S-4/A 1 d378996ds4a.htm AMENDMENT NO. 6 TO FORM S-4 Amendment No. 6 to Form S-4
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As filed with the Securities and Exchange Commission on January 30, 2013

Registration No. 333-183661

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 6

to

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

CANOPIUS HOLDINGS BERMUDA LIMITED

(Exact name of registrant as specified in its charter)

 

 

 

Bermuda   6331   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

Canopius Holdings Bermuda Limited

Atlantic House, 11 Par-La-Ville Road

Hamilton HM11

Bermuda

(441) 292-9905

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Corporation Service Company

2711 Centerville Road, Suite 400

Wilmington, DE 19808

(800) 927-9800

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Elliot S. Orol

Senior Vice President, General Counsel and Secretary
Tower Group, Inc.
120 Broadway (31st Floor)
New York, NY 10271
(212) 655-2000

 

John M. Schwolsky
Vladimir Nicenko

Willkie Farr & Gallagher LLP
787 Seventh Avenue
New York, NY 10019
(212) 728-8000

 

Susan Patschak
Canopius Holdings Bermuda Limited
Atlantic House, 11

Par-La-Ville Road

Hamilton HM11

Bermuda

(441) 292-9905

 

Alan Bossin
Appleby (Bermuda) Limited
Canon’s Court, 22 Victoria Street, P.O. Box HM 1179

Hamilton HM EX

Bermuda

(441) 298-3536

  Joseph L. Seiler III
Drinker Biddle & Reath LLP
1177 Avenue of the Americas
New York, NY 10036
(212) 248-3140

 

 

Approximate date of proposed sale to the public: As soon as practicable after the effectiveness of this registration statement and the satisfaction or waiver of all other conditions under the merger agreement described herein.


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If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer)  ¨

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer)  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered(1)

  Amount
to  be
Registered(2)
  Proposed
Maximum
Offering Price
Per Share
  Proposed
Maximum
Aggregate
Offering Price(3)
  Amount of
Registration Fee(4)

Common shares, par value $0.01 per share

  47,601,392   N/A  

$758,999,331.48

 

$86,981.32

 

 

(1) This registration statement covers the maximum number of common shares, par value $0.01 per share (“common shares”), of Canopius Holdings Bermuda Limited, which will be renamed Tower Group International, Ltd. (“Tower Ltd.”) concurrent with the completion of the merger described herein, that may be issued as part of the proposed merger described herein to the holders of the outstanding common stock, par value $0.01 per share (“common stock”), of Tower Group, Inc., a Delaware corporation (“Tower”), and to holders of Tower’s outstanding equity awards.
(2)

Based on the maximum number of Tower Ltd. common shares that may be issued as part of the proposed merger described herein, calculated as the product of (a) a maximum stock conversion number of approximately 1.2123 Tower Ltd. common shares for each whole share of Tower common stock multiplied by (b) the sum of (i) 38,409,826 shares of Tower common stock outstanding as of the close of business on January 25, 2013 and (ii) 855,530 shares of Tower common stock issuable pursuant to options outstanding as of the close of business on January 25, 2013. The stock conversion number is calculated based on several variables, the value of which is still being determined.

(3) Estimated solely for the purpose of calculating the registration fee required by Section 6(b) of the Securities Act of 1933, as amended, and computed pursuant to Rule 457(c) and Rule 457(f)(1) under the Securities Act. Such amount equals the product of (a) 39,265,356 (the sum of items (b)(i) and (ii) in footnote 2), and (b) $19.33, the average of the high and low sales prices for Tower common stock as reported on The NASDAQ Global Select Market on January 25, 2013.
(4) Calculated as follows: (a) $758,999,331.48, the proposed maximum offering price for the Tower Ltd. common shares being registered pursuant to the registration statement, multiplied by (b) 0.00011460. Such amount was previously paid.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this proxy statement/prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This proxy statement/prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale of these securities is not permitted.

SUBJECT TO COMPLETION, DATED JANUARY 30, 2013

 

LOGO

PROXY STATEMENT/PROSPECTUS

To the stockholders of Tower Group, Inc.:

You are cordially invited to attend a special meeting of the stockholders of Tower Group, Inc., which is referred to as Tower, to be held on March 12, 2013 at 9:00 a.m. local time, at the Millenium Hilton Hotel, 55 Church Street, New York, New York 10007. Only stockholders who held shares of Tower common stock at the close of business on January 30, 2013 will be entitled to vote at the special meeting and at any adjournments and postponements thereof.

As previously announced, on July 30, 2012, Tower entered into an Agreement and Plan of Merger, which is referred to as the original merger agreement, with Canopius Holdings Bermuda Limited, which is referred to as Canopius Bermuda, Canopius Mergerco, Inc., which is referred to as Delaware Purchaser, and Condor 1 Corporation, which is referred to as Merger Sub. On November 8, 2012 the original merger agreement was amended by Amendment No. 1 to the Agreement and Plan of Merger to reflect changes to the merger consideration to be received by Tower stockholders, which amendment is referred to as the amendment. The original merger agreement as amended by such amendment is referred to herein as the merger agreement. Pursuant to the merger agreement, Merger Sub will merge with and into Tower, with Tower surviving as an indirect wholly owned subsidiary of Canopius Bermuda (referred to as the merger). Concurrent with the completion of the merger, Canopius Bermuda will be renamed Tower Group International, Ltd. (Canopius Bermuda following the completion of the merger is referred to as Tower Ltd.). A complete copy of the original merger agreement is attached as Annex A-1 to this proxy statement/prospectus. The amendment to the original merger agreement is included as Annex A-2 to this proxy statement/prospectus.

At the effective time of the merger, among other things, each share of Tower’s common stock then issued and outstanding will be canceled and automatically converted into the right to receive a number of common shares of Tower Ltd. equal to the stock conversion number described in this proxy statement/prospectus. The stock conversion number is not known as of the date hereof and will not be known until the pricing date of the third party sale described herein, which is after the date of this proxy statement/prospectus. As discussed further in this proxy statement/prospectus, the stock conversion number can range from approximately 0.9598 to 1.2123 common shares of Tower Ltd. for every one share of Tower common stock based on Tower’s existing stockholders and optionholders (as well as holders of Tower’s convertible senior notes) owning less than 80% but greater than or equal to 76% of the fully diluted capital stock of Tower Ltd. immediately following the merger. The foregoing range for the stock conversion number would result in a range of approximately 44,416,970 to 56,101,993 common shares of Tower Ltd. being issued to Tower’s existing stockholders and optionholders (as well as holders of Tower’s convertible senior notes) based on Tower’s market capitalization as of January 15, 2013. However, Tower stockholders voting on the merger will not know at the time of the special meeting the exact number of common shares of Tower Ltd. they will receive as merger consideration. See “Risk Factors—Risks Related to the Merger—Conversion of the convertible notes may dilute the ownership interest of existing Tower stockholders in Tower Ltd.


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For U.S. federal income tax purposes, Tower expects that, generally, a U.S. stockholder of Tower should recognize gain, or loss, on the receipt of Tower Ltd. common shares and cash in lieu of fractional shares in exchange for Tower common stock in the merger. The Tower Ltd. common shares are expected to be listed on The NASDAQ Global Select Market under the symbol “TWGP” following the merger.

Tower is soliciting proxies for use at a special meeting of its stockholders to consider and vote upon (i) a proposal to adopt the merger agreement and approve the merger, which is referred to as Proposal 1, (ii) a proposal to approve, on an advisory basis, certain compensatory arrangements between Tower and its named executive officers that are based on or otherwise relate to the merger, as described in this proxy statement/prospectus, which is referred to as Proposal 2 and (iii) a proposal for an adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the proposal to adopt the merger agreement and approve the merger, which is referred to as Proposal 3. More information about Tower, Canopius Bermuda and the proposed merger is contained in this proxy statement/prospectus. The Tower Board of Directors urges all Tower stockholders to read this proxy statement/prospectus and the documents included with this proxy statement/prospectus, including the annexes and documents incorporated by reference in this proxy statement/prospectus carefully and in their entirety. In particular, the Tower Board of Directors urges you to read carefully “Risk Factors” beginning on page 22 of this proxy statement/prospectus.

After careful consideration, the Tower Board of Directors has approved and declared advisable the merger agreement. The Tower Board of Directors recommends that you vote “FOR” the adoption of the merger agreement and approval of the merger, and “FOR” the other proposals described in this proxy statement/prospectus. Stockholder approval of the adoption of the merger agreement is necessary to complete the merger.

Your vote is very important. Whether or not you expect to attend the special meeting, please vote as soon as possible by following the instructions in this proxy statement/prospectus to make sure that your shares are represented at the special meeting. In this regard, your failure to vote your shares at the special meeting (or to instruct your broker on how to vote your shares at the special meeting) will have the same effect as a vote against the proposal to adopt the merger agreement and approve the merger.

We strongly support the merger and enthusiastically recommend that you vote in favor of the proposals presented to you for approval at the special meeting. Thank you for your continued support of Tower.

 

Very truly yours,
Michael H. Lee
Chairman, President, and Chief Executive Officer
Tower Group, Inc.


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SOURCES OF ADDITIONAL INFORMATION

This proxy statement/prospectus refers to important business and financial information about Tower that is not included in or delivered with this proxy statement/prospectus. This information is available without charge to stockholders of Tower upon written or oral request. You can obtain the documents incorporated by reference into this document through the Securities and Exchange Commission website at www.sec.gov or by requesting them in writing or by telephone at the appropriate address or telephone number below:

Tower Group, Inc.

120 Broadway

31st Floor

New York, NY 10271

Attention: Secretary

Telephone Number: (212) 655-2000

www.twrgrp.com

Information contained on the Tower website is expressly not incorporated by reference into this proxy statement/prospectus.

To obtain timely delivery, Tower stockholders must request the information no later than five business days before the date of the Tower special meeting, or no later than March 5, 2013.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

The Bermuda Monetary Authority and the Bermuda Registrar of Companies accept no responsibility for the financial soundness of any proposal or for the correctness of any of the statements made or opinions expressed in this proxy statement/prospectus.

This proxy statement/prospectus is dated January     , 2013, and is first being mailed to the Tower stockholders on or about February 5, 2013.

For further information, see “Where You Can Find More Information” below.


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LOGO

TOWER GROUP, INC.

120 Broadway (31st Floor)

New York, New York 10271

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD MARCH 12, 2013

To the Stockholders of Tower Group, Inc.:

A special meeting of stockholders of Tower Group, Inc., a Delaware corporation, will be held on March 12, 2013, at 9:00 a.m. local time at the Millenium Hilton Hotel, 55 Church Street, New York, New York 10007 for the following purposes:

 

  1. To consider and vote upon a proposal to adopt the Agreement and Plan of Merger, dated as of July 30, 2012, among Tower, Canopius Bermuda, Delaware Purchaser and Merger Sub and approve the merger.

 

  2. To consider and vote upon a proposal to approve, on an advisory basis, certain compensatory arrangements between Tower and its named executive officers that are based on or otherwise relate to the merger, as described in this proxy statement/prospectus.

 

  3. To consider and vote upon an adjournment of the special meeting, if necessary, if a quorum is present, to solicit additional proxies if there are not sufficient votes at the time of the special meeting to adopt the merger agreement and approve the merger.

 

  4. To transact such other business as may properly come before the special meeting or any adjournment or postponement thereof.

The above matters are more fully described in this proxy statement/prospectus, which also includes, as Annexes A-1 and A-2, the complete text of the original merger agreement and the amendment, respectively. The record date for the special meeting is January 30, 2013. Only stockholders of record at the close of business on that date may vote at the special meeting or any adjournment thereof. We urge you to read carefully this proxy statement/prospectus in its entirety, including the annexes, and the documents incorporated by reference in this proxy statement/prospectus. In particular, we urge you to read carefully “Risk Factors” beginning on page 22 of this proxy statement/prospectus.

The affirmative vote of the holders of a majority of the shares of Tower common stock outstanding on the record date for the special meeting is required for approval of Proposal 1. Approval of Proposal 2, which is being made on an advisory basis, requires an affirmative vote from the holders of a majority of the outstanding shares of Tower common stock present in person or represented by proxy at the special meeting and entitled to vote, although such vote will not be binding on Tower. The affirmative vote of the holders of a majority of the outstanding shares of Tower common stock present in person or represented by proxy and entitled to vote at the special meeting is required to approve each other matter to be acted on at the special meeting, including in the case of Proposal 3 to adjourn the special meeting to solicit additional proxies in favor of Proposal 1.

Your proxy is being solicited by the Board of Directors of Tower. After careful consideration, the Tower Board of Directors has approved and declared advisable the merger agreement. The Board of Directors of Tower recommends that you vote “FOR” the adoption of the merger agreement and approval of the merger, and “FOR” each of the other proposals set forth above.

You are cordially invited to attend the special meeting in person. Whether or not you expect to attend the special meeting, please vote as soon as possible. You may vote your shares over the telephone or the internet. You may also submit your proxy card or voting instruction card by completing, signing, dating and mailing your proxy card or voting instruction card in the envelope provided. Even if you have voted by proxy, you may still vote in person if you attend the special meeting. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the special meeting, you must obtain a proxy issued in your name from that record holder.

 

By Order of the Board of Directors,
Elliot S. Orol

Senior Vice President, General Counsel

and Secretary

New York, New York

January     , 2013


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TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING

     1   

SUMMARY

     12   

The Companies

     12   

Master Transaction Agreement

     13   

Restructuring

     13   

Third Party Sale

     14   

The Merger

     15   

Post-Merger Management of Tower

     16   

Tower’s Reasons for the Merger

     16   

Recommendations of Tower’s Board of Directors

     17   

Opinion of Barclays to the Tower Board of Directors

     17   

The Special Meeting of Tower Stockholders

     18   

Interests of Certain Persons in the Merger

     19   

Certain U.S. Federal Tax Consequences of the Merger to U.S. Stockholders

     19   

No Appraisal Rights

     19   

Regulatory Approvals Required

     19   

Listing of Tower Ltd. Common Shares on NASDAQ

     20   

Termination of the Merger Agreement

     20   

Conditions to Completion of the Merger

     20   

Accounting Treatment of the Merger

     20   

Restrictions on Resales

     21   

Comparison of the Rights of Holders of Tower Common Stock and Tower Ltd. Common Shares

     21   

RISK FACTORS

     22   

Risks Related to the Merger

     22   

Risks Related to Tower Ltd. Following the Merger

     26   

Risks Related to Tower Ltd. Common Shares

     28   

Risks Related to the Tax Consequences of the Merger

     30   

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     35   

THE MERGER

     36   

Transactions Related to the Merger

     36   

The Merger

     40   

Background of the Transaction

     47   

Tower’s Reasons for the Merger and Recommendation of Tower’s Board of Directors

     54   

Opinion of Barclays to the Tower Board of Directors

     57   

Tower Projections and Assumptions for Barclays Fairness Opinion

     68   

Determination of Merger Consideration

     70   

Canopius Bermuda’s Reasons for the Merger

     70   

Interests of Certain Persons in the Merger

     71   

Golden Parachute Compensation

     74   

Security Ownership of Certain Beneficial Owners and Management of Tower

     75   

Conditions to Completion of the Merger

     76   

Regulatory Approvals Required

     76   

Accounting Treatment of the Merger

     77   

Restrictions on Resales

     77   

MATERIAL TAX CONSIDERATIONS

     78   

BERMUDA TAX CONSIDERATIONS

     79   

U.S. FEDERAL INCOME TAX CONSIDERATIONS

     79   

 

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OTHER RELATED AGREEMENTS

     90   

Third Party Sale Agreements

     90   

VOTE REQUIRED TO ADOPT THE MERGER AGREEMENT; BOARD RECOMMENDATION

     91   

STOCKHOLDER ADVISORY VOTE ON CERTAIN COMPENSATORY ARRANGEMENTS

     91   

Background; Stockholder Resolution

     91   

Required Vote; Board Recommendation

     91   

POSSIBLE ADJOURNMENT OF THE SPECIAL MEETING

     92   

THE COMPANIES

     93   

Tower Group, Inc.

