. - ----------------------- --------------------- CUSIP No. 011576290 SCHEDULE 13D Page 7 of 18 Pages - ----------------------- --------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 NAME OF REPORTING PERSON I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS H&F CORPORATE INVESTORS IV (BERMUDA) LTD. I.R.S. IDENTIFICATION NO. 94-3410238 - -------------------------------------------------------------------------------- 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) [ ] (b) [X] - -------------------------------------------------------------------------------- 3 SEC USE ONLY [ ] - -------------------------------------------------------------------------------- 4 SOURCE OF FUNDS WC - -------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) OR 2(e) [ ] - -------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION BERMUDA - -------------------------------------------------------------------------------- 7 SOLE VOTING POWER 11,635,128* NUMBER OF ------------------------------------------------------------------ 8 SHARES SHARED VOTING POWER -0- BENEFICIALLY ------------------------------------------------------------------ 9 OWNED BY SOLE DISPOSITIVE POWER 11,635,128* EACH ------------------------------------------------------------------ 10 REPORTING SHARED DISPOSITIVE POWER -0- PERSON WITH - -------------------------------------------------------------------------------- 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 11,635,128* - -------------------------------------------------------------------------------- 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ] - -------------------------------------------------------------------------------- 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 43.4%+ - -------------------------------------------------------------------------------- 14 TYPE OF REPORTING PERSON PN - -------------------------------------------------------------------------------- - ---------------------- * Assumes full conversion and exercise of all Securities beneficially owned by such Reporting Person into Common Shares. Such Securities are subject to the limitations on voting and conversion described herein. + Gives effect to the new issuance of Common Shares upon the full conversion and exercise of all Securities beneficially owned by such Reporting Person into Common Shares. Such Securities are subject to the limitations on voting and conversion described herein. - ----------------------- --------------------- CUSIP No. 011576290 SCHEDULE 13D Page 8 of 18 Pages - ----------------------- --------------------- This Schedule 13D is being filed on behalf of HFCP IV (Bermuda), L.P., a limited partnership organized under the laws of Bermuda ("HFCP IV Bermuda"), H&F International Partners IV-A (Bermuda), L.P., a limited partnership organized under the laws of Bermuda ("HFIP IV-A Bermuda"), H&F International Partners IV-B (Bermuda), L.P., a limited partnership organized under the laws of Bermuda ("HFIP IV-B Bermuda"), H&F Executive Fund IV (Bermuda), L.P., a limited partnership organized under the laws of Bermuda ("HFEF IV Bermuda", and together with HFCP IV Bermuda, HFIP IV-A Bermuda and HFIP IV-B Bermuda, the "Investors"), H&F Investors IV (Bermuda), L.P., a limited partnership organized under the laws of Bermuda ("HFI IV Bermuda") and H&F Corporate Investors IV (Bermuda) Ltd., a company organized under the laws of Bermuda ("HFCI IV Bermuda"). This Schedule 13D relates to the common shares, par value $0.01 (the "Common Shares"), of Arch Capital Group Ltd., a company organized under the laws of Bermuda (the "Company"). The Investors, together with HFI IV Bermuda and HFCI IV Bermuda are referred to herein as the "Reporting Persons". ITEM 1. SECURITY AND ISSUER. ------------------- This statement on Schedule 13D relates to the Common Shares of the Company, and is being filed pursuant to Rule 13d-1 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The address of the principal executive offices of the Company is 20 Horseneck Lane, Greenwich, Connecticut 06830. ITEM 2. IDENTITY AND BACKGROUND. ----------------------- (a) This statement is filed by the Reporting Persons. The Reporting Persons may be deemed to be a "group" within the meaning of Rule 13d-5 under the Exchange Act but disclaim being a member of a "group" with any other shareholder of the Company. The sole general partner of each of HFCP IV Bermuda, HFIP IV-A Bermuda, HFIP IV-B Bermuda and HFEF IV Bermuda is HFI IV Bermuda. The sole general partner of HFI IV Bermuda is HFCI IV Bermuda. The holders of shares of capital stock of HFCI IV Bermuda are described on Schedule I, which is attached hereto as part of Exhibit 1 and is incorporated herein by reference. (b) The address and principal place of business of all Reporting Persons is c/o A.S.&K. Services Ltd., Cedar House, 41 Cedar Avenue, Hamilton HM 12, Bermuda. (c) The principal business of each of HFCP IV Bermuda, HFIP IV-A Bermuda, HFIP IV-B Bermuda and HFEF IV Bermuda is that of a partnership engaged in making private equity and related principal investments. The principal business of HFI IV Bermuda is acting as general partner of each of HFCP IV Bermuda, HFIP IV-A Bermuda, HFIP IV-B Bermuda and HFEF IV Bermuda. The principal business of HFCI IV Bermuda is acting as general partner of HFI IV Bermuda. (d) None of the Reporting Persons, nor, to the best of their knowledge, any of the directors, - ----------------------- --------------------- CUSIP No. 011576290 SCHEDULE 13D Page 9 of 18 Pages - ----------------------- --------------------- executive officers, general partners or members referred to in paragraph (a) has, during the last five years, been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). (e) None of the Reporting Persons nor, to the best of their knowledge, any of the directors, executive officers, general partners or members referred to in paragraph (a) above has, during the last five years, been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws. (f) Each of the Reporting Persons is organized under the laws of Bermuda. Except as otherwise indicated on Schedule I, each of the individuals referred to in paragraph (a) above is a United States citizen. ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. ------------------------------------------------- The total amount of funds required by each Investor to purchase the Securities of the Company as described herein was furnished from the working capital of such Investor and is set forth below. Investor Amount -------- ------ HFCP IV Bermuda $181,322,595 HFIP IV-A Bermuda $29,759,927 HFIP IV-B Bermuda $9,830,812 HFEF IV Bermuda $4,086,666 Total $225,000,000 ITEM 4. PURPOSE OF TRANSACTION. ---------------------- The purchase by the Investors of the Securities (as defined below) as described herein was effected because of the Reporting Persons' belief that the Company and the Securities represent an attractive investment. The Investors, together with Warburg Pincus (Bermuda) Private Equity VIII, L.P., Warburg Pincus (Bermuda) International Partners, L.P., Warburg Pincus Netherlands International Partners I, C.V. and Warburg Pincus Netherlands International Partners II, C.V. (collectively, "Warburg") and affiliates of Farallon Capital Management, L.L.C., Marsh & McLennan Capital, Inc., GE Asset Management and GE Capital (collectively, the "Purchasers"), - ----------------------- --------------------- CUSIP No. 011576290 SCHEDULE 13D Page 10 of 18 Pages - ----------------------- --------------------- acquired the Securities on November 20, 2001 for an aggregate purchase price of $750 million, pursuant to the terms of a Subscription Agreement, dated as of October 24, 2001, as amended November 20, 2001 (the "Subscription Agreement"), by and among the Company and the Purchasers. The Securities purchased by the Purchasers include Series A Convertible Preference Shares, par value $0.01 per share, of the Company (the "Preference Shares") and Class A Warrants of the Company (the "Warrants", and together with the Preference Shares, the "Securities"). In connection with the acquisition of the Securities by the Purchasers, the Purchasers, certain members of the Company's management and the Company entered into a Shareholders Agreement, dated as of November 20, 2001 (the "Shareholders Agreement"). The issuance of the Common Shares issuable upon conversion or exercise of the Securities has not yet been approved by the shareholders of the Company or by certain insurance regulatory agencies that have regulatory authority over certain of the Company's operations. In addition, the Subscription Agreement contemplates that an amendment to the Company's Bye-Laws allowing the Purchasers full voting power with respect to their Securities will be presented to the Company's shareholders for approval. Accordingly, until such time that the required approvals, as described below, are received, the Securities purchased by the Purchasers are subject to the restrictions on voting, conversion and exercise that are described below. The following summaries set forth the material terms of the Subscription Agreement, the Securities and the Shareholders Agreement, but these summaries do not purport to be complete and are qualified in their entirety by reference to the full text of the documents and agreements that are filed as exhibits to this Schedule 13D and which are incorporated herein by reference. Subscription Agreement ---------------------- Pursuant to the terms of the Subscription Agreement, on November 20, 2001, the Investors purchased an aggregate of 10,521,839 Preference Shares and 1,113,289 Warrants from the Company for an aggregate of $225 million, or approximately $21.38 per Preference Share. The per share purchase price was designed to equal the per share book value of the Company as of June 30, 2001, adjusted to reflect a mark-to-market of the Company's investment portfolio. The initial per share purchase price is subject to adjustment in a number of circumstances. First, the Company is required to provide the Purchasers with an audited balance sheet as of June 30, 2001, together with reports on the Company's reserves and the market value of marketable securities reflected on such audited balance sheet. Based on this audited balance sheet and net of certain expenses incurred by the Company in connection with the transactions contemplated by the Subscription Agreement and of certain losses incurred by the Company, the per share purchase price is to be recalculated. If the recalculated per share purchase price is greater than the initial per share purchase price, the Purchasers will be required to pay the Company an amount equal to the difference between the recalculated and initial per share purchase prices, either in cash or in surrendered Preference Shares (valued at the higher of the recalculated per share purchase price or the then market value of the Common Shares), at the option of each Purchaser. If the recalculated per share purchase price is less that the initial per - ----------------------- --------------------- CUSIP No. 011576290 SCHEDULE 13D Page 11 of 18 Pages - ----------------------- --------------------- share purchase price, the Company shall issue the Purchasers additional Preference Shares having a value (based on the recalculated per share purchase price) equal to the difference between the initial and recalculated per share purchase prices. The purchase price is subject to further adjustment based on the calculation of an "Adjustment Basket" by the Company as soon as practicable following November 20, 2003 (or earlier if requested by the Purchasers and consented to by the Company). This Adjustment Basket is designed to represent the difference between the value of certain existing businesses and assets of the Company as of June 30, 2001 and the value of those assets and businesses as of the relevant date for the calculation of the Adjustment Basket. Finally, as soon as practicable following November 20, 2005, there is to be a further Adjustment Basket calculated based on the amount of certain liabilities of the Company. If these Adjustment Baskets are less than zero, the Company is required to issue additional Preference Shares to the Purchasers. If these Adjustment Baskets are greater than zero, the Company may repurchase Common Shares having an aggregate value equal to the Adjustment Basket. In addition, the Purchasers will receive additional Preference Shares from the Company in the event that the Company's existing Class B Warrants become exercisable. The Company agreed to seek the approval by the holders of Common Shares and Preference Shares of (a) an amendment to certain of the Company's Bye-Laws, and (b) the issuance of Common Shares issuable upon conversion of all Preference Shares and the issuance of Common Shares issuable upon exercise of all Class A Warrants (including by operation of the anti-dilution adjustments in the Class A Warrants), to the extent that the number of all such Common Shares and Common Shares issued in cancellation of the Class A Warrants of the Company in connection with the transactions under the Subscription Agreement would exceed 19.9% of the total number of Common Shares issued and outstanding on November 19, 2001 (the "Requisite Shareholder Approval"). The Company and the Purchasers have also agreed to seek approval by the insurance authorities in the States of Florida, Missouri, Nebraska and Wisconsin of the acquisition of greater than 9.9% of the total voting power of all shares of the Company entitled to vote generally in the election of directors by the Investors and Warburg (the "Requisite Regulatory Approval"). If the Requisite Shareholder Approval or the Requisite Regulatory Approval is not received within a specified period of time, or if the Adjustment Basket exceeds a specified threshold, the Purchasers have the right to exchange the Securities for substantially identical securities of a subsidiary of the Company that the Company has agreed to form, which subsidiary is to have a capital structure designed to mirror that of the Company and is to hold the core insurance operations of the Company. The Purchasers agreed that prior to the earlier of the meeting of the Company's shareholders to obtain Requisite Shareholder Approval or March 20, 2002, they will not transfer or dispose of any Securities. In addition, the Investors and certain other Purchasers agreed that if at any time they seek to transfer or dispose of a majority of the voting power or equity of the Company, that they will make such transaction available to all shareholders of the Company. Preference Shares ----------------- - ----------------------- --------------------- CUSIP No. 011576290 SCHEDULE 13D Page 12 of 18 Pages - ----------------------- --------------------- The Preference Shares have a liquidation preference of $21.00 per share and are entitled to participating dividends with the Common Shares on an as-converted basis. Each Preference Share is convertible, at the option of the holder, into one Common Share (subject to adjustment in certain circumstances). In addition, each Preference Share is mandatorily convertible into one Common Share (subject to adjustment in certain circumstances) upon the later of receipt of Requisite Shareholder Approval and Requisite Regulatory Approval and 90 days after the completion of the purchase price adjustments described above. Generally, the Preference Shares are entitled to vote together with the Common Shares as a single class on an as-converted basis. However, until receipt of Requisite Shareholder Approval and Requisite Regulatory Approval, no Purchaser shall have more than 9.9% of the outstanding voting power of the Company and the Purchasers shall be limited to an aggregate of 19.9% of the outstanding voting power of the Company. Warrants -------- Each Warrant entitles the holder thereof to acquire one Common Share of the Company for a purchase price of $20.00. The Warrants are immediately exercisable by the Purchasers and expire on September 19, 2002. Each Warrant may be exercised through cash payment of the purchase price, through the surrender of Common Shares having a value equal to the purchase price or upon surrender of the Warrant in exchange for Common Shares having a value equal to the excess of the value of the Common Shares that would be received on full exercise of the Warrant over the purchase price of the Warrant. The number of shares that are purchasable upon exercise of each Warrant and the per share purchase price are subject to adjustment in certain circumstances. Shareholders Agreement ---------------------- The Shareholders Agreement provides the Investors with certain governance rights and contains provisions relating to the transfer and disposition of the Securities. The Shareholders Agreement provides that immediately following the closing of the transactions contemplated by the Subscription Agreement, the Board of Directors of the Company shall consist of nine directors and that one director designated by the Investors and one director designated by Warburg shall be appointed to the Board. Following the receipt of Requisite Shareholder Approval and Requisite Regulatory Approval, the Board shall be increased to 15 directors and two additional directors designated by the Investors and four additional directors designated by Warburg shall be appointed to the Board. The Investors and Warburg shall have the right to nominate these directors to the Board for so long as they retain specified percentages of the Securities, and as these percentages decrease, the number of directors that the Investors and Warburg have the right to designate will decrease as well. The Shareholders Agreement further provides that the Company will not take specified actions unless these actions are approved by at least one of each of the Investors' and Warburg's designees to the Board, and that the Company will not declare any dividend or distribution on Common Shares, or repurchase any Common Shares, until such time as the Company has repurchased an aggregate of $250 million in Securities from the Investors and Warburg. - ----------------------- --------------------- CUSIP No. 011576290 SCHEDULE 13D Page 13 of 18 Pages - ----------------------- --------------------- Each Purchaser agreed to vote in favor of the matters subject to Requisite Shareholder Approval at the shareholder meeting called for that purpose. The Investors and Warburg also agreed that until November 20, 2003 they will not engage in certain transactions with the Company without the approval of a majority of the directors of the Company who are unaffiliated with either the Investors or Warburg. The Shareholders Agreement provides the Purchasers with customary registration rights, including demand registrations, piggy-back registration rights and the right to require the Company to register shares for sale on a delayed or continuous basis. As among themselves, certain of the Purchasers agreed to various tag-along and drag-along rights in the event that any one of them seeks to transfer or dispose of their Securities. The Purchasers also agreed that until the earliest of November 20, 2002, the vesting of the Company's existing Class B Warrants or the completion by the Company of a public offering meeting certain requirements, they would not transfer or dispose of in excess of one-third of their Securities. In addition, until the receipt of the Requisite Shareholder Approval and the Requisite Regulatory Approval, the Purchasers agreed that they will not convert any Preference Shares into Common Shares, or exercise any Warrant for Common Shares, if the Common Shares acquired by such Purchaser upon such conversion or exercise would exceed such Purchaser's pro rata portion of 19.9% of the Common Shares outstanding prior to November 20, 2001 or if such Purchaser's holdings of Common Shares would require regulatory approval. * * * * Except as set forth above, none of the Reporting Persons nor, to the best of their knowledge, any person listed in Schedule I, has any plans or proposals which relate to or would result in: (a) the acquisition by any person of additional securities of the Company, or the disposition of securities of the Company; (b) an extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the Company or any of its subsidiaries; (c) a sale or transfer of a material amount of assets of the Company or any of its subsidiaries; (d) any change in the present Board of Directors or management of the Company, including any plans or proposals to change the number or term of directors or to fill any existing vacancies on the board; (e) any material change in the present capitalization or dividend policy of the Company; (f) any other material change in the Company's business or corporate structure; (g) any changes in the Company's charter, bylaws or instruments corresponding thereto or other actions which may impede the acquisition of control of the Company by any person; (h) causing a class of securities of the Company to be delisted from a national securities exchange or to cease to be authorized to be quoted in an inter-dealer quotation system of a registered national securities association; (i) a class of equity securities of the Company becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Exchange Act; or (j) any action similar to any of those enumerated above. ITEM 5. INTEREST IN SECURITIES OF THE ISSUER. ------------------------------------ (a) The Reporting Persons beneficially own Common Shares of the Company by virtue of their ownership of the Securities, which are (subject to the restrictions described under Item 4 - ----------------------- --------------------- CUSIP No. 011576290 SCHEDULE 13D Page 14 of 18 Pages - ----------------------- --------------------- above) convertible into, or exercisable for, Common Shares as described under Item 4 above. As of November 20, 2001, the Investors collectively beneficially owned an aggregate of 11,635,128 Common Shares, assuming the full exercise and conversion of the Securities into Common Shares (without giving effect to the restrictions described under Item 4 above). By reason of its relationship with the Investors, under Rule 13d-3 under the Exchange Act, HFCI IV Bermuda may be deemed to own beneficially all of the Common Shares that are beneficially owned by the Investors. Assuming the full exercise and conversion of the Securities into Common Shares, as of November 20, 2001, the 11,635,128 Common Shares collectively beneficially owned by the Reporting Persons would (subject to the restrictions described under Item 4 above) represent approximately 43.4% of the outstanding Common Shares, after giving effect to the new issuance of Common Shares upon the full conversion and exercise of the Securities into Common Shares and based on the 12,868,158 Common Shares outstanding as of September 30, 2000 as set forth in the Company's Form 10-Q for the quarter then ended and the 2,314,916 Common Shares issued in connection with the transactions. (b) The Investors collectively have beneficial ownership of 11,635,128 Common Shares (without giving effect to the restrictions described under Item 4 above), assuming the full exercise and conversion of the Securities into Common Shares. Of these Common Shares, 10,521,839 Common Shares are represented by 10,521,839 Preference Shares, which even if not converted into Common Shares would, subject to the restrictions on voting described under Item 4 above, in the aggregate be entitled to the voting power equivalent to 10,521,839 Common Shares. Each Investor exercises voting power and dispositive power over its holdings of such shares through its respective general partner, which, in turn, acts through its respective general partner. (c) Except for the Securities acquired pursuant to the Subscription Agreement, during the last sixty days there were no transactions effected by the Reporting Persons or by any of the persons set forth on Schedule I hereto. (d) Except as set forth in this Item 5, no person other than each respective record owner referred to herein of the Securities is known to have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, such Securities. (e) Not applicable. ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH ------------------------------------------------------------- RESPECT TO SECURITIES OF THE ISSUER. ----------------------------------- Pursuant to Rule 13d-1(k) promulgated under the Exchange Act, the Reporting Persons have entered into an agreement on November 30, 2001 with respect to the joint filing of this statement and any amendment or amendments hereto (the "Joint Filing Agreement"). The Joint Filing Agreement is attached hereto as Exhibit 1 and incorporated herein by reference. Except as referred to above, or described in Item 4 hereof, there are no contracts, - ----------------------- --------------------- CUSIP No. 011576290 SCHEDULE 13D Page 15 of 18 Pages - ----------------------- --------------------- arrangements, understandings or relationships among the persons named in Item 2 or between such persons and any other person with respect to any securities of the Company. By virtue of the relationships among the Reporting Persons as described in Item 2, the Reporting Persons may be deemed to be a "group" under the Federal securities laws. ITEM 7. MATERIAL TO BE FILED AS EXHIBITS. -------------------------------- 1. Joint Filing Agreement, dated as of November 30, 2001, by and among HFCP IV (Bermuda), L.P., H&F International Partners VI-A (Bermuda), L.P., H&F International Partners IV-B (Bermuda), L.P., H&F Executive Fund (Bermuda), L.P., H&F Investors IV (Bermuda), L.P. and H&F Corporate Investors (Bermuda) Ltd. 2. Subscription Agreement, dated as of October 24, 2001, by and among Arch Capital Group Ltd. and the Purchasers party thereto. 3. Amendment No. 1 to the Subscription Agreement, with the following exhibits: Exhibit I: Certificate of Designations of Series A Convertible Preference Shares of Arch Capital Group Ltd. Exhibit II: Form of Class A Warrant of Arch Capital Group Ltd. Exhibit III: Amended Bye-Law 45 and 75 Exhibit IV: Form of Shareholders Agreement (See Exhibit 4 below) 4. Shareholders Agreement, dated as of November 20, 2001, by and among Arch Capital Group and the Shareholders signatory thereto. - ----------------------- --------------------- CUSIP No. 011576290 SCHEDULE 13D Page 16 of 18 Pages - ----------------------- --------------------- SIGNATURES After reasonable inquiry and to the best of our knowledge and belief, the undersigned certify that the information set forth in this statement is true, complete and correct. Dated: November 30, 2001 HFCP IV (BERMUDA), L.P. By: H&F Investors IV (Bermuda), L.P., its General Partner By: H&F Corporate Investors IV (Bermuda) Ltd., its General Partner By: /s/ John L. Bunce, Jr. ----------------------------------- Name: John L. Bunce, Jr. Title: Vice President H&F INTERNATIONAL PARTNERS IV-A (BERMUDA), L.P. By: H&F Investors IV (Bermuda), L.P., its General Partner By: H&F Corporate Investors IV (Bermuda) Ltd., its General Partner By: /s/ John L. Bunce, Jr. ----------------------------------- Name: John L. Bunce, Jr. Title: Vice President H&F INTERNATIONAL PARTNERS IV-B (BERMUDA), L.P. By: H&F Investors IV (Bermuda), L.P., its General Partner By: H&F Corporate Investors IV (Bermuda) Ltd., its General Partner By: /s/ John L. Bunce, Jr. ----------------------------------- Name: John L. Bunce, Jr. Title: Vice President - ----------------------- --------------------- CUSIP No. 011576290 SCHEDULE 13D Page 17 of 18 Pages - ----------------------- --------------------- H&F EXECUTIVE FUND IV (BERMUDA), L.P. By: H&F Investors IV (Bermuda), L.P., its General Partner By: H&F Corporate Investors IV (Bermuda) Ltd., its General Partner By: /s/ John L. Bunce, Jr. ----------------------------------- Name: John L. Bunce, Jr. Title: Vice President H&F INVESTORS IV (BERMUDA), L.P. By: H&F Corporate Investors IV (Bermuda) Ltd., its General Partner By: /s/ John L. Bunce, Jr. -------------------------------- Name: John L. Bunce, Jr. Title: Vice President H&F CORPORATE INVESTORS IV (BERMUDA) LTD. By: /s/ John L. Bunce, Jr. -------------------------------------- Name: John L. Bunce, Jr. Title: Vice President - ----------------------- --------------------- CUSIP No. 011576290 SCHEDULE 13D Page 18 of 18 Pages - ----------------------- --------------------- INDEX OF EXHIBITS 1. Joint Filing Agreement, dated as of November 30, 2001, by and among HFCP IV (Bermuda), L.P., H&F International Partners VI-A (Bermuda), L.P., H&F International Partners IV-B (Bermuda), L.P., H&F Executive Fund (Bermuda), L.P., H&F Investors IV (Bermuda), L.P. and H&F Corporate Investors (Bermuda) Ltd. 2. Subscription Agreement, dated as of October 24, 2001, by and among Arch Capital Group Ltd. and the Purchasers party thereto. 3. Amendment No. 1 to the Subscription Agreement, with the following exhibits: Exhibit I: Certificate of Designations of Series A Convertible Preference Shares of Arch Capital Group Ltd. Exhibit II: Form of Class A Warrant of Arch Capital Group Ltd. Exhibit III: Amended Bye-Law 45 and 75 Exhibit IV: Form of Shareholders Agreement (See Exhibit 4 below) 4. Shareholders Agreement, dated as of November 20, 2001, by and among Arch Capital Group and the Shareholders signatory thereto. EX-99 3 hfjointfilingagreement.txt EXHIBIT 1 EXHIBIT 1 JOINT FILING AGREEMENT ---------------------- Pursuant to Rule 13d-1(k) promulgated under the Securities Exchange Act of 1934, as amended, the undersigned hereby agree to the joint filing of this Statement on Schedule 13D including any amendments thereto. This Joint Filing Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. Date: November 30, 2001 HFCP IV (BERMUDA), L.P. By: H&F Investors IV (Bermuda), L.P., its General Partner By: H&F Corporate Investors IV (Bermuda) Ltd., its General Partner By: /s/ John L. Bunce, Jr. ----------------------------------- Name: John L. Bunce, Jr. Title: Vice President H&F INTERNATIONAL PARTNERS IV-A (BERMUDA), L.P. By: H&F Investors IV (Bermuda), L.P., its General Partner By: H&F Corporate Investors IV (Bermuda) Ltd., its General Partner By: /s/ John L. Bunce, Jr. ----------------------------------- Name: John L. Bunce, Jr. Title: Vice President H&F INTERNATIONAL PARTNERS IV-B (BERMUDA), L.P. By: H&F Investors IV (Bermuda), L.P., its General Partner By: H&F Corporate Investors IV (Bermuda) Ltd., its General Partner By: /s/ John L. Bunce, Jr. ----------------------------------- Name: John L. Bunce, Jr. Title: Vice President H&F EXECUTIVE FUND IV(BERMUDA), L.P. By: H&F Investors IV (Bermuda), L.P., its General Partner By: H&F Corporate Investors IV (Bermuda) Ltd., its General Partner By: /s/ John L. Bunce, Jr. ----------------------------------- Name: John L. Bunce, Jr. Title: Vice President H&F INVESTORS IV (BERMUDA), L.P. By: H&F Corporate Investors IV (Bermuda) Ltd., its General Partner By: /s/ John L. Bunce, Jr. ----------------------------------- Name: John L. Bunce, Jr. Title: Vice President H&F CORPORATE INVESTORS IV (BERMUDA) LTD. By: /s/ John L. Bunce, Jr. ----------------------------------- Name: John L. Bunce, Jr. Title: Vice President SCHEDULE I ---------- Set forth below is the name, present principal occupation and percentage owned of each of the shareholders of H&F Corporate Investors IV (Bermuda) Ltd. ("HFCI Bermuda"), each of whom is a United States citizen. HFCI Bermuda is the sole general partner of H&F Investors IV (Bermuda), L.P. ("HFI IV Bermuda), which, in turn, is the sole general partner of HFCP IV (Bermuda), L.P. ("HFCP IV Bermuda"), H&F International Partners IV-A (Bermuda), L.P. ("HFIP IV-A Bermuda"), H&F International Partners IV-B (Bermuda), L.P. ("HFIP IV-B Bermuda") and H&F Executive Fund (Bermuda), L.P. ("HFEF Bermuda"). HFCI Bermuda, HFI IV Bermuda, HFCP IV Bermuda, HFIP IV-A Bermuda, HFIP IV-B Bermuda and HFEF Bermuda are hereinafter referred to as the "Reporting Persons." % Name Owned Present Principal Occupation ---- ----- ---------------------------- F. Warren Hellman 9.9% Chairman, Hellman & Friedman LLC ("H&F") Matthew R. Barger 9.9% Senior Managing Director, H&F Thomas F. Steyer 9.9% Managing Director, H&F John L. Bunce, Jr. 9.9% Managing Director, H&F Brian M. Powers 9.9% Managing Director, H&F Mitchell R. Cohen 9.9% Managing Director, H&F Philip U. Hammerskjold 9.9% Managing Director, H&F Georgia Lee 9.9% Chief Financial Officer and Managing Director, H&F Patrick J. Healy 9.9% Managing Director, H&F David R. Tunnell 5.45% Principal, H&F Richard M. Levine 5.45% General Counsel and Principal, H&F EX-99 4 subscriptionagreement.txt EXHIBIT 2 EXHIBIT 2 --------- EXECUTION COPY -------------- SUBSCRIPTION AGREEMENT This Agreement (this "Agreement") is made as of October 24, 2001 by and between Arch Capital Group Ltd., a company organized under the laws of Bermuda (the "Company"), and each of the Purchasers named below (each, a "Purchaser" and, collectively, the "Purchasers"), in connection with the purchase by each Purchaser of the Securities (as defined below). Certain terms are defined in Schedule A hereto. WHEREAS, the Company has entered into employment arrangements with Paul Ingrey, Dwight Evans and Marc Grandisson, true and correct copies of which have been provided to the Purchasers. For good and valid consideration, the receipt of which is hereby acknowledged, the Company and each of the Purchasers agree as follows: A. SUBSCRIPTION AND PURCHASE OF SECURITIES 1. Agreement to Purchase. Subject to satisfaction of the conditions set forth in Section C below, each Purchaser, severally and not jointly, hereby irrevocably subscribes for and agrees to purchase, for the aggregate purchase price set forth below the name of such Purchaser on the signature page hereto (such Purchaser's "Total Purchase Price"), series A convertible preference shares (the "Preference Shares") and class A warrants (such warrants issued hereunder, the "Warrants," and together with the Preference Shares, the "Securities") of the Company. The Preference Shares will have the rights and privileges set forth in the form of Certificate of Designations attached hereto as Exhibit I (the "Certificate"). The Preference Shares will be convertible, on the terms and conditions set forth in the Certificate, into Common Shares (such shares, the "Conversion Shares") or, in the circumstance set forth in Section E hereof, common shares of Newco. The form of the Warrants is attached hereto as Exhibit II. The Warrants will be exercisable, on the terms and conditions thereof, for Common Shares (such shares, the "Warrant Shares"). 2. Number of Securities Purchased. The number of Preference Shares to be purchased by each Purchaser shall be equal to such Purchaser's Total Purchase Price divided by the Estimated Per Share Price. Such number is subject to adjustment as provided in Section B hereof. The number of Warrants to be purchased by each Purchaser shall be equal to (a) the Adjusted Warrant Amount times (b) the number of Common Shares issuable as of the date hereof upon exercise of all class A warrants outstanding on the date hereof (which is 2,531,079) divided by (c) the number of Common Shares outstanding as of June 30, 2001 -2- (which is 12,863,079). If the transactions contemplated by this Agreement, or options granted to management concurrently herewith, trigger an antidilution adjustment under existing class A warrants, the number of Warrants purchased by each Purchaser hereunder shall be adjusted upward to reflect the greater number of shares issuable upon exercise of outstanding class A warrants as a result of such antidilution adjustment. 3. Closing Date. Subject to the terms and conditions hereof, the purchase and sale of the Securities shall occur at 10:00 a.m. (Eastern time) on the third business day after the date on which the condition set forth in Section C.1(a) is satisfied (such date and time, the "Closing Date"). 4. Deliveries. As of the close of business on the business day immediately preceding the Closing Date, the Company shall advise the Purchasers of the Estimated Per Share Price. On the Closing Date, (a) each Purchaser shall pay its Total Purchase Price by wire transfer of immediately available funds to the account of the Company designated by the Company and (b) the Company shall deliver to such Purchaser certificates for the Securities purchased by such Purchaser, registered in the name of such Purchaser or its designee. B. POST-CLOSING ADJUSTMENTS 1. Audit Adjustment. ---------------- (a) As soon as practicable after the Closing Date, the Company shall engage (i) PricewaterhouseCoopers (the "Public Accountants") to audit the Company's consolidated balance sheet as of June 30, 2001, (ii) an independent actuary selected by the Transaction Committee and the Purchasers (the "Independent Actuary") to review the reserves for claims and claims expenses on such balance sheet, and (iii) an independent pricing service selected by the Transaction Committee and the Purchasers (the "Pricing Service") to determine the estimated fair value as of the Closing Date of the Company's investments in marketable securities included on such balance sheet. The audit shall be performed on the same basis as the preparation of the unaudited balance sheet and, in particular, the $4.3 million liability associated with an anticipated but incomplete reinsurance transaction shall either remain or be deemed to remain on the audited balance sheet as a liability. The Pricing Service, the Public Accountants and the Independent Actuary are referred to as the "Independent Advisors." (b) The Company shall provide the Independent Advisors with full access to its books and records for the purposes of such audit and reviews. The Independent Advisors shall keep the Transaction Committee and the Purchasers informed as to the progress of such audit and reviews, and the Transaction Committee and the Purchasers shall have the right -3- to participate and comment upon such audit and reviews. Any reviews pursuant to paragraph (d) below shall also be subject to the provisions of this paragraph. (c) Within 60 days after the Closing Date (or as soon thereafter as practicable), the Independent Advisors shall deliver the following to the Board of Directors and the Purchasers (the "Initial Determinations"): (i) The Public Accountants shall deliver the Company's consolidated balance sheet as of June 30, 2001 and an unqualified report thereto (the "Audited Balance Sheet"). (ii) The Independent Actuary shall deliver a report on the reserves for claims and claims expenses on the Audited Balance Sheet (the "Reserve Report"). (iii) The Pricing Service shall deliver a report of its determinations of estimated fair value as of the business day immediately preceding the Closing Date of the marketable securities in the Company's investment portfolio included in the Audited Balance Sheet (the "Portfolio Review"). In determining such estimated fair value, the Pricing Service shall use the Mark to Market Procedures. (iv) The Public Accountants shall calculate the Per Share Price including, without limitation, the amount set forth in clause (a)(i) of the definition of Per Share Price, and report the amounts to the Board of Directors and the Purchasers (the "Per Share Calculation"). (d) After receipt of the Initial Determinations, the Transaction Committee and the Purchasers shall have the right to make a full review of the Initial Determinations including, but not limited to, access by such professionals as Purchasers may deem necessary, to all of the workpapers and reports prepared by the Independent Advisors in connection with such Initial Determinations. The Transaction Committee may object to the Initial Determinations or one or more components thereof by giving written notice to the Purchasers, and the Purchasers (acting collectively) may object to the Initial Determinations or one or more components thereof by giving written notice to the Transaction Committee, in each case, within 30 days of the date on which the Initial Determinations are delivered. Any such notice shall state the basis of the objections in reasonable detail. The Transaction Committee and the Purchasers shall then endeavor in good faith to resolve the dispute as soon as possible. If the dispute is not resolved within 10 days after receipt of the objection, within five days thereafter the Transaction Committee and the Purchasers shall mutually agree on (i) a firm of independent accountants to review the Audited Balance Sheet or the Per Share Calculation, (ii) an independent actuary to review the Reserve Report and/or (iii) an independent pricing service to review the Portfolio Review, who shall complete such reviews within 30 days of appointment. -4- Based upon such independent reviews, the independent accountants referred to in the preceding sentence shall select either the per share calculation recommended by the Transaction Committee or that recommended by the Purchasers, whichever is closer to the independent review, and the per share calculation so selected shall be dispositive. If the Initial Determination (if not reviewed) or such review requires an adjustment to the Audited Balance Sheet, the Audited Balance Sheet as so adjusted shall be deemed to be the "Audited Balance Sheet" hereunder. (e) If the Per Share Price is greater than the Estimated Per Share Price, within five business days after the last date on which the Initial Determinations may be objected to or after the date that all reviews following any such objection have been completed (the "Applicable Date"), each Purchaser shall either (i) pay to the Company an amount (the "Aggregate Amount") in cash equal to the difference between the Per Share Price and the Estimated Per Share Price times the number of Preference Shares purchased by such Purchaser or (ii) surrender to the Company a number of Preference Shares equal to the Aggregate Amount divided by the greater of (A) the Per Share Price or (B) the Fair Market Value of a Preference Share as of the Applicable Date. The Purchasers shall make such payment by wire transfer of immediately available funds to the account of the Company designated by the Company. (f) If the Estimated Per Share Price is greater than the Per Share Price, within five business days after the Applicable Date, the Company shall issue and deliver to each Purchaser one or more certificates registered in the name of such Purchaser (or its designee) representing that number of Preference Shares equal to (i) the difference between the Estimated Per Share Price and the Per Share Price times (ii) the number of Preference Shares purchased by such Purchaser on the Closing Date divided by (iii) the Per Share Price. 