     93   

Canopius Holdings Bermuda Limited

     93   

Canopius Mergerco, Inc.

     93   

Condor 1 Corporation

     94   

THE RESTRUCTURING

     95   

Overview

     95   

Retrocession and Novation Transactions

     96   

Determination of Reserves

     96   

Syndicate 4444

     97   

AGREEMENT AND PLAN OF MERGER

     99   

The Restructuring of Canopius Bermuda

     99   

The Merger; Closing of the Merger

     99   

Merger Consideration to Tower Stockholders

     100   

TNAV Adjustment Mechanism

     100   

Treatment of Tower Stock Options

     101   

Treatment of Tower Restricted Stock

     101   

Governing Documents Following the Merger

     101   

Exchange of Stock Certificates Following the Merger

     101   

Representations and Warranties

     102   

Material Adverse Effect

     103   

Covenants

     104   

Reimbursement of Expenses

     106   

Officers and Directors upon Completion of the Merger

     106   

Directors’ and Officers’ Indemnification and Insurance

     106   

Conditions to Complete the Merger

     106   

Termination of the Merger Agreement

     107   

Obligations in Event of Termination

     108   

Amendment and Waiver

     108   

Governing Law

     108   

NO APPRAISAL RIGHTS

     108   

LISTING OF TOWER LTD. COMMON SHARES ON NASDAQ

     108   

SELECTED HISTORICAL FINANCIAL DATA OF TOWER

     108   

SELECTED HISTORICAL FINANCIAL DATA OF CANOPIUS BERMUDA

     109   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CANOPIUS HOLDINGS BERMUDA LIMITED

     111   

Overview

     111   

Critical Accounting Estimates

     111   

Loss and Loss Expense Reserves

     112   

Reinsurance Balances Receivable

     112   

Fair Value

     112   

 

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Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

     113   

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

     114   

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

     115   

Liquidity and Capital Resources

     115   

Other investments

     119   

Contractual Obligations

     119   

Quantitative and Qualitative Disclosures about Market Risk

     119   

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

     121   

THE BUSINESS OF TOWER

     139   

Overview

     139   

THE BUSINESS OF CANOPIUS BERMUDA

     140   

Overview

     140   

Description of Business

     140   

Insurance Lines

     140   

Properties

     143   

Legal Proceedings

     143   

MANAGEMENT AND OTHER INFORMATION OF TOWER LTD.

     144   

Directors of Tower Ltd.

     144   

Board Committees

     148   

Senior Management of Tower Ltd.

     148   

EXECUTIVE COMPENSATION

     151   

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

     151   

Policy and Procedures for Review of Related Party Transactions of Tower Ltd.

     151   

Certain Transactions With or Involving Tower’s Related Persons

     151   

Certain Transactions With or Involving Canopius Bermuda Related Persons

     151   

DESCRIPTION OF TOWER LTD. COMMON SHARES

     154   

Common Shares

     154   

Preferred Shares

     154   

Issuance of Shares

     154   

Bye-laws

     154   

No Sinking Fund

     156   

No Liability for Further Calls or Assessments

     156   

Stock Exchange Listing

     156   

Transfer Agent and Registrar

     156   

COMPARISON OF THE RIGHTS OF HOLDERS OF TOWER COMMON STOCK AND TOWER LTD. COMMON SHARES

     157   

LEGAL MATTERS

     180   

EXPERTS

     180   

ENFORCEABILITY OF CIVIL LIABILITIES

     181   

HOUSEHOLDING OF PROXY STATEMENT/PROSPECTUS

     181   

WHERE YOU CAN FIND MORE INFORMATION

     181   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF CANOPIUS HOLDINGS BERMUDA LIMITED

     F-1   

 

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LIST OF ANNEXES:

 

Annex A-1    Agreement and Plan of Merger      A1-1   
Annex A-2    Amendment No. 1 to Agreement and Plan of Merger      A2-1   

Annex B

  

Master Transaction Agreement

       B-1   

Annex C

  

Form of Amended and Restated Bye-laws of Tower Ltd.

       C-1   

Annex D

  

Amended and Restated Certificate of Incorporation of Tower

       D-1   

Annex E

  

Amended and Restated Bylaws of Tower

       E-1   

Annex F

  

Opinion of Barclays Capital Inc.

     F-1   

 

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QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING

The following questions and answers briefly address some commonly asked questions about the Tower special stockholders meeting and the merger. They do not include all of the information that may be important to you. Tower and Canopius Bermuda urge you to read carefully this entire proxy statement/prospectus, including the annexes and the documents incorporated by reference in this proxy statement/prospectus.

Q: Why am I receiving this proxy statement/prospectus?

A: This proxy statement/prospectus is being provided to Tower stockholders as part of a solicitation of proxies by the Tower Board of Directors for use at the special meeting of Tower stockholders, which is referred to in this proxy statement/prospectus as the special meeting. In addition, this proxy statement/prospectus constitutes a prospectus for Tower Ltd. in connection with the issuance by Tower Ltd. of common shares in connection with the merger. This proxy statement/prospectus also provides Tower stockholders with information they need to be able to vote or instruct their vote to be cast at the special meeting.

Q: What are the proposals on which I am being asked to vote?

A: There are three matters scheduled for a vote at the Tower special meeting:

 

   

Proposal to adopt the merger agreement and approve the merger (Proposal 1);

 

   

Proposal to approve, on an advisory basis, certain compensatory arrangements between Tower and its named executive officers that are based on or otherwise relate to the merger, as described in this proxy statement/prospectus (Proposal 2); and

 

   

Proposal to approve the adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes at the time of the special meeting to adopt the merger agreement and approve the merger (Proposal 3).

Q: Where and when will the special meeting be held?

A: The special meeting will be held on March 12, 2013, at 9:00 a.m. local time at the Millenium Hilton Hotel, 55 Church Street, New York, New York 10007.

Q: What will happen in the merger?

A: If Tower stockholder approval as described herein is obtained, all other conditions to the merger have been satisfied or waived and Tower has not exercised its termination right prior to the effective time of the merger (as discussed below), Merger Sub will merge with and into Tower, upon the terms and subject to the conditions set forth in the merger agreement. Upon the completion of the merger, the separate corporate existence of Merger Sub will cease and Tower will continue as the surviving corporation in the merger, succeed to and assume all the rights and obligations of Merger Sub and be an indirect wholly owned subsidiary of Tower Ltd.

Following the merger, Tower common stock will be delisted from The NASDAQ Global Select Market, which is referred to in this proxy statement/prospectus as NASDAQ. The Tower Ltd. common shares to be issued to the Tower stockholders will be registered with the Securities and Exchange Commission, which is referred to as the SEC, and are expected to be listed and traded on NASDAQ under the symbol “TWGP,” the same NASDAQ trading symbol currently used for Tower common stock.

Q: What will be the relationship between Tower and Tower Ltd. after the proposed transactions?

A: Following completion of the proposed transactions, Tower will be an indirect wholly owned subsidiary of Tower Ltd. Tower will be treated as the accounting acquirer following completion of the merger and the financial statements issued after the completion of the merger will include the operations of Tower Ltd. beginning on the effective date of the merger.

 

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Q: What is the MTA?

A: On April 25, 2012, in connection with its agreement to invest in Canopius Group Limited, which is referred to in this proxy statement/prospectus as Canopius, Tower entered into a Master Transaction Agreement, which is referred to in this proxy statement/prospectus as the MTA, with Canopius Bermuda, Delaware Purchaser and Canopius. Upon the terms and subject to the conditions set forth in the MTA, Tower has the right to effect certain transactions with Canopius and its subsidiaries, including Tower’s right to merge with a newly formed subsidiary of Delaware Purchaser, exercisable in Tower’s sole discretion. The complete text of the MTA is attached to this proxy statement/prospectus as Annex B. See “The Merger—Transactions Related to the Merger—Master Transaction Agreement.”

Q: What is the restructuring?

A: Prior to the effective time, Tower, Canopius and Canopius Bermuda will effect a restructuring of the insurance operations of Canopius Bermuda such that, as of the effective time, Canopius Bermuda will continue to own certain business and assets to be identified by the parties and will have transferred to Canopius all other business and assets of Canopius Bermuda. This restructuring of Canopius Bermuda prior to the effective time is referred to in this proxy statement/prospectus as the restructuring. The business retained by Canopius Bermuda in connection with the restructuring is referred to in this proxy statement prospectus as the retained business. Canopius has agreed in the MTA to indemnify Tower for all pre-closing liabilities of Canopius Bermuda and its subsidiaries, including Canopius Bermuda Limited, other than insurance liabilities under the express terms of any insurance contract or reinsurance agreement constituting a part of the retained business. See “The Restructuring.”

Q: What is the third party sale?

A: Effective immediately prior to the consummation of the merger, Canopius will sell 100% of its equity ownership of Canopius Bermuda in a private placement to a group of yet-to-be identified institutional investors with whom the placement agents have a pre-existing relationship, referred to in this proxy statement/prospectus as the third party investors, who will be the sole shareholders of Canopius Bermuda prior to the effective time. The third party investors will pay Canopius an aggregate purchase price in cash equal to the sum of the target TNAV amount (as defined below under “—What will Tower stockholders receive in the merger?”), plus such additional amount equal to the agreed value of the retained business. The sale to the third party investors for cash consideration permits Canopius to monetize its investment in Canopius Bermuda, which it is able to do because it has acquired Omega Insurance Holdings Limited, which is referred to in this proxy statement/prospectus as Omega, and therefore has a Bermuda-domiciled insurance company available for sale. This transaction is referred to as the third party sale. See “The Merger—Transactions Related to the Merger—Third Party Sale.”

Q: Have the third party investors been identified?

A: No. Following the mailing of this proxy statement/prospectus to Tower stockholders, Canopius will offer its equity interest in Canopius Bermuda in a private placement to a group of yet-to-be identified institutional investors with whom the placement agents have a pre-existing relationship. There can be no assurance that the third party sale will be consummated. If the third party sale does not occur, or if it does not occur on terms and conditions acceptable to Tower, Tower will exercise its right to terminate the merger agreement and abandon the merger.

Q: What is the investment discount that third party investors will receive in the third party sale?

A: Tower expects that the third party investors will only effect the third party sale on terms that include certain economic concessions to such investors reflecting a negotiated discount to the fair market value of Tower’s common stock as of a relevant pricing date (such discount is referred to in this proxy statement/prospectus as the investment discount). This investment discount, which will be determined through arm’s-length

 

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negotiations with the third party investors, will not affect the purchase price paid by such third party investors for Canopius Bermuda but will instead be included as a factor in the formula used to determine the per share merger consideration in the merger. The magnitude of the discount is a result of a number of criteria, which include, but are not limited to, (i) the size of the sale, (ii) the context of the private placement and (iii) the liquidity of the shares following the transaction, including any potential periods when an investor’s ability to freely trade such acquired shares may be restricted. Such discounts are typical in follow-on offerings for public companies, and tend to be somewhat greater for private placements for public entities. Tower and Canopius Bermuda believe that the third party investors may view this investment as having some similarities to those transactions. As a result, the investment discount will have a dilutive effect on current Tower stockholders by reducing the amount of stock such stockholders will receive in the merger and therefore increasing the percentage ownership of the third party investors in Tower Ltd. following the merger. Because the third party sale has not occurred as of the date of this proxy statement/prospectus, no assurances can be given as to what investment discount the third party investors will require in order to effect the third party sale. See “Risk Factors—Risks Related to the Merger—Existing Tower stockholders will own a smaller share of Tower Ltd. following completion of the merger.”

Q: What are Tower’s reasons for the merger?

A: Tower believes that the merger is likely to result in significant strategic and financial benefits to Tower Ltd., which would accrue to the Tower stockholders as shareholders of Tower Ltd., including that, among other reasons, (i) the merger will create a more efficient global, diversified specialty insurance company that supports Tower’s expansion plans, (ii) Tower Ltd. is expected to have improved profitability and financial strength, (iii) the merger will strengthen the combined group’s competitive position and support growth opportunities and (iv) the establishment of a Bermuda domicile will provide Tower with an international platform with access to U.S., Bermuda and Lloyd’s markets. Tower anticipates that the expected benefits from the combination of the businesses of Canopius Bermuda and Tower will create more value for the Tower stockholders in the long term than Tower could create as a standalone business. See “The Merger—Tower’s Reasons for the Merger and Recommendations of Tower’s Board of Directors.” In addition, Tower believes that the uncertainties, risks and potentially negative factors relevant to the transactions contemplated by the merger agreement were outweighed by the potential benefits that the Tower and the Tower stockholders are expected to achieve as a result of the merger. These uncertainties, risks and potentially negative factors include (i) that current Tower stockholders will own a smaller share of Tower Ltd. following completion of the merger relative to their current ownership percentage of Tower, (ii) failure to consummate the merger could negatively impact the stock price and the future business and financial results of Tower, (iii) risks related to the tax consequences of the merger, including the fact that U.S. non-exempt shareholders will be subject to U.S. federal income tax on their exchange of shares, (iv) the diversion of Tower Ltd. management’s attention to integration of operations and corporate and administrative infrastructures, (v) difficulties in achieving anticipated business opportunities and growth prospects from combining the business of Canopius Bermuda with that of Tower and (vi) challenges in keeping existing insureds and cedents and obtaining new insureds and cedents. See “Risk Factors.”

Q: What will Tower stockholders receive in the merger?

A: At the effective time, among other things, each issued and outstanding share of Tower common stock that you own will be cancelled and converted automatically into the right to receive a number of common shares of Tower Ltd. equal to the stock conversion number (together with any cash paid in lieu of fractional shares, referred to as the merger consideration).

“Stock conversion number” means the quotient obtained by dividing (x) the closing price per share of Tower common stock on NASDAQ on the pricing date of the third party sale by (y) the adjusted Canopius Bermuda price per share.