2. Adjustment for Vesting of Class B Warrants. In the event that the Company's class B warrants vest (or become exercisable) for any reason, then, within five business days of such vesting or the Applicable Date (whichever is later), the Company shall issue and deliver to each Purchaser one or more certificates registered in the name of such Purchaser (or its designee) representing that number of Preference Shares equal to the difference between (i) such Purchaser's Total Purchase Price divided by an amount equal to the difference between the Per Share Price and $1.50 and (ii) such Purchaser's Total Purchase Price divided by the Per Share Price. If the transactions contemplated by this Agreement, or options granted to management concurrently herewith, trigger an antidilution adjustment under existing class B warrants, the number of Preference Shares issued to the Purchasers in lieu of class B warrants shall be adjusted upward to reflect the greater number of shares issuable upon exercise of outstanding class B warrants as a result of such antidilution adjustment. -5- 3. Final Adjustment. ---------------- (a) The Adjustment Basket, as defined on Schedule B, shall be determined as soon as practicable after the second anniversary of the Closing Date or such earlier date as the Purchasers request and the Transaction Committee agrees, which agreement will not be unreasonably withheld (the "Test Date"). The Company shall engage its independent public accountants to prepare and deliver a report to the Transaction Committee and the Purchasers setting forth in reasonable detail the calculation of the Adjustment Basket (the "Adjustment Basket Report"). (b) The Company shall provide such independent public accountants with full access to its books and records for the purposes of preparing the Adjustment Basket Report. Such accountants shall keep the Transaction Committee and the Purchasers informed as to the progress of the Adjustment Basket Report, and the Transaction Committee and the Purchasers shall have the right to participate and comment upon the Adjustment Basket Report. Any reviews pursuant to paragraph (c) below shall also be subject to the provisions of this paragraph. (c) After receipt of the Adjustment Basket Report, the Transaction Committee and the Purchasers shall have the right to make a full review of the Adjustment Basket Report including, but not limited to, access by such professionals as Purchasers may deem necessary to all of the workpapers and reports prepared by the independent public accountants in connection with such Adjustment Basket Report. The Transaction Committee may object to the Adjustment Basket Report by giving written notice to the Purchasers, and the Purchasers (acting collectively) may object to the Adjustment Basket Report by giving written notice to the Transaction Committee, in each case, within 30 days of the date on which the Adjustment Basket Report is delivered. Any such notice shall state the basis of the objections in reasonable detail. The Transaction Committee and the Purchasers shall then endeavor in good faith to resolve the dispute as soon as possible. If the dispute is not resolved within 10 days after receipt of the objection, within five days thereafter, the Transaction Committee and the Purchasers shall mutually agree on a firm of independent accountants, an independent actuary and/or an independent pricing service to review the Adjustment Basket Report or one or more components thereof, who shall complete such reviews within 30 days of appointment. Based upon such independent reviews, the independent accountants referred to in the preceding sentence shall select either the adjusted basket report recommended by the Transaction Committee or that recommended by the Purchasers, whichever is closer to the independent review, and the adjusted basket report so selected shall be dispositive. (d) If the Adjustment Basket is less than zero, within five business days after the last date on which the Adjustment Basket Report may be objected to or the date on which all reviews following any such objection have been completed (the "Second Applicable -6- Date"), the Company shall issue and deliver to each Purchaser one or more certificates registered in the name of such Purchaser (or its designee) representing that number of Preference Shares equal to the difference between NF - - N, where: N = number of Preference Shares purchased by such Purchaser (after giving effect to any adjustment pursuant to Section B.1); P = Per Share Price; B = absolute value of the Adjustment Basket; and NF = such Purchaser's Total Purchase Price divided by [P - B/12.86 million]. (e) If the Adjustment Basket is greater than zero, the Company at the direction of the Transaction Committee may use cash in an amount equal to B to repurchase Common Shares (other than any Conversion Shares or Warrant Shares) without regard to the restriction on repurchases set forth in Article VI of the Shareholders Agreement. (f) In addition to paragraph (e), if the Adjustment Basket is less than zero and in the event that the class B warrants vest, then, on the Second Applicable Date, the Company shall also issue and deliver to each Purchaser (as a further adjustment for the vesting of the class B warrants) a number of Preference Shares equal to the difference between (A) such Purchaser's Total Purchase Price divided by an amount equal to [P - $1.50 - B/12.86 million] and (B) the Purchaser's Total Purchase Price divided by an amount equal to (P - $1.50). (g) On the fourth anniversary of the Closing Date, there shall be a calculation of a further Adjustment Basket, taking into account ONLY the following: (i) the matters listed in clause (c) of the definition of Non-Core Assets, to the extent not previously included in the first Adjustment Basket and (ii) any actual losses arising out of any breach of the representations set forth in Section D.3.h or D.3.k discovered after the second anniversary of the Closing. C. CONDITIONS PRECEDENT TO SALE OF SECURITIES ON THE CLOSING DATE 1. Mutual Conditions. The obligation of the Company to sell, and of each Purchaser to buy, the Securities on the Closing Date, is subject to the satisfaction, or waiver by the parties hereto, of the following conditions: (a) If required, the waiting period under the U.S. Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), shall have expired or been terminated early. -7- (b) There shall not be in effect an order or injunction of a court of competent jurisdiction prohibiting the consummation of the sale and purchase of the Securities hereunder that are to be purchased on the Closing Date. 2. Conditions of the Company. The obligation of the Company to sell the Securities on the Closing Date is subject to the satisfaction, or waiver by the Company, of the following conditions: (a) The representations and warranties made by each Purchaser in this Agreement shall be true and accurate in all material respects as of the Closing Date. (b) Each Purchaser shall have complied with and performed all agreements and covenants to be complied with or performed by it in all material respects at or prior to the Closing Date. 3. Conditions of the Purchasers. The obligation of each Purchaser to buy on the Closing Date the Securities set forth below the name of such Purchaser on the signature page hereof is subject to the satisfaction, or waiver by such Purchaser, of the following conditions: (a) The representations and warranties made by the Company in this Agreement shall be true and accurate as of the Closing Date (except that representations and warranties made as of another date shall be true and accurate as of such other date), except in each case as would not have a Material Adverse Effect. (b) The Company shall have complied with and performed all of its agreements and covenants to be complied with or performed in all material respects at or prior to the Closing Date. (c) Such Purchaser shall have received (i) a legal opinion of Conyers Dill & Pearman, Bermuda counsel to the Company, covering such matters under Bermuda law as are customary for transactions of this type and (ii) a legal opinion of Cahill Gordon & Reindel, United States counsel to the Company, regarding enforceability of this Agreement and the validity of the private placement exemption with respect to the sale and purchase of the Securities hereunder. Such opinions may be subject to such limitations and qualifications as are customary for legal opinions in transactions of this type. (d) Such Purchaser shall have received copies of such letters of resignation from the Board of Directors and certified resolutions of the Board of Directors electing such directors to fill the resulting vacancies in accordance with the Company's Bye-laws, all effective with the consummation of the purchase and sale of Securities hereunder so that the mem- -8- bers of the Board of Directors immediately following the Closing Date shall be as contemplated by Section 3.1(b) of the Shareholders Agreement. (e) The Company shall have executed and delivered a shareholders agreement substantially in the form attached as Exhibit IV hereto (the "Shareholders Agreement"). (f) The Company's Board shall have taken all such action as is necessary to exempt Purchasers from paragraphs 78 and 79(3) of the Company's Bye-laws. D. REPRESENTATIONS, WARRANTIES AND AGREEMENTS 1. Purchaser Acknowledgments. Each Purchaser, severally and not jointly, understands, acknowledges and hereby covenants and agrees with the Company as follows: (a) Subject to the terms and conditions of this Agreement, such Purchaser's agreement to purchase Securities hereunder is and shall be irrevocable. (b) The offering and sale of the Securities is intended to be exempt from registration under the United States Securities Act of 1933, as amended (the "Act"), by virtue of Section 4(2) of the Act. The Securities, the Conversion Shares and the Warrant Shares have not been registered under the Act. Except to the extent set forth in the Shareholders Agreement, the Company is under no obligation to register the Securities, the Conversion Shares or the Warrant Shares or to assist such Purchaser in complying with any exemption from registration. (c) There is no existing public or other market for the Securities, and it is not expected that any such market will develop. There can be no assurance that such Purchaser will be able to sell or dispose of its Securities. Without limiting the generality of the foregoing, in order not to jeopardize the offering's exempt status under the Act, a transferee of such Securities may, among other things, be required to fulfill the investor suitability requirements thereunder. (d) All certificates issued for the Securities, the Conversion Shares and the Warrant Shares will bear the following legend: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (1) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR (2) AN APPLICABLE EXEMPTION FROM REGISTRATION -9- THEREUNDER. ANY SALE PURSUANT TO CLAUSE (2) OF THE PRECEDING SENTENCE MUST BE ACCOMPANIED BY AN OPINION OF WACHTELL, LIPTON, ROSEN & KATZ, OR SUCH OTHER COUNSEL AS IS REASONABLY SATISFACTORY TO ARCH CAPITAL GROUP LTD., TO THE EFFECT THAT SUCH EXEMPTION FROM REGISTRATION IS AVAILABLE IN CONNECTION WITH SUCH SALE." (e) Prior to the earlier of the Shareholders Meeting (as defined below) and the four month anniversary of the Closing Date, the Securities, Conversion Shares and the Warrant Shares may not be sold, transferred or otherwise disposed of, directly or indirectly, without approval of the Transaction Committee. (f) The Purchasers shall not transfer, in one transaction, or a series of related transactions, to a single Person or group, Common Shares, and/or securities convertible into Common Shares, representing in excess of either 51% of the votes then entitled to be cast in the election of directors, or 51% of the then outstanding Common Shares (taking into account Common Shares issuable upon conversion of the Preference Shares) without making available to all holders of Common Shares the right to participate in such transaction on the same or substantially the same terms as the Purchasers (giving effect to the securities being transferred). 2. Purchaser Representations. Each Purchaser, severally and not jointly, hereby represents and warrants and covenants to the Company as follows: (a) The Securities to be purchased by such Purchaser are being purchased for such Purchaser's own account, and not with a view to distribution, assignment or resale to others or to fractionalization in whole or in part. No other person has or will have a direct or indirect beneficial interest in such Securities or any component thereof. (b) The financial situation of such Purchaser is such that it can afford to bear the economic risk of holding the Securities for an indefinite period, and such Purchaser can afford to suffer the complete loss of its investment in the Securities. Such Purchaser has (i) knowledge and experience in financial and business matters such that it is capable of evaluating the risks of the investment in the Securities and (ii) carefully reviewed the terms and provisions of this Agreement and has evaluated the restrictions and obligations contained herein. (c) This Agreement has been duly authorized, executed and delivered by such Purchaser and, assuming due execution and delivery by each other party hereto, consti- -10- tutes a valid and binding obligation of such Purchaser enforceable in accordance with its terms. (d) Such Purchaser shall hold the Securities subject to, and shall have voting rights with respect thereto as specified in, the Company's Bye-laws and the Certificate in effect from time to time and shall not assign, sell, hypothecate or otherwise transfer the Securities, the Conversion Shares or the Warrant Shares other than in accordance with applicable law and the provisions with respect thereto in such documents. (e) Such Purchaser covenants and agrees to make available to the Company and the appropriate insurance regulatory governmental authorities all information concerning such Purchaser required to be furnished to such governmental authorities in connection with obtaining requisite approvals, and further covenants and agrees to make all filings, and seek to acquire all consents, required by such governmental authorities. (f) The execution, delivery and performance by such Purchaser of this Agreement and the consummation of the transactions contemplated hereby do not and will not (i) violate any provision of the organizational documents of such Purchaser, (ii) assuming compliance with the matters referred to in Section C.1.a, violate any provision of any applicable law, statute, ordinance, rule, regulation, judgment, injunction, order or decree or (iii) violate or result in a default under any agreement or other instrument binding upon such Purchaser or any of its Subsidiaries, except in each case as would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect (as defined below) on such Purchaser. (g) Such Purchaser has, or will have prior to the Closing Date, sufficient cash or other sources of immediately available funds to enable it to make payment of the purchase price for the Securities as required hereunder and all related fees and expenses. 3. Representations and Warranties of the Company. Except as set forth in the disclosure letter delivered to the Purchasers by the Company dated as of the date hereof (the "Company Disclosure Letter"), or in the Company Reports filed since December 31, 2000 but prior to the date hereof, the Company hereby represents and warrants to each of the Purchasers that: (a) Organization, Good Standing and Qualification. (i) Each of the Company and its Subsidiaries is a corporation or other entity duly organized, validly existing and, if applicable, in good standing under the laws of its respective jurisdiction of organization and has all requisite corporate or similar power and authority to own, operate and lease its properties and assets and to carry on its business as presently conducted and is duly qualified to do business and is in good standing as a foreign corporation or other entity in each jurisdiction -11- where the ownership, operation or leasing of its assets or properties or conduct of its business requires such qualification except for failures to be so qualified, or to be so in good standing, which would not have a Material Adverse Effect. The Company has made available to Parent a complete and correct copy of the Company's certificate of incorporation, memorandum of association and Bye-laws, each as amended to date, which are in full force and effect. (ii) The Company does not have any Subsidiaries which (A) individually constitute or, if aggregated and treated as one Subsidiary, would constitute a "Significant Subsidiary" within the meaning of Rule 1-02(w) of Regulation S-X under the Exchange Act, (B) have unlimited liability share capital or other equity or similar interests of unlimited liability, or (C) conduct material insurance, fund management, broker-dealer, banking or consumer finance operations. Section 3.2(a)(ii) of the Company Disclosure Letter (X) lists the jurisdiction of organization of each of the Company's Subsidiaries, (Y) in the case of the Company's Subsidiaries that conduct insurance operations (collectively, the "Company Insurance Companies"), lists, as of June 30, 2001, the U.S. jurisdictions where the Company Insurance Companies are domiciled or "commercially domiciled" and licensed to do an insurance business for insurance regulatory purposes, and (Z) indicates which Subsidiaries in which the Company's interest therein includes unlimited share capital or other equity or similar interests of unlimited liability. Each of the Company and each of its Subsidiaries holds all material licenses or authorizations required or necessary to conduct its business as currently conducted. (iii) As of the date hereof, the Company does not own (other than (A) in a bona fide fiduciary capacity or in satisfaction of a debt previously contracted, (B) in the ordinary course of its insurance, annuity or asset management business, (C) in customer accounts held or maintained in the ordinary course, or (D) in any general account or otherwise in the ordinary course to offset insurance liabilities) beneficially, directly or indirectly, (X) any material equity securities or similar material interests of any Person other than its Subsidiaries, or (Y) any interest in any general partnership, unlimited company or other Person with share capital or other equity or similar interests of unlimited liability, or any general partnership interest in a limited partnership. (b) Capital Structure. (i) The authorized stock of the Company consists of 200,000,000 Common Shares, of which 12,868,158 Common Shares (including shares of restricted stock issued pursuant to Company Stock Plans) were issued and outstanding as of the close of business on September 30, 2001, and 50,000,000 preference shares, par value $0.01 per share, of which no shares are issued or outstanding as of the date hereof. All of the issued and outstanding Common Shares have been duly authorized and are validly issued, fully paid and nonassessable. Since September 30, 2001, the Company has issued no Common Shares, -12- or securities convertible or exchangeable into Common Shares. As of the date hereof, the Company has no commitments (including contingent or conditional commitments) to issue or deliver Common Shares or preference shares. (ii) All of the outstanding capital stock of, or other voting securities or ownership interests in, each Subsidiary, to the extent owned by the Company, is owned by the Company, directly or indirectly, free and clear of any mortgage, lien, pledge, charge, security interest or encumbrance in respect of such property or asset and free of any other limitation or restriction (including any restriction on the right to vote, sell or otherwise dispose of such capital stock or other voting securities or ownership interests, except as set forth in the Company's Bye-laws). Except as contemplated by this Agreement, there are no outstanding (A) securities of the Company or any of its Subsidiaries convertible into or exchangeable for shares of capital stock or other voting securities or ownership interests in any Subsidiary or (B) options or other rights to acquire from the Company or any of its Subsidiaries, or other obligation of the Company or any of its Subsidiaries to issue, any capital stock or other voting securities or ownership interests in, or any securities convertible into or exchangeable for any capital stock or other voting securities of or ownership interests in, any Subsidiary (the items in clauses (A) and (B) being referred to collectively with the capital stock of the subsidiaries as the "Subsidiary Securities"). There are no outstanding obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquire any of the Subsidiary Securities. (iii) Except as set forth above (A) there is no share capital or other voting securities of the Company authorized, reserved, issued or outstanding, (B) neither the Company nor any of its Subsidiaries is party to any agreement creating preemptive or other outstanding rights, subscriptions, options, warrants, stock appreciation rights, redemption rights, repurchase rights, convertible securities or other agreements, arrangements or commitments of any character relating to, or the value of which is determined by reference to, the issued or unissued share capital or other ownership interest of the Company or any of its Subsidiaries, and (C) neither the Company nor any of its Subsidiaries is party to any agreement creating any other securities or obligations convertible or exchangeable into or exercisable for, or giving any Person a right to subscribe for or acquire, any securities of the Company or its Subsidiaries, and no securities or obligations evidencing such rights are authorized, issued or outstanding. Neither the Company nor any of its Subsidiaries has outstanding any bonds, debentures, notes or other similar obligations. (iv) The Preference Shares have been duly authorized and reserved for issuance, and, when issued in accordance with the terms of this Agreement, will be -13- validly issued, fully paid and non-assessable. The Conversion Shares have been duly authorized and reserved for issuance, and when issued in exchange for the Preference Shares in accordance with the terms of the certificate, will be validly issued, fully paid and non-assessable. (v) The Warrants have been duly authorized, and, when executed and delivered in accordance with the terms of this Agreement, will constitute legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms. The Warrant Shares have been duly authorized and reserved for issuance, and, when issued upon exercise of the Warrants in accordance with the terms thereof, will be validly issued, fully paid and non-assessable. (c) Corporate Authority; Approval. The Company has all necessary corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Company, and the consummation by the Company of the transactions contemplated hereby, have been duly and validly authorized by all necessary corporate action, and no other corporate proceedings (other than Requisite Shareholder Approval following the issuance of the Securities) on the part of the Company are necessary to authorize this Agreement or to consummate the transactions so contemplated. The Board of Directors has unanimously determined, as of the date of this Agreement, that it is advisable and in the best interest of the Company's shareholders for the Company to enter into this Agreement and to consummate the transactions contemplated hereby upon the terms and subject to the conditions of this Agreement and, as of the date of this Agreement, has recommended that the Bye-Law Amendment and the issuance of the Conversion Shares and Warrant Shares to the Purchasers in accordance with the terms hereof be approved by the shareholders of the Company. This Agreement has been duly and validly executed and delivered by the Company and, assuming the due authorization, execution and delivery by each other party hereto, constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. The Company has received the opinion of its financial advisor, Credit Suisse First Boston Corporation ("CSFB"), to the effect that, as of the date hereof, the consideration to be received by the Company for the issuance and sale of the Securities is fair, from a financial point of view, to the Company, a true and correct copy of which will be furnished to Parent. (d) Governmental Filings; No Violations. (i) Other than the reports, filings, registrations, consents, approvals, permits, authorizations, applications, expiry of waiting periods and/or notices under the HSR Act, no notices, reports or other filings are required to be made by the Company or any of its Subsidiaries with, nor are any material consents, registrations, approvals, permits applications, expiry of waiting periods or authorizations required -14- to be obtained by the Company or any of its Subsidiaries from, any U.S. or non-U.S. governmental or regulatory authority, agency, commission, tribunal, body or other governmental, quasi-governmental, regulatory or self-regulatory entity, including, without limitation, any state insurance department or insurance or consumer finance regulatory agency, in each case, of competent jurisdiction (each a "Governmental Entity"), in connection with the execution and delivery of this Agreement by the Company and the issuance of the Preference Shares and Warrants contemplated hereby. (ii) The execution, delivery and performance of this Agreement by the Company do not, and the consummation by the Company of transactions contemplated hereby will not, constitute or result in (A) a breach or violation of, or a default under, the certificate of incorporation, memorandum of association or Bye-laws of the Company or the comparable governing instruments of any of its Subsidiaries, (B) a breach or violation of, or a default under, or the creation or acceleration of any obligations or the creation of a material lien, pledge, security interest or other encumbrance on the assets of the Company or any of its Subsidiaries (with or without notice, lapse of time or both) pursuant to, or the creation or acceleration of any right of termination under, any material agreement, lease, contract, license, note, mortgage, indenture, arrangement or other obligation, whether written or oral ("Contracts" and individually, a "Contract"), binding upon the Company or any of its Subsidiaries or any of their respective assets, or (C) any material and adverse change in the rights or obligations of the Company or any of its Subsidiaries under any material Contract. (e) Company Reports; Financial Statements; Undisclosed Liabilities; Statutory Statements. (i) Each registration statement, report, proxy statement or information statement prepared by the Company or its Subsidiaries since December 31, 1999, including the Company's Annual Report on Form 10-K for the year ended December 31, 2000 (the "Company Form 10-K"), each in the form (including exhibits, annexes and any amendments thereto) filed with the SEC (collectively, including any such reports filed with the SEC subsequent to the date hereof, the "Company Reports"), as of their respective dates, as amended prior to the date hereof or as supplemented by Company Reports filed prior to the date hereof, did not, and any Company Reports filed with the SEC subsequent to the date hereof will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading. Each of the consolidated balance sheets included in or incorporated by reference into the Company Reports (including the related notes and schedules) fairly presents, or will fairly present, in all material respects the consolidated financial position of the Company and its Subsidiaries as of its date, and each of the consolidated statements of income and of changes in shareholders' equity and cash flows included in or incorporated by reference into the Company Reports (including any related notes and -15- schedules) fairly presents, or will fairly present, in all material respects the results of operations, retained earnings and changes in financial position, as the case may be, of the Company and its Subsidiaries for the periods set forth therein (subject, in the case of unaudited statements, to notes and normal year-end audit adjustments that were not, or are not reasonably expected to be, material in amount or effect), in each case in accordance with U.S. generally accepted accounting principles ("GAAP") (except in the case of unaudited statements, as permitted by Form 10-Q) consistently applied during the periods involved, except as may be noted therein or in the notes thereto. (ii) Except for those liabilities that are fully reflected or reserved against on the consolidated balance sheet of the Company included in the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2001 or liabilities described in the notes thereto (or liabilities for which neither accrual nor footnote disclosure is required pursuant to GAAP), neither the Company nor any of its Subsidiaries has incurred any material liability of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether due or to become due), other than liabilities incurred in connection with the negotiation, execution, delivery and performance of this Agreement and the transactions contemplated hereby. (iii) Since December 31, 1999, the Company and each of its Subsidiaries has timely filed all material periodic statements, together with all exhibits, interrogatories, notes, schedules and any actuarial opinions, affirmations or certifications or other supporting documents in connection therewith, required to be filed with or submitted to any Governmental Entity on forms prescribed or permitted thereby (collectively, the "Company Regulatory Reports"). The financial statements included in the Company Regulatory Reports, including the notes thereto, were prepared in conformity in all material respects with applicable statutory accounting practices prescribed or permitted by the applicable Governmental Entity consistently applied for the periods covered thereby and present fairly, in all material respects, the statutory financial position of the Company or such Subsidiary as at the respective dates thereof and the results of operations thereof for the respective periods then ended. The Company Regulatory Reports complied in all material respects with all applicable Laws when filed, and no material deficiency has been asserted with respect to any Company Regulatory Report by any Governmental Entity. (iv) Except as set forth in the Company's proxy statement with respect to the annual meeting of Company shareholders in 2001, neither the Company nor any of its Subsidiaries is a party to any Contract with any officer or director of the Company or any Person in which any such officer or director holds 5% or more of eq- -16- uity interests which would be required to be disclosed under Item 404 of Regulation S-K promulgated by the SEC. (f) Absence of Certain Changes. (i) Since December 31, 2000 (A) the Company and its Subsidiaries have conducted their respective businesses only in the ordinary course, consistent with past practice, and (B) there has not been (1) any Material Adverse Effect with respect to the Company or any development or combination of developments, that, individually or in the aggregate, has had or is reasonably likely to have a Material Adverse Effect with respect to the Company; (2) any material change by the Company in accounting principles, practices or methods other than as required by GAAP or applicable Law; (3) any declaration, setting aside or payment of any dividend or other distribution in respect of the share capital of the Company; (4) any split in share capital, combination, recapitalization, redenomination of share capital or other similar transaction or issuance or authorization of any issuance of any other securities in respect of, in lieu of or in substitution for share capital of the Company; (5) any material addition, or any development involving a prospective material addition, to the Company's consolidated reserves for future policy benefits or other policy claims and benefits; or (6) any material change in the accounting, actuarial, investment, reserving, underwriting or claims administration policies, practices, procedures, methods, assumptions or principles of the Company or any Subsidiary of the Company except as required by GAAP or applicable Law. (ii) The Company has no Knowledge that any material rating presently held by the Company or any of its Subsidiaries is likely to modified, qualified, lowered or placed under surveillance for a possible downgrade for any reason. (g) Litigation. Except to the extent provided as of December 31, 2000 in appropriately identified reserves, there are no material civil, criminal or administrative actions, suits, claims, hearings, investigations, inquiries, arbitrations, mediations or proceedings ("Actions") pending or, to the Knowledge of the Company, threatened in writing against the Company or any of its Subsidiaries. (h) Employee Benefits; Labor. (i) For purposes of this Agreement, the term (A) "Plan" shall mean any "employee benefit plan," within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), whether or not subject to ERISA, and any employment, consulting, termination, severance, retention, change-in-control, deferred or incentive compensation, commission, stock option or other equity-based, vacation or other fringe-benefit plan, program, policy, arrangement, agreement or commitment, and (B) "Company Plan" shall mean each material Plan which is sponsored or contributed to by the Company or any of its Subsidiaries, to which the Company or any such Subsidiary has any obligation to contribute, or with respect to which the Company or any such Subsidiary is a party or otherwise has any material liability. -17- (ii) With respect to each Company Plan listed on the Company Disclosure Letter, the Company will deliver or make available to the Purchasers, no later than seven days after the date hereof, a true, correct and complete copy of: (A) each Company Plan, trust agreement, and insurance contract and other funding vehicle related thereto; (B) the most recent Annual Report (Form 5500 Series) and accompanying schedule, if any; (C) the current summary plan description and any material modifications thereto, if any (in each case, whether or not required to be furnished under ERISA); (D) the most recent annual financial report, if any; (E) the most recent actuarial report, if any; and (F) the most recent determination letter from the U.S. Internal Revenue Service (the "IRS") if any. Since June 30, 2001, there have been no amendments to any Company Plan adopted or approved, nor has the Company or any of its Subsidiaries undertaken to make any such amendments or to adopt or approve any new Company Plan that is not reflected in the Company Plan document. (iii) Each Company Plan has been operated and administered and is in compliance with its terms and all applicable Laws in all material respects, and there are no actions, suits, claims or governmental audits (other than routine claims for benefits in the ordinary course) pending or, to the Knowledge of the Company, threatened with respect to any Company Plan or the assets thereof that, if adversely determined, would, individually or in the aggregate, result in any material liability or obligation of the Company or any of its Subsidiaries. (iv) No Company Plan is (A) a multiemployer plan within the meaning of Section 4001(a)(3) of ERISA, or (B) a multiple employer plan within the meaning of Section 4063 or 4064 of ERISA. No Company Plan has an "accumulated funding deficiency" (within the meaning of Section 302 of ERISA or Section 412 of the Code), whether or not waived. (v) Each Company Plan that is intended to qualify under Section 401(a) and/or 401(k) of the Code has received a favorable determination letter from the IRS that it is so qualified and, to the Knowledge of the Company, nothing has occurred or been done or omitted to be done since the date of such letter that has adversely affected or will adversely affect such qualified status. The Company and its Subsidiaries have timely paid all contributions, premiums and expenses payable to or in respect of each Company Plan under the terms thereof and in accordance with all applicable Laws, except where any failure to pay such amounts has not and will not, individually or in the aggregate, resulted or result in any material liability or obligation of the Company or its Subsidiaries. (vi) Neither the Company nor any of its Subsidiaries has incurred or will incur, either directly or indirectly (including as a result of an indemnification obli- -18- gation), any material liability under or pursuant to any provision of Title I or IV of ERISA or the penalty, excise tax or joint and several liability provisions of the Code relating to Plans, and, to the Knowledge of the Company, no event, transaction or condition has occurred, exists or is expected to occur that would reasonably be expected to result in any such material liability to the Company or any of its Subsidiaries or, after the Effective Time, to the Purchasers. (vii) Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, either alone or in combination with any other event (whether contingent or otherwise) will (A) entitle any current or former employee, consultant or director of the Company or any of its Subsidiaries to any increased or modified benefit or payment; (B) increase the amount of compensation or benefits due to any such employee, consultant or director; (C) accelerate the vesting, payment or funding of any compensation, stock-based, incentive or other benefit; (D) result in any "parachute payment" under Section 280G of the Code (whether or not such payment is considered to be reasonable compensation for services rendered); (E) cause any compensation to fail to be deductible under Section 162(m) or any other provision of the Code or any similar Law; (F) otherwise result in any payment in the nature of severance or termination pay; or (G) limit or prohibit (except to the extent required by applicable Law) the ability to amend, merge, terminate or receive a reversion of assets from any Company Plan or related trust. (viii) The Company and its Subsidiaries