“Adjusted Canopius Bermuda price per share” means the quotient obtained by dividing (i) the sum of (a) the target TNAV amount, (b) the value of the retained business (determined in accordance with the MTA), (c) the aggregate amount of the placement fees received by the placement agents in connection with the third party sale

 

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and (d) the aggregate amount, expressed in dollars, equal to the absolute value of the discount from the closing price of Tower’s common stock on the pricing date of the third party sale, or on another reasonably current date (as agreed by Tower, Canopius Bermuda and the third party investors), that Tower, Canopius Bermuda and the third party investors have agreed is necessary in order to effect the third party sale, by (ii) the aggregate number of Canopius Bermuda common shares sold in the third party sale.

“Target TNAV amount” means the amount that Tower specifies in a written notice delivered to Canopius prior to the signing date of the purchase and sale agreements for the third party sale, as the target amount of the tangible net asset value of Canopius Bermuda as of the closing date of the third party sale.

For an illustration of the determination of the stock conversion number please see the table on page 45 in the section “The Merger—Illustrative Examples of Stock Conversion Number.”

See “Risk Factors—Risks Related to the Merger—Existing Tower stockholders will own a smaller share of Tower Ltd. following completion of the merger.”

Q: Given that the stock conversion number is based on certain factors that are not known at this time, is there a range outside of which Tower will not consummate the merger?

A: Yes. Tower will not consummate the merger if the former stockholders and optionholders of Tower, as well as holders of Tower’s convertible senior notes, could own 80% or more or less than 76% of the fully diluted capital stock of Tower Ltd. immediately following the effective time.

Tower believes that the merger is less desirable from a business perspective outside of this 76-80% ownership range and has committed not to consummate the merger if the ownership of Tower Ltd. by the former stockholders and optionholders of Tower, as well as holders of Tower’s convertible notes, could fall outside of such range immediately following the effective time. For instance, Tower believes that ownership by such parties of 80% or more of the fully diluted capital stock of Tower Ltd. could result in certain adverse tax consequences. See “Risk Factors—Risks Related to the Tax Consequences of the Merger—The merger may have adverse U.S. federal income tax consequences on Tower Ltd. under certain circumstances.” Conversely, the larger the percentage of Tower Ltd. common shares owned by the third party investors following the merger, the more dilutive the merger will be for current Tower stockholders. See “Risk Factors—Risks Related to the Merger—Existing Tower stockholders will own a smaller share of Tower Ltd. following completion of the merger.”

The merger will result in Tower stockholders and optionholders receiving between 44,416,970 and 56,101,993 common shares of Tower Ltd., which range is based on the 76-80% permitted ownership range discussed above and the resultant stock conversion number ranging from approximately 0.9598 to 1.2123. However, Tower stockholders voting on the merger will not know at the time of the special meeting the exact number of common shares of Tower Ltd. they will receive as merger consideration.

Q: What is the effect of the third party sale on the stock conversion number?

A: The investment discount received by the third party investors and the 5% placement fee paid to the placement agents in connection with the third party sale will have a dilutive impact on the ownership percentage of Tower stockholders in Tower Ltd. following the merger.

Q: How are Tower stock options treated in the merger?

A: At the effective time, each outstanding option to acquire Tower common stock, whether vested or unvested and whether granted under Tower’s 2004 Long-Term Equity Compensation Plan (which, as amended and restated, effective May 15, 2008, is referred to in this proxy statement/prospectus as the Long-Term Equity Plan) or otherwise, will automatically vest and become free of any forfeiture conditions and will constitute a fully

 

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vested option to acquire, on the same terms and conditions (other than vesting and performance conditions) as were applicable to such Tower stock option immediately prior to the merger, that number (rounded down to the nearest whole number) of Tower Ltd. common shares determined by multiplying (a) the number of shares of Tower common stock subject to such option immediately prior to the effective time by (b) the stock conversion number. The per share exercise price for Tower Ltd. common shares issuable upon exercise of such Tower Ltd. options will be an amount (rounded up to the nearest cent) equal to (i) the exercise price per share of Tower common stock at which the assumed Tower stock options were exercisable immediately prior to the effective time divided by (ii) the stock conversion number.

Q: How are shares of Tower restricted stock treated in the merger?

A: At the effective time, each outstanding share of Tower restricted stock that is outstanding and subject to vesting or forfeiture conditions, whether granted under the Long-Term Equity Plan or otherwise, will automatically vest and become free of any forfeiture conditions and be converted into the right to receive, as soon as reasonably practicable after the effective time, the merger consideration attributable to such share of restricted stock, without interest.

Q: What effect will the merger have on Tower’s convertible notes?

A: On September 20, 2010, Tower issued $150 million aggregate principal amount of 5.00% Convertible Senior Notes scheduled to mature on September 15, 2014, which are referred to in this proxy statement/prospectus as the convertible notes, pursuant to an indenture with U.S. Bank National Association, as trustee, which is referred to in this proxy statement/prospectus as the convertible note indenture. The convertible note indenture, including the form of convertible note, and the convertible note hedging transactions entered into by Tower in connection therewith, were filed as an exhibit to Tower’s Current Report on Form 8-K on September 20, 2010 and are incorporated herein by reference.

Among other consequences, consummation of the merger will constitute a “make-whole fundamental change” under the terms of the convertible note indenture, which will entitle the holders of the convertible notes to elect to convert all or a portion of their notes within three business days following satisfaction of the conversion procedures at an increased conversion rate for the merger consideration. See “The Merger—Treatment of Tower Convertible Senior Notes” and “Risk Factors—Risks Related to the MergerConversion of the convertible notes may dilute the ownership interest of existing Tower stockholders in Tower Ltd.”

Any common shares of Tower Ltd. issued upon conversion of the convertible notes will not be registered under the registration statement of which this prospectus/proxy statement is a part. Tower expects, but is not required to, file a resale registration statement covering such shares following the merger.

Q: Will appraisal rights be available for dissenting Tower stockholders?

A: Appraisal rights are not available to Tower stockholders in connection with the merger.

Q: When is the merger expected to be completed?

A: As of the date of this proxy statement/prospectus, the merger is expected to be completed in the first quarter of 2013. However, no assurance can be provided as to when or if the merger will occur. The required vote of Tower stockholders to adopt the merger agreement and approve the merger at the special meeting, as well as the necessary regulatory consents and approvals, must first be obtained and certain other conditions specified in the merger agreement must be satisfied or, to the extent permissible, waived.

 

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Q: How will the combined company be managed?

As of the date of this proxy statement/prospectus, Tower expects that the executive officers of Tower Ltd. following the completion of the merger will initially consist of the current senior management team of Tower, led by Michael H. Lee, who is currently serving as the Chairman of the Board of Directors, President and Chief Executive Officer of Tower.

Q: What will be the composition of the Tower Ltd. Board of Directors following the merger?

A: As of the date of this proxy statement/prospectus, Tower expects that each of its current directors will become directors of Tower Ltd. However, as of the date of this proxy statement/prospectus, a final determination as to who will be appointed to the Tower Ltd. Board of Directors has not been made and the requisite corporate action to appoint the persons who will serve as directors of Tower Ltd. following the completion of the merger has not been effected; accordingly, the persons who will serve as directors of Tower Ltd. following the completion of the merger may differ from the persons currently expected to serve in such capacity.

Q: Why is my vote important?

A: If you do not submit a proxy or vote in person at the special meeting, it will be more difficult for Tower to obtain the necessary quorum to hold the meeting. Your failure to submit a proxy or to vote in person will have the same effect as a vote against the merger proposal. If you hold your shares through a broker, your broker will not be able to cast a vote on the adoption of the merger agreement without instructions from you.

Q: What constitutes a quorum for the special meeting?

A: A quorum of stockholders is necessary to hold a valid meeting. A quorum will be present if stockholders holding a majority of the outstanding shares entitled to vote are present at the special meeting in person or represented by proxy. On the record date, there were 38,409,826 shares of Tower common stock outstanding and entitled to vote.

Q: How many votes are needed to approve each proposal?

A: The affirmative vote of the holders of a majority of the shares of Tower common stock outstanding on the record date for the special meeting is required for approval of Proposal 1. Approval of Proposal 2, which is being made on an advisory basis, requires an affirmative vote from the holders of a majority of the outstanding shares of Tower common stock present in person or represented by proxy at the special meeting and entitled to vote, although such vote will not be binding on Tower. The affirmative vote of the holders of a majority of the shares of Tower common stock present in person or represented by proxy and entitled to vote at the special meeting is required to approve each other matter to be acted on at the special meeting, including in the case of Proposal 3 to adjourn the special meeting to solicit additional proxies in favor of Proposal 1.

Q: Why am I being asked to approve, on a non-binding advisory basis, certain merger-related compensatory arrangements between Tower and its named executive officers?

A: Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is referred to in this proxy statement/prospectus as the Dodd-Frank Act, and Section 14A of the Securities Exchange Act of 1934, as amended, which is referred to in this proxy statement/prospectus as the Exchange Act, Tower stockholders are entitled to vote to approve, on an advisory basis, the compensation of the named executive officers of Tower that is based on or otherwise relates to the merger as disclosed in this proxy statement/prospectus, which compensation is referred to in this proxy statement/prospectus as the merger-related compensation. The terms of the merger-related compensation subject to such advisory vote are described in this proxy statement/prospectus

 

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under “The Merger—Golden Parachute Compensation.” See “Stockholder Advisory Vote on Certain Compensatory Arrangements.”

The affirmative vote of the holders of a majority of the outstanding shares of Tower common stock represented and voting either in person or by proxy at the special meeting and entitled to vote is required for approval of the proposal to approve the merger-related compensation. However, because the vote on this proposal is advisory, it will not be binding on the Tower Board of Directors. The merger-related compensation is an obligation of Tower to each of the named executive officers of Tower. Thus, regardless of the outcome of this advisory vote, such compensation will be payable, subject only to the conditions applicable thereto, if the merger is approved. For a more complete discussion of the compensation that Tower’ named executive officers may receive in connection with the merger, see “The Merger—Interests of Certain Persons in the Merger—Management—Tower—Merger-Related Compensation” and “Stockholder Advisory Vote on Certain Compensatory Arrangements.”

Q: Who can vote at the special meeting?

A: Only stockholders of record of Tower at the close of business on January 30, 2013 will be entitled to vote at the special meeting. If on January 30, 2013 your shares were registered directly in your name with Tower’s transfer agent, American Stock Transfer and Trust Company, LLC, then you are a stockholder of record. As a stockholder of record, you may vote in person at the special meeting or vote by proxy. Whether or not you plan to attend the special meeting, Tower urges you to vote by proxy over the telephone or on the internet as instructed below, or fill out and return a proxy card.

If on January 30, 2013 your shares were held not in your name, but rather in an account at a brokerage firm, bank, dealer, or other similar organization, then you are the beneficial owner of shares held in “street name” and this proxy statement/prospectus is being sent to you by that organization. The organization holding your account is considered to be the stockholder of record for purposes of voting at the special meeting. As a beneficial owner, you have the right to direct your broker or other agent regarding how to vote the shares in your account by following the instructions that the broker, bank or other nominee provides you along with this proxy statement/prospectus. You are also invited to attend the special meeting. However, since you are not the stockholder of record, you may not vote your shares in person at the special meeting unless you request and obtain a valid proxy from your broker or other agent.

Q: What are the voting recommendations of the Tower Board of Directors?

A: After careful consideration, the Tower Board of Directors has approved and declared advisable the merger agreement. The Tower Board of Directors recommends that you vote your shares:

 

   

“For” approval of the adoption of the merger agreement and approval of the merger (Proposal 1);

 

   

“For” approval, on an advisory basis, of certain compensatory arrangements between Tower and its named executive officers that are based on or otherwise relate to the merger, as described in this proxy statement/prospectus (Proposal 2); and

 

   

“For” adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes at the time of the special meeting to adopt the merger agreement and approve the merger (Proposal 3).

Q: How many shares will Tower’s executive officers and directors be entitled to vote at the special meeting? Do you expect them to vote in favor of the proposals?

A: As of the record date, Tower’s executive officers and directors had the right to vote approximately 3,818,990 shares of Tower common stock, representing approximately 9.9% of the Tower common stock then outstanding and entitled to vote at the special meeting. Tower expects that its executive officers and directors will vote “For” each of the proposals described in the question above.

 

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Q: What is the record date for the special meeting?

A: The record date for the special meeting is January 30, 2013, which is referred to in this proxy statement/prospectus as the record date. Only holders of Tower common stock at the close of business on the record date are entitled to notice of, and to vote at, the special meeting or any adjournment thereof.

Q: What do I need to do now?

A: The parties urge you to read carefully this proxy statement/prospectus, including the annexes hereto and the documents incorporated by reference herein. You also may want to review the documents referenced under the section “Where You Can Find More Information” below and consult with your accounting, legal and tax advisors.

Q: How do I vote if I am a stockholder of record?

A: If you are a stockholder of record, you may vote in person at the special meeting, you may vote by proxy using the enclosed proxy card, or you may vote by proxy over the telephone or on the internet as instructed below. If you are a beneficial owner of shares registered in the name of your broker, bank, or other agent, you should have received a proxy statement/prospectus along with voting instructions from that organization rather than from Tower. Simply follow the voting instructions provided by your broker, bank, or other agent to ensure that your vote is counted.

 

   

To vote in person, come to the special meeting and Tower will give you a ballot when you arrive.

 

   

To vote by telephone, dial toll free 1-800-690-6903 within the United States, U.S. territories, and Canada using a touch-tone phone and follow the recorded instructions. You will be asked to provide the company number and control number from the enclosed proxy card. Your vote must be received by 11:59 p.m. Eastern time on March 11, 2013 to be counted.

 

   

To vote through the internet, go to www.proxyvote.com and follow the instructions provided. Your vote must be received by 11:59 p.m. Eastern time on March 11, 2013 to be counted. If you vote over the internet, please do not return your proxy card.

 

   

To vote using a proxy card, simply complete, sign and date the enclosed proxy card and return it in the envelope provided. If you return your proxy card to Tower before the special meeting, the proxy holders will vote your shares as you direct.

Q: If my shares are held in “street name” by my bank, broker or other agent will my bank, broker or other agent vote my shares for me?

A: Only if you provide your bank, broker or other agent with instructions on how to vote your shares. If you do not provide the organization that holds your shares with specific instructions, under the rules of various national and regional securities exchanges, the organization that holds your shares may generally vote on routine matters but cannot vote on non-routine matters. If the organization that holds your shares does not receive instructions from you on how to vote your shares on a non-routine matter, the organization that holds your shares will inform the inspector of elections for the special meeting that it does not have the authority to vote on this matter with respect to your shares. This is generally referred to as a broker non-vote. When Tower’s inspector of elections tabulates the votes for any particular matter, broker non-votes will be counted for purposes of determining whether a quorum is present, but will not be counted toward the vote total for any proposal. Tower expects that each of the proposals presented at the special meeting will be considered non-routine matters, so Tower encourages you to provide voting instructions to the organization that holds your shares to ensure that your vote is counted on all two proposals.