have no liability for life, health, medical or other welfare benefits to former employees or beneficiaries or dependents thereof, except for health continuation coverage as required by Section 4980B of the Code or Part 6 of Title I of ERISA and at no expense to the Company and its Subsidiaries. (ix) No labor organization or group of employees of the Company or any of its Subsidiaries has made a pending demand for recognition or certification, and there are no representation or certification proceedings, or petitions seeking a representation proceeding, presently pending, or threatened to be brought or filed, with the National Labor Relations Board or any other labor relations tribunal or authority. There are no organizing activities, strikes, work stoppages, slowdowns, lockouts, material arbitrations or material grievances, or other material labor disputes pending or threatened against or involving the Company or any of its Subsidiaries. Each of the Company and its Subsidiaries is in compliance with all applicable laws in all material respects and collective bargaining agreements respecting employment and employment practices, terms and conditions of employment, wages and hours and occupational safety and health. -19- (i) Compliance with Laws; Permits. (i) The businesses of the Company and each of its Subsidiaries have been (since December 31, 1999), and are being, conducted in compliance in all material respects with all applicable federal, state, local or non-U.S. laws, statutes, ordinances, rules, regulations (including, without limitation, the rules of any applicable self-regulatory organization recognized by the SEC), rulings, written interpretations, judgments, orders, injunctions, decrees, arbitration awards, agency requirements, licenses or permits of any Governmental Entity of competent jurisdiction, including all regulations regulating the business and products of insurance and all applicable orders and directives of insurance regulatory authorities (including federal authorities with respect to variable insurance and annuity products) and orders resulting from market conduct examinations of insurance regulatory authorities (including federal authorities with respect to variable insurance and annuity products) (collectively, "Laws"). Except as set forth in the Company Reports filed prior to the date hereof and for regulatory examinations or reviews conducted in the ordinary course, no material investigation or review by any Governmental Entity with respect to the Company or any of its Subsidiaries is as of the date hereof pending or, to the Knowledge of the Company, threatened. (ii) No material change is required in the Company's or any of its Subsidiaries' processes, properties, practices or procedures in connection with any such Laws, and the Company has not received any written notice or communication of any material noncompliance with any such Laws that has not been cured as of the date hereof. Notwithstanding the generality of the foregoing, the Company and each of its Subsidiaries have in place policies and procedures with respect to themselves and their insurance agents, third-party administrators, brokers, broker/dealers, distributors and agents intended to assure that their sales processes and practices are consistent in all material respects with applicable Law governing such practices and processes, and, where there has been any material deviation therefrom, such deviation has been cured, resolved or settled through agreements with applicable Governmental Entities or are barred by all applicable statutes of limitations or other equitable principles. To the Knowledge of the Company, all employees of the Company and its Subsidiaries with management responsibility with respect to any business line, and all officers and directors thereof required to be registered with or licensed under applicable Laws, are so licensed and in good standing with the applicable Governmental Entity. (j) Takeover Statutes. There are applicable to the transactions contemplated by this Agreement no restrictive provision of any other applicable "fair price," "moratorium," "control share acquisition," "interested shareholder" or other similar anti-takeover statute or regulation (each a "Takeover Statute"). -20- (k) Taxes. (i) All material Tax Returns required to be filed by, or with respect to, the Company or any Subsidiary have been timely filed (taking into account extensions) and are correct and complete in all material respects. (ii) The Company and each of its Subsidiaries has timely paid all Taxes due and payable by it or for which it may be liable (other than Taxes that are being contested in good faith and for which adequate reserves are reflected in accordance with GAAP on the Company's consolidated balance sheet filed with the Company Form 10-K). (iii) The Company and each Subsidiary have made adequate provision in accordance with GAAP on the Company's consolidated balance sheet filed with the most recent Company Reports for all Taxes payable for which no Tax Return has yet been filed. (iv) Neither the Company nor any Subsidiary is doing business or maintains a taxable presence in a jurisdiction (a "Non-resident Jurisdiction") in which it does not file income Tax Returns (or does file Tax Returns in the manner contemplated by Treasury Regulation ss.1.882-4(a)(3)(iv) or any comparable provision of applicable law), and no claim has been made in writing by any taxing authority in a Non-resident Jurisdiction that the Company or any of its Subsidiaries are or may be subject to taxation by that jurisdiction. (v) No material deficiencies for any Taxes have been proposed, asserted or assessed, in each case in writing, by any taxing authority against the Company or any of its Subsidiaries that are not adequately reserved for in accordance with GAAP on the Company's consolidated balance sheet filed with the Company Form 10-K. (vi) Within the past three years neither the Company nor any of its Subsidiaries have been a "distributing corporation" or a "controlled corporation" in a distribution intended to qualify under Section 355(a) of the Internal Revenue Code of 1986, as amended (the "Code"). (vii) No material amounts of Tax could reasonably be expected to be imposed on the Company or any Subsidiary as a result of the reorganization contemplated by the September 26, 2000 proxy statement/prospectus of Arch Capital Group Ltd. or any related internal restructuring. -21- (viii) No agreements relating to the allocation or sharing of Taxes exist between the Company and/or any of its Subsidiaries, on the one hand, and a third party, on the other hand. (ix) All material Taxes required to be withheld from any compensation, dividend or other payment by or on behalf of the Company or any Subsidiary have been withheld, and such withheld Taxes have been duly and timely paid to the proper taxing authorities. (x) Based on the advice of its tax advisors, the Company does not believe that the Company or any of its Subsidiaries presently is a "personal holding company" within the meaning of Section 542(a) of the Code, a "foreign personal holding company" within the meaning of Section 552(a) of the Code, a "controlled foreign corporation" within the meaning of Section 957 of the Code or a "foreign investment company" within the meaning of Section 1246 of the Code. Based on the advice of its tax advisors, the Company does not believe that the Company presently is, or, at the end of the taxable year that includes the Closing Date, will be, a "passive foreign investment company" within the meaning of Section 1297 of the Code. (xi) The Company has not had and does not expect to have a disallowance of any deductions under Section 162(m) of the Code for employee remuneration of any amount paid or payable by the Company or any Subsidiary. "Taxes," with respect to any person means, (A) any and all taxes, charges, fees, levies or other assessments, including all net income, gross income, gross receipts, excise, stamp, real or personal property, ad valorem, withholding, social security, unemployment, use, license, net worth, payroll, franchise, severance, transfer, recording, employment, premium, windfall profits, environmental, customs duties, capital stock, profits, sales, registration, value added, alternative or add-on minimum, estimated or other taxes, assessments or charges imposed by any taxing authority and any interest, penalties, or additions to tax attributable thereto; (B) any joint or several liability of such person with any other person for the payment of any amounts of the type described in clause (A) of this definition, and (C) any liability of such person for the payment of any amounts of the type described in clause (A) as a result of any express or implied obligation to indemnify any other person. "Tax Returns" means any return, report, form or similar statement required to be filed with respect to any Tax (including any attached schedules), including any information return, claim for refund, amended return or declaration of estimated Tax. (l) Intellectual Property. Each of the Company and its Subsidiaries owns, or is licensed or otherwise possesses legally enforceable rights to use, all patents, trademarks, trade names, service marks, copyrights, and any applications therefor, technology, know-how, -22- computer software programs or applications, and tangible or intangible proprietary information or materials, including trade secrets (collectively, "Intellectual Property") that are used in, and material to, the business of the Company and its Subsidiaries as currently conducted, and any such patents, trademarks, trade names, service marks and copyrights held by the Company and/or its Subsidiaries are valid and subsisting except, in any such case, as would not have a Material Adverse Effect. (m) Brokers and Finders. Neither the Company nor any of its officers, directors or employees has employed any broker or finder or incurred any liability for any brokerage fees, commissions or finders' fees in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company or any of its Subsidiaries, except that the Company has employed CSFB as its financial advisor pursuant to a written agreement, a true and accurate copy of which has previously been provided to the Purchasers. (n) Insurance Business. (i) All actuarial reports with respect to the Company or any Company Insurance Company relied upon by the Company or any Company Insurance Company or Governmental Entity since December 31, 1999, and all attachments, addenda, supplements and modifications thereto (the "Company Actuarial Analyses"), were prepared using appropriate modeling and other procedures accurately applied, if relevant, and in conformity with generally accepted actuarial standards consistently applied, and the projections contained therein were properly prepared in accordance with the assumptions stated therein. The information and data furnished by the Company or any Company Insurance Company to its independent actuaries in connection with the preparation of the Company Actuarial Analyses were accurate in all material respects. (ii) The Company Insurance Companies are in compliance in all material respects with the underwriting guidelines applicable thereto. (iii) Except as would not, individually or in the aggregate, be reasonably likely to result in a material liability to the Company, (A) each separate account maintained by a Company Insurance Company (a "Separate Account") is duly and validly established and maintained under the laws of its state of formation and is either exempt from registration under the 1940 Act or is duly registered as an investment company under the 1940 Act, and (B) each such Separate Account is operated and all of its operations conducted, and each contract issued by a Company Insurance Company under which Separate Account assets are held has been duly and validly issued, offered and sold, in compliance with all applicable Laws. (o) Material Contracts. (i) Other than contracts or amendments thereto that have been disclosed in or have been filed as an Exhibit to a Company Report filed prior to -23- the date hereof, neither the Company nor any of its Subsidiaries is a party to or otherwise bound by any Material Contract. "Material Contract" means, with respect to any Person, any Contract that is material to the business, financial position or results of operations of such Person and its Subsidiaries, taken as a whole, including (A) any employment, severance, termination, consulting or retirement contract with an officer or member of senior management, and (B) any material Contract relating to the borrowing of money or the guarantee of any such obligation. (ii) All of the Company's Material Contracts are in full force and effect. True and complete copies of all such Material Contracts not filed as exhibits to the Company Reports prior to the date hereof have been delivered or made available by the Company to Purchasers. Neither the Company nor any of its Subsidiaries nor, to the Knowledge of the Company, any other party is in breach of or in default under any such Material Contract. Neither the Company nor any of its Subsidiaries is party to any (A) Contract containing any provision or covenant limiting in any material respect the ability of the Company or any of its Subsidiaries to (1) sell any products or services to any other Person, (2) engage in any line of business, or (3) compete with any Person, or (B) except for employment agreements disclosed pursuant to another Section of this Agreement or as provided in the certificate of incorporation, memorandum of association, Bye-laws or other constituent documents of the Company or any of its Subsidiaries, any Contract providing for indemnification of directors or executive officers of the Company in their capacity as such except as would not have a Material Adverse Effect. (p) Risk Management; Derivatives. (i) The Company and its Subsidiaries have in place risk management policies and procedures sufficient in scope and operation to protect against risks of the type and in amounts reasonably expected to be incurred by Persons of similar size and in similar lines of business as the Company and its Subsidiaries. (ii) The adoption of Statement of Financial Accounting Standards No. 133 will not have a material and adverse impact on the Company's consolidated results of operations or financial position. (iii) All material derivative instruments, including, without limitation, swaps, caps, floors and option agreements, whether entered into for the Company's own account, or for the account of one or more of its Subsidiaries or their customers, were entered into (A) only for purposes of mitigating identified risk or as a means of managing the Company's long-term debt objectives, (B) in accordance with prudent practices and in all material respects with all applicable laws, rules, regulations and regulatory policies, and (C) with counterparties believed by the Company to be financially responsible at the time; and each of them constitutes the valid and legally -24- binding obligation of the Company or one of its Subsidiaries, enforceable in accordance with its terms, and are in full force and effect. Neither the Company nor its Subsidiaries, nor to the Company's Knowledge any other party thereto, is in breach of any of its material obligations under any such agreement or arrangement. (q) Aviation Treaties. The Company Disclosure Letter sets forth a list of all reinsurance treaties relating to aviation insurance written by the Company or its Subsidiaries with respect to which the Company or any Subsidiary of the Company may be claimed against, together with a description of the material terms of such treaties (the "Aviation Treaties"). The information set forth in such schedule, as of the date hereof, fairly and accurately describes the Aviation Treaties and reasonably estimates, as of the date hereof, any liabilities that the Company or any of its Subsidiaries could reasonably be expected to incur in connection therewith. 4. Covenants. The Company and the Purchasers (severally and not jointly) hereby covenant and agree as follows: (a) Conduct of the Company. The Company agrees that from the date hereof until the Closing Date, (i) except as set forth in the Disclosure Letter or as otherwise expressly permitted or required by Sections D.4.b, D.4.e, D.4.h or Section E of this Agreement, or (ii) except with the prior written consent of the Purchasers (which consent shall not be unreasonably withheld or delayed), the Company and its Subsidiaries may conduct insurance and reinsurance businesses and operations and, in the ordinary course consistent with past practice, its other businesses and operations, and shall use their reasonable efforts to preserve intact their business organizations and material relationships with third parties and to keep available the services of their present officers and employees. Without limiting the generality of the foregoing, from the date hereof until the Closing Date, except as set forth in the Disclosure Letter or as expressly permitted or required by Sections D.4.b, D.4.e, D.4.h or Section E of this Agreement, without the prior written consent of the Purchasers: (A) the Company will not amend, or propose to amend, its Certificate of Incorporation, memorandum of association, bye-laws or other organizational documents; (B) the Company will not, and will not permit any of its Subsidiaries to, merge or consolidate with any other person; (C) the Company will not split, combine, subdivide, redeem or reclassify its shares or declare, set aside, make, or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of its share capital and other equity interests; -25- (D) the Company will not, directly or indirectly, redeem, repurchase or otherwise acquire or offer to redeem, repurchase, or otherwise acquire, any of its securities; (E) the Company will not (i) issue, deliver or sell, or authorize the issuance, delivery or sale of, any of its shares, or any securities convertible into or exercisable for, or any rights, warrants or options to acquire, any of its shares, grant any additional options to purchase Common Shares, or grant to any person any right to acquire any shares of the Company or any right, the value of which is based on the value of Common Shares, other than the issuance of Common Shares upon the exercise of share options outstanding on the date hereof in accordance with their present terms, (ii) enter into any agreement restricting the transfer of, or affecting the rights of holders of, the Company's securities, (iii) grant any preemptive or antidilutive rights with respect to any of the Company's securities, (iv) grant any registration rights with respect to the Company's securities, or (v) amend in any term of any outstanding securities of the Company or any of its Subsidiaries; (F) the Company will not acquire any assets or properties for cash or otherwise for an amount in excess of $500,000, in the aggregate; (G) the Company will not, and will not permit any of its Subsidiaries to, acquire (whether pursuant to merger, stock or asset purchase, joint venture or otherwise) in one transaction or series of related transactions any equity interest in, or all or substantially all of the assets of, any person or any business or division of any person; (H) the Company will not, and will not permit any of its Subsidiaries to, incur indebtedness for borrowed money, guarantee any indebtedness, issue or sell any debt securities or warrants or rights to acquire any debt securities of the Company or any of its Subsidiaries or guarantee any debt securities of others (collectively "Debt") in excess of $500,000, or prepay or refinance any indebtedness for Borrower's money; (I) the Company will not, and will not permit any of its Subsidiaries to, sell, lease, license or otherwise dispose of, any material amount of assets, securities or property, except pursuant to existing contracts or commitments; (J) the Company will not (i) change its tax or financial accounting policies, practices or methods except as required by accounting principles gen- -26- erally accepted in the U.S., or by the rules and regulations of the SEC or (ii) make any tax election, file any tax return or settle any tax contest or other matter, in each case, other than in a manner consistent with past practice; (K) the First American portion of the Core Insurance Operations shall not bind any gross or net insurance risk without the approval of Messrs. Ingrey, Evans or Grandisson; (L) the Company will not replace the independent auditors of the Company; (M) the Company will not increase by 5% or more the annual base compensation of any officer or key employee of the Company, or enter into or make any material change in any severance contract or arrangement with any such officer or key employee; (N) the Company will not consummate a complete liquidation or dissolution of the Company, a merger or consolidation (i) in which the Company or any Subsidiary is a constituent corporation, or (ii) with respect to which the Common Shares would have the right to vote under applicable law, a sale of all or substantially all of the Company's assets, or any similar business combination; (O) the Company will not approve the annual plan, annual capital expenditure budget or the five-year plan of the Company and its Subsidiaries, taken as a whole; (P) the Company will not remove the Chief Executive Officer or Chairman of the Company, or appoint a new Chief Executive Officer or Chairman of the Company; (Q) the Company will not, and shall cause its Subsidiaries to not, engage in any transaction with any officer, director, or affiliate of any officer or director, of the Company; (R) the Company will not (i) establish, enter into or amend any collective bargaining agreement, Plan or Company Plan, including, without limitation, any severance plan, agreement or arrangement, (ii) increase the compensation payable or to become payable or the benefits provided to its current or former directors, officers, employees, consultants or service providers or (iii) accelerate the vesting or payment of the compensation payable or the -27- benefits provided to any current or former director, officer, employee, consultant or service provider, in each case other than as required by applicable Law or any existing Company Plan; or (S) the Company will not, and will not permit any of its Subsidiaries to, agree or commit to do any of the foregoing. Nothing in this Section D.4 shall grant to any Purchaser any right of consent (to the extent that such right would result in such Purchaser being deemed to "control" an insurance subsidiary of the Company that is domiciled in the United States where the exercise of such control would otherwise require the prior approval of such state). (b) Shareholders Meeting. The Company will cause a meeting of its shareholders (the "Shareholders Meeting") to be duly called and held as soon as reasonably practicable after the Closing Date for the purpose of voting on (i) the adoption of an amendment (the "Bye-Law Amendment") of the Company's bye-law 45 and 75 in the form of Exhibit III hereto, and (ii) the issuance of such number of Conversion Shares that, together with the total number of Warrant Shares issuable upon exercise of the Warrants, is in excess of the amount that is permitted to be issued without shareholder approval under Rule 4350(i)(1)(D) of the Nasdaq Stock Market. The parties agree and acknowledge that Robert Clements will serve as Chairman of the Board of Directors so long as he is a director and is willing to serve in such capacity. (c) Proxy Statement. (i) Promptly after the Closing Date, the Company shall prepare and file with the SEC the proxy statement (the "Proxy Statement") relating to the Shareholders Meeting. The Company shall mail the Proxy Statement to its shareholders as promptly as practicable after the Closing Date and, if necessary, after the Proxy Statement shall have been so mailed, promptly circulate amended, supplemental or supplemented proxy material, and, if required in connection therewith, resolicit proxies. The parties acknowledge and agree that no shareholder approval is required prior to the Closing Date in connection with the sale and purchase of the Securities and the consummation of the transactions contemplated hereby. (ii) The Company will advise the Purchasers and the Transaction Committee, promptly after it receives notice thereof, of the time when any supplement or amendment has been filed or any request by the SEC for amendment of the Proxy Statement or comments thereon and responses thereto or requests by the SEC for additional information. If at any time the Company or the Purchasers, respectively, discover any information relating to the Company or the Purchasers, or any of their respective affiliates, officers or directors, that should be set forth in an amendment or supplement to the Proxy Statement so that the document will not include any mis- -28- statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, then the party that discovers any misleading information shall promptly notify the other parties hereto and an appropriate amendment or supplement describing the information shall be promptly filed with the SEC and, to the extent required by law or regulation, disseminated to the Company's shareholders. (d) Government Filings. The Company and the Purchasers shall cooperate with one another in (i) determining whether any other action by or in respect of, or filing with, any federal, state or local court, administrative or regulatory agency or commission or other governmental authority or agency, domestic or foreign (each, a "Governmental Entity") is required in connection with the consummation of the transactions contemplated hereby or the effectiveness of the Bye-Law Amendment and (ii) seeking any consents, approvals or waivers, taking any actions, or making any filings, furnishing information required in connection therewith and seeking promptly to obtain any consents, approvals or waivers. The Company and the Purchasers agree, if required, to make an appropriate filing of a Notification and Report Form pursuant to the HSR Act with respect to the transactions contemplated hereby as promptly as practicable and to supply as promptly as practicable any additional information and documentary material that may be requested pursuant to the HSR Act and to take all other actions necessary to cause the expiration or termination of the applicable waiting period under the HSR Act as soon as practicable. (e) Dispositions; Pending Acquisitions. Prior to the Closing, the Company shall endeavor in good faith, subject to prevailing market conditions, to (i) sell, and cause its Subsidiaries to sell, all marketable securities, publicly traded equity securities, non-investment grade debt securities and illiquid securities owned by it (other than shares of any Subsidiary) and (ii) invest the proceeds from such sales prior to Closing Date in short-term, liquid, investment grade debt securities, and after the Closing Date, as determined by Board of Directors. The Company shall also use its commercially reasonable efforts to consummate the acquisition of Rock River. (f) Public Announcements. Upon the execution of this Agreement, the Company and the Purchasers will consult with each other with respect to the issuance of a press release to be released by the Company with respect to this Agreement and the transactions contemplated hereby, which release shall require the prior approval of the Purchasers. Prior to the Closing Date, except as otherwise agreed to by the parties, the parties shall not issue any report, statement or press release or otherwise make any public statements with respect to this Agreement, except as in the reasonable judgment of the party may be required by law, any national stock exchange or the Nasdaq Stock Market or in connection with the obligations of a publicly-held company. The Company and the Purchasers will consult with each -29- other with respect to the issuance of a press release on or after the Closing Date with respect to the consummation of the transactions contemplated by this Agreement, which release shall require the prior approval of the Purchasers. (g) Access; Information. From the date hereof until the Closing Date and subject to applicable law, the Company shall (i) give to each Purchaser, its counsel, financial advisors, auditors and other authorized representatives reasonable access to the offices, properties, books and records of such party, (ii) provide access to each Purchaser, its counsel, financial advisors, auditors and other authorized representatives to such financial and operating data and other information as such persons may reasonably request and (iii) instruct its employees, counsel, financial advisors, auditors and other authorized representatives to cooperate with the Purchasers in its investigation. Any investigation pursuant to this Section shall be conducted in such manner as not to interfere unreasonably with the conduct of the business of the Company. Unless otherwise required by law, each Purchaser will hold, and will cause its respective officers, employees, counsel, financial advisors, auditors and other authorized representatives to hold, any nonpublic information obtained in any such investigation or otherwise, when conducted before or after the date hereof, in confidence and shall not use for its own benefit in a manner adverse to the Company, and shall take reasonable steps to prevent disclosure of, any confidential information that it receives, and shall use at least the same degree of care to avoid disclosure of such information as it uses with respect to its own confidential information; provided, however, that no Purchaser shall have any obligations hereunder with respect to information which (A) is known by such Purchaser on a non-confidential basis at the time of disclosure by the Company, (B) is at the time of disclosure, or becomes thereafter, publicly available other than pursuant to a breach of this subsection by such Purchaser, (C) is received from a third party without restriction on further disclosure, (D) is independently developed by such Purchaser, or (E) is requested or required to be disclosed by self-regulatory organizations or by applicable law on request of any Governmental Entity. In the event of clause (E), such Purchaser will give prior notice to the Company of such disclosure in order to enable the Company to seek a protective order or other remedy or to waive compliance with this subsection. Each Purchaser shall give to the Company and its counsel such information regarding ownership of the Company, ownership of such Purchaser and related areas as they reasonably request in connection with preparing disclosure in filings under the Act or the Exchange Act on issues arising under the Internal Revenue Code of 1986, as amended, including the rules applicable to "controlled foreign corporations" thereunder. The Company shall, to the extent practicable, cause its Subsidiaries to maintain under separate ledgers the components necessary to calculate the Adjustment Basket. -30- (h) Indemnification; Insurance. (i) To the fullest extent permitted by law, from and after the Closing Date, all rights to indemnification as of the date hereof in favor of the directors, officers, employees and agents of the Company or any of its Subsidiaries with respect to their activities as such prior to the Closing Date and, with respect to the Transaction Committee also, after the Closing Date, as provided in the bye-laws or other organizational documents of the Company and its Subsidiaries in effect on the date hereof, or otherwise in effect on the date hereof, shall continue in full force and effect for a period of not less than six years from the Closing Date. The Purchasers shall not cause the Company to take any action inconsistent with this Section D.4.h. (ii) To the extent, if any, not provided by an existing right of indemnification or other agreement or policy, after the Closing Date, the Company shall, to the fullest extent permitted by applicable law, indemnify and hold harmless, each present and former director or officer of the Company or any of its Subsidiaries (collectively, the "Indemnified Parties") against all costs and expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages, liabilities and settlement amounts paid in connection with any claim, action, suit, proceeding or investigation (whether arising before or after the Closing Date), whether civil, administrative or investigative, arising out of or pertaining to any action or omission in their capacity as a director, officer, employee or agent of the Company or any of its Subsidiaries, in each case before the Closing Date (including the transactions contemplated by this Agreement) and, with respect to the Transaction Committee, also after the Closing Date. In the event of any such costs, expenses, judgments, fines, losses, claims, damages, liabilities or settlement amounts (whether or not arising before the Closing Date), (A) the Company shall pay the reasonable fees and expenses of counsel selected by the Indemnified Parties, which counsel shall be reasonably satisfactory to the Company, promptly after statements therefor are received, and otherwise advance to the Indemnified Parties upon request reimbursement of documented expenses reasonably incurred, in either case, to the extent not prohibited by the applicable law and (B) the Company shall cooperate in the defense of any such matter. In the event any Indemnified Party is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, the Company shall reimburse such Indemnified Party for all of its expenses in bringing and pursuing such action. (iii) For a period of at least six (6) years after the Closing Date, the Company shall cause to be maintained in effect the directors' and officers' liability insurance policies maintained by the Company and its Subsidiaries or substitute policies with at least the same coverage containing terms and conditions which are substantially equivalent with respect to matters occurring prior to the Closing Date, but the -31- Company shall not, in any event, be required to pay more than 200% of the current cost of such coverage. (iv) In the event the Company or any of its successors or assigns (A) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (B) transfers all or substantially all of its properties and assets to any person, then, and in either such case, proper provision shall be made so that the successors and assigns of the Company, shall assume the obligations set forth in this Section D.4(h). This Section D.4(h) is intended to benefit (and shall be enforceable by) the Indemnified Parties and their respective heirs, executors and personal representatives. (i) Further Assurances. Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use its reasonable best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary or desirable under applicable legal requirements, to consummate and make effective the transactions contemplated by this Agreement. If at any time after the Closing Date, any further action is necessary or desirable to carry out the purposes of this Agreement, the parties hereto shall use their reasonable best efforts to take or cause to be taken all such necessary or desirable action and execute, and deliver and file, or cause to be executed, delivered and filed, all necessary or desirable documentation. (j) Certain Tax Matters. (i) With respect to each taxable year during which any Purchaser owns shares of the Company, the Company shall use its reasonable best efforts to cause the Company and each of its Subsidiaries (A) not to constitute a "passive foreign investment company" within the meaning of Section 1297 of the Code, (B) not to satisfy the gross income requirement set forth in Section 542(a) of the Code, (C) not to satisfy the gross income requirement set forth in Section 552(a) of the Code, and (D) not to have any related person insurance income within the meaning of Section 953(c)(2) of the Code. (ii) In the event that the Company or any of its Subsidiaries constitutes a personal holding company, a foreign personal holding company, a controlled foreign corporation, a foreign investment company or a passive foreign investment company for U.S. federal income tax purposes with respect to any taxable year, the Company shall provide, and shall cause its Subsidiaries to provide, each Purchaser with such information as such Purchaser may reasonably request to satisfy its legitimate tax, accounting or other reporting requirements. -32- E. RIGHT TO EXCHANGE PREFERENCE SHARES 1. Formation of Newco. The Company shall use best efforts to (a) form a wholly owned Subsidiary ("Newco") to which the Company shall contribute 100% of its equity interest in Arch Reinsurance Ltd., a Bermuda company ("ARL") and (b) contribute, or cause the appropriate Subsidiary to contribute, all Core Insurance Operations other than Arch Reinsurance Company, a Nebraska corporation ("ARC"), in each case, no later than 90 days after the Closing Date (subject, in the case of direct or indirect contribution of U.S. domiciled insurance companies, to any necessary regulatory approvals or material third party approvals). From and after such formation and contribution, the Company shall not engage in the insurance business other than through Newco, except for (i) its holding of ARC and (ii) the operations of American Independent Insurance Holding Company, a Pennsylvania corporation ("AIIH") and Hales & Co., Inc., a Delaware corporation ("Hale"), but only to the extent of the current nature and scope of such operations of AIIH and Hale. The Company shall (1) use its best efforts to cause Newco to have the benefit of, or obtain independently, the same insurance authorizations as currently held by ARC, and (2) seek to accomplish the transactions contemplated by this paragraph in as tax-efficient a manner as possible. 2. Capital Structure of Newco. Newco shall be a company organized under the laws of Bermuda, with a number and kind of authorized and outstanding capital shares (including shares and warrants identical to the Preference Shares and Warrants), and a memorandum of association and bye-laws that replicate, as nearly as possible, those of the Company. All of such outstanding shares shall, upon such formation and contribution, be held by the Company. Until the latest of (a) the receipt of Requisite Shareholder Approval, (b) the receipt of Requisite Regulatory Approval and (c) ninety days following consummation of the Final Adjustment contemplated by Section B.3. of this Agreement to the extent that the number and kind of outstanding capital shares of the Company change from time to time, a corresponding adjustment shall be made by the Company in the number and kind of outstanding capital shares of Newco. 3. Exchange Right. From and after the occurrence of an Exchange Trigger Event, the Preference Shares and Warrants may be exchanged, in whole or in part (provided that Preference Shares representing a minimum of $150 million in Liquidation Preference shall be required for the initial such exchange), for preference shares and warrants of Newco bearing identical rights and privileges, including the right to convert into, or be exercised for, common shares of Newco. Such right to exchange shall be exercisable upon delivery to the Company and Newco of an exchange notice, which notice shall specify the number of Preference Shares and Warrants surrendered for exchange. Once delivered, the exchange notice shall be irrevocable, subject to the delivery of the required preference shares and/or warrants of Newco by the Company to the surrendering holder. Each exchange shall be -33- deemed to have been effected at the close of business on the date of receipt by the Company of the exchange notice, and the person exercising such exchange right shall be deemed to be the record holder of Newco preference shares and/or warrants as of the close of business on such date. From and after the exercise of such exchange right, the Company shall replicate, as nearly as possible, the rights and benefits, including governance rights and registration rights, provided for the benefit of Purchasers under this Agreement, the Certificate, the Shareholders Agreement and as otherwise contemplated under this Agreement for the benefit of the holders of preference shares and/or warrants of Newco. An "Exchange Trigger Event" shall mean any one or more of the following: (a) failure to obtain the Requisite Shareholder Approval (unless such failure was due to a breach by the Purchaser of a covenant hereunder) within five months of Closing Date, (b) failure to obtain the Requisite Regulatory Approval within six months of Closing Date or (c) if the Final Adjustment contemplated by Section B.3. of this Agreement is less than zero and its absolute value exceeds $250 million. 4. Maintenance of Newco. Until the latest of (a) the receipt of Requisite Shareholder Approval, (b) the receipt of Requisite Regulatory Approval and (c) ninety days following the consummation of the Final Adjustment contemplated by Section B.3. of this Agreement, the Company shall maintain intact the business, customers and employees of Newco and its operations as contemplated by Section E.1 and shall not (i) sell, dispose, exchange or distribute by way of dividend or otherwise any of the capital stock of Newco, (ii) sell, dispose, or exchange any assets of Newco, except in the ordinary course of business and to the extent the proceeds are retained in Newco, (iii) pay any dividend or distribution to the Company, or (iv) permit Newco, or any of its Subsidiaries to engage in any merger, business combination, consolidation or other similar transaction except for such transactions between wholly owned Subsidiaries of Newco. 5. Failure of Regulatory Approval. To the extent approval of any governmental authority is necessary either (a) for the Company to satisfy its obligations under Section E.1, or (b) for a holder of Preference Shares or Warrants to exercise its exchange right under Section E.3, and such approval has not occurred at the time a holder gives an exchange notice, the Company will hold Newco, the assets and operations to be contributed in Newco, and ARC in trust for the benefit of such exchanging holder, and shall use best efforts to restructure such holdings, if necessary, to obtain such approval, or to provide the same economic and governance benefit as intended to be provided by the exchange right for preference shares and warrants of Newco. 6. Modification or Amendment. The original signatories to this Agreement shall be the sole parties required to agree with the Company to any modification, amendment or waiver of the provisions of this Section E and no other holder of Preference Shares shall have such consent rights. -34- F. ADDITIONAL PROVISIONS 1. Modification. This Agreement may not be modified, amended or supplemented except in writing and signed by the party against whom any modification, amendment or supplement is sought. No term or condition of this Agreement may be, or will be deemed to have been, waived except in writing by the party charged with the waiver. A waiver shall operate only as to the specific term or condition waived and will not constitute a waiver for the future or act on anything other than that which is specifically waived. Any modification, amendment, supplement or waiver to be executed by the Company must be approved by the Transaction Committee. 2. Purchasers' Costs and Expenses. The Company will reimburse the Purchasers for their costs and expenses in connection with the transactions contemplated by this Agreement, including, without limitation, (a) the fees and expenses of the Purchaser's accountants, attorneys and other advisors and (b) any and all losses, liabilities, claims, damages and any out-of-pocket costs and expenses incurred in connection with any claims, disputes, proceedings or litigation arising directly or indirectly out of the transactions contemplated by this Agreement, provided that any such reimbursed costs and expenses shall not be reflected in any reduction of Book Value included under "C" in Schedule B. 3. Notices. Any notice or other communications required or permitted to be given pursuant to this Agreement shall be in writing and shall be sent by registered or certified mail, return receipt requested, postage prepaid, by hand delivery (including courier services), or by facsimile as follows: if to the Company, to: Arch Capital Group Ltd. 20 Horseneck Lane Greenwich, CT 06830 Attention: General Counsel Facsimile: (203) 861-7240 with copies to: Cahill Gordon & Reindel 80 Pine Street New York, NY 10005 Attention: Immanuel Kohn, Esq. Facsimile: (212) 269-5420 -35- and if to any Purchaser, at its address set forth on the signature pages hereof or, with respect to the Company and the Purchasers, to such other person or address as either party shall specify by like notice to the other party. Any notice or communication shall be deemed given or made (a) when delivered by hand, (b) when mailed, three business days after being deposited in the mail, postage prepaid, sent by certified mail, return receipt requested, and (c) when sent by facsimile, receipt acknowledged. 4. Successors, Assigns. This Agreement and all of the terms and provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that this Agreement is not transferable or assignable by any Purchaser (other than to any Affiliate of such Purchaser) without the Company's consent. Notwithstanding the foregoing, a Purchaser shall be free to assign its rights and obligations hereunder with respect to up to 30% of such Purchaser's Total Purchase Price to any Person previously discussed with the Company, provided that such assignee becomes a party hereto, whereupon such assignee shall have the rights of, and be subject to the obligations of, a "Purchaser" hereunder. Following any assignment (including from a Purchaser to its Affiliates) the assignor shall have no further obligations under, and shall have no rights or benefits of any kind under, the Agreement with respect to the subscription so assigned. Following the assignment by any of the signatories on pages S-2 to S-5 ( "Warburg Purchaser") to its Affiliate, such Warburg Purchaser shall have no further obligations under, and shall have no rights or benefits of any kind under, this Agreement. 5. Transaction Committee. During the period from the date of this Agreement through the Second Applicable Date, in the event that the Company's Board of Directors is required to act with respect to (a) an amendment, modification or waiver of rights under, this Agreement, the Certificate, the Warrants or the Shareholders Agreement (the "Related Agreements"), (b) the enforcement of obligations of the Purchasers under the Related Agreements or (c) approval of actions relating to the disposition of Non-Core Assets, such action shall be deemed approved by the Board if approved by the Transaction Committee. 6. Governing Law. The validity and effects of this Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York. 7. Survival. The representations and warranties set forth in Section D.3 of this Agreement shall survive the Closing Date, but the exclusive remedy shall be through the Adjustment Basket(s) contemplated by Section B.3. of this Agreement. 8. Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto and supersedes all prior agreements, understandings and arrangements, oral or written, among the parties hereto with respect to the subject matter hereof. -36- 9. Severability. If any one or more of the provisions contained in this Agreement shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability will not affect any other provision hereof. 10. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be considered an original and all of which together shall be deemed to be one and the same instrument. 11. Currencies. Unless otherwise specifically indicated, all payments and currency amounts indicated herein refer to and shall be denominated in United States Dollars. "Dollars" and "$" shall denote United States Dollars. [Signature pages follow] S-1 IN WITNESS WHEREOF, each Purchaser has executed this Agreement as of the date first above-written. HFCP IV (BERMUDA), L.P., By: H&F Investors IV, LLC, its General Partner, By: H&F Investors III, Inc., its Manager, By: /s/ John L. Bunce, Jr. ---------------------------- Name: John L. Bunce, Jr. Title: Vice President Amount Subscribed: $250 million Notices to: HFCP IV (Bermuda), L.P. c/o Hellman & Friedman LLC One Maritime Plaza Suite 1200 San Francisco, California 94111 Attention: Richard M. Levine Telephone: (415) 788-5111 Facsimile: (415) 788-0176 With copies to: Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 Attention: Patricia A. Vlahakis Telephone: (212) 403-1000 Facsimile: (212) 403-2000 S-2 IN WITNESS WHEREOF, each Purchaser has executed this Agreement as of the date first above-written. WARBURG PINCUS PRIVATE EQUITY VIII, L.P., By: Warburg, Pincus & Co., its General Partner, By: /s/ Kewsong Lee ---------------------------- Name: Kewsong Lee Title: Partner Amount Subscribed: $250 million Notices to: Warburg Pincus Private Equity VIII, L.P. 466 Lexington Avenue New York, New York 10017 Attention: Kewsong Lee Telephone: (212) 878-0600 Facsimile: (212) 878-9100 With copies to: Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 Attention: Patricia A. Vlahakis Telephone: (212) 403-1000 Facsimile: (212) 403-2000 S-3 IN WITNESS WHEREOF, each Purchaser has executed this Agreement as of the date first above-written. WARBURG PINCUS INTERNATIONAL PARTNERS, L.P. By: Warburg, Pincus & Co., its General Partner, By: /s/ Kewsong Lee ---------------------------- Name: Kewsong Lee Title: Partner Amount Subscribed: $240 million Notices to: Warburg Pincus International Partners, L.P. 466 Lexington Avenue New York, New York 10017 Attention: Kewsong Lee Telephone: (212) 878-0600 Facsimile: (212) 878-9100 With copies to: Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 Attention: Patricia A. Vlahakis Telephone: (212) 403-1000 Facsimile: (212) 403-2000 S-4 IN WITNESS WHEREOF, each Purchaser has executed this Agreement as of the date first above-written. WARBURG PINCUS NETHERLANDS INTERNATIONAL PARTNERS I, C.V. By: Warburg, Pincus & Co., its General Partner, By: /s/ Kewsong Lee ---------------------------- Name: Kewsong Lee Title: Partner Amount Subscribed: $6 million Notices to: Warburg Pincus Netherlands International Partners I, C.V. 466 Lexington Avenue New York, New York 10017 Attention: Kewsong Lee Telephone: (212) 878-0600 Facsimile: (212) 878-9100 With copies to: Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 Attention: Patricia A. Vlahakis Telephone: (212) 403-1000 Facsimile: (212) 403-2000 S-5 IN WITNESS WHEREOF, each Purchaser has executed this Agreement as of the date first above-written. WARBURG PINCUS NETHERLANDS INTERNATIONAL PARTNERS II, C.V. By: Warburg, Pincus & Co., its General Partner, By: /s/ Kewsong Lee ---------------------------- Name: Kewsong Lee Title: Partner Amount Subscribed: $4 million Notices to: Warburg Pincus Netherlands International Partners II, C.V. 466 Lexington Avenue New York, New York 10017 Attention: Kewsong Lee Telephone: (212) 878-0600 Facsimile: (212) 878-9100 With copies to: Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, New York 10019 Attention: Patricia A. Vlahakis Telephone: (212) 403-1000 Facsimile: (212) 403-2000 S-6 Accepted and agreed to as of the date first above-written. ARCH CAPITAL GROUP LTD. By: /s/ Louis Petrillo --------------------------------- Name: Louis Petrillo Title: Senior Vice President and General Counsel Schedule A ---------- Certain Definitions ------------------- "Adjusted Warrant Amount" means, with respect to each Purchaser, (a) the product of 0.5 times (b) an amount equal to (i) such Purchaser's Total Purchase Price divided by (ii) the Estimated Per Share Price minus $1.50. "Affiliate" shall have the same meaning as set forth in the Shareholder Agreement. "Common Shares" means the common shares, par value $0.01 per share, of the Company. "Core Insurance Operations" shall mean the following assets and capital: (i) Arch Reinsurance Ltd., a Bermuda company ("ARL"), (ii) Arch Capital Group (U.S.) Inc., a Delaware corporation ("ACG(US)"), (iii) Arch Reinsurance Company, a Nebraska corporation ("ARC"), (iv) Cross River Insurance Company, a Nebraska corporation (including funding for Rock River Insurance Company, a Wisconsin corporation ("Rock River")), (v) Arch Risk Transfer Services Ltd., a Cayman Islands company (including First American Financial Corporation, a Missouri corporation), (vi) capital held at the holding company level, gross of capital to be invested in unfunded private equity commitments which, when funded, shall be deemed to be Non-Core Assets, and (vii) $2.5 million in segregated assets and liabilities in cell companies. "Estimated Per Share Price" means (a) the Company's total shareholders' equity as of June 30, 2001 as set forth on its unaudited consolidated balance sheet as of such date (which is $271,652,000), adjusted using the Mark to Market Procedures, so that marketable securities in the Company's investment portfolio are valued at their estimated fair value as of the business day immediately preceding the Closing Date in accordance with GAAP, divided by (b) the total number of Common Shares outstanding as of June 30, 2001 (which is 12,863,079). "Fair Market Value" shall mean (a) with respect to Common Shares, the average of the high and low daily sales price on the Nasdaq of the Common Shares for the 20 trading days immediately preceding the date of which Fair Market Value is to be calculated, and (b) with respect to a security convertible into or exchangeable for Common Shares, the product of (i) the average of the high and low daily sales price on the Nasdaq of the Common A-1 Shares for the 20 trading days immediately preceding the date of which Fair Market Value is to be calculated, and (ii) the number of Common Shares into which such security is then convertible or exchangeable. "GAAP" means accounting principles generally accepted in the United States applied on a basis consistent with those used in preparation of the Audited Balance Sheet. "Knowledge" refers to the actual knowledge of an officer or the Chairman of the Company. "Mark to Market Procedures" means that the Company will liquidate all non treasury securities prior to the Closing Date and reinvest the proceeds in short term U.S. Treasury Securities. All remaining securities held at the Closing Date will be marked to market based on the closing bid price on the Closing Date. A purchase price adjustment computed will be made as follows: Realized gains (losses) in the period from XXX July 1, 2001 to day before the closing Plus (minus) the change in unrealized gains in the period July 1, 2001 to the Closing Date As follows: Unrealized gain (loss) at June 30 XXX net of Unrealized gain (loss) at closing XXX +XXX (net unrealized) Market value change XXX Less Tax effect at 18.5% Purchase price adjustment XXX "Material Adverse Effect" on the Company means a material adverse effect on the properties, assets, liabilities, condition (financial or otherwise), business, operations or operating earnings of the Company and its Subsidiaries, taken as a whole, or an effect which is reasonably likely to prevent or materially delay or materially impair the ability of the Company to consummate the transactions contemplated by this Agreement, excluding any such effect resulting from changes in general economic or industry conditions, announcement of the transaction contemplated hereby or the performance by the Company of its obligations hereunder. "Non-Core Assets" shall mean the following: (a) American Independent Insurance Holding Company, a Pennsylvania corporation, A-2 (b) Hales & Co., Inc., a Delaware corporation, (c) escrow assets under the Folksamerica disposition agreement, net of the contingent reserve recorded as of June 30, 2001, as adjusted for 18.5% tax benefits and minus all liabilities, contingent or otherwise, not transferred to the purchaser under such disposition agreement, including "Excluded Liabilities" under such disposition agreement, (d) all non-public securities held by the Company, ACG (US), and ARC and (e) all commitments to The Trident Partnership, II and Distribution Partners, as and when funded. "Per Share Price" means (a) the Company's total shareholders' equity as of June 30, 2001 as set forth on the Audited Balance Sheet, adjusted (i) so that marketable securities in the Company's investment portfolio are valued at their estimated fair value as of the business day immediately preceding the Closing Date, using the Mark to Market Procedures, as set forth in the Portfolio Review and (ii) to give effect to those expenses that are described in "C" on Schedule B that are ascertainable prior to the calculation of the Per Share Price (whether or not paid prior to Closing) and that would otherwise result in a decrease of total shareholders' equity of the Company, divided by (b) the total number of Common Shares outstanding as of June 30, 2001 (which is 12,863,079). "Person" shall mean any individual, corporation, partnership, trust, limited liability company, association or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Transaction Committee" means a committee of the Board of Directors consisting of persons who either (a) were members of the Board of Directors on October 22, 2001 and/or (b) were designated as members of the Transaction Committee by a person who was a member of the Board of Directors on October 22, 2001. A-3 Schedule B ---------- Adjustment Basket ----------------- The Adjustment Basket shall be equal to A + B - C, where: A = sum of (Realized Value - Adjusted Closing Book Value) of each Non-Core Asset. "Realized Value" means (a) with respect to any Non-Core Asset that is disposed of on or prior to the Test Date: (i) all cash proceeds realized from the disposition of such asset from July 1, 2001 through the Test Date (the "Realization Period") to the extent such proceeds are received by the Company, Newco or a subsidiary of Newco and would be distributable to the Company, net of all taxes or withholding that would be payable if such proceeds were so distributed, plus (ii) the after-tax amount of any dividends or distributions made from such asset during the Realization Period (to the extent received by the Company or Newco), minus (iii) taxes payable (plus actual tax benefits) resulting from such disposition, minus (iv) earn-outs and other incentive payments actually made, or committed to, in connection with such disposition (with reasonable estimates with respect to commitments which are outstanding as of the Test Date), minus (v) investment banking, brokerage, legal and consulting fees and other costs actually incurred in connection with such disposition, minus all contingent liabilities, guarantee and escrows associated with such disposition; and (b) with respect to any Non-Core Asset that is not disposed of on or prior to the Test Date: the appraised value, as determined by a reputable appraisal firm selected by the Purchasers and the Transaction Committee. Such appraisal shall take into account, among other things, without duplication, the illiquid nature of such assets, the size of the business, the minority nature of the interest and an expected future 20% cost of capital for such business. "Adjusted Closing Book Value" means, with respect to any Non-Core Asset that is or is not disposed of on or prior to the Test Date, its book value, determined in accordance with GAAP, as of June 30, 2001 as set forth in the Audited Balance Sheet, plus, in the case of Non-Core Assets, a capital charge equal to 15% per annum, compounded annually, computed from the Closing Date to the Test Date (or in the case of Non-Core Assets disposed of, the disposition date). B = Test Date Balances - Closing Date Balances B-1 "Test Date Balances" means the sum of (a) the Insurance Balances at the Test Date, calculated on the same basis as the Audited Balance Sheet, and (b) all related cash collections (including, without limitation, premiums and reinsurance recoveries) and cash payments from June 30, 2001 to the Test Date. It is anticipated that cash flows subject to these provisions will be maintained under separate general ledger control. "Closing Date Balances" means the Insurance Balances at June 30, 2001 as set forth on the Audited Balance Sheet, including, without limitation, the amount set forth in clause (a)(i) of the definition of Per Share Price. For the avoidance of doubt, A or B can be either a positive or negative balance. "Insurance Balances" means premiums receivable, unpaid claims and claims expenses recoverable, prepaid reinsurance premiums, reinsurance balances receivable, deferred policy acquisition costs, claims and claims expenses, unearned premiums, reinsurance balances payable, and any other insurance balance (e.g., assets held in separate accounts, claims payable, aggregate deductible fund, payables to Bermuda cell and commissions payable) of the Core Insurance Operations with respect to any policy or contract written or having an effective date prior to the Closing Date. The Insurance Balances as contemplated herein are intended to incorporate, among other things, return and additional premiums, retrospectively rated contract features, extra-contractual obligations, commissions, fees and guarantee funds and residual market assessments and other cash flows associated with in force business as of the Closing Date and all obligations arising from business that expired prior to Closing. C = Reductions in Book Value arising from the following (and without duplication of any expenses included in the calculation of Realized Value and without duplication of any expenses otherwise reflected in the determination of the Per Share Price), all costs and expenses relating to the purchase and sale of Securities and the transactions provided for hereunder (including, without limitation, all costs and expenses arising from performance by the Company of its obligations hereunder, all costs associated with the purchase price adjustments, all costs of any payments that become due to any third party as a result of the transactions hereunder, and all costs relating to litigation concerning this Agreement), actual losses arising out of breach of representations of the Company hereunder, the rationalization of the Company's operations and elimination of overhead undertaken in connection with this transaction with the approval of the Transaction Committee, the reduction in book value resulting from any other expenses (including internal incentive arrangements), employee B-2 separation agreements, fee payable by the Company to Credit Suisse First Boston Corporation or any other investment banking firm or broker, legal fees payable to counsel engaged by or on behalf of the Company, and other related breakage costs, in each case in connection with the transactions hereby. B-3 EX-99 5 subscriptionamend.txt EXHIBIT 3 EXHIBIT 3 --------- EXECUTION COPY -------------- AMENDMENT NO. 1 Reference is made to the Subscription Agreement dated as of October 24, 2001 (the "Agreement") by and between Arch Capital Group Ltd., a company organized under the laws of Bermuda (the "Company"), and Warburg Pincus Private Equity VIII, L.P., Warburg Pincus International Partners, L.P., Warburg Pincus Netherlands International Partners I, C.V., Warburg Pincus Netherlands International Partners II, C.V. (the "Original Warburg Signatories"), and HFCP IV (Bermuda), L.P. (the "Original H&F Signatory"). Capitalized terms used without definition herein have the meanings given to them in the Agreement. This amendment ("Amendment") to the Agreement is made as of November 20, 2001, among the Original Warburg Signatories, Warburg, the Original H&F Signatory, H&F, the Management Purchasers, Trident, GE and Farallon. WHEREAS, the Original Warburg Signatories have assigned their rights and obligations under the Subscription Agreement with respect to the purchase of a portion of the Securities thereunder to the Warburg entities listed in Schedule 1 hereto (such Warburg assignees, together with Warburg Pincus Netherlands International Partners I, C.V. and Warburg Pincus Netherlands International Partners II, C.V., being referred to herein as "Warburg"); WHEREAS, the Original H&F Signatory has assigned its rights and obligations under the Subscription Agreement with respect to the purchase of a portion of the Securities thereunder to the H&F entities listed in Schedule 2 hereto (such H&F assignees, together with the Original H&F Signatory, being referred to herein as "H&F" ; WHEREAS, the Company and the purchasers named therein (the "Management Purchasers") have entered into a Management Subscription Agreement, dated as of October 24, 2001 (the "Management Subscription Agreement"), pursuant to the terms of which, among other things, the Company shall issue and sell to the Management Purchasers, and the Management Purchasers shall acquire from the Company, certain Securities; WHEREAS, the Company, the Original Warburg Signatories, the Original H&F Signatory and Trident have entered into a letter agreement, dated as of November 8, 2001 (the "Trident Assignment Agreement") pursuant to the terms of which, among other things, the Original Warburg Signatories assigned to Trident their right, and Trident assumed from the Original Warburg Signatories their obligation, under the Subscription Agreement to purchase certain Securities; WHEREAS, the Company, the Original Warburg Signatories and the Original H&F Signatory have entered into letter agreements, dated as of November 20, 2001, with -2- Orbital Holdings, Ltd. and Insurance Private Equity Investors, L.L.C. (collectively, the "GE Assignment Agreement"), pursuant to the terms of which, among other things, the Original Warburg Signatories assigned to GE their right, and GE assumed from the Original Warburg Signatories their obligation, under the Subscription Agreement to purchase certain Securities; WHEREAS, the Company, the Original Warburg Signatories, the Original H&F Signatory and Farallon have entered into a letter agreement, dated as of November 20, 2001 (the "Farallon Assignment Agreement"), pursuant to the terms of which, among other things, the Original H&F Signatory assigned to Farallon its right, and Farallon assumed from the Original H&F Signatory its obligation, under the Subscription Agreement to purchase certain Securities; WHEREAS, the parties hereto desire to acknowledge and reflect certain amendments to the Subscription Agreement and certain Exhibits thereto. For good and valid consideration, the receipt of which is hereby acknowledged, the Company and each of the Purchasers agree as follows: A. AMENDMENTS TO SUBSCRIPTION AGREEMENT 1. The legend set forth in Section D.1.(d) of the Agreement is amended and restated as follows: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED, OFFERED OR SOLD EXCEPT (A) IN COMPLIANCE WITH THE PROVISIONS OF A CERTAIN SUBSCRIPTION AGREEMENT AND A CERTAIN SHAREHOLDERS AGREEMENT AND (B) PURSUANT TO (1) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, OR (2) AN APPLICABLE EXEMPTION FROM REGISTRATION THEREUNDER. ANY SALE PURSUANT TO CLAUSE (B)(2) OF THE PRECEDING SENTENCE MUST BE ACCOMPANIED BY AN OPINION OF WACHTELL, LIPTON, ROSEN & KATZ, OR SUCH OTHER COUNSEL AS IS REASONABLY SATISFACTORY TO ARCH CAPITAL GROUP LTD., TO THE EFFECT THAT SUCH EXEMPTION FROM REGISTRATION IS AVAILABLE IN CONNECTION WITH SUCH SALE." 2. The representations and warranties made by the Company in the Agreement shall be deemed made also as of the Closing Date (except that representations and warranties made as of another date shall be true and accurate as of such other date). -3- 3. The definitions of "Estimated Per Share Price" and "Per Share Price" in Schedule A are amended to substitute "as of the close of business on the third business day preceding the Closing Date" for "as of the business day immediately preceding the Closing Date". It is understood that for purposes of the Mark to Market Procedures, and any adjustments based on those procedures, the close of business on the third business day preceding the Closing Date should be used (including, without limitation, for purposes of Section B.1(a) and B.1(c)(iii) of the Agreement) rather than the day prior to the Closing Date, or the Closing Date. 4. (a) The parties hereto acknowledge and agree that the Company has not liquidated its investment portfolio prior to Closing in accordance with the first sentence of Section D.4(e). From and after Closing, and prior to the time of the audit adjustment contemplated by Section B.1 (the "Audit Adjustment"), the Company will sell the portion of its investment portfolio not theretofore sold which is listed in Schedule 3 hereto. With respect to such sales from and after Closing and prior to the audit adjustment, in calculating the Per Share Price, the actual prices realized upon the sale of such securities shall be used in the Mark to Market Procedures, in lieu of the estimated fair value of such securities as of the close of business on the third business day immediately preceding the Closing Date. (b) The parties hereto acknowledge that for purposes of calculating the Estimated Per Share Price, the Mark to Market Procedures were performed using closing sales prices instead of closing bid prices and that to adjust for such variance a "Bid/Ask Spread Adjustment" was included in the Mark to Market Procedures as set forth in Schedule 4(A) hereto. Such adjustment is hereby deemed to modify the Mark to Market Procedures set forth in Schedule A to the Agreement. For purposes of the Audit Adjustment, and subject to clause (a) of this Section 4, the Mark to Market Procedures shall also use closing sales prices (instead of closing bid prices) and such "Bid/Ask Spread Adjustment" shall be applied, on the same percentage basis, by the Pricing Service in performing the Audit Adjustment under Section B.1(a), it being understood that the Purchasers have not accepted the closing sales prices underlying in Schedule 4(A) as binding, and the Pricing Service shall, among other things, verify such prices in the Audit Adjustment. (c) The parties acknowledge the Schedule 4(B) hereto sets forth the number of Preference Shares and Class A Warrants to be issued to each Purchaser at Closing based on the Estimated Per Share Purchase Price. 5. The Company acknowledges that it will arrange for the listing of the Common Shares issuable upon conversion or exercise of the Preference Shares and Warrants on the Nasdaq Stock Market, to the extent not so listed (it being understood that, prior to the Requisite Shareholder Approval, the Company shall not be obligated to list more Common Shares than it is then permitted to issue under applicable Nasdaq rules). -4- 6. The parties hereto acknowledge that (a) in the event that Section E.3 becomes applicable, and the Purchasers are entitled to preference shares and warrants of Newco bearing "identical rights and privileges", such securities shall not include the voting limitations imposed under Sections (f)(3)(B) or (C) of the Certificate for Preference Shares pending Requisite Shareholder Approval or Requisite Regulatory Approval to the extent such approvals are not required for the issuance or acquisition of Newco securities and (b) from and after the Closing the reference to "original signatories" in Section E.6 shall mean Warburg and H&F as defined herein. 7. Schedule A of the Agreement is amended to add the following: "Farallon" shall mean Farallon Capital Partners, L.P., Farallon Capital Institutional Partners II, L.P., Farallon Capital Institutional Partners III, L.P., and RR Capital Partners, L.P. collectively, with each individually being a "Farallon Purchaser". "GE" shall mean Orbital Holdings, Ltd. and Insurance Private Equity Investors, L.L.C., collectively, with each individually being a "GE Purchaser" "Requisite Regulatory Approval" has the meaning given to such term in the Certificate. "Requisite Shareholder Approval" has the meaning given to such term in the Certificate. "Trident" shall mean Trident II, L.P., Marsh & McLennan Capital Professionals Fund, L.P., and Marsh & McLennan Employee's Securities Company, L.P., collectively, with each individually a "Trident Purchaser." 8. The parties agree that (a) effective as of the Closing, the only Class A Warrants outstanding will be held by The Trident Partnership, L.P. and Taracay Investors and the only Class B Warrants outstanding will be held by Robert Clements (or members of his family or trusts established for his or his family's benefit) and (b) there is no adjustment under section 3.1 of the Class A Warrants of the Company or under section 4.1 of the Class B Warrants of the Company in connection with the grants set forth on Schedule 5 hereto, or the issuance of the Preference Shares, the Warrants, or the Common Shares issuable upon conversion or exercise thereof, under the Subscription Agreement or the Management Subscription Agreements. 9. The definition of Non-Core Assets is amended to add a clause (f): "(f) all commitments to Innovative Coverage Concepts LLC." -5- 10. The Company shall, as promptly as practicable, adopt a policy and establish procedures designed to ensure that the Company and its subsidiaries shall not act in violation of the Foreign Corrupt Practices Act of 1977, as amended (15 U.S.C. Section 78dd-1, et seq.), as if it were applicable to the Company. 11. Upon execution hereof, each of Trident, GE and Farallon shall become "Purchasers" under the Subscription Agreement, with such rights and obligations as may be set forth therein, subject in each case to the terms of the GE Assignment Agreement, the Trident Assignment Agreement or the Farallon Assignment Agreement, as may be applicable. B. AMENDMENTS TO EXHIBITS TO SUBSCRIPTION AGREEMENT 1. The form of Certificate attached as Exhibit I to the Subscription Agreement will be replaced by the form attached hereto. 2. The form of Warrant attached as Exhibit II to the Subscription Agreement will be replaced by the form attached hereto. 3. The form of Bye-law amendment attached as Exhibit III to the Subscription Agreement will be replaced by the form attached hereto. 4. The form of Shareholders Agreement attached as Exhibit IV to the Subscription Agreement will be replaced by the form attached hereto. C. DISCLOSURE SCHEDULE Item 5 of the Disclosure Schedule to the Agreement is replaced with Schedule 5 hereto. D. ACKNOWLEDGEMENTS BY ASSIGNEES 1. Trident acknowledges that from and after the Closing, references to "Warburg" and "H&F" in the Trident Assignment Agreement shall mean Warburg and H&F as defined herein, in lieu of the Original Warburg Signatories and the Original H&F Signatory, respectively. 2. GE acknowledges that from and after the Closing, references to "Warburg" and "H&F" in the GE Assignment Agreement shall mean Warburg and H&F as defined herein, in lieu of the Original Warburg Signatories and the Original H&F Signatory, respectively. -6- 3. Farallon acknowledges that from and after the Closing, references to "Warburg" and "H&F" in the Farallon Assignment Agreement shall mean Warburg and H&F as defined herein, in lieu of the Original Warburg Signatories and the Original H&F Signatory, respectively. 