 

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Q: How many votes do I have?

A: On each matter to be voted upon, you have one vote for each share of Tower common stock you own as of January 30, 2013.

Q: Can I change my vote after submitting my proxy?

A: Yes. You can revoke your proxy at any time before the final vote at the special meeting. If you are the record holder of your shares, you may revoke your proxy in any one of the following ways:

 

   

You may submit another properly completed proxy card with a later date.

 

   

You may grant a subsequent proxy by telephone or through the internet.

 

   

You may send a timely written notice that you are revoking your proxy to the Tower Group, Inc.’s Secretary at 120 Broadway, 31st Floor, New York, New York 10271.

 

   

You may attend the special meeting and vote in person. Simply attending the special meeting will not, by itself, revoke your proxy.

Your most recent proxy card or telephone or internet proxy is the one that is counted.

If your shares are held by your broker or bank as a nominee or agent, you should follow the instructions provided by your broker or bank.

Q: What if I abstain from voting or do not vote?

A: If you are a Tower stockholder, and if you do not provide your bank or broker with instructions on how to vote your street name shares, your bank or broker will not be permitted to vote them unless your bank or broker already has discretionary authority to vote such street name shares. Also, if your bank or broker has indicated on the proxy that it does not have discretionary authority to vote such street name shares, your bank or broker will not be permitted to vote them. Either of these situations results in a broker non-vote.

Q: What happens if I sell my shares of Tower common stock after the record date but before the special meeting?

A: If you transfer your Tower common stock after the record date but before the date of the special meeting, you will retain your right to vote at the special meeting. However, you will not have the right to receive any Tower Ltd. common shares or cash in exchange for your former shares of Tower common stock if and when the merger is completed. In order to receive Tower Ltd. common shares and cash in exchange for your shares of Tower common stock, you must hold your Tower common stock through the completion of the merger.

Q: Should I send in my stock certificates now?

A: No. Tower stockholders should keep their existing stock certificates at this time. After the proposed merger is completed, you will receive written instructions for exchanging your Tower stock certificates and receiving the merger consideration.

Q: Do I have to take any action now to exchange my shares held in book-entry form?

A: No. Tower stockholders who hold their shares in book-entry form will receive written instructions for exchanging your beneficial interest and receiving the merger consideration.

Q: How can I find out the results of the voting at the special meeting?

A: Tower expects to make a public announcement of the preliminary voting results as soon as practicable following the special meeting. Final voting results are expected to be published in a current report on Form 8-K

 

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filed by Tower with the SEC on or before the fourth business day following the special meeting. If final voting results are not available to Tower in time to file a Form 8-K within four business days following the special meeting, Tower intends to file a Form 8-K to publish preliminary results and, within four business days after the final results are known to Tower, file an additional Form 8-K to publish the final results.

Q: Will Tower hold an annual meeting in 2013? If so, when are stockholder proposals due for that meeting?

A: If the merger is completed, Tower will become an indirect wholly owned subsidiary of Tower Ltd. and will not have any public stockholders. As a result, there will be no public participation in any future meeting of Tower stockholders. However, if the merger is not completed or if Tower is otherwise required to do so under applicable law, Tower will hold an annual meeting of stockholders in 2013. In addition, if the merger is completed in a timely manner, it is expected that Tower Ltd. will hold an annual general meeting of shareholders in 2013. For more information regarding the Tower Ltd. annual general meeting of shareholders, please see “Management and Other Information of Tower Ltd.—Directors of Tower Ltd.

In the event that Tower holds an annual meeting of stockholders in 2013, stockholders may submit proposals on matters appropriate for stockholder action at meetings of its stockholders in accordance with Rule 14a-8 promulgated under the Exchange Act. For such proposals to be included in Tower’s proxy materials relating to its 2013 annual meeting of stockholders, if held, all applicable requirements of Rule 14a-8 must be satisfied and, pursuant to Rule 14a-8, such proposals must have been received by Tower no later than November 19, 2012. Such proposals should be delivered to Tower Group, Inc., 120 Broadway, 31st Floor, New York, NY 10271 Attention: Secretary.

If the merger is not completed, Tower’s Corporate Governance and Nominating Committee will consider candidates for Director recommended by any stockholder who (a) has been a continuous record owner of at least 2% of Tower’s common stock for at least one year prior to submission and (b) provides a written statement that the holder intends to continue ownership of the shares through the stockholders meeting. Such recommendations or other proposals of business to be considered by the stockholders must be made by written notice addressed to the Secretary of Tower no more than 120 days and no fewer than 90 days prior to the anniversary of the date of the previous year’s annual meeting of stockholders and in any event at least 45 days prior to the first anniversary of the date on which Tower first mailed its proxy materials for the previous year’s annual meeting of stockholders. Consequently, any such recommendation for Director or other proposal for consideration by the stockholders with respect to the Company’s 2013 annual meeting of stockholders must be made no earlier than January 3, 2013 and no later than February 2, 2013. Tower also advises you to review its amended and restated bylaws, which contain additional requirements about advance notice of stockholder proposals and director nominations.

Q: Are there risks associated with the merger that I should consider in deciding how to vote?

A: Yes. There are a number of risks related to the merger and the other transactions contemplated by the merger agreement that are discussed in this proxy statement/prospectus and in other documents incorporated by reference or referred to in this proxy statement/prospectus. Please read with particular care the detailed description of the risks described in “Risk Factors” and in the Tower SEC filings referred to in “Where You Can Find More Information” below.

Q: Will a proxy solicitor be used?

A: Yes. Tower has engaged the proxy advisor Georgeson Inc. for a fee of $9,500 and reimbursement of certain expenses, to assist in the solicitation of proxies. Tower will bear the entire cost of soliciting proxies from Tower stockholders.

 

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Q: Who can help answer my questions?

A: If you have any questions about the proposed transactions, need assistance in voting your shares, or if you need additional copies of this proxy statement/prospectus or the enclosed proxy card, you should contact:

Tower Group, Inc.

120 Broadway (31st Floor)

New York, NY 10271

Attention: Secretary

Telephone No: (212) 655-2000

Q: Where can I find more information about Tower?

A: You can find more information about Tower from the various sources described under “Where You Can Find More Information” below.

 

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SUMMARY

This summary highlights selected information contained in this proxy statement/prospectus and may not contain all of the information that is important to you. You should read carefully this entire proxy statement/prospectus, including the annexes and the documents incorporated by reference, to fully understand the proposed transactions and the voting procedures for the special meeting. See also the section entitled “Where You Can Find More Information” beginning on page 181 of this proxy statement/prospectus. The page references have been included in this summary to direct you to a more complete description of the topics presented below.

All references in this proxy statement/prospectus to Tower refer to Tower Group, Inc., a Delaware corporation, and, unless the content otherwise requires, its subsidiaries, managing general agencies and management companies; all references in this proxy statement/prospectus to Canopius Bermuda refer to Canopius Holdings Bermuda Limited, an exempted company formed under the laws of Bermuda; all references in this proxy statement/prospectus to Tower Ltd. refer to Canopius Bermuda following the completion of the merger; all references in this proxy statement/prospectus to Tower Ltd. common shares refer to the common shares of Canopius Bermuda following completion of the merger; all references in this proxy statement/prospectus to Canopius refer to Canopius Group Limited, a Guernsey, Channel Islands company; all references in this proxy statement/prospectus to Delaware Purchaser refer to Canopius Mergerco, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Canopius Bermuda; all references in this proxy statement/prospectus to Merger Sub refer to Condor 1 Corporation, a Delaware corporation and an indirect wholly owned subsidiary of Delaware Purchaser; all references to the original merger agreement refer to the Agreement and Plan of Merger, dated as of July 30, 2012, among Tower, Canopius Bermuda, Delaware Purchaser and Merger Sub, a copy of which is included as Annex A-1 to this proxy statement/prospectus; all references to the amendment refer to Amendment No. 1 to the Agreement and Plan of Merger, dated as of November 8, 2012, among Tower, Canopius Bermuda, Delaware Purchaser and Merger Sub, a copy of which is included as Annex A-2 to this proxy statement/prospectus; all references to the merger agreement refer to the original merger agreement, as amended by the amendment; all references in this proxy statement/prospectus to the closing refer to the closing of the merger, and the date on which the closing occurs is referred to as the closing date; all references in this proxy statement/prospectus to the effective time refer to the effective time of the consummation of the merger, which will occur when the certificate of merger is filed with the Secretary of State of the State of Delaware (or at such later time as may be agreed by the parties and specified in the certificate of merger) immediately following the closing; and all references in this proxy statement/prospectus to the MTA refer to the Master Transaction Agreement, dated as of April 25, 2012, among Tower, Canopius, Canopius Bermuda and Delaware Purchaser, as amended, a copy of which is included as Annex B to this proxy statement/prospectus.

The Companies. (Page 93)

Tower Group, Inc.

120 Broadway (31st Floor)

New York, New York 10271

(212) 655-2000

Tower Group, Inc., or Tower, is a Delaware corporation formed in 1996, with its headquarters in New York, New York. Tower’s common stock is currently listed on NASDAQ under the ticker symbol “TWGP.” Through its insurance subsidiaries, Tower offers a broad range of commercial, specialty and personal property and casualty insurance products and services to businesses in various industries and to individuals throughout the United States. As a result of the merger, Tower will become an indirect wholly owned subsidiary of Tower Ltd. and will be delisted from NASDAQ.

Canopius Holdings Bermuda Limited

Atlantic House

11 Par-La-Ville Road

Hamilton HM11

Bermuda

(441) 292-9905

 

 

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Canopius Holdings Bermuda Limited, or Canopius Bermuda, is a privately-held exempted company formed under the laws of Bermuda in 2007. Canopius Bermuda is a wholly owned subsidiary of Canopius Group Limited, a privately-owned insurance holding company domiciled in Guernsey, Channel Islands, which is referred to in this proxy statement/prospectus as Canopius. Canopius Bermuda is the direct holding company of Canopius Bermuda Limited, or CBL, a Class 3A Bermuda reinsurance company. CBL currently writes structured reinsurance treaty business and provides capital support to Canopius’s underwriting operations at Lloyd’s of London, which is referred to as Lloyd’s.

On August 20, 2012, Canopius, through an amalgamation of its wholly owned subsidiary, Canopius Holdings Limited, with Omega Insurance Holdings Limited, a Bermuda exempted company, which is referred to herein as Omega, acquired Omega, including Omega’s subsidiaries (i) Omega Underwriting Agents Limited (the managing agent of Lloyd’s Syndicate 958), a United Kingdom company, (ii) Omega Specialty Insurance Company Limited, a Bermuda domiciled reinsurance company, (iii) Omega US Holdings, Inc., a Delaware corporation, and (iv) Omega US Insurance, Inc., a Delaware domiciled stock property and casualty insurance company. The amalgamated entity and its subsidiaries are not now and have never been subsidiaries of Canopius Bermuda.

Following the restructuring, it is expected that CBL will continue to participate in Canopius’s Lloyd’s business through quota share reinsurance and will provide reinsurance to third party cedents.

Effective immediately prior to the consummation of the merger, Canopius will sell 100% of its equity ownership of Canopius Bermuda to a group of yet-to-be identified third party investors, who will be the sole shareholders of Canopius Bermuda prior to the effective time. See “—Third Party Sale” below. Upon consummation of the merger, the former stockholders and optionholders of Tower, as well as holders of Tower’s convertible notes, will own less than 80% but greater than or equal to 76% of the fully diluted capital stock of Tower Ltd. and the third party investors in Canopius Bermuda will own less than or equal to 24% but greater than 20% of the fully diluted capital stock of Tower Ltd.

Concurrent with the completion of the merger, Canopius Bermuda will be renamed “Tower Group International, Ltd.” At and as of the effective time, Tower Ltd. will be a publicly traded company and its common shares are expected be listed on NASDAQ under the symbol “TWGP.”

Master Transaction Agreement. (Page 36)

In connection with Tower’s purchase of 10.7% of the issued and outstanding common share capital of Canopius, on April 25, 2012, Tower entered into a Master Transaction Agreement, which is referred to in this proxy statement/prospectus as the MTA, with Canopius Bermuda, Delaware Purchaser and Canopius. Upon the terms and subject to the conditions set forth in the MTA, Tower has the right to effect certain transactions with Canopius and its subsidiaries, including Tower’s right to merge with a newly formed subsidiary of Delaware Purchaser, exercisable in Tower’s sole discretion. The complete text of the MTA is attached to this proxy statement/prospectus as Annex B. Tower intends to maintain its 10.7% interest in Canopius following the merger.

Restructuring. (Page 37 and 95)

Prior to the effective time, Tower, Canopius and Canopius Bermuda will effect a restructuring of the insurance operations of Canopius Bermuda such that, as of the effective time, Canopius Bermuda will continue to own certain business and assets to be identified by the parties and will have transferred to Canopius all other business and assets of Canopius Bermuda. This restructuring of Canopius Bermuda prior to the effective time is referred to in this proxy statement/prospectus as the restructuring. The business retained by Canopius Bermuda in connection with the restructuring is referred to in this proxy statement prospectus as the retained business.

 

 

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The retained business includes the loss reserves, loss adjustment reserves and unearned premium reserves, and the insurance and reinsurance obligations to which they relate, under all insurance and reinsurance contracts written by CBL before July 31, 2012 with unaffiliated parties. In addition, the retained business includes 100% of CBL’s quota share participation in the 2012, 2011 and 2010 underwriting year of account results of Syndicate 4444 pursuant to certain quota share reinsurance agreements to which CBL is a party, and the loss reserves, loss adjustment reserves and unearned premium reserves relating to such quota share participation; provided that certain percentages of such quota share participation will have been retroceded to an affiliate of Canopius other than CBL. All of CBL’s loss reserves, loss adjustment reserves and unearned premium reserves and the insurance and reinsurance obligations to which they relate, other than such reserves and obligations relating to the retained business, will be commuted, novated or retroceded to affiliates of Canopius, other than Canopius Bermuda or its subsidiaries.

Canopius has agreed in the MTA to indemnify Tower for all pre-closing liabilities of Canopius Bermuda and its subsidiaries, including CBL, other than insurance liabilities under the express terms of any insurance contract or reinsurance agreement constituting a part of the retained business. See “The Restructuring.”

As part of the restructuring, the ownership of all operating subsidiaries of Canopius Bermuda other than CBL will be transferred to another Canopius company, other than Canopius Bermuda and its subsidiaries.