4. The Management Purchasers acknowledge that from and after the Closing, references to "Warburg" and "H&F" in the Management Subscription Agreement shall mean Warburg and H&F as defined herein, in lieu of the Original Warburg Signatories and the Original H&F Signatories, respectively. E. MISCELLANEOUS 1. The validity and effects of this Amendment shall be governed by and construed and enforced in accordance with the laws of the State of New York. 2. This Amendment may be executed in any number of counterparts, each of which shall be considered an original and all of which together shall be deemed to be one and the same instrument. [Signature pages follow] IN WITNESS WHEREOF, each Party has executed this Amendment as of the date first above-written. WARBURG PINCUS PRIVATE EQUITY VIII, L.P., WARBURG PINCUS INTERNATIONAL PARTNERS, L.P., WARBURG PINCUS NETHERLANDS INTERNATIONAL PARTNERS I, C.V. WARBURG PINCUS NETHERLANDS INTERNATIONAL PARTNERS II, C.V. By: Warburg, Pincus & Co., its General Partner By: /s/ Kewsong Lee ------------------------------ Name: Kewsong Lee Title: Partner WARBURG PINCUS (BERMUDA) PRIVATE EQUITY VIII, L.P. By: Warburg Pincus (Bermuda) Private Equity Ltd., its General Partner, By: /s/ Kewsong Lee ----------------------------- Name: Kewsong Lee Title: Partner WARBURG PINCUS (BERMUDA) INTERNATIONAL PARTNERS, L.P. By: Warburg Pincus (Bermuda) International Ltd., its General Partner, By: /s/ Kewsong Lee ------------------------------ Name: Kewsong Lee Title: Partner HFCP IV (BERMUDA), L.P., By: H&F Investors IV (Bermuda), L.P. By: H&F Corporate Investors IV (Bermuda) Ltd. its General Partner, By: /s/ David R. Tunnell --------------------------- Name: David R. Tunnell Title: Authorized Signatory H&F INTERNATIONAL PARTNERS IV-A (BERMUDA), L.P. By: H&F Investors IV (Bermuda), L.P., its General Partner, By: H&F Corporate Investors IV (Bermuda) Ltd., its General Partner By: /s/ David R. Tunnell --------------------------- Name: David R. Tunnell Title: Authorized Signatory H&F INTERNATIONAL PARTNERS IV-B (BERMUDA), L.P. By: H&F Investors IV (Bermuda), L.P., its General Partner, By: H&F Corporate Investors IV (Bermuda) Ltd., its General Partner By: /s/ David R. Tunnell --------------------------- Name: David R. Tunnell Title: Authorized Signatory H&F EXECUTIVE FUND IV (BERMUDA), L.P. By: H&F Investors IV (Bermuda), L.P., its General Partner, By: H&F Corporate Investors IV (Bermuda) Ltd., its General Partner By: /s/ David R. Tunnell --------------------------- Name: David R. Tunnell Title: Authorized Signatory FARALLON CAPITAL PARTNERS, L.P. By: Farallon Partners, L.L.C., its General Partner By: /s/ Monica R. Landry ---------------------------------- Name: Monica R. Landry Title: Managing Member Notice Information for Farallon Capital Partners, L.P.: c/o Farallon Capital Management, L.L.C. One Maritime Plaza Suite 1325 San Francisco, CA 94111 Attention: Mark Wehrly and Sarah Aitcheson Telephone: (415) 421-2132 Facsimile: (415) 421-2133 FARALLON CAPITAL INSTITUTIONAL PARTNERS II, L.P. By: Farallon Partners, L.L.C., its General Partner By: /s/ Monica R. Landry ------------------------------ Name: Monica R. Landry Title: Managing Member Notice Information for Farallon Capital Institutional Partners II, L.P.: c/o Farallon Capital Management, L.L.C. One Maritime Plaza Suite 1325 San Francisco, CA 94111 Attention: Mark Wehrly and Sarah Aitcheson Telephone: (415) 421-2132 Facsimile: (415) 421-2133 FARALLON CAPITAL INSTITUTIONAL PARTNERS III, L.P. By: Farallon Partners, L.L.C., its General Partner By: /s/ Monica R. Landry ------------------------------- Name: Monica R. Landry Title: Managing Member Notice Information for Farallon Capital Institutional Partners III, L.P.: c/o Farallon Capital Management, L.L.C. One Maritime Plaza Suite 1325 San Francisco, CA 94111 Attention: Mark Wehrly and Sarah Aitcheson Telephone: (415) 421-2132 Facsimile: (415) 421-2133 RR CAPITAL PARTNERS, L.P. By: Farallon Partners, L.L.C., its General Partner By: /s/ Monica R. Landry ------------------------------ Name: Monica R. Landry Title: Managing Member Notice Information for RR Capital Partners, L.P.: c/o Farallon Capital Management, L.L.C. One Maritime Plaza Suite 1325 San Francisco, CA 94111 Attention: Mark Wehrly and Sarah Aitcheson Telephone: (415) 421-2132 Facsimile: (415) 421-2133 TRIDENT II, L.P. By: MMC Capital, Inc., as Manager By: /s/ David J. Wermuth ------------------------------- Name: David J. Wermuth Title: Principal Notice Information for Trident II, L.P.: 1166 Avenue of the Americas New York, New York Attention: Mark Dallara Facsimile: (212) 345-5627 and c/o Marsh & McLennan Capital, Inc. 20 Horseneck Lane Greenwich, CT 06830 Attention: David Wermuth Facsimile: (203) 862-2925 MARSH & MCLENNAN CAPITAL PROFESSIONALS FUND, L.P. By: MMC Capital, Inc., as Manager By: /s/ David J. Wermuth ------------------------------- Name: David J. Wermuth Title: Principal Notice Information for Marsh & McLennan Capital Professionals Fund, L.P.: 1166 Avenue of the Americas New York, New York Attention: Mark Dallara Facsimile: (212) 345-5627 and c/o Marsh & McLennan Capital, Inc. 20 Horseneck Lane Greenwich, CT 06830 Attention: David Wermuth Facsimile: (203) 862-2925 MARSH & MCLENNAN EMPLOYEES' SECURITIES COMPANY, L.P. By: MMC Capital, Inc., as Manager By: /s/ David J. Wermuth ------------------------------- Name: David J. Wermuth Title: Principal Notice Information for Marsh & McLennan Employees' Securities Company, L.P.: 1166 Avenue of the Americas New York, New York Attention: Mark Dallara Facsimile: (212) 345-5627 and c/o Marsh & McLennan Capital, Inc. 20 Horseneck Lane Greenwich, CT 06830 Attention: David Wermuth Facsimile: (203) 862-2925 INSURANCE PRIVATE EQUITY INVESTORS, L.L.C. By: GE Asset Management Incorporated, its Manager, By: /s/ Patrick McNeela ------------------------------- Name: Patrick McNeela Title: Vice President Notice Information for Insurance Private Equity Investors, L.L.C.: c/o GE Asset Management Incorporated 3003 Summer Street Stamford, CT 06905 Attention: Michael M. Pastore, Esq. ORBITAL HOLDINGS, LTD. By: /s/ Lorraine Hliboki ----------------------------------- Name: Lorraine Hliboki Title: Attorney-in-fact Notice Information for Orbital Holdings, Ltd.: c/o GE Capital 120 Longridge Rd. Stamford, CT 06927 SOUNDVIEW PARTNERS LP By: Robert Clements, its General Partner By: /s/ Robert Clements ------------------------------- Name: Robert Clements Title: General Partner OTTER CAPITAL LLC By: John Pasquesi, its Managing Member By: /s/ John Pasquesi ------------------------------- Name: John Pasquesi Title: Managing Member PETER A. APPEL By: /s/ Peter A. Appel ----------------------------------- Name: Peter A. Appel PAUL B. INGREY By: /s/ Paul B. Ingrey ----------------------------------- Name: Paul B. Ingrey DWIGHT R. EVANS By: /s/ Dwight R. Evans ----------------------------------- Name: Dwight R. Evans MARC GRANDISSON By: /s/ Marc Grandisson ----------------------------------- Name: Marc Grandisson For purposes of Section A.8. only: TARACAY INVESTORS By: Robert Clements, Managing Partner By: /s/ Robert Clements --------------------------------- Name: Robert Clements For purposes of Section A.8. only: THE TRIDENT PARTNERSHIP, L.P. By: Trident Corp., its General Partner By: /s/ Martine Purssell --------------------------------- Name: Martine Purssell Title: Assistant Secretary Accepted and agreed to as of the date first above-written. ARCH CAPITAL GROUP LTD. By: /s/ Peter A. Appel ------------------------ Name: Peter A. Appel Title: President and Chief Executive Officer For purposes of Section A.8 only: Marilyn Clements /s/ Marilyn Clements ------------------------------ For purposes of Section A.8 only: Jeffrey D. Clements /s/ Jeffrey D. Clements ------------------------------ For purposes of Section A.8 only: John Clements /s/ John Clements ------------------------------ For purposes of Section A.8 only: Ben T. Clements /s/ Ben T. Clements ------------------------------ For purposes of Section A.8 only: Paula Clements Sager /s/ Paula Clements Sager ------------------------------ For purposes of Section A.8 only: TRUST ESTABLISHED UNDER INDENTURE OF MARILYN CLEMENTS By: /s/ Robert Clements -------------------------- as trustee Schedule 1 -------- Warburg Pincus (Bermuda) Private Equity VIII, L.P. Warburg Pincus (Bermuda) International Partners, L.P. Schedule 2 ---------- H & F International Partners IV - A (Bermuda), L.P. H & F International Partners IV -B (Bermuda), L.P. H & F Executive Fund IV (Bermuda), L.P. EXHIBIT I --------- Final Schedule to the Bye-laws of Arch Capital Group Ltd. CERTIFICATE OF DESIGNATIONS OF SERIES A CONVERTIBLE PREFERENCE SHARES The terms of the authorized Preference Shares (as defined below) of Arch Capital Group Ltd., a company incorporated under the laws of Bermuda (the "Company"), shall be as set forth below in this Schedule to the Bye-laws of the Company (this "Schedule"). (a) Designation. (1) There is hereby created from the authorized and ----------- unissued preference shares of the Company a series of convertible preference shares designated as the Company's "Series A Convertible Preference Shares" (the "Preference Shares") as designated by the Board of Directors. Each Preference Share will have a liquidation preference of $21.00 (the "Liquidation Preference"). (2) All Preference Shares purchased, exchanged, converted or otherwise acquired by the Company shall be repurchased and canceled and, upon the taking of any action required by applicable law, shall be restored to the status of authorized but unissued preference shares of the Company, without designation as to series, and may thereafter be reissued. (b) Currency. All Preference Shares shall be denominated in United -------- States currency, and all payments and distributions thereon or with respect thereto shall be made in United States currency. All references herein to "$" or "dollars" refer to United States currency. (c) Ranking. The Preference Shares shall, with respect to dividend ------- rights and rights upon liquidation, winding up or dissolution, rank (1) prior to each other class or series of shares of the Company except Parity Shares and (2) on a parity with Parity Shares. For purposes hereof, (A) "Junior Shares" shall mean the Common Shares of the Company, par value $0.01 per share (the "Common Shares") and the shares of any other class or series of equity securities of the Company which, by the terms of the Bye-laws of the Company or of the instrument by which the Board of Directors shall fix the rights, preferences and limitations thereof, shall not be designated as ranking on a parity with the Preference Shares in respect of dividend rights and rights upon liquidation, winding up or dissolution and (B) "Parity Shares" shall mean the shares of any other class or series of equity securities of the Company which, by the terms of the Bye-laws of the Company or of the instrument by which the Board of Directors shall fix the rights, preferences and limitations thereof, shall, in the event that the dividends thereon are not paid in full, be entitled to share ratably with the Preference Shares, or shall, in the event that the amounts payable thereon on liquidation are not paid in full, be enti- -2- tled to share ratably with the Preference Shares in any distribution of assets other than by way of dividends in accordance with the sums which would be payable in such distribution if all sums payable were discharged in full. (d) Dividends. The holders of Preference Shares shall be entitled to --------- receive, from funds legally available therefor, dividends payable when, as and if dividends (including, without limitation, any dividend consisting of stock or other securities or property or rights or warrants to subscribe for securities of the Company or any of its subsidiaries by way of dividend or spin-off) are declared by the Board of Directors with respect to the Common Shares. Dividends shall be payable on each outstanding Preference Share in an amount per Preference Share equal to the amount of such dividends as would be payable with respect to the number of Common Share(s) into which such Preference Share is convertible pursuant to paragraphs (g)(1) and (h). No dividends may be paid or declared on or with respect to the Common Shares prior to the declaration and payment of a dividend on or with respect to the Preference Shares. Dividends shall be non-cumulative. (e) Liquidation Preference. (1) Upon any voluntary or involuntary ---------------------- liquidation, dissolution or winding up of the Company or a reduction or decrease in the Company's shares resulting in a distribution of assets to the holders of any class or series of the Company's shares, each holder of Preference Shares shall be entitled to payment out of the assets of the Company available for distribution of an amount equal to the then effective Liquidation Preference per Preference Share held by such holder, plus all accumulated and unpaid dividends thereon, before any distribution is made on any Junior Shares, including, without limitation, Common Shares. If, upon any voluntary or involuntary liquidation, dissolution or winding up of the Company or a reduction or decrease in the Company's capital Shares, the amounts payable with respect to Preference Shares and all other Parity Shares are not paid in full, the holders of Preference Shares and the holders of the Parity Shares shall share equally and ratably in any distribution of assets of the Company in proportion to the full liquidation preference and all accumulated and unpaid dividends to which each such holder is entitled. (2) Neither the voluntary sale, conveyance, exchange or transfer (for cash, shares, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation, merger or amalgamation of the Company with or into any person or the consolidation, merger or amalgamation of any person with or into the Company shall alone be deemed to be a voluntary or involuntary liquidation, dissolution or winding up of the Company, or a reduction or decrease in the capital of the Company, without the adoption of a formal plan of liquidation by the Company. (f) Voting Rights. Except as required by applicable Bermuda law, the ------------- Bye-laws of the Company and as may otherwise be provided herein or in any amendment hereto, the holders of Preference Shares shall not be entitled to any voting rights as shareholders of the Company except as follows: -3- (1) The affirmative vote of the holders of at least a majority of the outstanding Preference Shares, voting with holders of shares of all other series of preference shares affected in the same way as a single class, in person or by proxy, at a special or annual meeting called for the purpose, or by written consent in lieu of a meeting, shall be required to amend, repeal or change any provisions of this Schedule in any manner which would adversely affect, alter or change the powers, preferences or special rights of the Preference Shares and any such securities affected in the same way; provided, however, that the creation, authorization or issuance of any other class or series of capital shares or the increase or decrease in the amount of authorized shares of any such class or series or of the Preference Shares, or any increase, decrease or change in the par value of any class or series of shares (including the Preference Shares), shall not require the consent of the holders of the Preference Shares and shall not be deemed to affect adversely, alter or change the powers, preferences and special rights of the Preference Shares. With respect to any matter on which the holders are entitled to vote as a separate class, each Preference Share shall be entitled to one vote. (2) Holders of Preference Shares shall be entitled to notice of any shareholders' meeting. The holders of Preference Shares shall be entitled to vote upon all matters upon which holders of the Common Shares have the right to vote, and shall be entitled to the number of votes equal to the largest whole number of Common Shares into which such Preference Shares could be converted pursuant to the provisions of paragraphs (g)(1) and (h) hereof, at the record date for the determination of the shareholders entitled to vote on such matters, or, if no such record date is established, at the date such vote is taken or any written consent of shareholders is solicited, such votes to be counted together with all other shares having general voting powers and not separately as a class. (3) Notwithstanding the provisions of paragraph (f)(2), the vote of the Preference Shares shall be limited as set forth herein. (A) Prior to receipt of the Requisite Shareholder Approval, if the votes conferred by the Controlled Shares (as defined in bye-law 45) of any person, including the Preference Shares held by that person, would otherwise represent more than 9.9% of the voting power of all shares entitled to vote generally at an election of Directors, the vote of each Preference Share held by such person shall be reduced by whatever amount is necessary so that after any such reduction, the votes conferred by the Controlled Shares of such person, including such Preference Shares, shall constitute 9.9% of the total voting power of all shares of the Company entitled to vote generally at any election of Directors. -4- (B) Prior to the receipt of the Requisite Shareholder Approval, if the aggregate votes conferred by the Preference Shares then outstanding, together with any Common Shares issued upon conversion of any Preference Shares, or issued upon exercise of any Class A Warrants issued under the Subscription Agreement or the Management Subscription Agreement (including by operation of the anti-dilution adjustments in the Class A Warrants), or issued in cancellation of the Class A Warrants of the Company in connection with the transactions under the Subscription Agreement (together, the "Aggregate Potential Votes") would exceed 19.9% of the total votes entitled to be cast by the Common Shares issued and outstanding on November 19, 2001 (the "Total Base Votes"), then the vote of each Preference Share shall be reduced proportionately (in relation to the total number of Preference Shares then outstanding) so that, after giving effect to such reduction, the Aggregate Potential Votes do not exceed 19.9% of the Total Base Votes (it being understood that if both clause (A) and this clause (B) apply, clause (B) shall be applied first, then clause (A)). (C) Prior to the receipt of the Requisite Regulatory Approval, if the votes conferred by Common Shares and Preference Shares beneficially owned by a given person would otherwise represent more than 9.9% of the voting power of all shares entitle to vote generally at an election of Directors, the vote of each Preference Share held by such person shall be reduced by whatever amount is necessary so that after any such reduction, the votes conferred by the Common Shares and Preference Shares beneficially owned by such person, shall constitute 9.9% of the total voting power of all shares of the Company entitled to vote generally at any election of Directors. (D) Until such time as any waiting period with respect to the acquisition of Preference Shares by Orbital Holdings, Ltd. And Insurance Private Equity Investors, L.P. required to expire under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, including any extensions thereof, shall have expired or been terminated, the Preference Shares held by such GE Purchasers shall not have any votes with respect to the election of directors. (g) Conversion. ---------- -5- (1) Optional Conversion. Each Preference Share shall be convertible ------------------- at any time and from time to time at the option of the holder thereof into fully paid and nonassessable Common Shares. The number of Common Shares deliverable upon conversion of a Preference Share as of the Issuance Date, subject to adjustment as hereinafter provided, shall be one. (2) Mandatory Conversion. Following the later of (a) receipt of the -------------------- Requisite Shareholder Approval and the Requisite Regulatory Approval, and (b) 90 days following the consummation of the Final Adjustment contemplated by Section B.3 of the Subscription Agreement, the Preference Shares shall automatically convert into Common Shares. The number of Common Shares deliverable upon conversion of a Preference Share shall be as set forth in paragraphs (g)(1) and (h). (3) Fractional Shares. In connection with the conversion of any ----------------- Preference Shares, no fractions of Common Shares shall be issued, but in lieu thereof, the Company shall pay a cash adjustment in respect of such fractional interest in an amount equal to such fractional interest multiplied by the Current Market Price of the Common Shares as of the date of conversion. If more than one Preference Share shall be surrendered for conversion by the same holder at the same time, the number of full Common Shares issuable on conversion thereof shall be computed on the basis of the total number of Preference Shares so surrendered. (4) Mechanics of Conversion. (a) Before any holder of Preference ----------------------- Shares shall be entitled to convert the same into Common Shares, he shall surrender the certificate or certificates therefor, duly endorsed, or deliver an appropriate indemnity agreement, at the office of the Company or its transfer agent for the Preference Shares and shall give written notice to the Company of the election to convert the same and shall state therein the name or names in which the certificate or certificates for Common Shares are to be issued. The Company shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preference Shares, or to the nominee or nominees of such holder, a certificate or certificates for the number of Common Shares to which such holder shall be entitled as aforesaid. A certificate or certificates will be issued for the remaining Preference Shares in any case in which fewer than all of the Preference Shares represented by a certificate are converted. (b) In connection with the mandatory conversion, the Company shall deliver written notice to each such holder that the conversion date has occurred and the place where certificates are to be surrendered for conversion. (5) Issue Taxes. The Company shall pay all issue taxes, if any, ----------- incurred in respect of the issue of Common Shares on conversion. If a holder of shares surrendered for conversion specifies that the Common Shares to be issued on conversion are to be issued in a name or names other than the name or names in which such surrendered shares stand, the -6- Company shall not be required to pay any transfer or other taxes incurred by reason of the issuance of such Common Shares to the name of another. (6) Reservation of Shares. The Company shall at all times reserve --------------------- and keep available, free from preemptive rights, for issuance upon the conversion of Preference Shares, such number of its authorized but unissued Common Shares as will from time to time be sufficient to permit the conversion of all outstanding Preference Shares. Prior to the delivery of any securities which the Company shall be obligated to deliver upon conversion of the Preference Shares, the Company shall comply with all applicable laws and regulations which require action to be taken by the Company. All Common Shares delivered upon conversion of the Preference Shares will upon delivery be duly and validly issued and fully paid and nonassessable, free of all liens and charges and not subject to any preemptive rights. (h) Conversion Price Adjustments. The number of Common Shares ---------------------------- into which each Preference Share is convertible shall be subject to adjustment from time to time as follows: (1) Share Splits and Combinations. In case the Company shall at any ----------------------------- time or from time to time after the Issuance Date (A) subdivide or split the outstanding Common Shares, (B) combine or reclassify the outstanding Common Shares into a different number of shares or (C) issue by reclassification of the Common Shares any shares of the Company, then, and in each such case, the number of Common Shares into which each Preference Share is convertible shall be adjusted so that the holder of any Preference Shares thereafter surrendered for conversion shall be entitled to receive the number of Common Shares or other securities of the Company which such holder would have owned or have been entitled to receive after the occurrence of any of the events described above, had such Preference Shares been surrendered for conversion immediately prior to the occurrence of such event or the record date therefor, whichever is earlier. An adjustment made pursuant to this subparagraph (1) shall become effective at the close of business on the day upon which such corporate action becomes effective. Such adjustment shall be made successively whenever any event listed above shall occur. (2) Share Dividends in Common Shares. In case the Company at any -------------------------------- time or from time to time after the Issuance Date pays a dividend or makes a distribution in Common Shares on any class of shares of the Company (other than a dividend or distribution of Common Shares or other securities which is made directly to the holders of Preference Shares pursuant to paragraph (d), or with respect to which adjustments are provided in paragraph (h)(1) above) the number of Common Shares into which each Preference Share is convertible shall be adjusted so that the holder of any Preference Shares thereafter surrendered for conversion shall be entitled to receive the number of Common Shares which such holder would have owned or have been entitled to -7- receive after such dividend, had such Preference Shares been surrendered for conversion immediately prior to the record date for the determination of holders entitled to receive such dividend. (3) Distribution of Indebtedness, Securities or Assets. In case the -------------------------------------------------- Company distributes to all holders of Common Shares (whether by dividend or other distribution, or in a merger, amalgamation or consolidation or otherwise) evidences of indebtedness, shares of any class or series, other securities, including rights or warrants to subscribe for securities, cash or assets, in each case, of the Company or any of its subsidiaries (other than a dividend or distribution which is made directly to the holders of Preference Shares pursuant to paragraph (d) above), the Company shall distribute to the holders of Preference Shares the same in an amount per Preference Share equal to the amount as would be payable with respect to the number of Common Share(s) into which such Preference Share is convertible pursuant to paragraphs (g)(1) and (h). (4) Transactions in Which Common Shares are Exchanged. In case at ------------------------------------------------- any time the Company shall be a party to any transaction (including, without limitation, a merger, amalgamation, consolidation, sale of all or substantially all of the Company's assets, liquidation or recapitalization of the Common Shares and excluding any transaction to which clauses (1), (2) or (3) of this paragraph (h) apply) in which the previously outstanding Common Shares shall be changed into or exchanged for different securities of the Company or common stock or other securities of another corporation or entity (including cash) or any combination of any of the foregoing (each such transaction being a "Transaction"), the Company shall make all necessary provisions such that each Preference Share shall thereafter be convertible into, in lieu of Common Shares, the amount of securities or other property to which such holder would actually have been entitled as a holder of Common Shares upon the consummation of the Transaction if such holder had converted such Preference Shares immediately prior to such Transaction (subject to adjustments from and after consummation of the Transaction as nearly equivalent as possible to the adjustments provided for in this paragraph (h)). (5) Below Market Offerings of Common Shares. In case the --------------------------------------- Company shall at any time, or from time to time, issue Common Shares (or securities convertible into, or exercisable for, Common Shares) at a price per share (or having a conversion or exercise price per share) less than the Current Market Price (or, in the case of an issuance or sale in connection with an underwritten public offering, less than 99% of the Current Market Price, as determined by the underwriters, less underwriting discounts and commissions) as of the date of issuance of such shares or of such other securities, then, and in each such case, the number of Common Shares into which each Preference Share is convertible shall -8- be adjusted so that the holder of each share thereof shall be entitled to receive, upon the conversion thereof, the number of Common Shares determined by multiplying (A) the number of Common Shares into which such share was convertible on the day immediately prior to such date by (B) a fraction, the numerator of which shall be the sum of (i) the number of Common Shares outstanding on such date and (ii) the number of additional Common Shares issued (or into which the other securities may convert or be exercised), and the denominator of which shall be the sum of (aa) the number of Common Shares outstanding on such date and (bb) the number of Common Shares which the aggregate consideration receivable by the Company for the total number of Common Shares so issued (or into which the other securities may convert or be exercised) would purchase at such Current Market Price on such date. An adjustment made pursuant to this subparagraph (5) shall be made on the next Business Day following the date on which any such issuance is made and shall be effective retroactively immediately after the close of business on such date. For purposes of this subparagraph (5), the aggregate consideration receivable by the Company in connection with the issuance of Common Shares, or of other securities convertible into or exercisable for Common Shares, shall be deemed to be equal to the sum of the aggregate offering price (before deduction of reasonable underwriting discounts or commissions and expenses) of all such securities plus the minimum aggregate amount, if any, payable upon conversion or exercise of any such other securities into Common Shares. The provisions of this clause (h) shall not apply to the issuance of any Common Shares (i) pursuant to any restricted share, share option, share purchase or similar plan or arrangement for the benefit of employees or directors of the Company or any of its subsidiaries approved by the Board of Directors or a duly organized committee thereof, (ii) pursuant to options, warrants and conversion rights outstanding on November 20, 2001, or (iii) issued upon conversion of Preference Shares or exercise of Class A Warrants issued under the Subscription Agreement or the Management Subscription Agreement, including pursuant to the purchase price adjustments therein. (i) Certain Definitions. As used in this Schedule, the ------------------- following terms shall have the following meanings, unless the context otherwise requires: "Board of Directors" means the Board of Directors of the Company. ------------------ "Business Day" means any day other than a Saturday, Sunday or a ------------ United States federal or Bermuda holiday. -9- "Conversion Price" per Preference Share at any time means the price ---------------- equal to $21.00 divided by the number of Common Shares into which such share is then convertible. "Current Market Price" means the average of the closing bid and -------------------- asked prices of the Common Shares as reported by the National Association of Securities Dealers Automated Quotation System, or if the Common Shares are not there listed, on the principal United States national exchange on which such shares are listed or admitted. "Issuance Date" means the first date of issuance of any Preference ------------- Shares. "Management Subscription Agreement" means the Management --------------------------------- Subscription Agreement, dated as of October 24, 2001, by and between the Company and certain of its officers and directors parties thereto. "Requisite Regulatory Approval" means approval by the insurance ----------------------------- authorities in the States of Florida, Missouri, Nebraska and Wisconsin of the acquisition of greater than 9.9% of the total voting power of all shares of the Company entitled to vote generally in the election of directors by the persons who are original signatories to the Subscription Agreement as "Purchasers". "Requisite Shareholder Approval" means the approval by the holders ------------------------------ of Common Shares and Preference Shares of (a) an amendment to bye-laws 45 and 75 in the form of Exhibit III to the Subscription Agreement, and (b) the issuance of Common Shares issuable upon conversion of all Preference Shares issued under the Subscription Agreement and the Management Subscription Agreement and the issuance of Common Shares issuable upon exercise of all Class A Warrants issued under the Subscription Agreement and the Management Subscription Agreement (including by operation of the anti-dilution adjustments in the Class A Warrants), to the extent that the number of all such Common Shares and Common Shares issued in cancellation of the Class A Warrants of the Company in connection with the transactions under the Subscription Agreement would exceed 19.9% of the total number of Common Shares issued and outstanding on November 19, 2001. "Subscription Agreement" means the Subscription Agreement, dated as ---------------------- of October 24, 2001, by and between Arch Capital Group Ltd., a company organized under the laws of Bermuda, and each of the Purchasers named therein, as amended as of November 20, 2001. (j) Headings. The headings of the paragraphs of this Schedule are -------- for convenience of reference only and shall not define, limit or affect any of the provisions hereof. (k) Bye-laws. This Schedule shall be attached to the Bye-laws -------- of the Company and shall become incorporated in such Bye-laws. EXHIBIT II ---------- [ ] CLASS A WARRANTS, EACH WARRANT ENTITLING THE HOLDER TO PURCHASE ONE COMMON SHARE OF ARCH CAPITAL GROUP LTD. ARCH CAPITAL GROUP LTD. THIS WARRANT (THE "WARRANT") AND THE UNDERLYING COMMON SHARES MAY NOT BE TRANSFERRED EXCEPT (I) IN COMPLIANCE WITH THE PROVISIONS OF THE AGREEMENTS PURSUANT TO WHICH THE CLASS A WARRANTS WERE ORIGINALLY ISSUED AND ANY APPLICABLE STATE SECURITIES OR "BLUE SKY" LAWS AND (II) (A) PURSUANT TO AN EFFECTIVE REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), (B) IN COMPLIANCE WITH RULE 144 UNDER THE ACT, (C) INSIDE THE UNITED STATES TO A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN AND IN COMPLIANCE WITH RULE 144A UNDER THE ACT, (D) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 OF REGULATION S UNDER THE ACT OR (E) INSIDE THE UNITED STATES TO AN INSTITUTIONAL "ACCREDITED INVESTOR", AS DEFINED IN RULE 501(A) (1), (2), (3) OR (7) UNDER THE ACT IN A TRANSACTION WHICH, IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY, QUALIFIES AS AN EXEMPT TRANSACTION UNDER THE ACT AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. ARCH CAPITAL GROUP LTD., a Bermuda exempted limited company (the "Company"), hereby certifies that, for value received, [ ] (the "Holder"), or its assigns, is entitled, subject to the terms set forth below, to purchase from the Company, at any time and from time to time in whole or in part, an aggregate of [ ] fully paid and nonassessable common shares, par value $.01 per share ("Common Shares"), of the Company during the period beginning on the date of issuance hereof (the "Closing Date") and ending on September 19, 2002 (the "Exercise Period"). 1. PURCHASE PRICE. Such Common Shares shall be purchased at a purchase price per share, subject to the provisions of Paragraph 3 hereof, equal to $20.00 (as adjusted in accordance with the terms hereof, the "Purchase Price"). The number and character of such Common Shares are subject to adjustment as provided below, and the term "Common Shares" shall mean, unless the context otherwise requires, the Common Shares or other securities or property at the time deliverable upon the exercise of this Warrant. 2. EXERCISE OF WARRANT. The purchase rights evidenced by this Warrant shall be exercised by the Holder surrendering this Warrant, with the form of subscription at the end hereof duly executed by such Holder (the "Exercise Notice"), to the Company at its offices, 20 Horseneck Lane, Greenwich, Connecticut 06830, accompanied by payment as specified below of the aggregate Purchase Price determined as of the Determination Date (as defined below) of the Common Shares being purchased pursuant to such exercise. Payment of the aggregate Purchase Price may be made, at -2- the option of the Holder, (i) in cash, (ii) by certified check or bank cashier's check payable to the order of the Company in the amount of such Purchase Price, (iii) by delivering Common Shares with an aggregate Market Price (as hereinafter defined) as of the day prior to the Company's receipt of the Exercise Notice (the "Determination Date") equal to the product of the Purchase Price and the number of Common Shares being purchased, (iv) by the Company reducing, at the request of the Holder, the number of Common Shares for which this Warrant is exercisable by a number of Common Shares (the "Surrendered Stock") such that the product of (a) the Market Price per Common Share as of the Determination Date less the Purchase Price in effect on the Determination Date multiplied by (b) the Surrendered Stock equals or exceeds the product of (x) the Purchase Price in effect on the Determination Date and (y) the number of Common Shares being purchased, or any combination of the methods of payment described in clauses (i) through (iv) above. 2.1. Partial Exercise. This Warrant may be exercised for less than the ---------------- full number of Common Shares at the times called for hereby, in which case the number of Common Shares receivable upon the exercise of this Warrant as a whole, the sum payable upon the exercise of this Warrant as a whole, shall be proportionately reduced. Upon any such partial exercise, the Company at its expense will forthwith issue to the Holder hereof a new Warrant or Warrants of like tenor for the number of Common Shares as to which rights have not been exercised, such Warrant or Warrants to be issued in the name of the Holder hereof or his nominee (upon payment by such Holder of any applicable transfer taxes). 2.2. Delivery of Certificates for Common Shares on Conversion. As soon as -------------------------------------------------------- practicable after the exercise of this Warrant and payment of the Purchase Price, and in any event within ten (10) days thereafter, the Company, at its expense, will cause to be issued in the name of and delivered to the Holder hereof a certificate or certificates for the number of fully paid and nonassessable Common Shares or other securities or property to which such Holder shall be entitled upon such exercise, plus, in lieu of any fractional share to which such Holder would otherwise be entitled, cash in an amount determined in accordance with Paragraph 3.9 hereof. The Company agrees that the Common Shares so received shall be deemed to be issued to the Holder as the record owner of such Common Shares as of the close of business on the date on which this Warrant shall have been surrendered and payment for such Common Shares made as aforesaid. 3. ANTI-DILUTION PROVISIONS AND OTHER ADJUSTMENTS. In order to prevent dilution of the right granted hereunder, the Purchase Price shall be subject to adjustment from time to time in accordance with this Paragraph 3. Upon each adjustment of the Purchase Price pursuant to this Paragraph 3, the registered holder hereof shall thereafter be entitled to acquire upon exercise of this Warrant, at the Purchase Price resulting from such adjustment, the number of shares of the Company's Common Shares obtainable by multiplying the Purchase Price in effect immediately prior to such adjustment by the number of shares of the Company's Common Shares acquirable upon conversion thereof immediately prior to such adjustment and dividing the product thereof by the Purchase Price resulting from such adjustment. 3.1. Adjustment for Issue or Sale of Common Shares. Except as provided in --------------------------------------------- Paragraph 3.5 below, if and whenever on or after the date of issuance hereof the Company shall issue or sell, or -3- shall in accordance with subparagraphs (1) to (8) of this Paragraph 3.1 inclusive, be deemed to have issued or sold any Common Shares to any person for a consideration per share less than the Market Price (or, in the case of an issuance or sale in connection with an underwritten public offering, 99% of the Market Price less underwriting discounts and commissions) in effect immediately prior to the time of such issue or sale, then forthwith upon such issue or sale (each, a "Triggering Transaction"), the Purchase Price shall, subject to subparagraphs (1) to (8) of this Paragraph 3.1, be reduced to the Purchase Price (calculated to the nearest tenth of a cent) determined by multiplying the Purchase Price in effect immediately prior to the time of such Triggering Transaction by a fraction, the numerator of which shall be the sum of (x) the product of the Number of Common Shares Deemed Outstanding (as defined below) immediately prior to such Triggering Transaction multiplied by the Market Price immediately prior to such Triggering Transaction plus (y) the total amount, if any, received or receivable at any time by the Company as consideration for the issuance or sale of such Common Shares, and the denominator of which shall be the product of (x) the Number of Common Shares Deemed Outstanding immediately after such Triggering Transaction, multiplied by (y) the Market Price immediately prior to such Triggering Transaction; provided that in the case of a sale of Common Shares pursuant to a purchase, underwriting or similar agreement, the Market Price shall mean the Market Price in effect upon the date such agreement is executed by the Company. For purposes of this Paragraph 3, the term "Number of Common Shares Deemed Outstanding" at any given time shall mean the sum of (i) the number of Common Shares outstanding at such time, and (ii) the number of Common Shares deemed to be outstanding under subparagraphs (1) to (8) of this Paragraph 3, inclusive, at such time. For purposes of this Paragraph 3, inclusive, at such time. For purposes of this Paragraph 3, the term "Market Price" shall mean, as of any date, (a) for any period during which a security shall be listed for trading on a national securities exchange or on the Nasdaq Stock Market ("Nasdaq"), or (in the case of non-United States securities) similar securities exchange, the closing price per share of such security as of such day, or, in case no reported sale occurs on such trading day, the mean of the reported closing bid and asked prices per share for the prior five trading days ending on such day, (b) for any period during which such security shall not be so listed, but when prices for such security shall be reported by Nasdaq or similar system in the case of non-U.S. securities, the mean of the most recent average bid and asked prices per share as quoted by Nasdaq or such other system or (c) the market price per share of such security as determined by the Board of Directors of the Company (the "Board of Directors") as of the next preceding day, in the event neither (a) nor (b) above shall be applicable, or in the event the Board of Directors shall be in good faith determine that application of (a) or (b) would not result in a fair determination of the Market Price. For purposes of determining the adjusted Purchase Price under this Paragraph 3.1, the following subparagraphs (1) to (8), inclusive, shall be applicable: (1) In case the Company at any time shall in any manner issue or sell (whether directly or by assumption in a merger or otherwise) any rights to subscribe for or to purchase, or any options for the purchase of, Common Shares or any other securities convertible into or exchangeable or exercisable for Common Shares (such rights or options being herein called "Options" and such convertible, exchangeable or exercisable shares or securities being herein -4- called "Convertible Securities"), whether or not such Options or the right to convert, exercise or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Common Shares are issuable upon exercise, conversion or exchange (determined by dividing (x) the total amount, if any, received or receivable by the Company as consideration for the issuing of such Options, plus the minimum aggregate amount of additional consideration payable to the Company upon the exercise of all such Options, by (y) the total maximum number of Common Shares issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities) shall be less than the Market Price (or, in the case of an issuance or sale in connection with an underwritten public offering, less than 99% of the Market Price less underwriting discounts and commissions), determined as of the date of such issuance or sale (or, in the case of an issuance or sale pursuant to a purchase, underwriting or similar agreement, the Market Price determined as of the date such agreement is executed by the Company), then the total maximum number of Common Shares issuable upon exercise of such Options or conversion or exchange of all such Convertible Securities shall (as of the date of the grant of such Option) be deemed to be outstanding and to have been issued and sold by the Company for such price per share. No adjustment of the Purchase Price shall be made upon exercise of such Options or conversion or exchange of such Convertible Securities, except as otherwise provided in subparagraph (3) below. (2) In case the Company at any time shall in any manner issue or sell (whether directly or by assumption in a merger or otherwise) any Convertible Securities, whether or not the rights to exchange, exercise or convert thereunder are immediately exercisable, and the price per share for which Common Shares are issuable upon such conversion, exercise or exchange (determined by dividing (x) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (y) the total maximum number of Common Shares issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the Market Price (or, in the case of an issuance or sale in connection with an underwritten public offering, less than 99% of the Market Price less underwriting discounts and commissions), determined as of the date of such issuance or sale (or, in the case of an issuance or sale pursuant to a purchase, underwriting or similar agreement, the Market Price determined as of the date such agreement is executed by the Company), then the total maximum number of Common Shares issuable upon conversion or exchange of all such Convertible Securities shall (as of the date of the issue or sale of such Convertible Securities) be deemed to be outstanding and to have been issue and sold by the Company for such price per share. No adjustment of the Purchase Price shall be made upon the actual issue of such Common Shares upon exercise of the rights to exchange or convert under such Convertible Securities, except as otherwise provided in subparagraph (3) below. (3) If the exercise price provided for in any Options referred to in subparagraph (1), the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in subparagraph (1) or (2), or the rate at which any Convertible Securities referred to in subparagraph (1) or (2) are convertible into or exchange- -5- able for Common Shares, shall change at any time (other than under or by reason of provisions designed to protect against dilution of the type set forth in Paragraph 3.1 or 3.3), the Purchase Price in effect at the time of such change shall forthwith be readjusted to the Purchase Price which would have been in effect at the time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion or exchange rate, as the case may be, at the time initially granted, issued or sold. If the exercise price provided for in any Option referred to in subparagraph (1), the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in subparagraph (1) or (2), or the rate at which any Convertible Securities referred to in subparagraph (1) or (2) are convertible into or exchangeable for Common Shares, shall be reduced at any time under or by reason of provisions with respect thereto designed to protect against dilution, then the Purchase Price then in effect hereunder shall forthwith be adjusted to such respective amount as would have been obtained had such Option or Convertible Security never been issued as to such Common Shares and had adjustments been made upon the issuance of Common Shares delivered as aforesaid, but only if as a result of such adjustment the Purchase Price then in effect hereunder is hereby reduced and provided that there shall be no duplication of any adjustments otherwise made in accordance with the terms hereof. (4) On the expiration of any Option or the termination of any right to convert or exchange any Convertible Securities, the Purchase Price then in effect hereunder shall forthwith be increased to the Purchase Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination, never been issued. (5) In case any Options shall be issued in connection with the issue or sale of other securities of the Company, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued without consideration. (6) In case any Common Shares, Options or Convertible Securities shall be issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Company therefor. In case any Common Shares, Options or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be the fair value of such consideration as determined in good faith by the Board of Directors. (7) The number of Common Shares outstanding at any given time shall not include shares owned or held by or for the account of the Company, but the disposition of any shares so owned or held shall be considered an issue or sale of Common Shares for the purpose of this Paragraph 3.1. (8) In case the Company shall declare a dividend or make any other distribution upon the stock of the Company payable in Common Shares, Options or Convertible Securi- -6- ties, then in such case any Common Shares, Options or Convertible Securities, as the case may be, issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. 3.2. Determination of Date of Issuance or Sale of Common Shares. For ---------------------------------------------------------- purposes of Paragraph 3.1, in case the Company shall take a record of the holders of its Common Shares for the purpose of determining holders entitled (x) to receive a dividend or other distribution payable in Common Shares, Options or Convertible Securities, or (y) to subscribe for or purchase Common Shares, Options or Convertible Securities, then such record date shall be deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right or subscription or purchase, as the case may be. 3.3. Subdivisions and Combinations. In case the Company shall at any time ----------------------------- subdivide (other than by means of a dividend payable in Common Shares covered by subparagraph 3.1(8)) its outstanding Common Shares into a greater number of shares, the Purchase Price in effect immediately prior to such subdivision shall be appropriately reduced, and, conversely, in case the outstanding Common Shares of the Company shall be combined into a smaller number of shares, the Purchase Price in effect immediately prior to such combination shall be proportionately increased. 3.4. Reorganization, Reclassification, Consolidation, Merger or Sale of ------------------------------------------------------------------ Assets. If any capital reorganization or reclassification of the shares of the - ------ Company, or consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Shares shall be entitled to receive stock, securities, cash or other property with respect to or in exchange for Common Shares, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the Holder of this Warrant shall have the right to acquire and receive upon exercise hereof such common stock, securities, cash or other property issuable or payable (as part of the reorganization, reclassification, consolidation, merger or sale) with respect to or in exchange for such number of outstanding Common Shares of the Company as would have been received upon exercise of this Warrant at the Purchase Price then in effect. The Company will not effect any such consolidation, merger or sale unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument, mailed or delivered to the Holder of this Warrant at the last address of such Holder appearing on the books of the Company, the obligation to deliver to such holder such common stock, securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to purchase. In the event that pursuant to the terms of this Paragraph 3.4, this Warrant becomes exercisable for securities other than Common Shares, then the provisions of Section 3 shall apply to such securities as though such securities were Common Shares. If a purchase, tender or exchange offer is made to and accepted by the holders of more than 50% of the outstanding Common Shares of the Company, the Company shall not effect any consolidation, merger or sale with the person having made such offer or with any Affiliate of such person unless prior to the consummation of such consolidation, merger or sale the holder of this Warrant shall have been given a reasonable opportunity to then elect to receive upon the exercise of this Warrant either the common shares, securities or assets then issuable with respect to the Common -7- Shares of the Company or the common shares, securities or assets, or the equivalent, issued to previous holders of the Common Shares in accordance with such offer. For purposes hereof the term "Affiliate" with respect to any given person shall mean any person controlling, controlled by or under common control with the given person. 3.5. No Adjustment for Exercise of Certain Options, Warrants, Etc. The ------------------------------------------------------------ provisions of this Section 3 shall not apply to any Common Shares issued, issuable or deemed outstanding under subparagraphs (1) to (8) of paragraph 3.1, inclusive: (i) to any person pursuant to any stock option, stock purchase or similar plan or arrangement for the benefit of employees or directors of the Company or its subsidiaries; provided that any Common Shares issued pursuant to any such plan or arrangement (in excess of 1,700,000 shares) shall be approved by the Board of Directors or a duly organized committee thereof, it being further provided that, with respect to Class A Warrants exercised by the Initial Investors or their Affiliates (as defined in the Registration Statement filed by the Company in connection with the Company's public offering of its Common Shares), this Section 3 shall apply with respect to any Common Shares issued pursuant to any such plan or arrangement in excess of 1,700,000 shares (ii) pursuant to options, warrants and conversion rights in existence on the date of issuance hereof or (iii) pursuant to the exercise of any Class A Warrants or Class B Warrants described in the Company's prospectus relating to the initial public offering of its Common Shares. 3.6. Notices of Record Date, Etc. In the event that: --------------------------- (1) the Company shall declare any cash dividend upon its Common Shares, or (2) the Company shall declare any dividend upon its Common Shares payable in common shares or make any special dividend or other distribution to the holders of its Common Shares, or (3) the Company shall offer for subscription pro rata to the holders of its Common Shares any additional common shares of any class or other rights, or (4) there shall be any capital reorganization or reclassification of the shares of the Company, including any subdivision or combination of its outstanding Common Shares, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation, or (5) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in connection with such event, the Company shall give to the Holder of this Warrant: (i) at least ten (10) days' prior written notice of the date on which the books of the Company shall close or a record shall be taken for such dividend distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up; and -8- (ii) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, at least ten (10) days prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (i) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Shares shall be entitled thereto, and such notice in accordance with the foregoing clause (ii) shall also specify the date on which the holders of Common Shares shall be entitled to exchange their Common Shares for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. Each such written notice shall be given by first class mail, postage prepaid, addressed to the Holder of this Warrant at the address of such Holder as shown on the books of the Company. 3.7. Adjustments for Other Distributions. If at any time or from time to ----------------------------------- time on or after the date of issuance hereof, the Company shall distribute, grant or issue to all holders of its Common Shares any of its assets or debt securities or any rights or warrants to purchase assets or securities of the Company (including securities or cash, but excluding (x) distributions covered by Section 3.1 or (y) cash dividends or other cash distributions that are paid out of consolidation current net earnings or earnings retained in the business as shown on the books of the Company unless such cash distributions in any twelve month period exceed 3.00% of the average Market Price of the Common Shares for the fifteen (15) trading days ending on the first day of such twelve month period) (collectively, the "Purchase Rights"), then the Holder of this Warrant shall be entitled to, at its option: (i) have the Purchase Price reduced to the Purchase Price (calculated to the nearest tenth of a cent) determined by multiplying the Purchase Price in effect immediately prior to the time of distribution of such Purchase Rights by a fraction, the numerator of which shall be the difference between (x) the Market Price immediately prior to such distribution and (y) the fair market value of the assets, securities, rights or warrants applicable to one Common Share (which fair market value shall be determined by the Company in accordance with generally accepted accounting principals) and the denominator of which shall be the Market Price immediately prior to such distribution; provided that in the case of a distribution, grant or issuance pursuant to a purchase, underwriting or similar agreement, the Market Price shall mean the Market Price in effect upon the date such agreement is executed by the Company; or (ii) acquire (within thirty (30) days after the later to occur of the initial exercise date of such Purchase Rights or receipt by such Holder of the notice concerning Purchase Rights to which such Holder shall be entitled under Paragraph 3.6) and upon the terms applicable to such Purchase Rights either: (x) the aggregate Purchase Rights which such Holder could have acquired if it had held the number of Common Shares acquirable upon exercise of this Warrant immediately before the grant, issuance or sale of such Purchase Rights; provided that if any Purchase Rights were distributed to holders of -9- Common Shares without the payment of additional consideration by such holders, corresponding Purchase Rights shall be distributed to the exercising holder of this Warrant as soon as possible after such exercise and it shall not be necessary for the exercising holder of this Warrant specifically to request delivery of such rights; or (y) in the event that any such Purchase Rights shall have expired or shall expire prior to the end of said thirty (30) day period, the number of Common Shares or the amount of property which such Holder could have acquired upon such exercise at the same time or times at which the Company granted, issued or sold such expired Purchase Rights. 3.8. Adjustment by Board of Directors. If any event occurs as to which the -------------------------------- provisions of this Section 3 are not strictly applicable or if strictly applicable would not fairly protect the rights of the Holder of this Warrant in accordance with the essential intent and principles of such provisions, then the Board of Directors shall make an adjustment in the application of such provisions, in accordance with such essential intent and principles, so as to protect such rights as aforesaid, but in no event shall any adjustment have the effect of increasing the Purchase Price as otherwise determined pursuant to any of the provisions of this Section 3 except in the case of a combination of shares of a type contemplated in Paragraph 3.3 and then in no event to an amount larger than the Purchase Price as adjusted pursuant to Paragraph 3.3. 3.9. Fractional Shares. The company shall not issue fractions of Common ----------------- Shares upon exercise of this Warrant or scrip in lieu thereof. If any fraction of a Common Share would, except for the provisions of this Paragraph 3.9, be issuable upon exercise of this Warrant, the company shall in lieu thereof pay to the person entitled thereto an amount in cash equal to the product of such fraction, calculated to the nearest one-hundredth (1/100), and the Market Price of a Common Share as of such date of exercise. 3.10. Officers' Statement as to Adjustments. Whenever the Purchase Price ------------------------------------- shall be adjusted as provided in this Section 3, the Company shall forthwith file at the office designated for the exercise of this Warrant a statement, signed by the chairman of the Board, the President, any Vice President or the Treasurer of the Company, showing in reasonable detail the facts requiring such adjustment and the Purchase Price that will be effective after such adjustment. The Company shall also cause a notice setting forth any such adjustments to be sent by mail, first class, postage prepaid, to the record holder of this warrant at his or its address appearing on the Warrant register of the Company. If such notice relates to an adjustment resulting from an event referred to in Paragraph 3.6, such notice shall be included as part of the notice required to be mailed and published under the provisions of Paragraph 3.6. 4. NO DILUTION OR IMPAIRMENT. The Company will not, by amendment of its charter or through reorganization, reclassification, consolidation, amalgamation, merger, dissolution, sale of assets or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder hereof against dilution or other impairment. Without limiting the generality of the -10- foregoing, the Company will not increase the par value of any Common Share receivable upon the exercise of this Warrant above the amount payable therefor upon such exercise, and at all times will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Common Shares upon the exercise of this Warrant. 5. RESERVATION OF COMMON SHARES, ETC., ISSUABLE UPON EXERCISE OF WARRANTS. The Company shall at all times reserve and keep available out of its authorized but unissued Common Shares, solely for issuance and delivery upon the exercise of this Warrant and other similar warrants, such number of its duly authorized Common Shares as from time to time shall be issuable upon the exercise of this Warrant and all other similar warrants at the time outstanding. 6. REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft or destruction) upon delivery of an indemnity agreement (with surety if reasonably required) in an amount reasonably satisfactory to it, or (in the case of mutilation) upon surrender and cancellation thereof, the Company will issue, in lieu thereof, a new Warrant of like tenor. 7. REMEDIES. The Company stipulates that the remedies at law of the Holder of this Warrant in the event of any default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that the same may be specifically enforced. 8. NEGOTIABILITY, ETC. This Warrant is issued upon the following terms, to all of which each taker or owner hereof consents and agrees: (a) Nether this Warrant, the Common Shares underlying this Warrant (the "Underlying Stock") nor the rights of the Holder hereunder may be transferred except in compliance with the provisions of a certain Subscription Agreement executed in connection with the issuance of this Warrant, copies of which are on file at the principal office of the Company. The provisions of this Section 8 shall be binding upon any transferee of this Warrant and upon each holder of Underlying Stock. (b) Subject to the limitation described in this Section 8, title to this Warrant may be transferred by endorsement (by the Holder hereof executing the form of assignment at the end hereof including guaranty of signature) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery. (c) Any person in possession of this Warrant properly endorsed and, if not the original holder hereof, to whom possession was transferred in accordance with the provisions was transferred in accordance with the provisions of clauses (a) and (b) of this Section 8 is authorized to represent himself as absolute owner hereof and is granted power to transfer absolute title hereto by endorsement and delivery hereof to a bona fide pur- -11- chaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of every such bona fide purchaser, and every such bona fide purchaser shall acquire title hereto and to all rights represented hereby. (d) Until this Warrant is transferred on the books of the Company, the Company may treat the registered Holder of this Warrant as the absolute owner hereof for all purposes without being affected by any notice to the contrary. (e) The Company shall not be required to pay any U.S. federal or state transfer tax or charge that may be payable in respect of any transfer involved in the transfer or delivery of this Warrant or the issuance or conversion or delivery of certificates for Common Shares in a name other than that of the registered Holder of this warrant or to issue or deliver any certificates for Common Shares upon the exercise of this Warrant until any and all such taxes and charges shall have been paid by the Holder of this Warrant or until it has been established to the Company's satisfaction that no such tax or charge is due. 9. NO RIGHTS TO VOTE OR RECEIVE DIVIDENDS OR OTHER DISTRIBUTIONS. Prior to the exercise of this Warrant, the Holder hereof shall not be entitled to any rights of a shareholder of the Company with respect to Common Shares for which this Warrant shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein. 10. MAILING OF NOTICES, ETC. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first-class certified mail, postage prepaid, to the address furnished to the Company in writing by the last Holder of this Warrant who shall have furnished an address to the Company in writing. 11. CHANGE, WAIVER, ETC. The terms of this Warrant may not be changed, waived, discharged or terminated orally but only by an instrument in writing signed by the Holder of this Warrant against which enforcement of the change, waiver, discharge or termination is sought. S-1 ARCH CAPITAL GROUP LTD. By: ------------------------- Name: Title: Dated: Attest: - ------------------ [To be signed only upon exercise of Warrant] To Arch Capital Group Ltd. The undersigned, the Holder of the within Warrant, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, ________________ Common Shares of Arch Capital Group Ltd. and herewith makes payment of $_________ therefor and/or requests that the number of Common Shares for which the within Warrant is exercisable to reduced by __________ Common Shares (in addition to the Common Shares being purchased) and/or delivers _________ Common Shares, the aggregate of such payment being equal to the aggregate purchase price for the Common Shares being purchased, and requests that the certificates for the Common Shares being purchased be issued in the name of, and be delivered to, _____________, whose address is ________________. Dated: - ---------------------------- ------------------------------------- (Signature must conform in all respects to name of Holder as specified on the face of the Warrant) ------------------------------------- Address [To be signed only upon transfer of Warrant] FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ______________ the within Warrant and appoints _______________ attorney to transfer said right on the books of Arch Capital Group Ltd. with full power of substitution in the premises. Dated: - ---------------------------- ------------------------------------- (Signature must conform in all respects to name of Holder as specified on the face of the Warrant) ------------------------------------- Address In the presence of - ---------------------------- EXHIBIT III ----------- Amended Bye-law 45 ------------------ 45. LIMITATION ON VOTING RIGHTS OF CONTROLLED SHARES (1) Except as provided in the other paragraphs of this Bye-law 45, every Member of record owning shares conferring the right to vote present in person or by proxy shall have one vote, or such other number of votes as may be specified in the terms of the issue and rights and privileges attaching to such shares or in these Bye-laws, for each such share registered in such Member's name. (2) If, as a result of giving effect to the foregoing provisions of this Bye-law 45 or otherwise, the votes conferred by the Controlled Shares, directly or indirectly or by attribution, to any U.S. Person would otherwise represent more than 9.9% of the voting power of all shares entitled to vote generally at an election of Directors, the votes conferred by the Controlled Shares on such U.S. Person shall be reduced by whatever amount is necessary so that after any such reduction the votes conferred by the Controlled Shares to such U.S. Person shall constitute 9.9% of the total voting power of all shares of the Company entitled to vote generally at any election of Directors (provided, however, that (a) votes shall be reduced only (i) in shares of the Company, if any, held by such U.S. Person within the meaning of Section 958(a) of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) in shares of the Company if any (other than shares held directly by the H&F Funds or the WP Funds) held by such U.S. Person within the meaning of Section 958(b) of the Code, (b) votes shall be reduced in shares of the Company held directly by the H&F Funds and the WP Funds only if and to the extent that reductions in the vote of other shares do not result in satisfaction of the 9.9% threshold set forth in this paragraph (2), (c) such reduction (or portion thereof) in votes conferred by shares held directly by an H&F Fund shall not be effective on or after such date, if any, as such H&F Fund reasonably objects in writing to such reduction (or portion thereof) after reasonable notice given to such H&F Fund in advance (to the extent feasible) of any meeting of shareholders (which notice the Company shall provide in writing) and (d) such reduction (or portion thereof) in votes conferred by shares held directly by a WP Fund shall not be effective on or after such date, if any, as such WP Fund reasonably objects in writing to such reduction (or portion thereof) after reasonable notice given to such WP Fund in advance (to the extent feasible) of any meeting of shareholders (which notice the Company shall provide in writing)). (3) (a) "Controlled Shares" in reference to any person means all shares of the Company directly, indirectly or constructively owned by such person within the meaning of Section 958 of the Code; (b) "U.S. Person" means a United States person as defined in Section ----------- 7701(a)(30) of the Code; -2- (c) "H&F Fund" means the Hellman & Friedman parties to the Shareholders Agreement by and among the Company and certain investors dated as of November 20, 2001 (the "Shareholders Agreement"); and (d) "WP Fund" means the Warburg Pincus parties to the Shareholders Agreement. (4) Upon written notification by a Member to the Board, the number of votes conferred by the total number of shares held directly by such Member shall be reduced to that percentage of the total voting power of the Company, as so designated by such Member (subject to acceptance of such reduction by the Board in its sole discretion), so that (and to the extent that) such Member may meet any applicable insurance or other regulatory requirement or voting threshold or limitation that may be applicable to such Member or to evidence that such person's voting power is no greater than such threshold. (5) Notwithstanding the foregoing provisions of this Bye-law 45, after having applied such provisions as best as they consider reasonably practicable, the Board may make such final adjustments to the aggregate number of votes conferred, directly or indirectly or by attribution, by the Controlled Shares on any U.S. Person that they consider fair and reasonable in all the circumstances to ensure that such votes represent 9.9% (or the percentage designated by a Member pursuant to paragraph (4) of this Bye-law 45) of the aggregate voting power of the votes conferred by all the shares of the Company entitled to vote generally at any election of Directors. Such adjustments intended to implement the 9.9% limitation set forth in paragraph (2) of this Bye-law 45 shall be subject to the proviso contained in such paragraph (2), but adjustments intended to implement the limitation set forth in a notification pursuant to paragraph (4) of this Bye-law 45 shall not be subject to the proviso contained in paragraph (2). (6) Each Member shall provide the Company with such information as the Company may reasonably request so that the Company and the Board may make determinations as to the ownership (direct or indirect or by attribution) of Controlled Shares to such Member or to any person to which Shares may be attributed as a result of the ownership of Shares by such Member. -3- Amended Bye-law 75 75. CERTAIN SUBSIDIARIES With respect to any company incorporated under the laws of Bermuda, Barbados or the Cayman Islands all of the voting shares of which are owned (directly or indirectly through subsidiaries) by the Company, and any other subsidiary of the Company designated by the Board of the Company (together, the "Designated Companies"), the board of directors of each such Designated Company shall consist of the persons who have been elected by the Members to be directors of such Designated Company (the "Designated Company Directors"). Notwithstanding the general authority set out in Bye-law 2(1), the Board shall vote all shares owned by the Company in each Designated Company to ensure the constitutional documents of such Designated Company require such Designated Company Directors to be elected as the directors of such Designated Company, and to elect such Designated Company Directors as the directors of such Designated Company. The Company shall enter into agreements with each such Designated Company to effectuate or implement this Bye-law. EX-99 6 shareholdersagreement.txt EXHIBIT 4 EXHIBIT 4 --------- EXECUTION COPY -------------- SHAREHOLDERS AGREEMENT BY AND AMONG THE SHAREHOLDERS SIGNATORY HERETO AND ARCH CAPITAL GROUP LTD. DATED AS OF NOVEMBER 20, 2001 TABLE OF CONTENTS PAGE ---- ARTICLE I CERTAIN DEFINITIONS Section 1.1. Certain Definitions..........................................2 ARTICLE II REPRESENTATIONS AND WARRANTIES Section 2.1. Representations and Warranties of the Company................7 Section 2.2. Representations and Warranties of Warburg....................8 Section 2.3. Representations and Warranties of H&F........................8 Section 2.4. Representations and Warranties of GE.........................8 Section 2.5. Representations and Warranties of Trident....................9 Section 2.6. Representations and Warranties of Farallon...................9 ARTICLE III VOTING; BOARD REPRESENTATION Section 3.1. Board of Directors...........................................9 Section 3.2. Committees of the Board.....................................11 Section 3.3. Investor Protection Matters.................................11 Section 3.4. Voting......................................................13 Section 3.5. Chairman of the Company.....................................13 Section 3.6. Certain Transactions........................................13 ARTICLE IV REGISTRATION RIGHTS Section 4.1. Demand Registrations........................................14 Section 4.2. Shelf Registration..........................................16 Section 4.3. Piggy-Back Registration.....................................16 Section 4.4. Allocation of Shares to be Registered.......................16 Section 4.5. Registration Procedures.....................................17 Section 4.6. Registration Expenses.......................................20 Section 4.7. Indemnification; Contribution...............................20 ARTICLE V TAG-ALONG RIGHTS; DRAG-ALONG RIGHTS; RESTRICTIONS ON TRANSFER AND CONVERSION Section 5.1. Tag-Along Rights; Drag-Along Rights.........................22 -i- PAGE ---- Section 5.2. Restrictions on Transfer....................................23 Section 5.3. Restrictions on Conversion..................................24 ARTICLE VI RESTRICTIONS ON DIVIDENDS AND SHARE REPURCHASES ARTICLE VII EFFECTIVENESS AND TERMINATION Section 7.1. Effectiveness...............................................24 Section 7.2. Termination.................................................25 ARTICLE VIII MISCELLANEOUS Section 8.1. Injunctive Relief...........................................25 Section 8.2. Successors and Assigns......................................25 Section 8.3. Amendments; Waiver..........................................25 Section 8.4. Notices.....................................................26 Section 8.5. Applicable Law..............................................27 Section 8.6. Headings....................................................27 Section 8.7. Integration.................................................27 Section 8.8. Severability................................................27 Section 8.9. Consent to Jurisdiction.....................................28 Section 8.10. Counterparts................................................28 -ii- SHAREHOLDERS AGREEMENT, dated as of November 20, 2001 (this "Agreement"), by and among ARCH Capital Group Ltd., a company registered under the laws of Bermuda (the "Company"), WARBURG PINCUS (BERMUDA) PRIVATE EQUITY VIII, L.P., a limited partnership organized under the laws of Bermuda, WARBURG PINCUS (BERMUDA) INTERNATIONAL PARTNERS, L.P., a limited partnership organized under the laws of Bermuda, WARBURG PINCUS NETHERLANDS INTERNATIONAL PARTNERS I, C.V., an entity organized under the laws of the Netherlands, WARBURG PINCUS NETHERLANDS INTERNATIONAL PARTNERS II, C.V., an entity organized under the laws of the Netherlands (each, a "Warburg Purchaser," and collectively, "Warburg"), HFCP IV (BERMUDA), L.P., a limited partnership organized under the laws of Bermuda, H&F INTERNATIONAL PARTNERS IV-A (BERMUDA), L.P., a limited partnership organized under the laws of Bermuda, H&F INTERNATIONL PARTNERS IV-B (BERMUDA), L.P., a limited partnership organized under the laws of Bermuda, and H&F EXECUTIVE FUND IV (BERMUDA), L.P., a limited partnership organized under the laws of Bermuda (each, a "H&F Purchaser," and collectively, "H&F," and together with Warburg and such other Persons that are, or may hereafter become, parties hereto (in either case for purposes of such provisions hereof as may be indicated immediately above the signature of such other Persons) pursuant to the terms of Section 8.2 hereof, the "Investors"). W I T N E S S E T H: WHEREAS, the Company and certain of the Investors have entered into a Subscription Agreement, dated as of October 24, 2001, as amended November 20, 2001 (the "Subscription Agreement"), pursuant to the terms of which, among other things, the Company shall issue and sell to the Investors, and Investors shall acquire from the Company, (1) Series A Convertible Preference Shares, par value U.S. $0.01 per share, of the Company (the "Preference Shares"), and (2) Class A Warrants to purchase common shares, par value U.S. $0.01 per share, of the Company (the "Common Shares") (the "Class A Warrants," and together with the Preference Shares, the "Purchased Securities") (such sale and purchase and the other transactions contemplated by the Subscription Agreement or described in the following recitals, the "Transactions"); WHEREAS, the Company and the purchasers named therein (the "Management Purchasers") have entered into a Management Subscription Agreement, dated as of October 24, 2001 (the "Management Subscription Agreement"), pursuant to the terms of which, among other things, the Company shall issue and sell to the Management Purchasers, and the Management Purchasers shall acquire from the Company, Purchased Securities; WHEREAS, the Company, Warburg, H&F and Trident have entered into a letter agreement, dated as of November 8, 2001, pursuant to the terms of which, among other things, Warburg assigned to Trident its right, and Trident assumed from Warburg its obligation, under the Subscription Agreement to purchase certain Purchased Securities; WHEREAS, the Company, Warburg, H&F and GE have entered into a letter agreement, dated as of November 20, 2001, pursuant to the terms of which, among other things, Warburg assigned to GE its right, and GE assumed from Warburg its obligation, under the Subscription Agreement to purchase certain Purchased Securities; WHEREAS, the Company, Warburg, H&F and Farallon have entered into a letter agreement, dated as of November 20, 2001, pursuant to the terms of which, among other things, H&F assigned to Farallon its right, and Farallon assumed from H&F its obligation, under the Subscription Agreement to purchase certain Purchased Securities; WHEREAS, the execution of this Agreement is a condition to the obligation of the parties to consummate the Transactions; and WHEREAS, the Company and Investors desire to establish in this Agreement certain terms and conditions concerning the acquisition of Purchased Securities and related provisions concerning the Investors' relationship with and investment in the Company following the consummation of the Transactions; NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: ARTICLE I CERTAIN DEFINITIONS Section 1.1 Certain Definitions. In addition to other terms defined elsewhere in this Agreement, as used in this Agreement, the following terms shall have the meanings ascribed to them below: "Affiliate" shall mean, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such first Person (including with respect to individuals, any trusts, foundations, family limited partnerships or similar entities); provided, however, that no portfolio investment of either Warburg or H&F, or any of their respective Affiliates, shall be deemed to be an Affiliate of Warburg or H&F, as the case may be; provided, further, that none of the Farallon Purchasers or Farallon, or any of their respective Affiliates, shall be deemed to be an Affiliate of H&F. As used in this definition, "control" (including, with correlative meanings, "controlled by" and "under common control with") shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise). "Agreement" shall have the meaning assigned to such term in the preamble hereto. "Approval Date" shall mean the later of the dates on which the Requisite Shareholder Approval and the Requisite Regulatory Approval occur. "Beneficially Own" shall mean, with respect to any securities, having "beneficial ownership" of such securities for purposes of Rule 13d-3 or 13d-5 under the Exchange Act as in effect on the date hereof, and "Beneficial Ownership" shall have the corresponding meaning. "Blackout Period" shall have the meaning assigned in Section 4.1(c). -2- "Board" shall mean the duly elected Board of Directors of the Company in office at the applicable time. "Business Day" shall mean any day that is not a Saturday, Sunday or other day on which the commercial banks in New York City are authorized or required by law to remain closed. "Bye-laws" shall mean the bye-laws of the Company. "Claims" shall have the meaning assigned in Section 4.7(a). "Class A Warrants" shall have the meaning assigned in the recitals hereto. "Closing" shall mean the consummation of the Transactions pursuant to the terms of the Subscription Agreement. "Common Shares" shall have the meaning assigned in the recitals hereto. "Company" shall have the meaning assigned in the preamble hereto. "Demand Registration" shall mean any registration effected pursuant to a Warburg Demand Request or a H&F Demand Request. "Director" shall mean any member of the Board. "Effective Period" shall have the meaning assigned in Section 4.5(a)(3). "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations that may from time to time be promulgated thereunder. "Existing Registration Rights" shall have the meaning assigned in Section 4.1(a) hereof. "Farallon" shall mean Farallon Capital Partners, L.P., Farallon Capital Institutional Partners II, L.P., Farallon Capital Institutional Partners III, L.P. and RR Capital Partners, L.P., collectively, with each individually being a "Farallon Purchaser". "Farallon Permitted Transferee" shall mean, with respect to any Farallon Purchaser, any Person or entity that directly or indirectly through one or more intermediaries controls, or is controlled by or is under common control with such Farallon Purchaser or an entity over which such Farallon Purchaser has management rights. "GE" shall mean Insurance Private Equity Investors, L.L.C. and Orbital Holdings, Ltd., collectively, with each individually being a "GE Purchaser". "GE Permitted Transferee" shall mean, with respect to any GE Purchaser, any Person or entity that directly or indirectly through one or more intermediaries controls, or is controlled by or is under common control with such GE Purchaser or an entity over which such GE Purchaser has management rights, or any successor trustees or trust (if applicable). -3- "H&F" shall have the meaning assigned in the preamble hereto. "H&F Demand Request" shall have the meaning assigned in Section 4.1(b) hereof. "H&F Demand Shares" shall have the