Third Party Sale. (Page 38)

Effective immediately prior to the consummation of the merger, Canopius will sell 100% of its equity ownership of Canopius Bermuda in a private placement to a group of yet-to-be identified third party equity investors with whom the placement agents have a pre-existing relationship, referred to in this proxy statement/prospectus as the third party investors, who will be the sole shareholders of Canopius Bermuda prior to the effective time. The third party investors will pay Canopius an aggregate purchase price in cash equal to the sum of the target TNAV amount, plus such additional amount equal to the agreed value of the retained business. The sale to the third party investors for cash consideration permits Canopius to monetize its investment in Canopius Bermuda, which it is able to do because it has acquired Omega and therefore has a Bermuda-domiciled insurance company available for sale. This transaction is referred to as the third party sale and will be conducted in a manner that is exempt from the registration requirements of the Securities Act pursuant to the so-called “Section 4(11/2)” exemption.

While the third party investors, in the aggregate, will own more than 20% but less than or equal to 24% of the outstanding shares of Tower Ltd. immediately following the effective time of the merger, Canopius Bermuda will impose controls on the initial private placement intended to ensure that each of the third party investors and its affiliates will own less than 5% of the outstanding shares of Tower Ltd., except for any existing stockholders of Tower that decide to participate in the third party sale and already own 5% or more of the outstanding shares of Tower common stock. In addition, Canopius Bermuda will impose controls on the initial private placement by reviewing investor subscription agreements to ensure that no third party investor will hold 10% or more of Tower Ltd. at the effective time of the merger. Each subscription agreement entered into in connection with the third party sale will contain a representation from the relevant investor that its purchase of shares of Canopius Bermuda will not cause it (taken together with its affiliates) to own the foregoing ownership thresholds of Tower Ltd. immediately following the merger. The subscription agreements will also specify that any breach of such representation will cause the sale of Canopius Bermuda shares to such investor to be void and of no effect. However, Tower Ltd. will not limit the ability of its shareholders (including the third party investors) to purchase additional shares in the secondary market following the effective time of the merger. To the extent that a third party investor acquires additional shares and thereby holds more than 5% of the outstanding shares of Tower Ltd. following the merger, such investor will be required to make the applicable Section 13 filing with the SEC pursuant to the Exchange Act.

 

 

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The Merger. (Page 36)

Following completion of the third party sale described above, Merger Sub will merge with and into Tower, with Tower as the surviving corporation becoming an indirect wholly owned subsidiary of Tower Ltd. At the effective time, among other things, each issued and outstanding share of Tower common stock will be cancelled and converted automatically into the right to receive a number of common shares of Tower Ltd. equal to the stock conversion number.

“Stock conversion number” means the quotient obtained by dividing (x) the closing price per share of Tower common stock on NASDAQ on the pricing date of the third party sale by (y) the adjusted Canopius Bermuda price per share.

“Adjusted Canopius Bermuda price per share” means the quotient obtained by dividing (i) the sum of (a) the target TNAV amount, (b) the value of the retained business (determined in accordance with the MTA), (c) the aggregate amount of the placement fees received by the placement agents in connection with the third party sale and (d) the aggregate amount, expressed in dollars, equal to the absolute value of the discount from the closing price of Tower’s common stock on the pricing date of the third party sale, or on another reasonably current date (as agreed by Tower, Canopius Bermuda and the third party investors), that Tower, Canopius Bermuda and the third party investors have agreed is necessary in order to effect the third party sale (referred to as the third party discount), by (ii) the aggregate number of Canopius Bermuda common shares sold in the third party sale.

“Target TNAV amount” means the amount that Tower specifies in a written notice delivered to Canopius prior to the signing date of the purchase and sale agreements for the third party sale, as the target amount of the tangible net asset value of Canopius Bermuda as of the closing date of the third party sale.

The stock conversion number, the adjusted Canopius Bermuda price per share and the target TNAV amount are not known at this time and will not be known until after the pricing date of the third party sale, which is after the date of this proxy statement/prospectus. Many unknown factors are used in calculating the stock conversion number, the adjusted Canopius Bermuda price per share and the target TNAV amount, including (i) the value of the retained business, (ii) the closing price per share of Tower common stock on NASDAQ on the pricing date of the third party sale and (iii) the investment discount received by the third party investors in the third party sale. See “Risk Factors—Risks Related to the Merger—Existing Tower stockholders will own a smaller share of Tower Ltd. following completion of the merger.”

Notwithstanding these unknown factors, however, Tower will not consummate the merger if the former stockholders and optionholders of Tower, as well as holders of Tower’s convertible senior notes, could own 80% or more or less than 76% of the fully diluted capital stock of Tower Ltd. immediately following the effective time. Tower believes that the merger is less desirable from a business perspective outside of this 76-80% ownership range and has committed not to consummate the merger if the ownership of Tower Ltd. by the former stockholders and optionholders of Tower, as well as holders of Tower’s convertible notes, could fall outside of such range immediately following the effective time. For instance, Tower believes that ownership by such parties of 80% or more of the fully diluted capital stock of Tower Ltd. could result in certain adverse tax consequences. See “Risk Factors—Risks Related to the Tax Consequences of the Merger—The merger may have adverse U.S. federal income tax consequences on Tower Ltd. under certain circumstances.” Conversely, the larger the percentage of Tower Ltd. common shares owned by the third party investors following the merger, the more dilutive the merger will be for current Tower stockholders. See “Risk Factors—Risks Related to the Merger—Existing Tower stockholders will own a smaller share of Tower Ltd. following completion of the merger.”

The merger will result in Tower stockholders and optionholders receiving between 44,416,970 and 56,101,993 common shares of Tower Ltd., which range is based on the 76-80% permitted ownership range

 

 

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discussed above and the resultant stock conversion number ranging from approximately 0.9598 to 1.2123. However, Tower stockholders voting on the merger will not know at the time of the special meeting the exact number of common shares of Tower Ltd. they will receive as merger consideration.

Post-Merger Management of Tower. (Page 71)

Pursuant to the merger agreement, the directors of Tower Ltd. immediately following the effective time will be designated by Tower. As of the date of this proxy statement/prospectus, Tower expects that each of its current directors will become directors of Tower Ltd. However, a final determination as to who will be appointed to the Tower Ltd. Board of Directors has not been made as of the date of this proxy statement/prospectus and the requisite corporate action to appoint the persons who will serve as directors of Tower Ltd. following the completion of the merger has not been effected; accordingly, the persons who will serve as directors of Tower Ltd. following the completion of the merger may differ from the persons currently expected to serve in such capacity.

In addition, pursuant to the merger agreement, the executive officers of Tower Ltd. immediately following the effective time will be designated by Tower. As of the date of this proxy statement/prospectus, Tower expects that the executive officers of Tower Ltd. following the completion of the merger will initially consist of the current senior management team of Tower, led by Michael H. Lee, who is currently serving as the Chairman of the Board of Directors, President and Chief Executive Officer of Tower.

Tower’s Reasons for the Merger. (Page 54)

In reaching its conclusion to approve the merger agreement, the Tower Board of Directors reviewed a significant amount of information and considered a number of factors in its deliberations and concluded that the merger is likely to result in significant strategic and financial benefits to Tower Ltd., which would accrue to the Tower stockholders, as shareholders of Tower Ltd., including that:

 

   

the merger will create a more efficient global, diversified specialty insurance company that supports Tower’s expansion plans;

 

   

the merger will create a more efficient international holding company structure;

 

   

the combination of Tower’s and Canopius Bermuda’s businesses through the merger will result in a diversified product platform consisting of commercial, specialty and personal lines, reinsurance and international specialty products;

 

   

the establishment of a Bermuda domicile will provide Tower with a strategic international platform with access to U.S., Bermuda and Lloyd’s markets;

 

   

Tower Ltd. is expected to have improved profitability and financial strength;

 

   

the merger will strengthen the combined group’s competitive position and will support growth opportunities;

 

   

Bermuda provides Tower with a better business platform to grow its existing and newly created businesses;

 

   

the merger improves the profitability of new assumed reinsurance business from insurance companies in the U.S. and Lloyds’ syndicates; and

 

   

the abilities and international experience of the insurance professionals expected to be employed by CBL will complement the strengths of Tower’s personnel and expand the international reach of the combined group.

 

 

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In addition, Tower believes that the uncertainties, risks and potentially negative factors relevant to the transactions contemplated by the merger agreement were outweighed by the potential benefits that the Tower and the Tower stockholders are expected to achieve as a result of the merger. These uncertainties, risks and potentially negative factors include (i) that current Tower stockholders will own a smaller share of Tower Ltd. following completion of the merger relative to their current ownership percentage of Tower, (ii) failure to consummate the merger could negatively impact the stock price and the future business and financial results of Tower, (iii) risks related to the tax consequences of the merger, including the fact that U.S. non-exempt shareholders will be subject to U.S. federal income tax on their exchange of shares, (iv) the diversion of Tower Ltd. management’s attention to integration of operations and corporate and administrative infrastructures, (v) difficulties in achieving anticipated business opportunities and growth prospects from combining the business of Canopius Bermuda with that of Tower and (vi) challenges in keeping existing insureds and cedents and obtaining new insureds and cedents. See “Risk Factors.”

Recommendations of Tower’s Board of Directors. (Page 54)

After careful consideration, the Tower Board of Directors has unanimously approved and declared advisable the merger agreement. The Tower Board of Directors has adopted resolutions approving the merger agreement and the merger, recommending that the holders of Tower common stock vote to adopt the merger agreement and approve the merger and directing that the merger agreement and merger be submitted to a vote of the Tower stockholders. The Tower Board of Directors recommends that you vote “FOR” the adoption of the merger agreement and approval of the merger, and “FOR” the other proposals described in this proxy statement/prospectus.

Opinion of Barclays to the Tower Board of Directors. (Page 57)

Tower engaged Barclays Capital Inc., which is referred to in this proxy statement/prospectus as Barclays, to render an opinion with respect to the fairness, from a financial point of view, of the merger consideration to be offered to Tower’s stockholders in the transaction.

The full text of Barclays’ written opinion, dated as of November 6, 2012, is attached as Annex F to this proxy statement/prospectus. Barclays’ written opinion sets forth, among other things, the assumptions made, procedures followed, factors considered and limitations upon the review undertaken by Barclays in rendering its opinion. Tower’s stockholders are encouraged to read the opinion carefully in its entirety.

Selected Historical Financial Data. (Pages 108 and 109)

The selected historical financial data of Tower required to be contained in this proxy statement/prospectus is incorporated by reference to Tower’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on February 29, 2012, as amended by Amendment No. 1 to Form 10-K filed with the SEC on January 16, 2013, and Tower’s Amended Quarterly Report on Form 10-Q/A for the period ended September 30, 2012, filed with the SEC on January 17, 2013.

The selected historical financial data of Canopius Bermuda required to be contained in this proxy statement/prospectus, which begins on page 109, does not take into consideration the restructuring transactions effected prior to the effective time, which transactions will have a material impact on the financial condition and results of operations of Canopius Bermuda following the effective time. Accordingly, such selected historical financial data should only be read in combination with the quantitative and qualitative descriptions of the restructuring contained in this proxy statement/prospectus, including the unaudited pro forma condensed consolidated financial information beginning on page 121, which gives effect to the restructuring. You are strongly encouraged to read “The Restructuring” and “Unaudited Pro Forma Condensed Consolidated Financial Information.”

 

 

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Unaudited Pro Forma Condensed Consolidated Financial Information. (Page 121)

The unaudited pro forma condensed consolidated financial information contained in this proxy statement/prospectus, which begins on page 121, is based on the historical financial statements of Tower and Canopius Bermuda, and gives effect to (i) the restructuring of Canopius Bermuda, (ii) the third party sale of common stock of Canopius Bermuda and (iii) the merger of Merger Sub, a wholly-owned subsidiary of Canopius Bermuda, with and into Tower. Notwithstanding the legal form of the transactions, the unaudited pro forma financial information was prepared using the acquisition method of accounting with Tower, the legal acquiree, treated as the accounting acquirer and Canopius Bermuda, the legal acquirer, treated as the accounting acquiree (a reverse acquisition) and Canopius treated as the accounting seller.

The unaudited pro forma condensed consolidated balance sheet was prepared as if each of the transactions had occurred on September 30, 2012. The unaudited pro forma condensed consolidated statements of income for the nine months ended September 30, 2012 and the year ended December 31, 2011 were prepared as if each of the transactions had occurred on January 1, 2011.

The unaudited pro forma condensed consolidated financial statements have been prepared for illustrative purposes only and are not necessarily indicative of the financial condition or results of operations of future periods or the financial condition or results of operations that actually would have been realized had the entities been a single entity as of or for the periods presented. The unaudited pro forma condensed consolidated financial information should be read together with the historical condensed consolidated financial statements and related notes of Tower and Canopius Bermuda incorporated by reference into or included in this registration statement. See “Unaudited Pro Forma Condensed Consolidated Financial Information” beginning on page 121.

The Special Meeting of Tower Stockholders. (Page 1)

 

   

Date, Time & Place of the Special meeting

The special meeting will be held on March 12, 2013, at 9:00 a.m. local time at the Millenium Hilton Hotel, 55 Church Street, New York, New York 10007.

 

   

Proposals

There are three matters scheduled for a vote at the Tower special meeting:

 

   

Proposal to adopt the merger agreement and approve the merger (Proposal 1);

 

   

Proposal to approve, on an advisory basis, certain compensatory arrangements between Tower and its named executive officers that are based on or otherwise relate to the merger, as described in this proxy statement/prospectus (Proposal 2); and

 

   

Proposal to approve the adjournment of the special meeting, if necessary, to solicit additional proxies if there are not sufficient votes at the time of the special meeting to adopt the merger agreement and approve the merger (Proposal 3).

 

   

Record Date; Outstanding Shares; Shares Entitled to Vote

Only stockholders of record of Tower at the close of business on January 30, 2013 will be entitled to vote at the special meeting. On this record date, there were 38,409,826 shares of Tower common stock outstanding and entitled to vote. Each share of Tower common stock outstanding as of January 30, 2013 is entitled to one vote on each proposal and any other matter properly coming before the special meeting.

 

 

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Stock Ownership and Voting by Tower’s Directors and Officers

As of the record date, Tower’s executive officers and directors, had the right to vote approximately 3,818,990 shares of Tower common stock, representing approximately 9.9% of the Tower common stock then outstanding and entitled to vote at the special meeting. Tower expects that its executive officers and directors, will vote “For” each of the proposals described above.

 

   

Vote Required

The affirmative vote of the holders of a majority of the shares of Tower common stock outstanding on the record date for the special meeting is required for approval of Proposal 1. Approval of Proposal 2, which is being made on an advisory basis, requires an affirmative vote from the holders of a majority of the outstanding shares of Tower common stock present in person or represented by proxy at the special meeting and entitled to vote, although such vote will not be binding on Tower. The affirmative vote of the holders of a majority of the outstanding shares of Tower common stock present in person or represented by proxy and entitled to vote at the special meeting is required to approve each other matter to be acted on at the special meeting, including in the case of Proposal 3 to adjourn the special meeting to solicit additional proxies in favor of Proposal 1.

The Tower Board of Directors recommends that Tower stockholders vote “For” each of the proposals set forth above.