meaning assigned in Section 4.1(b) hereof. "H&F Directors" shall have the meaning assigned in Section 3.1(c) hereof. "H&F Purchaser" shall have the meaning assigned the preamble hereto. "H&F Registrable Shares" shall have the meaning assigned in Section 4.1(b) hereof. "Independent Director" means a Director who is not an Affiliate of either Warburg or H&F. "Initial H&F Director" shall have the meaning assign in Section 3.1(b). "Initial Investment" shall mean, with respect to any Investor, the total number of Common Shares issuable (a) upon conversion of the Preference Shares acquired by such Investor at the Closing, (b) upon conversion of any additional Preference Shares acquired by such Investor with respect to the Preference Shares referred to in clause (a) pursuant to the terms of the Subscription Agreement (or the Management Subscription Agreement), (c) upon exercise for cash of the Class A Warrants acquired by such Investor at Closing, (d) upon exercise for cash of any additional Class A Warrants acquired by such Investor pursuant to the terms of the Subscription Agreement (or the Management Subscription Agreement) and (e) any other securities issued in respect of the securities described in clauses (a) though (d) of this definition or into which such securities shall be converted in connection with stock splits, reverse stock splits, stock dividends or distributions, or combinations or similar recapitalizations. "Initial Shares" shall mean, with respect to any Investor, (a) the Preference Shares acquired by such Investor at the Closing, (b) any additional Preference Shares acquired by such Investor with respect to the Preference Shares referred to in clause (a) pursuant to the terms of the Subscription Agreement (or the Management Subscription Agreement), (c) the Class A Warrants acquired by such Investor at Closing, (d) any additional Class A Warrants acquired by such Investor pursuant to the terms of the Subscription Agreement (or the Management Subscription Agreement) and (e) any other securities issued in respect of the securities described in clauses (a) though (d) of this definition or into which such securities shall be converted in connection with stock splits, reverse stock splits, stock dividends or distributions, or combinations or similar recapitalizations. References to the "the number of Initial Shares" shall mean the number of Common Shares comprising the Initial Shares (based, in the case of Preference Shares and Class A Warrants, upon the number of Common Shares issuable upon conversion or exercise for cash thereof). "Initial Warburg Director" shall have the meaning assigned in Section 3.1(b) hereof. -4- "Interested Party Transaction" shall mean any transaction between the Company or any of its Subsidiaries and any officer or Director, or Affiliate of any officer or Director, of the Company. "Investors" shall have the meaning assigned in the preamble hereto. "Investor Shares" shall mean, at any time, any Common Shares issuable in respect of Initial Shares acquired by an Investor and any Common Shares acquired by an Investor after the Closing (and any Common Shares or other securities issued in respect thereof or into which such Common Shares shall be converted in connection with stock splits, reverse stock splits, stock dividends or distributions, or combinations or similar recapitalizations). "Management Purchasers" shall have the meaning set forth in the recitals hereto. "Management Subscription Agreement" shall have the meaning set forth in the recitals hereto. "Mandatory Conversion Date" shall have the meaning set forth in Section 3.3 hereof. "Market Value" shall mean, as of any date, the average of the daily high and low sales prices per Common Share on the Nasdaq for each of the twenty full trading days immediately preceding (but not including) such date. "Material Transaction" shall have the meaning assigned in Section 4.1(c). "Maximum Number" shall have the meaning assigned in Section 4.4. "Nasdaq" shall mean The Nasdaq Stock Market, Inc. "Nasdaq Independent Director" shall have the meaning specified in Rule 4200(a)(14) of the Rules of the National Association of Securities Dealers, Inc. "Participating Investor" shall have the meaning assigned in Section 4.5(a)(2) hereof. "Per Share Price" shall have the meaning assigned in the Subscription Agreement. "Person" shall mean any individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Piggy-Back Registration" shall have the meaning assigned in Section 4.3. "Piggy-Back Request" shall have the meaning assigned in Section 4.3. "Preference Shares" shall have the meaning assigned in the recitals hereto. "Purchased Securities" shall have the meaning assigned in the recitals hereto. -5- "Registrable Shares" shall have the meaning assigned in Section 4.1(b) hereof. "Requisite Regulatory Approval" shall have the meaning assigned in the Certificate of Designations for the Preference Shares. "Requisite Shareholder Approval" shall have the meaning assigned in the Certificate of Designations for the Preference Shares. "Retained Investment" shall mean, with respect to any Investor, at any time, the amount of the Initial Investment Beneficially Owned by such Investor at such time. "Retained Percentage" shall mean, with respect to any Investor, at any time, the quotient, expressed as a percentage, of (a) such Investor's Retained Investment, over (b) such Investor's Initial Investment. "SEC" shall mean the United States Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations that may from time to time be promulgated thereunder. "Selling Investor" shall have the meaning assigned in Section 5.1(a) hereof. "Shelf Registration Statement" shall have the meaning assigned in Section 4.2 hereof. "Subscription Agreement" shall have the meaning assigned in the recitals hereto. "Subsidiary" shall mean, with respect to any Person, any other entity of which securities or other ownership interests having ordinary power to elect a majority of the board of directors or other persons performing similar functions are at any time directly or indirectly owned by such Person. "Tag-Along Investor" shall have the meaning assigned in Section 5.1(a) hereof. "Third Party Sale" shall have the meaning assigned in Section 5.1(a) hereof. "Third Party Sale Notice" shall have the meaning assigned in Section 5.1(a) hereof. "Transactions" shall have the meaning assigned in the recitals hereto. "Trident" shall mean Trident II, L.P., Marsh & McLennan Capital Professionals Fund, L.P. and Marsh & McLennan Employee's Securities Company, L.P., collectively, with each individually a "Trident Purchaser." "Votes" shall mean votes entitled to be cast generally in the election of Directors. "Voting Power" shall mean, calculated at a particular point in time, the ratio, expressed as a percentage, of (a) the Votes represented by the Voting Securities with respect to -6- which the Voting Power is being determined, to (b) the aggregate Votes represented by all then outstanding Voting Securities. For this purpose, the votes attributable to the Preference Shares shall be on an as-converted basis, without regard to the limitations imposed under the Certificate of Designations. "Voting Securities" shall mean (a) the Common Shares, (b) the Preference Shares and (c) shares of any other class of securities of the Company then entitled to vote generally in the election of Directors. "Warburg" shall have the meaning assigned in the preamble hereto. "Warburg Demand Request" shall have the meaning assigned in Section 4.1(a) hereof. "Warburg Demand Shares" shall have the meaning assigned in Section 4.1(a) hereof. "Warburg Directors" shall have the meaning assigned in Section 3.1(c) hereof. "Warburg Purchaser" shall have the meaning assigned in the preamble hereto. "Warburg Registrable Shares" shall have the meaning assigned in Section 4.1(a) hereof. ARTICLE II REPRESENTATIONS AND WARRANTIES Section 2.1 Representations and Warranties of the Company. The Company represents and warrants to each Investor as follows: (a) The Company has been duly formed and is validly existing as a company in good standing under the laws of Bermuda and has all necessary corporate power and authority to enter into this Agreement and to carry out its obligations hereunder. (b) This Agreement has been duly and validly authorized by the Company and the Company has taken all necessary and appropriate action to execute and deliver this Agreement and to perform its obligations hereunder. (c) This Agreement has been duly executed and delivered by the Company and, assuming due authorization and valid execution and delivery by each other party hereto, is a valid and binding obligation of the Company, enforceable against it in accordance with its terms. -7- Section 2.2 Representations and Warranties of Warburg. Each Warburg Purchaser represents and warrants to each other party hereto as follows: (a) Such Warburg Purchaser has been duly formed and is validly existing and in good standing, to the extent applicable, under the laws of its respective jurisdiction of formation and has all necessary power and authority to enter into this Agreement and to carry out its obligations hereunder. (b) This Agreement has been duly and validly authorized by such Warburg Purchaser and such Warburg Purchaser has taken all necessary and appropriate action to execute and deliver this Agreement and to perform its obligations hereunder. (c) This Agreement has been duly executed and delivered by such Warburg Purchaser and, assuming due authorization and valid execution and delivery by the Company, is a valid and binding obligation of such Warburg Purchaser, enforceable against it in accordance with its terms. Section 2.3 Representations and Warranties of H&F. Each H&F Purchaser represents and warrants to each other party hereto as follows: (a) Such H&F Purchaser has been duly formed and is validly existing under the laws of its respective jurisdiction of formation and has all necessary power and authority to enter into this Agreement and to carry out its obligations hereunder. (b) This Agreement has been duly and validly authorized by such H&F Purchaser and such H&F Purchaser has taken all necessary and appropriate action to execute and deliver this Agreement and to perform its obligations hereunder. (c) This Agreement has been duly executed and delivered by such H&F Purchaser and, assuming due authorization and valid execution and delivery by the Company, is a valid and binding obligation of such H&F Purchaser, enforceable against it in accordance with its terms. Section 2.4 Representations and Warranties of GE. Each GE Purchaser represents and warrants to each other party hereto as follows: (a) Such GE Purchaser has been duly formed and is validly existing under the laws of its respective jurisdiction of formation and has all necessary power and authority to enter into this Agreement and to carry out its obligations hereunder. (b) This Agreement has been duly and validly authorized by such GE Purchaser and such GE Purchaser has taken all necessary and appropriate action to execute and deliver this Agreement and to perform its obligations hereunder. (c) This Agreement has been duly executed and delivered by such GE Purchaser and, assuming due authorization and valid execution and delivery by the Company, is a valid and binding obligation of such GE Purchaser, enforceable against it in accordance with its terms. -8- Section 2.5 Representations and Warranties of Trident. Each Trident Purchaser represents and warrants to each other party hereto as follows: (a) Such Trident Purchaser has been duly formed and is validly existing under the laws of its respective jurisdiction of formation and has all necessary power and authority to enter into this Agreement and to carry out its obligations hereunder. (b) This Agreement has been duly and validly authorized by such Trident Purchaser and such Trident Purchaser has taken all necessary and appropriate action to execute and deliver this Agreement and to perform its obligations hereunder. (c) This Agreement has been duly executed and delivered by such Trident Purchaser and, assuming due authorization and valid execution and delivery by the Company, is a valid and binding obligation of such Trident Purchaser, enforceable against it in accordance with its terms. Section 2.6 Representations and Warranties of Farallon. Each Farallon Purchaser represents and warrants to each other party hereto as follows: (a) Such Farallon Purchaser has been duly formed and is validly existing under the laws of its respective jurisdiction of formation and has all necessary power and authority to enter into this Agreement and to carry out its obligations hereunder. (b) This Agreement has been duly and validly authorized by such Farallon Purchaser and such Farallon Purchaser has taken all necessary and appropriate action to execute and deliver this Agreement and to perform its obligations hereunder. (c) This Agreement has been duly executed and delivered by such Farallon Purchaser and, assuming due authorization and valid execution and delivery by the Company, is a valid and binding obligation of such Farallon Purchaser, enforceable against it in accordance with its terms. ARTICLE III VOTING; BOARD REPRESENTATION Section 3.1 Board of Directors. (a) The Company shall be managed by its duly elected officers subject to the overall direction and supervision of the Board. Each of Warburg and H&F shall, and shall cause its controlled Affiliates to, vote all Voting Securities that such Investor and its controlled Affiliates Beneficially Own and take any and all actions as may be reasonably necessary to cause the provisions of this Section 3.1, including the election of the Warburg Directors and H&F Directors, to be effectuated. (b) Prior to the Closing, and as a condition to the Closing, the Company shall use its best efforts to secure the resignation of a number of Directors such that there remain seven Directors immediately following the Closing (the "Pre-Closing Directors"), of whom at least two shall qualify as Nasdaq Independent Directors. Immediately following the Closing, the size of the Board shall be decreased such that the Board shall consist of nine Directors, and one Director -9- designated by Warburg, (the "Initial Warburg Director") and one Director designated by H&F (the "Initial H&F Director") shall each be appointed by the Board as a director to serve in such classes of Directors as may be necessary to assure that each class in Directors is as near in equal in number as possible and that the Initial Warburg Director and the Initial H&F Director are distributed among different classes. (c) Effective as of 12:00 a.m. on the date immediately following the Approval Date, the size of the Board shall be increased such that the Board shall then and thereafter consist of 15 Directors (such number not to be increased without the consent of Warburg and H&F) and (i) four individuals designated by Warburg (together with the Initial Warburg Director, and any other replacements or substitutions therefor, the "Warburg Directors"), and (ii) two individual designated by H&F (together with the Initial H&F Director, and any other replacements or substitutions therefor, the "H&F Directors") shall each be appointed by the Board as a Director to serve in such classes of Directors as may be necessary to assure that each class in Directors is as near in equal in number as possible and that the Warburg Directors and the H&F Directors, respectively, are distributed among different classes. (d) For so long as Warburg's Retained Percentage is equal to or exceeds 75%, the Initial Warburg Director and, following the Approval Date each Warburg Director, shall be included in the slate of nominees recommended by the Board to shareholders for election as directors at each annual general meeting of shareholders at which such Warburg Director's term is scheduled to expire. For so long as Warburg's Retained Percentage is less than 75% but exceeds or is equal to 55%, there shall be a number of individuals designated by Warburg included in the slate of nominees recommended by the Board to shareholders for election as directors at each annual general meeting of shareholders such that the aggregate number of Warburg Directors shall be not less than four. For so long as Warburg's Retained Percentage is less than 55% but exceeds or is equal to 40%, there shall be a number of individuals designated by Warburg included in the slate of nominees recommended by the Board to shareholders for election as directors at each annual general meeting of shareholders such that the aggregate number of Warburg Directors shall be not less than three. For so long as Warburg's Retained Percentage is less than 40% but exceeds or is equal to 25%, there shall be a number of individuals designated by Warburg included in the slate of nominees recommended by the Board to shareholders for election as directors at each annual general meeting of shareholders such that the aggregate number of Warburg Directors shall be not less than two. For so long as Warburg's Retained Percentage is less than 25% but is equal to or exceeds 10%, there shall be a number of individuals designated by Warburg included in the slate of nominees recommended by the Board to shareholders for election as directors at each annual general meeting of shareholders such that the aggregate number of Warburg Directors shall be not less than one. For so long as Warburg has the power to have at least two Directors included in the slate of nominees recommended by the Board, power with respect to one such Director shall be exercised by Warburg Pincus (Bermuda) Private Equity VIII, L.P and power with respect to one such Director shall be exercised by Warburg Pincus (Bermuda) International Partners, L.P. (e) For so long as H&F's Retained Percentage is equal to or exceeds 60%, each H&F Director shall be included in the slate of nominees recommended by the Board to shareholders for election as directors at each annual general meeting of shareholders at which such H&F Director's term is scheduled to expire. For so long as H&F's Retained Percentage is -10- less than 60% but exceeds or is equal to 35%, there shall be a number of individuals designated by H&F included in the slate of nominees recommended by the Board to shareholders for election as directors at each annual general meeting of shareholders such that the aggregate number of H&F Directors shall be not less than two. For so long as H&F's Retained Percentage is less than 35% but is equal to or exceeds 20%, there shall be a number of individuals designated by H&F included in the slate of nominees recommended by the Board to shareholders for election as directors at each annual general meeting of shareholders such that the aggregate number of H&F Directors shall be not less than one. For so long as H&F has the power to have at least one Director included in the slate of nominees recommended by the Board, such power shall be exercised by HFCP IV (Bermuda), L.P. (f) Each of Warburg and H&F shall provide to the Company in a timely manner all information required by Regulation 14A and Schedule 14A under the Exchange Act with respect to each Warburg Director and each H&F Director, respectively. Section 3.2 Committees of the Board. The Company and the Investors agree that (1) for so long as there is at least one Warburg Director on the Board, each committee of the Board shall include at least one Warburg Director, and (2) for so long as there is at least one H&F Director on the Board, each committee of the Board shall include at least one H&F Director. The foregoing is subject to any restrictions on service on the audit committee as may be applicable under the rules of the National Association of Securities Dealers, Inc. or the SEC. Section 3.3 Investor Protection Matters. Except as specifically set forth herein, in accordance with the Company's Bye-laws, the Board shall act by the vote of a majority of the Directors present at a meeting, and the required quorum for a meeting of the Board shall be a majority of the whole Board. Notwithstanding the foregoing, and except as specifically set forth in the Subscription Agreement, (a) prior to the Approval Date, unless also approved by the Initial Warburg Director and the Initial H&F Director, and (b) following the Approval Date, unless also approved by (i) at least one Warburg Director, if at such time Warburg's Retained Percentage equals or exceeds 25%, and (ii) at least one H&F Director, if at such time H&F's Retained Percentage equals or exceeds 50%, the Company shall not (and shall not permit any of its Subsidiaries to): (1) amend, or propose to amend, its certificate of incorporation, memorandum of association, bye-laws, or other organizational documents, or amend, terminate or waive any provision under, the Subscription Agreement or any other Agreement entered into in connection therewith; (2) split, consolidate, combine, subdivide, redeem or reclassify its share capital or other equity interests, or amend any term of the outstanding securities of the Company or its Subsidiaries; (3) declare, set aside, make or pay any dividend or other distribution in respect of its share capital or other equity interests, or purchase or redeem, directly or indirectly, any share capital or other equity interests (other than (A) dividends by a Subsidiary of the Company to the Company or a Subsidiary of the Company, and (B) dividends or other distributions by any entity in which the Company or any Subsidiary -11- owns a minority interest, made in the normal course of business, consistent with past practice); (4) other than (A) in respect of grants or exercises under the 1999 Long Term Incentive and Share Award Plan, the 1995 Long Term Incentive and Share Award Plan and the Long Term Incentive Plan for New Employees, (B) issuances of securities pursuant to the Subscription Agreement and the Management Subscription Agreement, and (C) issuances of securities upon conversion or exercise of securities issued pursuant to clause (B) or of securities outstanding on the date hereof, issue, deliver or sell, or authorize the issuance, delivery or sale of, any share capital of any class, any equity interest, or any options, warrants, conversion or other rights to purchase any such shares or equity interests, or any securities convertible into or exchangeable for such shares or equity interests, or issue or authorize the issuance of any other security in respect of or in lieu of or in substitution for shares of capital or equity interests, or enter into any agreements restricting the transfer of, or affecting the rights of holders of, Common Shares, grant any preemptive or anti-dilutive rights to any holder of any class of securities of the Company, or grant registration rights with respect to any of the Company's securities; (5) amend or waive any rights under any grants made under the Long Term Incentive Plan for New Employees; (6) incur any indebtedness for borrowed money, guarantee any such indebtedness or issue or sell any debt securities, in excess of $5,000,000 in the aggregate, or prepay or refinance any indebtedness for borrowed money; (7) engage in any Interested Party Transaction; (8) acquire any assets or properties for cash or otherwise for an amount in excess of $5,000,000 in the aggregate; (9) acquire, whether by means of merger, stock or asset purchase, joint venture or other similar transaction, any equity interest in, or all or substantially all of the assets of any Person, or any business or division of any Person; (10) replace the independent auditors of the Company or make any material change in any method of financial accounting or accounting practice, except for any such change required by reason of a concurrent change in U.S. generally accepted accounting principles; (11) sell or otherwise dispose of assets material to the Company and its Subsidiaries taken as a whole, except as specifically contemplated by the Subscription Agreement; (12) increase by 5% or more the annual base compensation of any officer or key employee of the Company, or enter into or make any material change in any severance contract or arrangement with any such officer or key employee; -12- (13) consummate a complete liquidation or dissolution of the Company, a merger or consolidation (A) in which the Company or any Subsidiary is a constituent corporation or (B) with respect to which the Common Shares would have the right to vote under applicable law, a sale of all or substantially all of the Company's assets, or any similar business combination; (14) enter into any transaction involving in excess of $1,000,000, or, if such transaction is in the ordinary course of business consistent with past practice, $5,000,000; (15) approve the annual plan, annual capital expenditure budget or the five-year plan of the Company and its Subsidiaries, taken as a whole; (16) remove the Chief Executive Officer or Chairman of the Company, or appoint a new Chief Executive Officer or Chairman of the Company; or (17) enter into any agreement with respect to the foregoing. Nothing in this Section 3.3 shall grant either H&F or Warburg any right or consent to the extent that such right would result in such party being deemed to "control" an insurance subsidiary of the Company that is domiciled in any state in the United States, where the exercise of such control would otherwise require the prior approval of such state. In addition, the rights of Warburg and H&F set forth in this Section 3.3 shall, in any event, terminate upon the mandatory conversion of the Preference Shares under paragraph (g)(2) of the Certificate of Designations for the Preference Shares (the "Mandatory Conversion Date") or the earlier conversion of all Preference Shares in accordance with their terms. Section 3.4 Voting. Each Investor agrees to vote all Voting Securities Beneficially Owned by such Investor or by any controlled Affiliate of such Investor in favor of (a) the proposals to be submitted for approval of the shareholders of the Company at the special general meeting of the Company's shareholders to be held in connection with the Transactions and (b) the proposals to approve the grant to Robert Clements of 1,689,629 restricted shares and the grant to John M. Pasquesi of options to purchase 1,126,419 Common Shares at $20.00 per share, which grants were made in connection with the Transactions, which such proposals will be submitted for approval of the shareholders of the Company at the 2002 annual general meeting of the Company's shareholders. Section 3.5 Chairman of the Company. For so long as he is willing and able to serve as the Chairman of the Company, Warburg and H&F agree to take such actions as may be necessary to cause Robert Clements to be duly elected as Chairman of the Company. Section 3.6 Certain Transactions. For a period of two years after the Closing, except for transactions specifically contemplated by this Agreement, the Related Agreements (as defined in the Subscription Agreement) or the Purchased Securities, neither Warburg nor H&F nor any of their respective Affiliates will, directly or indirectly, without the prior approval of a majority of the Independent Directors: (a) acquire securities or assets from the Company or any of its Subsidiaries, (b) engage in any "Rule 13e-3 transaction" (as such term is defined in Rule 13e-3(a)(3) under the Securities Exchange Act of 1934, as amended) involving the Company, or (c) engage in any other transaction that would result in the compulsory acquisition of Common -13- Shares. The Company shall not agree to amend this Section 3.6, without the prior approval of a majority of the Independent Directors. The Company, Warburg and H&F shall endeavor to include at all times two Independent Directors on the Board. ARTICLE IV REGISTRATION RIGHTS Section 4.1 Demand Registrations. (a) Warburg may at any time following the date hereof and on not more than five separate occasions in the aggregate and not more frequently than once during any 180 day period, require the Company to file a registration statement under the Securities Act in respect of all or a portion of the Investor Shares then Beneficially Owned by Warburg or by any other person that Beneficially Owns Investor Shares and who acquired such Investor Shares in connection with such person's status as a partner in any partnership in which Warburg or any of its Affiliates is the general partner (all such Investor Shares, the "Warburg Registrable Shares") (provided that such request covers Warburg Registrable Shares with a Market Value on the date of the Demand Request of at least $25 million), by delivering to the Company a written notice stating that such right is being exercised, specifying the number of Common Shares to be included in such registration (the shares subject to such request, the "Warburg Demand Shares") and describing the intended method of distribution thereof (a "Warburg Demand Request"). Upon receiving a Warburg Demand Request, the Company shall (1) provide written notice of the Warburg Demand Request, pursuant to Section 4.3 hereof, to H&F and each other Investor, (2) use reasonable efforts to file as promptly as reasonably practicable a registration statement on such form as the Company may reasonably deem appropriate providing for the registration of the sale of such Warburg Demand Shares and any other Investor Shares to be included pursuant to Sections 4.3 and 4.4 hereof pursuant to the intended method of distribution and (3) after the filing of an initial version of the registration statement, use reasonable efforts to cause such registration statement to be declared effective under the Securities Act as promptly as practicable after the date of filing of such registration statement. Any Demand Registration filed pursuant to the request of Warburg may, subject to the provisions of Section 4.4 below, include other Common Shares that the Company is required to include in such registration statement by virtue of existing agreements between the holders of such Common Shares and the Company (the "Existing Registration Rights"). (b) H&F may at any time following the date hereof and on not more than five separate occasions in the aggregate and not more frequently than once during any 180 day period, require the Company to file a registration statement under the Securities Act in respect of all or a portion of the Investor Shares then Beneficially Owned by H&F or by any other person that Beneficially Owns Investor Shares and who acquired such Investor Shares in connection with such person's status as a partner in any partnership in which H&F or any of its Affiliates is the general partner (all such Common Shares, the "H&F Registrable Shares," and together with the Warburg Registrable Shares, the "Registrable Shares") (provided that such request covers H&F Registrable Shares with a Market Value on the date of the Demand Request of at least $25 million), by delivering to the Company a written notice stating that such right is being exercised, specifying the number of Common Shares to be included in such registration (the shares subject to such request, the "H&F Demand Shares") and describing the intended method of distribution thereof (a "H&F Demand Request"). Upon receiving a H&F Demand Request, the Company -14- shall (1) provide written notice of the H&F Demand Request, pursuant to Section 4.3 hereof, to Warburg and each other Investor, (2) use reasonable efforts to file as promptly as reasonably practicable a registration statement on such form as the Company may reasonably deem appropriate providing for the registration of the sale of such H&F Demand Shares and any other Investor Shares to be included therein pursuant to Section 4.3 and 4.4 hereof pursuant to the intended method of distribution, and (3) after the filing of an initial version of the registration statement, use reasonable efforts to cause such registration statement to be declared effective under the Securities Act as promptly as practicable after the date of filing of such registration statement. Any Demand Registration filed pursuant to the request of H&F may, subject to the provisions of Section 4.4 below, include other Common Shares that the Company is required to include in such registration statement by virtue of the Existing Registration Rights. (c) Notwithstanding anything in this Agreement to the contrary, the Company shall be entitled to postpone and delay, for reasonable periods of time not to exceed 60 consecutive days and in no event to exceed more than an aggregate of 90 days during any 360-day period (a "Blackout Period"), the filing or effectiveness of any Demand Registration if the Board shall determine that any such filing or the offering of any Registrable Shares would (1) in the good faith judgment of the Board, impede, delay or otherwise interfere with any pending or contemplated acquisition, corporate reorganization or other similar material transaction involving the Company (each, a "Material Transaction"), (2) based upon advice from the Company's investment banker or financial advisor, adversely affect any pending or contemplated financing, offering or sale of any class of securities by the Company, or (3) in the good faith judgment of the Board, require disclosure of material non-public information (other than information relating to an event described in clauses (1) or (2) above) which, if disclosed at such time, would be harmful to the best interests of the Company and its shareholders. Upon notice by the Company to each Investor of any such determination, such Investor shall keep the fact of any such notice strictly confidential, and during any Blackout Period promptly halt any offer, sale, trading or transfer by it or any of its Subsidiaries of any Common Shares for the duration of the Blackout Period set forth in such notice (or until such Blackout Period shall be earlier terminated in writing by the Company) and promptly halt any use, publication, dissemination or distribution of the Demand Registration, each prospectus included therein, and any amendment or supplement thereto by it for the duration of the Blackout Period set forth in such notice (or until such Blackout Period shall be earlier terminated in writing by the Company) and, if so directed by the Company, will deliver to the Company any copies then in its possession of the prospectus covering such Registrable Shares. (d) In case a Demand Registration has been filed, if a Material Transaction has occurred, the Company may cause such Demand Registration to be withdrawn and its effectiveness terminated or may postpone amending or supplementing such Demand Registration for a reasonable period of time; provided, however, that in no event shall a Demand Registration so withdrawn by the Company count for the purposes of determining the number of Demand Registrations to which either Warburg or H&F is entitled under Section 4.1(a) or (b). (e) In connection with any underwritten offering under this Section 4.1, the managing underwriter for such Demand Registration shall be jointly selected by Warburg and H&F, provided that such managing underwriter shall be a nationally recognized investment banking firm. -15- (f) Nothing in this Article IV shall affect or supersede any of the transfer restrictions set forth in Article V hereof or any of the other provisions of this Agreement. Section 4.2 Shelf Registration. At the request of either Warburg or H&F, the Company shall use reasonable best efforts to file a registration statement on Form S-3, or any successor form thereto, covering the offering of Investor Shares by all Investors (subject to the provisions of Section 5.2 hereof) on a delayed or continuous basis (the "Shelf Registration Statement") to be effective as soon as reasonably practicable following the Closing Date. Upon effectiveness of the Shelf Registration Statement, the Company will use its reasonable best efforts to keep the Shelf Registration Statement effective with the SEC until such time the Investor Shares held by all Investors are freely tradable under Rule 144(k) under the Securities Act. Notwithstanding the foregoing, the Company may suspend the effectiveness of the Shelf Registration Statement during any Blackout Period. Section 4.3 Piggy-Back Registration. If, at any time following the date hereof, the Company proposes to register any Common Shares under the Securities Act on its behalf or on behalf of any of its shareholders (including pursuant to a Demand Registration), on a form and in a manner that would permit registration of Common Shares (other than in connection with dividend reinvestment plans, rights offerings or a registration statement on Form S-4 or S-8 or any similar successor form), the Company shall give reasonably prompt written notice to each Investor of its intention to do so. Upon the written election of any Investor (a "Piggy-Back Request"), given within ten Business Days following the receipt by such Investor of any such written notice (which election shall specify the number of the Investor Shares intended to be disposed of by such Investor), the Company shall include in such registration statement (a "Piggy-Back Registration"), subject to the provisions of Section 4.4 hereof, such number of the Investor Shares as shall be set forth in such Piggy-Back Request. Section 4.4 Allocation of Shares to be Registered. In the event that the Company proposes to register Common Shares in connection with an underwritten offering and a nationally recognized investment banking firm selected by the Company, or in the case of a Demand Registration selected by Warburg and H&F, to act as managing underwriter thereof reasonably and in good faith shall have advised the Company and each Investor in writing that, in its opinion, the inclusion in the registration statement of some or all of the Investor Shares sought to be registered in a Piggy-Back Request would adversely affect the price or success of the offering, the Company shall include in such registration statement such number of Common Shares as the Company is advised can be sold in such offering without such an effect (the "Maximum Number") as follows and in the following order of priority: (a) first, if such registration is not in connection with a Demand Registration, such number of Common Shares, if any, as the Company intended to be registered by the Company for its own account, or to be registered pursuant to Existing Registration Rights, to the extent such Existing Registration Rights so require; (b) second, if and to the extent that the number of Common Shares to be registered under clause (a) is less than the Maximum Number (or because the registration is a Demand Registration, in which case the Company is not permitted to offer Common Shares), such number of Investor Shares as Warburg, H&F, Trident, Farallon and GE (and, to the extent required by any Existing Registration Rights, any other holder of Common Shares having such rights) shall have intended to register which, when added to the number of Common Shares to be registered under clause (a), is less than or equal to the Maximum Number, it being understood -16- that the number of shares included by Warburg, H&F, Trident, Farallon and GE (and such other holders under Existing Registration Rights) shall be cut back, if necessary, in proportion to their relative ownership at the time; and (c) third, if and to the extent that the number of Common Shares to be registered under clause (b) is less than the Maximum Number, such number of Investor Shares as the Participating Investors (other than Warburg, H&F, Trident, Farallon and GE (and such other holders under Existing Registration Rights)) shall have intended to register which, when added to the number of Common Shares to be registered under clauses (a) and (b), is less than or equal to the Maximum Number, it being understood that the number of shares included by the Participating Investors (other than Warburg, H&F, Trident, Farallon and GE (and such other holders under Existing Registration Rights)) shall be cut back, if necessary, in proportion to their relative ownership. Section 4.5 Registration Procedures. (a) In connection with each registration statement prepared pursuant to this Article IV, and in accordance with the intended method or methods of distribution of the Investor Shares as described in such registration statement, the Company shall, as soon as reasonably practicable and to the extent practicable: (1) prepare and file with the SEC a registration statement on an appropriate registration form and use reasonable efforts to cause such registration statement to become and remain effective as promptly as reasonably practicable; provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company shall furnish to counsel to H&F and Warburg, if disposing of Registrable Shares under such registration statement, draft copies of all such documents proposed to be filed at least five days prior to such filing, which documents will be subject to the reasonable review of each of H&F and Warburg, as appropriate, and its agents and representatives; (2) furnish without charge to each Investor seeking to dispose of Investor Shares thereunder (each, a "Participating Investor"), and the managing underwriter or underwriters, if any, at least one conformed copy of the registration statement and each post-effective amendment or supplement thereto (but excluding schedules, all documents incorporated or deemed incorporated therein by reference and all exhibits, unless requested in writing by such Participating Investor or such underwriter) and such number of copies of the summary, preliminary, final, amended or supplemented prospectuses included in such registration statement as such Participating Investor or such underwriter may reasonably request; (3) except with respect to a Shelf Registration Statement, the obligations of the Company with respect to the effectiveness thereof to be governed by Section 4.2, use reasonable best efforts to keep such registration statement effective for the earlier of (A) 180 days and (B) such time as all of the securities covered by the registration statement have been disposed (the "Effective Period"); prepare and file with the SEC such amendments, post-effective amendments and supplements to the registration statement and the prospectus as may be necessary to maintain the effectiveness of the registration for the Effective Period and to cause the prospectus (and any amendments or supplements thereto) to be filed; -17- (4) use reasonable efforts to register or qualify the Investor Shares covered by such registration statement under such other securities or "blue sky" laws of such jurisdictions in the United States as are reasonably necessary, keep such registrations or qualifications in effect for so long as the registration statement remains in effect, and do any and all other acts and things which may be reasonably necessary to enable each Participating Investor or any underwriter to consummate the disposition of the Investor Shares in such jurisdictions; (5) use reasonable efforts to cause the Investor Shares to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable each Participating Investor to consummate the disposition of the Investor Shares; (6) use reasonable efforts to cause all Investor Shares covered by such registration statement to be listed on the Nasdaq or on the principal securities exchange on which the Common Shares are then listed; (7) promptly notify each Participating Investor and the managing underwriter or underwriters, if any, after becoming aware thereof, (A) when the registration statement or any related prospectus or any amendment or supplement thereto has been filed, and, with respect to the registration statement or any post-effective amendment, when the same has become effective, (B) of any request by the SEC for amendments or supplements to the registration statement or the related prospectus or for additional information, (C) of the issuance by the SEC of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings for that purpose, (D) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Investor Shares to be registered for sale in any jurisdiction or the initiation of any proceeding for such purpose or (E) within the Effective Period of the happening of any event or the existence of any fact that makes any statement in the registration statement or any post-effective amendment thereto, prospectus or any amendment or supplement thereto, or any document incorporated therein by reference untrue in any material respect or which requires the making of any changes in the registration statement or post-effective amendment thereto or any prospectus or amendment or supplement thereto so that they will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (8) during the Effective Period, use its reasonable efforts to obtain the withdrawal of any order enjoining or suspending the use or effectiveness of the registration statement or any post-effective amendment thereto; (9) deliver promptly to each of Warburg and H&F, if disposing of Investor Shares under such registration statement, copies of all correspondence between the SEC and the Company, its counsel or auditors and all memoranda relating to discussions with the SEC or its staff with respect to the registration statement and permit each of Warburg and H&F, if disposing of Investor Shares under such registration statement, to do such -18- investigation, with respect to information contained in or omitted from the registration statement, as it reasonably deems necessary; (10) in the case of an underwritten offering, use best efforts to enter into an underwriting agreement customary in form and scope for underwritten secondary offerings of the nature contemplated by the applicable registration statement; (11) provide a transfer agent and registrar for all such Investor Shares covered by such registration statement not later than the effective date of such registration statement, subject to any applicable laws or regulations; and (12) cooperate with each Participating Investor and the managing underwriter or underwriters, if any, to facilitate the timely preparation and delivery of certificates representing such Investor Shares to be sold under the registration statement; and, in the case of an underwritten offering, enable such Investor Shares to be in such denominations and registered in such names as the managing underwriter or underwriters, if any, may request in writing at least two Business Days prior to any sale of the Investor Shares to the underwriters. (b) In the event that the Company would be required, pursuant to Section 4.5(a)(7)(E) above, to notify each Participating Investor or the managing underwriter or underwriters, if any, of the happening of any event specified therein, the Company shall, subject to the provisions of Section 4.1(c) hereof, as promptly as practicable, prepare and furnish to each Participating Investor and to each such underwriter a reasonable number of copies of a prospectus supplemented or amended so that, as thereafter delivered to purchasers of Investor Shares that have been registered pursuant to this Agreement, such prospectus shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Each Participating Investor agrees that, upon receipt of any notice from the Company pursuant to Section 4.5(a)(7)(E) hereof, it shall, and shall use its reasonable best efforts to cause any sales or placement agent or agents for the Investor Shares and the underwriters, if any, to, forthwith discontinue disposition of the Investor Shares until such Person shall have received copies of such amended or supplemented prospectus and, if so directed by the Company, to destroy or to deliver to the Company all copies, other than permanent file copies, then in its possession of the prospectus (prior to such amendment or supplement) covering such Investor Shares as soon as practicable after such Participating Investor's receipt of such notice. (c) Each Participating Investor shall furnish to the Company in writing its intended method of distribution of the Investor Shares it proposes to dispose of and such other information as the Company may from time to time reasonably request in writing, but only to the extent that such information is required in order for the Company to comply with its obligations under all applicable securities and other laws and to ensure that the prospectus relating to such Investor Shares conforms to the applicable requirements of the Securities Act. Each Participating Investor shall notify the Company as promptly as practicable of any inaccuracy or change in information previously furnished by such Participating Investor to the Company or of the occurrence of any event, in either case as a result of which any prospectus relating to the -19- Investor Shares contains or would contain an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and promptly furnish to the Company any additional information required to correct and update any previously furnished information or required so that such prospectus shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (d) In the case of any registration under Section 4.1 hereof pursuant to an underwritten offering, or in the case of a registration under Section 4.3 hereof if the Company has determined to enter into an underwriting agreement in connection therewith, all Investor Shares to be included in such registration shall be subject to the applicable underwriting agreement and no Person may participate in such registration unless such Person agrees to sell such Person's securities on the basis provided therein and completes and executes all questionnaires, indemnities, underwriting agreements and other documents (other than powers of attorney) which must be executed in connection therewith, and provides such other information to the Company or the underwriter as may be reasonably requested to register such Person's Investor Shares. Section 4.6 Registration Expenses. The Company shall bear all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, fees and expenses in connection with the review of underwriting arrangements by the NASD Regulation, Inc. (including the fees of any "qualified independent underwriter"), agent fees and commissions, printing costs and fees and disbursements of its counsel, and of one counsel as may be reasonably selected by Warburg and H&F on behalf of the Participating Investors, and accountants, in each case, in connection with any registration and listing of any Investor Shares pursuant to Section 4.1, 4.2 or 4.3, other than underwriting discounts or commissions in connection with the Investor Shares disposed of by any Participating Investor, which shall be borne by such Participating Investor. Section 4.7 Indemnification; Contribution. (a) The Company shall, and it hereby agrees to, indemnify and hold harmless each Participating Investor and its partners, members, officers, directors, employees and controlling Persons, if any, and each underwriter, its partners, officers, directors, employees and controlling Persons, if any, in any offering or sale of Common Shares, against any losses, claims, damages or liabilities to which each such indemnified party may become subject, insofar as such losses, claims, damages or liabilities, or actions or proceedings in respect thereof, including any amounts paid in settlement as provided herein (collectively, "Claims"), arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in any registration statement, or any preliminary or final prospectus contained therein, or any amendment or supplement thereto, or any document incorporated by reference therein, or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, and the Company shall, and it hereby agrees to, reimburse each Participating Investor or any such underwriter for any legal or other out-of-pocket expenses reasonably incurred by it in connection with investigating or defending any such Claims; provided, however, that the Company shall not be liable to any such Person in any such case to the extent that any such Claims arise out of or -20- are based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, or preliminary or final prospectus, or amendment or supplement thereto, in reliance upon and in conformity with information furnished in writing to the Company by such Participating Investor or any underwriter expressly for use therein. (b) Each Participating Investor shall, and hereby agrees to (1) indemnify and hold harmless the Company, its directors, officers, employees and controlling Persons, if any, and each underwriter, its partners, officers, directors, employees and controlling Persons, if any, in any offering or sale of Common Shares, against any Claims to which each such indemnified party may become subject, insofar as such Claims arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in such registration statement, or any preliminary or final prospectus contained therein, or any amendment or supplement thereto, or any document incorporated by reference therein, or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Participating Investor expressly for use therein, and (2) reimburse the Company for any legal or other out-of-pocket expenses reasonably incurred by the Company in connection with investigating or defending any such Claim. (c) Promptly after receipt by an indemnified party under Section 4.7(a) or Section 4.7(b) of written notice of the commencement of any action or proceeding for which indemnification under Section 4.7(a) or Section 4.7(b) may be requested, such indemnified party shall notify the indemnifying party in writing of the commencement of such action or proceeding, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party in respect of such action or proceeding hereunder unless the indemnifying party was materially prejudiced by such failure of the indemnified party to give such notice, and in no event shall such omission relieve the indemnifying party from any other liability it may have to such indemnified party. In case any such action or proceeding shall be brought against any indemnified party and it shall notify an indemnifying party of the commencement thereof, such indemnifying party shall be entitled to participate therein and, to the extent that it shall determine, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, such indemnifying party shall not be liable to such indemnified party for any legal or any other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. If the indemnifying party is not entitled to, or elects not to, assume the defense of a claim, it will not be obligated to pay the fees and expenses of more than one counsel for each indemnified party with respect to such claim. The indemnifying party will not be subject to any liability for any settlement made without its consent, which consent shall not be unreasonably withheld or delayed. No indemnifying party shall, without the prior written consent of the indemnified party, compromise or consent to entry of any judgment or enter into any settlement agreement with respect to any action or proceeding in respect of which indemnification is sought under Section 4.7(a) or Section 4.7(b) (whether or not the indemnified party is an actual or potential party thereto), unless such compromise, consent or settlement includes an unconditional -21- release of the indemnified party from all liability in respect of such claim or litigation and does not subject the indemnified party to any material injunctive relief or other material equitable remedy. (d) Each Participating Investor and the Company agree that if, for any reason, the indemnification provisions contemplated by Sections 4.7(a) or 4.7(b) hereof are unavailable to or are insufficient to hold harmless an indemnified party in respect of any Claims referred to therein (other than as a result of the provisos thereto), then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such Claims in such proportion as is appropriate to reflect the relative fault of and benefits derived by the indemnifying party, on the one hand, and the indemnified party, on the other hand, as well as other equitable considerations. The amount paid or payable by an indemnified party as a result of the Claims referred to above shall be deemed to include (subject to the limitations set forth in Section 4.7(c) hereof) any legal or other fees or expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action, proceeding or claim. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. ARTICLE V TAG-ALONG RIGHTS; DRAG-ALONG RIGHTS; RESTRICTIONS ON TRANSFER AND CONVERSION Section 5.1 Tag-Along Rights; Drag-Along Rights. (a) In the event that Warburg, H&F or GE proposes to sell, convey, dispose or otherwise transfer Initial Shares (such party proposing to sell, the "Selling Investor") in a bona fide transaction to an un-Affiliated third party, or in a series of related bona fide transactions to multiple un-Affiliated third parties, and the net proceeds of such sale are reasonably expected to exceed $50 million (such a transaction, or series of related transactions, a "Third Party Sale"), such Selling Investor shall notify the other Investors having rights under this Section 5.1 (each such other Investor, a "Tag-Along Investor") in writing of such Third Party Sale, which notice shall set forth the material terms of such Third Party Sale, including, without limitation, the number of Initial Shares proposed to be sold and the per share price thereof (the "Third Party Sale Notice"). Such Tag-Along Investor shall have the right, but not the obligation, to participate in such Third Party Sale with respect to Initial Shares upon providing the Selling Investor written notice of intent to exercise such right within ten Business Days of the receipt of Third Party Sale Notice; provided, however, that (i) GE shall have such rights only (A) if Warburg is the Selling Investor, or (B) if H&F is the Selling Investor and Warburg shall have exercised its rights to become at Tag-Along Investor under this Section 5.1, and (ii) Farallon shall have such rights only (A) if H&F is the Selling Investor, or (B) if Warburg is the Selling Investor and H&F shall have exercised its rights to become a Tag-Along Investor under this Section 5.1. Such notice shall set forth the number of Initial Shares that such Tag-Along Investor desires to sell in such Third Party Sale, which such number shall not exceed that number of Initial Shares equal to the product of (i) the number of Initial Shares set forth in the Third Party Sale Notice, and (ii) the quotient of (A) the Retained Investment of such Tag-Along Investor, over (B) the sum of (I) the Retained Investment of the Selling Investor, and (II) the Retained Investment of all Tag-Along Investors. Notwithstanding the foregoing, this Section -22- 5.1 shall not be applicable to any sale effected in the public markets (including by means of a "block trade" effected through any registered broker-dealer), or to any distribution to partners of any partnership in which either Warburg or H&F, or any of their respective Affiliates, is the general partner. (b) In the event that Warburg or H&F proposes to become a Selling Investor under Section 5.1(a), Trident shall have the rights of a Tag-Along Investor under Section 5.1(a). (c) In the event that Warburg and/or H&F proposes to sell, convey, dispose or otherwise transfer Initial Shares representing either 51% of the votes then entitled to be cast in the election of directors, or 51% of the then outstanding Common Shares (taking into account Common Shares issuable upon conversion of the Preference Shares) in a transaction, or in a series of related transactions, to a single Person or group, Warburg and H&F shall have the right to require that Trident, and Trident shall have the obligation to, participate in such transaction, up to a number of Initial Shares then Beneficially Owned by Trident that shall not exceed that number of Initial Shares equal to the product of (i) the number of Initial Shares proposed to be transferred, and (ii) the quotient of (A) the Retained Investment of Trident, over (B) the sum of (I) the Retained Investment of Warburg and H&F, and (II) the Retained Investment of Trident and all other Investors participating in such sale. (d) No Tag-Along Investor under this Sections 5.1 shall be required to assume any responsibility for any indemnification obligations arising under such Third Party Sale in excess of the proportion of the number of Initial Shares sold by such party to the total number of Initial Shares sold in such Third Party Sale; provided, however, that the limitation provided in this Section 5.1(d) shall not be applicable to any indemnification obligations resulting from representations or warranties specifically relating to, and made by or on behalf of, such party. Section 5.2 Restrictions on Transfer. Until the earliest to occur of (a) the first anniversary of the Closing, (b) the occurrence of any event that would cause Company's outstanding Class B Warrants to vest and/or become exercisable, or (c) the completion by the Company of a registered public offering of Common Shares the net proceeds to the Company of which exceed $25 million, each of Warburg, H&F, Farallon, GE and Trident, and each Management Purchaser, agrees that it or he will not sell, dispose, convey or otherwise transfer any of such Investor's Initial Shares if, following the consummation of such sale, the Retained Percentage of such Investor would be less that 66%; provided, however, that GE and Farallon shall have the right to sell, dispose, convey or otherwise transfer Initial Shares to any GE Permitted Transferee or any Farallon Permitted Transferee, respectively; provided, further, that such GE Permitted Transferee or such Farallon Permitted Transferee, as the case may be, shall become a party hereto and agree to be bound by the terms hereof. Following the earliest to occur of clauses (a), (b) or (c) in the preceding sentence, there shall be no restrictions on transfer of any Initial Shares, except as may be imposed by applicable law, including by the Securities Act. Nothing in this Section 5.2 shall be deemed to affect any disposition of Initial Shares pursuant to the terms of any merger, consolidation or other business combination transaction, or to the tender of any Initial Shares into any tender or exchange offer, provided, that such merger, consolidation or other business combination has been approved by, or such tender or exchange offer has been recommended to, the shareholders of the Company by, the Board. -23- Section 5.3 Restrictions on Conversion. Prior to the receipt of the Requisite Shareholder Approval, no Investor shall convert any Preference Share or exercise any Class A Warrant, if the number of Common Shares to be issued to such Investor upon such conversion or exercise, together with all Common Shares issued upon prior conversions or exercise by such holder, would exceed such Investor's Permissible Conversion Amount. An Investor's "Permissible Conversion Amount" shall be a number of Common Shares equal to the product of (a) the total number of Common Shares issuable to such Investor upon conversion or exercise of all such Investor's Initial Shares, and (b) a fraction the numerator of which is (i) (A) the product of.199 times the total number of Common Shares issued and outstanding on November 19, 2001 minus (B) the 140,380 Common Shares issued on November 20, 2001, and the denominator of which is (ii) the total number of Common Shares issuable upon conversion or exercise of all Initial Shares. Prior to the Receipt of the Requisite Shareholder Approval, each holder of Preference Shares and Class A Warrants issued under the Subscription Agreement or the Management Subscription Agreement shall require any transferee of Preference Shares or Class A Warrants to agree to this restriction, such that it applies to such transferee as if such transferee had acquired such securities at Closing, and attributing to such transferee a pro rata portion of any conversion or exercise by the transferor, prior to such transfer. Prior to receipt of the Requisite Regulatory Approval, no Investor shall convert any Preference Shares into Common Shares or exercise any Class A Warrants unless all necessary approvals for such ownership of Common Shares have been obtained, it being understood that, subject to Section 5.2 hereof, this restriction on conversion and exercise shall not restrict an Investor from converting or exercising and selling, or otherwise disposing of, the shares received on conversion or exercise in such a manner as would not result in violation of any applicable regulation. GE shall not convert any Preference Shares, or exercise any Class A Warrant, until such time as any required waiting period, including extensions thereof, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, shall have expired or been terminated. ARTICLE VI RESTRICTIONS ON DIVIDENDS AND SHARE REPURCHASES The Company shall not declare any dividend or make any other distribution on, or in respect of, any Common Shares, and shall not repurchase any Common Shares, until such time as the Company has repurchased from Warburg and H&F, in proportion to their respective Retained Investments at the time of such repurchase, Initial Shares having an aggregate value of $250 million, at a per share price acceptable to Warburg and H&F. ARTICLE VII EFFECTIVENESS AND TERMINATION Section 7.1 Effectiveness. This Agreement shall take effect immediately upon the Closing and shall remain in effect until it is terminated pursuant to Section 7.2 hereof. -24- Section 7.2 Termination. Other than with respect to Article IV hereof and with respect to the termination provisions specifically elsewhere set forth in this Agreement as may be applicable to any particular Section of this Agreement, this Agreement shall terminate upon the earliest to occur of the following: (a) the tenth anniversary of the Closing; or (b) mutual written agreement of the Company, Warburg and H&F at any time to terminate this Agreement. ARTICLE VIII MISCELLANEOUS Section 8.1 Injunctive Relief. Each party hereto acknowledges that it would be impossible to determine the amount of damages that would result from any breach of any of the provisions of this Agreement and that the remedy at law for any breach, or threatened breach, of any of such provisions would likely be inadequate and, accordingly, agrees that each other party shall, in addition to any other rights or remedies which it may have, be entitled to seek such equitable and injunctive relief as may be available from any court of competent jurisdiction to compel specific performance of, or restrain any party from violating, any of such provisions. In connection with any action or proceeding for injunctive relief, each party hereto hereby waives the claim or defense that a remedy at law alone is adequate and agrees, to the maximum extent permitted by law, to have each provision of this Agreement specifically enforced against it, without the necessity of posting bond or other security against it, and consents to the entry of injunctive relief against it enjoining or restraining any breach or threatened breach of such provisions of this Agreement. Section 8.2 Successors and Assigns. This Agreement shall be binding upon, and shall inure to the benefit of and be enforceable by the Company, Warburg and H&F, and for the purposes of such provisions hereof as may be indicated immediately above the signatures of Farallon, GE, Trident and each Management Purchaser, and their respective successors and permitted assigns, and no such term or provision is for the benefit of, or intended to create any obligations to, any other Person, except as otherwise specifically provided in this Agreement. Neither this Agreement nor any rights or obligations hereunder shall be assignable without the consent of each other party; provided, however, that in connection with any sale or transfer by Warburg or H&F of any Investor Shares, the transferee of such Investor Shares may become a party hereto solely for purposes of Article IV and Sections 3.4, 5.2 and 5.3 hereof and have the rights of, and be subject to the obligations of, an "Investor" upon due execution and delivery of a counterpart signature page hereto. Notwithstanding the foregoing, GE or Farallon may assign its rights hereunder to any GE Permitted Transferee or any Farallon Permitted Transferee, respectively, provided such GE Permitted Transferee or Farallon Permitted Transferee, as the case may be, becomes a party hereto and agrees to be bound by the terms hereof. Section 8.3 Amendments; Waiver. This Agreement may be amended only by an agreement in writing executed by the parties hereto. Any party may waive in whole or in part any benefit or right provided to it under this Agreement, such waiver being effective only if -25- contained in a writing executed by the waiving party. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon breach thereof shall constitute a waiver of any such breach or of any other covenant, duty, agreement or condition, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. Section 8.4 Notices. Except as otherwise provided in this Agreement, all notices, requests, claims, demands, waivers and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered by hand, when delivered personally or by facsimile transmission if promptly electronically confirmed, as follows, or as set forth on the signature page executed by the any Investor: If to Company: Arch Capital Group, Ltd. 20 Horseneck Lane Greenwich, Connecticut 06830 Attention: General Counsel Telephone: (203) 862-4300 Fax: (203) 861-7240 with a copy to: Cahill Gordon & Reindel 80 Pine Street New York, New York 10005 Attention: Immanuel Kohn, Esq. Telephone: (212) 701-3000 Fax: (212) 269-5420 If to Warburg: c/o Warburg, Pincus Equity Partners, L.P. 466 Lexington Avenue New York, New York 10017 Attention: Scott A. Arenare, Esq. Telephone: (212) 878-0600 Fax: (212) 878-9200 with a copy to: Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, NY 10019 Attention: Andrew R. Brownstein, Esq. Telephone: (212) 403-1000 -26- Fax: (212) 403-2000 If to H&F: c/o Hellman & Friedman LLC One Maritime Plaza Suite 1200 San Francisco, CA 94111 Attention: Richard M. Levine, Esq. Telephone: (415) 788-5111 Fax: (415) 788-0176 with a copy to: Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, NY 10019 Attention: Patricia A. Vlahakis, Esq. Telephone: (212) 403-1000 Fax: (212) 403-2000 or to such other address, facsimile number or telephone as either party may, from time to time, designate in a written notice given in a like manner. Section 8.5 Applicable Law. Except to the extent of the applicability of the Companies Law of Bermuda to this Agreement, this Agreement shall be governed by and construed in accordance with the laws of the State of New York with regard to contracts formed and to be entirely performed within such state without giving effect to principles of conflicts of law. Section 8.6 Headings. The descriptive headings of the several sections in this Agreement are for convenience only and do not constitute a part of this Agreement and shall not be deemed to limit or affect in any way the meaning or interpretation of this Agreement. References to "Sections" and "Articles" herein shall be to the Sections or Articles of this Agreement, unless the context requires otherwise. Section 8.7 Integration. This Agreement and the other writings referred to herein or delivered pursuant hereto which form a part hereof contain the entire understanding of the parties with respect to its subject matter. This Agreement supersedes all prior agreements and understandings between the parties with respect to its subject matter. Section 8.8 Severability. If any term or provision of this Agreement or any application thereof shall be declared or held invalid, illegal or unenforceable, in whole or in part, whether generally or in any particular jurisdiction, such provision shall be deemed amended to the extent, but only to the extent, necessary to cure such invalidity, illegality or unenforceability, and the validity, legality and enforceability of the remaining provisions, both generally and in every other jurisdiction, shall not in any way be affected or impaired thereby. -27- Section 8.9 Consent to Jurisdiction. In connection with any suit, claim, action or proceeding arising out of this Agreement, the parties each hereby consent to the in personam jurisdiction of the United States federal courts and state courts located in the Borough of Manhattan, City of New York, State of New York; the Company, Warburg and H&F each agree that service in the manner set forth in Section 8.4 hereof shall be valid and sufficient for all purposes; and the parties each agree to, and irrevocably waive any objection based on forum non conveniens or venue, appear in any United States federal court or state court located in the Borough of Manhattan, City of New York, State of New York. Section 8.10 Counterparts. This Agreement may be executed by the parties hereto in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -28- IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their respective authorized officers as of the date set forth at the head of this Agreement. ARCH CAPITAL GROUP, LTD. By: /s/ Louis Petrillo ----------------------------------------- Name: Louis Petrillo Title: Senior Vice President and General Counsel HFCP IV (BERMUDA),L.P. By: H&F Investors IV (Bermuda), L.P., its General Partner, By: H&F Corporate Investors IV (Bermuda) Ltd., its General Partner By: /s/ David R. Tunnell -------------------------------------- Name: David R. Tunnell Title: Authorized Signatory H&F INTERNATIONAL PARTNERS IV-A (BERMUDA), L.P. By: H&F Investors IV (Bermuda), L.P., its General Partner, By: H&F Corporate Investors IV (Bermuda) Ltd., its General Partner By: /s/ David R. Tunnell ------------------------------------- Name: David R. Tunnell Title: Authorized Signatory -29- H&F INTERNATIONAL PARTNERS IV-B (BERMUDA), L.P. By: H&F Investors IV (Bermuda), L.P., its General Partner, By: H&F Corporate Investors IV (Bermuda) Ltd., its General Partner By: /s/ David R. Tunnell -------------------------------------- Name: David R. Tunnell Title: Authorized Signatory H&F EXECUTIVE FUND IV (BERMUDA), L.P. By: H&F Investors IV (Bermuda), L.P., its General Partner, By: H&F Corporate Investors IV (Bermuda) Ltd., its General Partner By: /s/ David R. Tunnell -------------------------------------- Name: David R. Tunnell Title: Authorized Signatory -30- WARBURG PINCUS NETHERLANDS INTERNATIONAL PARTNERS I, C.V. By: Warburg, Pincus & Co., its General Partner, By: /s/ Kewsong Lee -------------------------------------- Name: Kewsong Lee Title: Partner WARBURG PINCUS NETHERLANDS INTERNATIONAL PARTNERS II, C.V. By: Warburg, Pincus & Co., its General Partner, By: /s/ Kewsong Lee -------------------------------------- Name: Kewsong Lee Title: Partner WARBURG PINCUS (BERMUDA) INTERNATIONAL PARTNERS, L.P. By: Warburg Pincus (Bermuda) International Ltd., its General Partner, By: /s/ Kewsong Lee -------------------------------------- Name: Kewsong Lee Title: Partner -31- WARBURG PINCUS (BERMUDA) PRIVATE EQUITY VIII, L.P. By: Warburg Pincus (Bermuda) Private Equity Ltd., its General Partner, By: /s/ Kewsong Lee ------------------------------------- Name: Kewsong Lee Title: Partner -32- FOR PURPOSES OF ARTICLES II, IV AND V AND SECTION 3.4 HEREOF: TRIDENT II, L.P. By: MMC Capital, Inc., as Manager By: /s/ David J. Wermuth --------------------------------------- Name: David J. Wermuth Title: Principal Notice Information for Trident II, L.P.: 1166 Avenue of the Americas New York, New York Attention: Mark Dallara Facsimile: (212) 345-5627 and c/o Marsh & McLennan Capital, Inc. 20 Horseneck Lane Greenwich, CT 06830 Attention: David Wermuth Facsimile: (203) 862-2925 -33- FOR PURPOSES OF ARTICLES II, IV AND V AND SECTION 3.4 HEREOF: MARSH & MCLENNAN CAPITAL PROFESSIONALS FUND, L.P. By: MMC Capital, Inc., as Manager By: /s/ David J. Wermuth -------------------------------------- Name: David J. Wermuth Title: Principal Notice Information for Marsh & McLennan Capital Professionals Fund, L.P.: 1166 Avenue of the Americas New York, New York Attention: Mark Dallara Facsimile: (212) 345-5627 and c/o Marsh & McLennan Capital, Inc. 20 Horseneck Lane Greenwich, CT 06830 Attention: David Wermuth Facsimile: (203) 862-2925 -34- FOR PURPOSES OF ARTICLES II, IV AND V AND SECTION 3.4 HEREOF: MARSH & MCLENNAN EMPLOYEES' SECURITIES COMPANY, L.P. By: MMC Capital, Inc., as Manager By: /s/ David J. Wermuth -------------------------------------- Name: David J. Wermuth Title: Principal Notice Information for Marsh & McLennan Employees' Securities Company, L.P.: 1166 Avenue of the Americas New York, New York Attention: Mark Dallara Facsimile: (212) 345-5627 and c/o Marsh & McLennan Capital, Inc. 20 Horseneck Lane Greenwich, CT 06830 Attention: David Wermuth Facsimile: (203) 862-2925 -35- FOR PURPOSES OF ARTICLES II,IV AND V AND SECTION 3.4 HEREOF: FARALLON CAPITAL PARTNERS, L.P. By: Farallon Partners, L.L.C., its General Partner By: /s/ Monica R. Landry ------------------------------------ Name: Monica R. Landry Title: Managing Member Notice Information for Farallon Capital Partners,L.P.: c/o Farallon Capital Management L.L.C. One Maritime Plaza Suite 1325 San Francisco, CA 94111 Attention: Mark Wehrly and Sarah Aitcheson Telephone: (415) 421-2132 Facsimile: (415) 421-2133 -36- FOR PURPOSES OF ARTICLES II, IV AND V AND SECTION 3.4 HEREOF: FARALLON CAPITAL INSTITUTIONAL PARTNERS II, L.P. By: Farallon Partners, L.L.C., its General Partner By: /s/ Monica R. Landry ------------------------------------- Name: Monica R. Landry Title: Managing Member Notice Information for Farallon Capital Institutional Partners II, L.P.: c/o Farallon Capital Management, L.L.C. One Maritime Plaza Suite 1325 San Francisco, CA 94111 Attention: Mark Wehrly and Sarah Aitcheson Telephone: (415) 421-2132 Facsimile: (415) 421-2133 -37- FOR PURPOSES OF ARTICLES II, IV AND V AND SECTION 3.4 HEREOF: FARALLON CAPITAL INSTITUTIONAL PARTNERS III, L.P. By: Farallon Partners, L.L.C., its General Partner By: /s/ Monica R. Landry ------------------------------------- Name: Monica R. Landry Title: Managing Member Notice Information for Farallon Capital Institutional Partners III, L.P.: c/o Farallon Capital Management, L.L.C. One Maritime Plaza Suite 1325 San Francisco, CA 94111 Attention: Mark Wehrly and Sarah Aitcheson Telephone: (415) 421-2132 Facsimile: (415) 421-2133 -38- FOR PURPOSES OF ARTICLES II, IV AND V AND SECTION 3.4 HEREOF: RR CAPITAL PARTNERS, L.P. By: Farallon Partners, L.L.C., its General Partner By: /s/ Monica R. Landry -------------------------------------- Name: Monica R. Landry Title: Managing Member Notice Information for RR Capital Partners, L.P.: c/o Farallon Capital Management, L.L.C. One Maritime Plaza Suite 1325 San Francisco, CA 94111 Attention: Mark Wehrly and Sarah Aitcheson Telephone: (415) 421-2132 Facsimile: (415) 421-2133 -39- FOR PURPOSES OF ARTICLES II, IV AND V AND SECTION 3.4 HEREOF: INSURANCE PRIVATE EQUITY INVESTORS, L.L.C. By: GE Asset Management Incorporated, its Manager, By: /s/ Patrick McNeela ------------------------------------- Name: Patrick McNeela Title: Vice President Notice Information for Insurance Private Equity Investors, L.L.C.: c/o GE Asset Management Incorporated 3003 Summer Street Stamford, CT 06905 Attention: Michael M. Pastore, Esq. FOR PURPOSES OF ARTICLES II, IV AND V AND SECTION 3.4 HEREOF: ORBITAL HOLDINGS, LTD. By: /s/ Lorraine Hliboki ------------------------------------- Name: Lorraine Hliboki Title: Attorney-in-fact Notice Information for Orbital Holdings, Ltd.: c/o GE Capital 120 Longridge Rd. Stamford, CT 06927 -40- FOR PURPOSES OF ARTICLES IV AND SECTIONS 3.4, 5.2 AND 5.3 HEREOF: SOUND VIEW PARTNERS LP By: Robert Clements, its General Partner By: /s/ Robert Clements -------------------------------------- Name: Robert Clements Title: General Partner Notice Information for Sound View Partners, LP: -41- FOR PURPOSES OF ARTICLES IV AND SECTIONS 3.4, 5.2 AND 5.3 HEREOF: OTTER CAPITAL LLC By: John Pasquesi, its Managing Member By: /s/ John Pasquesi ------------------------------------- Name: John Pasquesi Title: Managing Member Notice Information for Otter Capital LLC: -42- FOR PURPOSES OF ARTICLES IV AND SECTIONS 3.4, 5.2 AND 5.3 HEREOF: PETER A. APPEL By: /s/ Peter A. Appel -------------------------------------- Name: Peter A. Appel Notice Information for Peter A. Appel: -43- FOR PURPOSES OF ARTICLES IV AND SECTIONS 3.4, 5.2 AND 5.3 HEREOF: PAUL B. INGREY By: /s/ Paul B. Ingrey -------------------------------------- Name: Paul B. Ingrey Notice Information for Paul B. Ingrey: -44- FOR PURPOSES OF ARTICLES IV AND SECTIONS 3.4, 5.2 AND 5.3 HEREOF: DWIGHT R. EVANS By: /s/ Dwight R. Evans -------------------------------------- Name: Dwight R. Evans Notice Information for Dwight R. Evans: -45- FOR PURPOSES OF ARTICLES IV AND SECTIONS 3.4, 5.2 AND 5.3 HEREOF: MARC GRANDISSON By: /s/ Marc Grandisson ---------------------------------------- Name: Marc Grandisson Notice Information Marc Grandisson: -----END PRIVACY-ENHANCED MESSAGE-----