Interests of Certain Persons in the Merger. (Page 71)

In considering the recommendation of the Tower Board of Directors, you should be aware that certain directors and officers of Tower and Canopius Bermuda may have interests in the proposed transactions that are different from, or in addition to, your interests as a Tower stockholder generally and which may create potential conflicts of interest. The Tower Board of Directors was aware of these interests and considered them when they adopted the merger agreement and approved the transactions contemplated thereby.

Certain U.S. Federal Tax Consequences of the Merger to U.S. Stockholders. (Page 79)

A U.S. stockholder generally will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the fair market value of the merger consideration paid to such U.S. stockholder and the adjusted basis of the Tower common stock exchanged by such U.S. stockholder in the merger. However, in certain circumstances section 304 of the Internal Revenue Code of 1986, as amended (the “Code”) could cause the entire amount of the merger consideration paid to a U.S. stockholder to be treated as a dividend regardless of the gain realized on the merger. See “Material Tax Considerations—U.S. Federal Income Tax Considerations.”

No Appraisal Rights. (Page 108)

Appraisal rights are statutory rights under Delaware General Corporation Law, or the DGCL, that enable stockholders who object to certain extraordinary transactions to demand that the corporation pay such stockholders the fair value of their shares instead of receiving the consideration offered to stockholders in connection with the extraordinary transaction. However, appraisal rights are not available in all circumstances. Appraisal rights are not available to Tower stockholders in connection with the merger.

Regulatory Approvals Required. (Page 76)

Consummation of the merger and the transactions contemplated thereby, including the third party sale, by Tower, Canopius Bermuda, Delaware Purchaser and Merger Sub will require (i) the consent of, notification to, approval for or other authorization from the U.K. Financial Services Authority, Lloyd’s, the U.S. Federal Trade Commission and the U.S. Department of Justice, (ii) “Form A” change of control, disclaimers of control or similar filings to the applicable insurance regulator in the various states of domicile or commercial domicile of Tower’s insurance subsidiaries and (iii) notification to other market or governmental authorities.

As previously announced by Tower, Tower has received or made, as applicable, all required insurance regulatory consents, notifications and approvals with respect to the merger.

 

 

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Listing of Tower Ltd. Common Shares on NASDAQ. (Page 108)

Canopius Bermuda common shares are not currently traded or quoted on a stock exchange or quotation system. The Tower Ltd. common shares are expected to be listed on The NASDAQ Global Select Market under the symbol “TWGP” following the merger.

Termination of the Merger Agreement. (Page 107)

Canopius Bermuda can terminate the merger agreement under certain circumstances, which would prevent the merger from being consummated. In addition, Tower has the right in its sole discretion at any time and for any or no reason to terminate the merger agreement and abandon the merger. In the event that Tower exercises its right to terminate the merger agreement, it will nonetheless be obligated to reimburse Canopius Bermuda and its affiliates for their reasonable out-of-pocket costs incurred in connection with negotiating, documenting and implementing the merger agreement and the transactions contemplated thereby to the extent that such costs exceed the $1,000,000 option exercise fee paid by Tower.

Conditions to Completion of the Merger. (Page 106)

Under the terms of the merger agreement, the closing date of the merger will be as specified by Tower in a written notice (referred to as the closing notice) to Canopius Bermuda, subject to the satisfaction or (to the extent permitted by applicable law) waiver by Canopius Bermuda, Delaware Purchaser and Merger Sub of certain conditions to their respective obligations to consummate the merger.

Although the merger agreement contains no conditions precedent to Tower’s obligations to consummate the merger, Tower will not proceed with the merger in the event that (i) the third party sale cannot be effected, or can only be effected on terms that would make the stock conversion number, and therefore the merger, unattractive to Tower, (ii) the adjusted Canopius Bermuda price per share declines to a point such that the third party investors would own 20% or less of the fully diluted capital stock of Tower Ltd. immediately following the effective time, (iii) Tower stockholders and optionholders, as well as holders of Tower’s convertible notes, would own less than 76% of the fully diluted capital stock of Tower Ltd. immediately following the effective time, (iv) the parties to the merger agreement fail to obtain the necessary regulatory approvals on terms acceptable to Tower, (v) Tower’s stockholders fail to adopt the merger agreement and approve the merger, (vi) Tower’s Board of Directors determine that the transactions contemplated by the merger agreement are not favorable to Tower or its stockholders and (vii) Tower has not received an opinion of a nationally recognized law firm, in form and substance satisfactory to Tower, to the effect that the merger should not cause Tower Ltd. to be treated as a domestic corporation under Section 7874(b) of the Internal Revenue Code of 1986, as amended. Tower has the explicit right in the merger agreement to terminate that agreement and not complete the merger at any time and for any or no reason prior to the effective time of the merger.

Accounting Treatment of the Merger. (Page 77)

The merger will be accounted for using the acquisition method of accounting, with Tower being treated as the accounting acquirer under U.S. GAAP. Accordingly, the assets and liabilities of Canopius Bermuda will be, as of the effective time, recorded at their respective fair values and added to those of Tower, including an amount for goodwill representing the difference between the acquisition consideration and the fair value of the identifiable net assets.

 

 

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Restrictions on Resales. (Page 77)

All Tower Ltd. common shares received by Tower stockholders in the merger will be freely tradable, except that Tower Ltd. common shares received in the merger by persons who become affiliates of Tower Ltd. for purposes of Rule 144 under the Securities Act of 1933, as amended, which is referred to in this proxy statement/prospectus as the Securities Act, may be resold by them only in transactions permitted by Rule 144, or as otherwise permitted under the Securities Act.

Comparison of the Rights of Holders of Tower Common Stock and Tower Ltd. Common Shares. (Page 157)

The rights of Tower stockholders and the relative powers of the Tower Board of Directors are governed by the laws of the State of Delaware, including the DGCL, and Tower’s amended and restated certificate of incorporation and amended and restated bylaws, which are collectively referred to in this proxy statement/prospectus as the Tower organizational documents. As a result of the merger, the holders of Tower common stock will become holders of Tower Ltd. common shares and their rights will be governed by applicable Bermuda law, including the Bermuda Companies Act of 1981, which is referred to in this proxy statement/prospectus as the Companies Act, and by Tower Ltd.’s memorandum of association and amended and restated bye-laws. Following the merger, former Tower stockholders will have different rights as Tower Ltd. shareholders than they did as Tower stockholders. For a summary of the material differences between the rights of Tower stockholders and Tower Ltd. shareholders, please see “Description of Tower Ltd. Common Shares” and “Comparison of the Rights of Holders of Tower Common Stock and Tower Ltd. Common Shares.”

 

 

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RISK FACTORS

Tower stockholders should consider carefully the following factors in evaluating whether to vote to adopt the merger agreement and approve the merger. These factors should be considered in conjunction with the other information included in or incorporated by reference into this proxy statement/prospectus, including the risks discussed in Tower’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on February 29, 2012, as amended by Amendment No. 1 to Form 10-K filed with the SEC on January 16, 2013 under the heading “Risk Factors.” See “Where You Can Find More Information.”

Risks Related to the Merger

Existing Tower stockholders will own a smaller share of Tower Ltd. following completion of the merger.

Several factors used in determining the per share merger consideration will have a dilutive impact on the ownership percentage of Tower stockholders in Tower Ltd. following the merger, including (i) the investment discount received by the third party investors in the third party sale, (ii) the 5% placement fee paid to the placement agents in connection with the third party sale, (iii) declines in the market value of Tower common stock and (iv) appreciation of the tangible net asset value of Canopius Bermuda prior to the effective time. Each of these factors may result in Tower stockholders owning a smaller share of Tower Ltd. following completion of the merger. However, Tower will not consummate the merger if the former stockholders and optionholders of Tower, as well as holders of Tower’s convertible notes, could own 80% or more or less than 76% of the fully diluted capital stock of Tower Ltd. immediately following the effective time. The percentage of noteholders that elect to convert their convertible notes will not be known until after the per share stock consideration for Tower stockholders has already been determined. See “—Conversion of the convertible notes may dilute the ownership interest of existing Tower stockholders in Tower Ltd.”

The table below shows the sensitivity of the stock conversion number and the Tower Ltd. common share ownership percentage of Tower stockholders to the price of Tower common stock and the adjusted Canopius Bermuda price per share using an illustrative range of prices. The actual price of Tower common stock and the adjusted Canopius Bermuda price per share may differ materially from those shown in the table below.

Illustrative Post-Merger Ownership of Tower Ltd.

 

    

At $196,705,886 in Target TNAV or

$16.17 Adjusted Canopius Bermuda Price

Per Share(2)(3)

 
     Assuming no Conversion of Tower’s
Convertible Notes
    Assuming Conversion of Tower’s
Convertible Notes
 

Tower Stock Price(1)

   Stock  Conversion
Number
     % of Tower  Ltd.
Owned by Tower
Stockholders(4)
    Stock  Conversion
Number
     % of Tower  Ltd.
Owned by Tower
Stockholders(5)
 
$18.50      1.1438x         76.2     1.1438x         79.0
$19.00      1.1747x         76.7     1.1747x         79.5
$19.50      1.2056x         77.1     1.2056x         79.9

 

(1) The closing price per share of Tower common stock on NASDAQ on the pricing date of the third party sale.
(2)

“Adjusted Canopius Bermuda price per share” means the quotient obtained by dividing (i) the sum of (a) the target TNAV amount, (b) the value of the retained business, (c) the aggregate amount of the placement fees received by the placement agents in connection with the third party sale, which will be calculated at a fixed percentage of 5% of the total amount raised in the third party sale and (d) the aggregate amount, expressed in dollars, equal to the absolute value of the discount from the closing price of Tower’s common stock on the pricing date of the third party sale, or on another reasonably current date (as agreed by Tower, Canopius Bermuda and the third party investors), that Tower, Canopius Bermuda and the third party investors have agreed is necessary in order to effect the third party sale, by (ii) the aggregate number of Canopius Bermuda

 

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  common shares sold in the third party sale. Illustrative Adjusted Canopius Bermuda price per share assumes a 5% discount for third party investors. Actual discount may be larger or smaller. See “The Merger—Illustrative Examples of Stock Conversion Number.”
(3) Canopius Bermuda currently has 150,000,000 shares authorized and 100 shares issued and outstanding. Prior to the closing of the transaction and in conjunction with the restructuring, Canopius Bermuda intends to increase the number of its shares issued and outstanding. 14,025,737 reflects the current estimate of Canopius Bermuda’s post-restructuring outstanding shares.
(4) Assumes for illustrative purposes 38,376,845 Tower common shares outstanding as of September 30, 2012 (and 855,530 options to purchase common shares). At some Tower share prices, holders of the convertible notes may decide to elect merger consideration. See “—Conversion of the convertible notes may dilute the ownership interest of existing Tower stockholders in Tower Ltd.”
(5) Assumes for illustrative purposes 38,376,845 Tower common shares outstanding as of September 30, 2012 (and 855,530 options to purchase common shares) and 7,011,962 shares issued under exercise of the “make-whole fundamental change” provision as of September 30, 2012.

The historical financial statements of Canopius Bermuda included in this proxy statement/prospectus do not take into consideration the restructuring.

The historical financial statements of Canopius Bermuda included in this proxy statement/prospectus beginning on page F-1 and the selected historical financial data of Canopius Bermuda beginning on page 109 do not take into consideration the restructuring transactions effected prior to the effective time, which transactions will have a material impact on the assets, liabilities, cash flows and results of operations of Canopius Bermuda following the effective time. Accordingly, such financial statements and the related selected historical financial data should only be read in combination with the quantitative and qualitative descriptions of the restructuring contained in this proxy statement/prospectus, including the unaudited pro forma condensed consolidated financial information beginning on page 121, which gives effect to the restructuring. You are strongly encouraged to read “The Restructuring” and “Unaudited Pro Forma Condensed Consolidated Financial Information.”

Failure to consummate the merger could negatively impact the stock price and the future business and financial results of Tower.

If the merger is not consummated, the ongoing business of Tower may be adversely affected and, without realizing any of the benefits of having consummated the merger, Tower will be subject to a number of risks, including the following:

 

   

the current prices of Tower common stock may reflect a market assumption that the merger will occur, meaning that a failure to complete the merger could result in a decline in the price of Tower common stock;

 

   

matters relating to the merger (including integration planning) have required and will continue to require substantial commitments of time and resources by Tower management, which could otherwise have been devoted to other opportunities that may have been beneficial to Tower; and

 

   

Tower will be required to pay significant costs relating to the proposed merger, including legal, accounting, filing and possible other fees and mailing, financial printing and other expenses in connection with the transaction whether or not the merger is consummated.

If the merger is not consummated, these risks may materialize and may adversely affect Tower’s business, financial results and stock price.

 

 

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The combination of the businesses currently conducted by Tower and Canopius Bermuda will create numerous risks and uncertainties, which could adversely affect Tower Ltd.’s operating results or prevent Tower Ltd. from realizing the expected benefits of the merger.

Strategic transactions like the merger create numerous uncertainties and risks and require significant efforts and expenditures. Tower will transition from a standalone public Delaware corporation to being part of a combined company organized in Bermuda. This combination will entail many changes, including the integration of Canopius Bermuda with Tower, and changes in systems and other operations. These activities are complex, and Tower Ltd. may encounter unexpected difficulties or incur unexpected costs, including:

 

   

the diversion of Tower Ltd. management’s attention to integration of operations and corporate and administrative infrastructures;

 

   

difficulties in achieving anticipated business opportunities and growth prospects from combining the business of Canopius Bermuda with that of Tower;

 

   

difficulties in the integration of operations and systems;

 

   

challenges in keeping existing insureds and cedents and obtaining new insureds and cedents; and

 

   

challenges in attracting and retaining key personnel.

If any of these factors impairs Tower Ltd.’s ability to integrate the operations of Tower with those of Canopius Bermuda successfully or on a timely basis, Tower Ltd. may not be able to realize the anticipated business opportunities and growth prospects from combining the businesses. In addition, Tower Ltd. may be required to spend additional time or money on integration that otherwise would be spent on the development and expansion of its business.

In addition, the market price of Tower Ltd. common shares may decline following the business combination, including if the integration of Tower and Canopius Bermuda is unsuccessful, takes longer than expected or fails to achieve financial benefits to the extent anticipated by financial analysts or investors, or the effect of the business combination on the financial results of the combined company is otherwise not consistent with the expectations of financial analysts or investors.

 

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There may be unexpected delays in the consummation of the merger, which would delay Tower stockholders’ receipt of the merger consideration and could impact Tower’s ability to timely achieve contemplated cost savings associated with the merger.

The merger is expected to close in the first quarter of 2013. However, certain events may delay the consummation of the merger, including, without limitation, the inability to obtain required approval of Tower stockholders, the effectiveness of the registration statement of which this proxy statement/prospectus is a part and/or the ability to obtain regulatory approval of governmental and market authorities, including the U.K. Financial Services Authority, Lloyd’s and insurance regulators in various jurisdictions in the United States, among others. If these events were to occur, the receipt of shares of Tower Ltd. common stock by Tower stockholders would be delayed. In addition, a delay in the consummation of the merger could impact Tower Ltd.’s ability to timely realize cost savings associated with the merger. As previously announced by Tower, Tower has received or made, as applicable, all required insurance regulatory consents, notifications and approvals with respect to the merger.

As a result of the merger, Tower Ltd. will incur additional direct and indirect costs.

Tower Ltd. will incur additional costs and expenses in connection with and as a result of the merger. These costs and expenses include professional fees to comply with Bermuda corporate and tax laws and financial reporting requirements, costs and expenses incurred in connection with holding meetings of the Tower Ltd. Board of Directors and certain executive management meetings outside of the United States, as well as any additional costs Tower Ltd. may incur going forward as a result of its new corporate structure. There can be no assurance that these costs will not exceed the costs historically borne by Tower and Canopius Bermuda.

Conversion of the convertible notes may dilute the ownership interest of existing Tower stockholders in Tower Ltd.

On September 20, 2010, Tower issued $150 million aggregate principal amount of 5.00% Convertible Senior Notes scheduled to mature on September 15, 2014, which are referred to in this proxy statement/prospectus as the convertible notes, pursuant to an indenture with U.S. Bank National Association, as trustee, which is referred to in this proxy statement/prospectus as the convertible note indenture. The convertible note indenture, including the form of convertible note, and the convertible note hedging transactions entered into by Tower in connection therewith, were filed as an exhibit to Tower’s Current Report on Form 8-K on September 20, 2010 and are incorporated herein by reference.

Among other consequences, consummation of the merger will constitute a “make-whole fundamental change” under the terms of the convertible note indenture, which will entitle the holders of the convertible notes to elect to convert all or a portion of their notes within three business days following satisfaction of the conversion procedures at an increased conversion rate for the merger consideration. See “The Merger—Treatment of Tower Convertible Senior Notes.” Any common shares of Tower Ltd. issued upon conversion of the convertible notes will not be registered under the registration statement of which this prospectus/proxy statement is a part. Tower expects, but is not required to, file a resale registration statement covering such shares following the merger.

Upon conversion (which is solely at the option of a noteholder), Tower may elect to deliver shares of its common stock together with cash in lieu of fractional shares (which is described as a physical settlement); cash payment without any delivery of shares of common stock (which is referred to as a cash settlement); or a combination of cash and common stock (which is referred to as a combination settlement).

Prior to the close of business on the business day immediately preceding March 15, 2014, Tower will use the same settlement methods for all conversions occurring on the same conversion date. However, prior to March 15, 2014, Tower Ltd. will not have any obligation to use the same settlement method with respect to conversions that occur on different conversion dates.

If Tower does not elect a settlement method, then a combination settlement will be used and the cash amount will be $1,000. Tower Ltd.’s policy will be to settle conversions of the notes using a combination settlement with a cash amount of $1,000 (assuming that the product of the applicable conversion rate and the last reported sale price of Tower’s common stock as of the relevant conversion date is at least equal to $1,000, and subject to the settlement policies described above).

 

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Furthermore, the terms of the convertible notes permit Tower to convert such notes using shares of Tower Ltd. in lieu of cash, and Tower currently anticipates that it will effect any such conversion using common shares of Tower Ltd.

If Tower elects to settle any such conversion using Tower Ltd. common shares in lieu of cash, such Tower Ltd. common shares will dilute the ownership interests of Tower’s existing stockholders in Tower Ltd. notwithstanding the convertible note hedging transactions entered into by Tower.

The following table illustrates the maximum number of shares holders of the convertible notes could receive in the event they choose to convert all their notes into Tower common shares as of September 30, 2012 and the potential value of those shares.

 

Tower Share Price

   Maximum Number of Shares
Issued to Noteholders
   Dollar Value of Shares
Issued to Noteholders
$18.50    7,011,962    $129,721,297
$19.00    7,011,962    $133,227,278
$19.50    7,011,962    $136,733,259

For the period from December 10, 2012 to January 9, 2013, the convertible notes have traded in a range from 100.250% to 103.125% of par, implying an aggregate market value of the convertible notes of $150,375,000 to $154,687,500. Based on the dollar value of the potential conversion and the recent trading value, Tower management does not expect that the convertible noteholders will exercise their conversion rights.

However, whether a convertible noteholder elects to convert following the closing date is unpredictable and is based on numerous factors that are unknown to, or outside of the control of, Tower. For instance, holders of the convertible notes would likely take into consideration Tower’s share price, the volatility of Tower’s share price and the credit quality of Tower Ltd., among other factors, in determining whether to exercise their conversion rights. Accordingly, Tower stockholders should analyze the benefits and detriments of the merger assuming the alternatives of full, partial and no conversion.

Due to the variables involved in the transaction, Tower stockholders will not know the amount of Tower Ltd. common shares they will receive as merger consideration prior to voting on the merger.

At the effective time, among other things, each issued and outstanding share of Tower common stock that you own will be cancelled and converted automatically into the right to receive a number of common shares of Tower Ltd. equal to the stock conversion number. The stock conversion number will be based on a variety of factors, which are not known at this time and will not be known until the third party sale is complete, including (i) the value of the retained business, (ii) the closing price of Tower common stock on NASDAQ on the pricing date of the third party sale and (iii) the investment discount received by the third party investors in the third party sale. For an illustration of the many factors used in determining the stock conversion number, please see the table on page 45 in the section “The Merger—Illustrative Examples of Stock Conversion Number.”

Risks Related to Tower Ltd. Following the Merger

Tower Ltd.’s business, operations and financial condition are subject to various risks. Some of these risks are described below; however, this section does not describe all risks applicable to Tower Ltd., its industry or its business, and it is intended only as a summary of certain material factors. Additional risks relating to Tower, which will be a wholly owned indirect subsidiary of Tower Ltd., are discussed in Tower’s Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on February 29, 2012, as amended by Amendment No. 1 to Form 10-K filed with the SEC on January 16, 2013, under the heading “Risk Factors.”

 

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Future results of the combined company may differ materially from the unaudited pro forma financial statements presented in this proxy statement/prospectus.

The future results of the combined company may be materially different from those shown in the unaudited pro forma financial statements presented in this proxy statement/prospectus, which show only a combination of the historical results of Tower and Canopius Bermuda taking into effect its pre-closing restructuring.

The market price of Tower Ltd.’s common shares and Tower Ltd.’s earnings per share may decline as a result of the merger.

The market price of Tower Ltd.’s common shares may decline as a result of, among other things, the merger if Tower Ltd. does not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial or industry analysts or if the effect of the merger on Tower Ltd.’s financial results is not consistent with the expectations of financial or industry analysts. In addition, the failure to achieve expected benefits and unanticipated costs relating to the merger could reduce Tower Ltd.’s future earnings per share.

As Tower Ltd. expands the operations of its Bermuda reinsurance subsidiaries, Tower Ltd. will be increasingly exposed to the risks facing similarly situated Bermuda-based property and casualty reinsurers generally.

As Tower Ltd. expands the operations of its Bermuda reinsurance subsidiaries following the merger, it will be increasingly exposed to the many and significant risks facing similarly situated Bermuda-based property and casualty reinsurers, including but not limited to:

 

   

the possibility that pricing changes in the reinsurance industry may make it more difficult for Tower Ltd. to effectively compete or produce attractive returns;

 

   

the possibility of severe or unanticipated losses from natural or man-made catastrophes;

 

   

the effectiveness of Tower Ltd.’s loss limitation methods with respect to reinsurance it underwrites;

 

   

the cyclical nature of the reinsurance industry;

 

   

the levels of new and renewal business achieved and the premium environment;

 

   

a lack of opportunities to increase writings in Tower Ltd.’s reinsurance lines of business and in specific areas of the reinsurance market;

 

   

the inherent uncertainties of establishing reserves for loss and loss adjustment expenses, and Tower Ltd.’s reliance on industry loss estimates and those generated by modeling techniques;

 

   

unanticipated adjustments to premium estimates;

 

   

changes in the availability, cost or quality of reinsurance or retrocessional coverage;

 

   

the amount and timing of reinsurance recoverables and reimbursements Tower Ltd. actually receives from its reinsurers; and

 

   

declining demand for reinsurance due to increased retentions by cedents and other factors.

The Bermudian regulatory system, and potential changes thereto, could have a material adverse effect on Tower Ltd.’s business.

Bermuda statutes, regulations and policies of the Bermuda Monetary Authority, or the BMA, require Bermuda reinsurers to maintain minimum levels of statutory capital, surplus and liquidity, to meet solvency standards, to obtain prior approval of ownership and transfer of shares (in certain circumstances) and to submit to certain periodic examinations of its financial condition. These statutes and regulations may, in effect, restrict the ability of Bermuda-based reinsurance subsidiaries of Canopius Bermuda, such as CBL, to write insurance and reinsurance policies, to make certain investments and to distribute funds.

 

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Risks Related to Tower Ltd. Common Shares

U.S. persons who own Tower Ltd. common shares may have more difficulty in protecting their interests than U.S. persons who are stockholders of a Delaware corporation.

As a result of the merger, the holders of Tower common stock will become holders of Tower Ltd. common shares and their rights will be governed by applicable Bermuda law, including the Companies Act, and by Tower Ltd.’s memorandum of association and amended and restated bye-laws. Following the merger, former Tower stockholders will have different rights as Tower Ltd. shareholders than they did as Tower stockholders.

The Companies Act differs in some material respects from laws generally applicable to Delaware corporations, such as Tower, and their stockholders. Set forth below is a summary of certain significant provisions of the Companies Act, which includes, where relevant, information on modifications adopted under Tower Ltd.’s bye-laws that differ in certain respects from Delaware corporate law. Because the following statements are summaries, they do not discuss all aspects of Bermuda law that may be relevant to Tower Ltd. and its shareholders.

Interested Directors. Under Bermuda law and Tower Ltd.’s bye-laws, a transaction entered into by Tower Ltd., in which a director has an interest, will not be voidable by Tower Ltd., and such director will not be accountable to Tower Ltd. for any benefit realized under that transaction, provided the nature of the interest is disclosed at the first opportunity at a meeting of the Board of Directors, or in writing, to the Board of Directors. In addition, Tower Ltd.’s bye-laws allow a director to be taken into account in determining whether a quorum is present and to vote on a transaction in which that director has an interest following a declaration of the interest under the Companies Act, unless the majority of the disinterested directors determine otherwise. Under Delaware law, the transaction would not be voidable if:

 

   

the material facts as to the interested director’s relationship or interests were disclosed or were known to the Board and the Board in good faith authorized the transaction by the affirmative vote of a majority of the disinterested directors;

 

   

the material facts were disclosed or were known to the stockholders entitled to vote on such transaction and the transaction was specifically approved in good faith by vote of the majority of shares entitled to vote thereon; or

 

   

the transaction was fair as to the corporation at the time it was authorized, approved or ratified.

Business Combinations with Large Shareholders or Affiliates. As a Bermuda company, Tower Ltd. may enter into business combinations with its large shareholders or one or more wholly owned subsidiaries, including asset sales and other transactions in which a large shareholder or a wholly owned subsidiary receives, or could receive, a financial benefit that is greater than that received, or to be received, by other shareholders or other wholly owned subsidiaries, without obtaining prior approval from Tower Ltd.’s shareholders and without special approval from Tower Ltd.’s Board of Directors. Under Bermuda law, amalgamations and mergers require the approval of the Board of the Directors, and except in the case of amalgamations or mergers with and between wholly owned subsidiaries, shareholder approval. However, when the affairs of a Bermuda company are being conducted in a manner that is oppressive or prejudicial to the interests of some shareholders, one or more shareholders may apply to a Bermuda court, which may make an order as it sees fit, including an order regulating the conduct of the company’s affairs in the future or ordering the purchase of the shares of any shareholders by other shareholders or the company. If Tower Ltd. were a Delaware company, it would need prior approval from the Board of Directors or a supermajority of its stockholders to enter into a business combination with an interested shareholder for a period of three years from the time the person became an interested stockholder, unless Tower Ltd. opted out of the relevant Delaware statute. Bermuda law and Tower Ltd.’s bye-laws would require the Board’s approval and, in some instances, shareholder approval of such transactions.

Shareholders’ Suits. The rights of shareholders under Bermuda law are not as extensive as the rights of shareholders in many U.S. jurisdictions. Class actions and derivative actions are generally not available to shareholders under the laws of Bermuda. However, the Bermuda courts ordinarily would be expected to follow

 

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English case law precedent, which would permit a shareholder to commence a derivative action in Tower Ltd.’s name to remedy a wrong done to Tower Ltd. where an act is alleged to be beyond its corporate power, is illegal or would result in the violation of its memorandum of association or bye-laws. Furthermore, consideration would be given by the court to acts that are alleged to constitute (i) fraud against the minority shareholders or (ii) an act that required the approval of a greater percentage of Tower Ltd.’s shareholders than actually approved it. The winning party in such an action generally would be able to recover a portion of attorneys’ fees incurred in connection with the action. Tower Ltd.’s bye-laws provide that shareholders waive all claims or rights of action that they might have, individually or in the right of Tower Ltd., against any director or officer for any act or failure to act in the performance of such director’s or officer’s duties, except with respect to any fraud or dishonesty of the director or officer or to recover any gain, personal profit or advantage to which the director or officer is not legally entitled. Class actions and derivative actions generally are available to stockholders under Delaware law for, among other things, breach of fiduciary duty, corporate waste and actions not taken in accordance with applicable law. In such actions, the court has discretion to permit the winning party to recover attorneys’ fees incurred in connection with the action.

Indemnification of Directors and Officers. Under Bermuda law and Tower Ltd.’s bye-laws, Tower Ltd. is required to indemnify its directors, officers, any other person appointed to a committee of the Board (and their respective heirs, executors or administrators) to the fullest extent permitted by law against all liabilities, actions, costs, charges, losses, damages and expenses, incurred or sustained by such persons by reason of any act done, concurred in or omitted in the (actual or alleged) conduct of Tower Ltd.’s business or in the discharge of their duties; provided that such indemnification shall not extend to any matter that would render such indemnification void under the Companies Act. Under Delaware law, a corporation may indemnify a director or officer of the corporation against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in defense of an action, suit or proceeding by reason of such position if (i) such director or officer acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and (ii) with respect to any criminal action or proceeding, such director or officer had no reasonable cause to believe his conduct was unlawful.

Anti-takeover provisions in Tower Ltd.’s bye-laws could delay or deter a takeover attempt that shareholders might consider to be desirable and may make it more difficult to replace members of Tower Ltd.’s Board of Directors.

Tower Ltd.’s amended and restated bye-laws, which will be substantially in the form as set forth in Annex C to this proxy statement/prospectus, contain provisions that may entrench directors and make it more difficult for shareholders to replace directors even if the shareholders consider it beneficial to do so. In addition, these provisions could delay or prevent a change of control that a shareholder might consider favorable. For example, these provisions may prevent a shareholder from receiving the benefit from any premium over the market price of Tower Ltd.’s common shares offered by a bidder in a potential takeover. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of Tower Ltd.’s common shares if they are viewed as discouraging changes in management and takeover attempts in the future.

For example, Tower Ltd.’s bye-laws will contain the following provisions that could have such an effect:

 

   

election of directors is staggered, meaning that members of only one of three classes of directors are elected each year;

 

   

directors serve for a term of three years; and

 

   

shareholders have limited ability to remove directors.

Tower Ltd.’s shareholders may have difficulty effecting service of process on Tower Ltd. or enforcing judgments against Tower Ltd. in the United States.

Tower Ltd. is organized under the laws of Bermuda and a portion of Tower Ltd.’s business will be based in Bermuda. In addition, certain of Tower Ltd.’s directors and officers may reside in Bermuda or other jurisdictions

 

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outside of the United States. As such, Tower has been advised that there is doubt as to whether a holder of Tower Ltd. common shares would be able to (i) enforce, in the courts of Bermuda, judgments of U.S. courts against persons who reside in Bermuda based upon the civil liability provisions of the U.S. federal securities laws or (ii) bring an original action in the Bermuda courts to enforce liabilities against Tower Ltd. or its directors and officers who reside outside of the United States, based solely upon the civil liability provisions of the U.S. federal securities laws.

Further, Tower has been advised that there is no treaty in effect between the United States and Bermuda providing for the enforcement of judgments of U.S. courts, and there are grounds upon which Bermuda courts may not enforce judgments of U.S. courts. Because judgments of U.S. courts are not automatically enforceable in Bermuda, it may be difficult for Tower Ltd.’s shareholders to recover against Tower Ltd. based on such judgments.

Risks Related to the Tax Consequences of the Merger

Receipt of the merger consideration may be treated as a dividend, instead of proceeds of a sale, for some stockholders.

Although it is expected that the receipt of the merger consideration by most, if not all, holders of Tower common stock pursuant to the merger will be treated for U.S. federal income tax purposes as the proceeds from the sale of stock to Delaware Purchaser, some stockholders may be treated as having received a taxable dividend. If you are a non-U.S. stockholder, the paying agent or other withholding agent for the transaction may withhold U.S. federal income tax with respect to such deemed dividend and may sell a portion of your Tower Ltd. shares to satisfy such withholding obligation. See “Material Tax Considerations—U.S. Federal Income Tax Considerations.”

The U.S. Internal Revenue Service (“IRS”) might reclassify the transaction to prevent U.S. stockholders from recognizing a loss, if any, in connection with the merger.

The receipt of the merger consideration for Tower common stock by U.S. stockholders pursuant to the merger will be a taxable transaction for U.S. federal income tax purposes. In general, a U.S. stockholder will recognize gain or loss equal to the difference between the fair market value of the Tower Ltd. common shares (plus any cash in lieu of fractional shares) received by such stockholder and such stockholder’s adjusted tax basis in the Tower common stock surrendered. It is possible that the IRS could assert an alternative characterization of the merger that would prevent a U.S. stockholder from recognizing taxable loss, if any, on the receipt of merger consideration for Tower common stock pursuant to the merger. See “Material Tax Considerations—U.S. Federal Income Tax Considerations—U.S. Holders—Exchange of Tower Common Stock for the Merger Consideration.”

The merger may have adverse U.S. federal income tax consequences on Tower Ltd. under certain circumstances.

Section 7874 of the Code addresses “inversion” transactions, which refer in relevant part to transactions in which a U.S. corporation becomes a subsidiary of a foreign corporation. This section provides that in certain instances such foreign corporation may be treated as a domestic corporation for U.S. federal income tax purposes.

Because the former holders of Tower common stock are not expected to own 80 percent or more of the stock (by vote or value) of Tower Ltd. by reason of the merger (the “ownership test”), we believe that Tower Ltd. should not be treated as a domestic corporation under section 7874 of the Code. It is possible that the IRS could disagree with the position that the ownership test is satisfied and assert that section 7874 of the Code applies to treat Tower Ltd. as a domestic corporation following the merger. Such IRS position, if sustained, would result in significant tax liability to Tower Ltd. and other adverse tax consequences. There is limited guidance regarding the application of the section 7874 provisions, including the ownership test. Moreover, new statutory and/or regulatory provisions under section 7874 of the Code (or otherwise) could be enacted or promulgated that adversely affect Tower Ltd.’s status as a foreign corporation for U.S. federal tax purposes, and any such

 

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provisions could have retroactive application to Tower Ltd. See “Material Tax Considerations—U.S. Federal Income Tax Considerations—Tower Ltd. and its Subsidiaries—Taxation of Tower Ltd. and its Subsidiaries as a Result of the Merger—Inversion Transactions.”

Tower Ltd. and Tower Ltd.’s Bermuda subsidiaries may become subject to Bermuda taxes after March 31, 2035.

Bermuda currently imposes no income tax on corporations. Canopius Bermuda has obtained an assurance from the Bermuda Minister of Finance under The Exempted Undertakings Tax Protection Act 1966 of Bermuda, that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to Canopius Bermuda or its Bermuda subsidiaries, until March 31, 2035. We cannot assure you that Tower Ltd. or its Bermuda subsidiaries will not be subject to any Bermuda tax after that date. See “Material Tax Considerations—Bermuda Tax Considerations—Tower Ltd. and its Subsidiaries—Taxation of Tower Ltd. and its Subsidiaries Following the Merger.”

Tower Ltd. and Tower Ltd.’s non-U.S. subsidiaries may be subject to U.S. tax, which may have a material adverse effect on Tower Ltd.’s financial condition and operating results.

Tower believes that Canopius Bermuda and its non-U.S. subsidiaries have operated, and they intend to continue to operate, in such a manner as to minimize the risk that they would be considered to be engaged in a trade or business in the United States (and, in the case of those non-U.S. companies qualifying for treaty protection, in a manner that should not cause any of such non-U.S. subsidiaries to be doing business through a permanent establishment in the United States), and therefore subject to U.S. federal net income taxes or branch profits taxes. However, because there is uncertainty as to the activities that constitute being engaged in a trade or business within the United States, and what constitutes a permanent establishment under the applicable tax treaties, there can be no assurance that the IRS will not contend successfully that Tower Ltd. or one or more of its non-U.S. subsidiaries is or has been engaged in a trade or business, or carrying on business through a permanent establishment, in the United States. See “Material Tax Considerations—U.S. Federal Income Tax Considerations—Tower Ltd. and its Subsidiaries—Taxation of Tower Ltd. and its Subsidiaries Following the Merger—In General.”

Dividends paid by Tower Ltd.’s U.S. subsidiaries to Tower Ltd. will be subject to a 30 percent withholding tax.

Foreign corporations are generally subject to U.S. income tax imposed by withholding on certain “fixed or determinable annual or periodic gains, profits and income” derived from sources within the U.S. (such as dividends and certain interest), subject to exemption under the Code or reduction by applicable treaties. The income tax treaty between the United States of America and Bermuda, as amended, does not reduce the U.S. withholding rate on such U.S.-source income. The non-treaty rate of U.S. withholding tax is currently 30 percent. Accordingly, dividends and interest, if any, paid by Tower Ltd.’s U.S. subsidiaries to Tower Ltd. will be subject to a 30 percent U.S. withholding tax. See “Material Tax Considerations—U.S. Federal Income Tax Considerations—Tower Ltd. and its Subsidiaries—Taxation of Tower Ltd. and its Subsidiaries Following the Merger—In General.”

The reinsurance agreements between Tower Ltd. and Tower Ltd.'s U.S. subsidiaries (including any that may be entered into with Tower and its U.S. subsidiaries upon completion of the merger) may be subject to recharacterization or other adjustment for U.S. federal income tax purposes, which may have a material adverse effect on Tower Ltd.’s financial condition and operating results.

Under section 845 of the Code, the IRS may allocate income, deductions, assets, reserves, credits and any other items related to a reinsurance agreement among certain related parties, recharacterize such items, or make any other adjustment, in order to reflect the proper source, character or amount of the items for each party. In addition, if a reinsurance contract has a significant tax avoidance effect on any party to the contract, the IRS may

 

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make adjustments with respect to such party to eliminate the tax avoidance effect. No regulations have been issued under section 845 of the Code. Accordingly, the application of such provisions to Tower Ltd. and its subsidiaries is uncertain and we cannot predict what impact, if any, such provisions may have on Tower Ltd. or its subsidiaries either before or after completion of the merger. See “Material Tax Considerations—U.S. Federal Income Tax Considerations—Tower Ltd. and its Subsidiaries—Taxation of Tower Ltd. and its Subsidiaries Following the Merger—In General.”

If Tower Ltd. is classified as a passive foreign investment company, which we refer to as a PFIC, your taxes could increase.

If Tower Ltd. is classified as a PFIC, such classification would have material adverse tax consequences for U.S. persons that directly or indirectly own Tower Ltd.’s shares, including subjecting such U.S. persons to a greater tax liability than might otherwise apply. We believe that Canopius Bermuda should not be, and currently do not expect Tower Ltd. to become, a PFIC for U.S. federal income tax purposes; however, no assurance can be given that Canopius Bermuda is not, and that Tower Ltd. will not become, a PFIC. There are currently no regulations regarding the application of the PFIC provisions to an insurance company. New regulations or pronouncements interpreting or clarifying these provisions may be forthcoming. We cannot predict what impact, if any, such guidance would have on persons subject to U.S. federal income tax that directly or indirectly own Tower Ltd.’s shares. Moreover, if Tower Ltd. is a PFIC for any years in which dividends are paid or for the preceding year, such dividends will not be eligible for the reduced rates of U.S. federal income tax applicable to “qualified dividends.” See “Material Tax Considerations—U.S. Federal Income Tax Considerations—U.S. Holders—Taxation of U.S. Holders Following the Merger—Passive Foreign Investment Company Considerations.

If you own or are treated as owning 10 percent or more of Tower Ltd.’s shares and Tower Ltd. or one or more of its non-U.S. subsidiaries is classified as a controlled foreign corporation (a “CFC”), your taxes could increase.

Each United States person (as defined in section 957(c) of the Code) who (i) owns (directly, indirectly through non-U.S. persons, or constructively by application of certain attribution rules (“constructively”)) 10 percent or more of the total combined voting power of all classes of shares of a non-U.S. corporation at any time during a taxable year (a “10 percent U.S. Shareholder”) and (ii) owns (directly or indirectly through non-U.S. persons) shares of such non-U.S. corporation on the last day of such taxable year, must include in its gross income for U.S. federal income tax purposes its pro rata share of the CFC's “subpart F income,” even if the subpart F income is not distributed, if such non-U.S. corporation has been a CFC for an uninterrupted period of 30 days or more during such taxable year. A non-U.S. corporation is considered a CFC if 10 percent U.S. Shareholders own (directly, indirectly through non-U.S. persons, or constructively) more than 50 percent of the total combined voting power of all classes of voting shares of such non-U.S. corporation or more than 50 percent of the total value of all shares of such corporation. For purposes of taking into account subpart F insurance income, a CFC also generally includes a non-U.S. insurance company in which more than 25 percent of the total combined voting power of all classes of shares or more than 25 percent of the total value of all shares is owned (directly, indirectly through non-U.S. persons or constructively) by 10 percent U.S. Shareholders, on any day during the taxable year of such corporation. We cannot assure you that Tower Ltd. or its non-U.S. subsidiaries will not be classified as CFCs. Furthermore, due to the attribution provisions of the Code regarding determination of beneficial ownership, you may be a 10 percent U.S. Shareholder even though you do not directly own 10 percent or more of the total combined voting power of Tower Ltd.

If one or more of Tower Ltd.’s non-U.S. subsidiaries is determined to have related person insurance income (“RPII”), you may be subject to U.S. taxation on your pro rata share of such income.

If Tower Ltd. is directly, indirectly through non-U.S. persons or constructively owned 25 percent or more by U.S. persons and the RPII of any of Tower Ltd.’s non-U.S. insurance subsidiaries were to equal or exceed 20 percent of such subsidiary’s gross insurance income in any taxable year and direct or indirect insureds (and

 

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persons related to such insureds within the meaning of section 953(c)(6) of the Code) owned, directly or indirectly through entities (including Tower Ltd.), 20 percent or more of the voting power or value of such non-U.S. insurance subsidiary, then a U.S. person who owns any of Tower Ltd.’s shares (directly or indirectly through non-U.S. persons) on the last day of the taxable year would be required to include in its income for U.S. federal income tax purposes such person’s pro rata share of such subsidiary’s RPII for the entire taxable year, generally determined as if such RPII were distributed proportionately only to U.S. persons at that date regardless of whether such income is distributed. The amount of RPII earned by Tower Ltd.’s non-U.S. insurance subsidiaries (generally, premium and related investment income from the direct or indirect insurance or reinsurance of any direct or indirect U.S. holder of common shares or any person related to such holder within the meaning of section 953(c)(6) of the Code) will depend on a number of factors, including the identity of persons directly or indirectly insured or reinsured by such non-U.S. insurance subsidiaries. The gross RPII of each of Tower Ltd.’s non-U.S. insurance subsidiaries is not expected in the foreseeable future to equal or exceed 20 percent of such subsidiary's gross insurance income. No assurance can be given that this will be the case because some of the factors that determine the existence or extent of RPII may be beyond Tower Ltd.’s knowledge and/or control.

The RPII rules provide that if a U.S. person disposes of shares in a non-U.S. insurance corporation in which U.S. persons own 25 percent or more of the shares (even if the amount of RPII is less than 20 percent of such corporation's gross insurance income and the ownership of its shares by direct or indirect insureds and related persons is less than the 20 percent threshold), any gain from the disposition will generally be treated as ordinary income to the extent of such U.S. person's share of the corporation’s undistributed earnings and profits that were accumulated during the period that such U.S. person owned the shares (whether or not such earnings and profits are attributable to RPII). In addition, such U.S. person will be required to comply with certain reporting requirements, regardless of the number of shares owned by such U.S. person. Although Tower Ltd. will not itself be directly engaged in the insurance business, CBL will be so engaged and other non-U.S. subsidiaries of Tower Ltd. may be so engaged. As a result, it is possible that these RPII rules will apply to disposition of Tower Ltd. shares. The RPII provisions have never been interpreted by the courts or the U.S. Treasury Department in final regulations, and regulations interpreting the RPII provisions of the Code exist only in proposed form. It is not certain whether these regulations will be adopted in their proposed form or what changes or clarifications might ultimately be made thereto or whether any such changes, as well as any interpretation or application of RPII by the IRS, the courts or otherwise, might have retroactive effect. The U.S. Treasury Department has authority to impose, among other things, additional reporting requirements with respect to RPII. Accordingly, the meaning of the RPII provisions and the application of those provisions to Tower Ltd. and its non-U.S. subsidiaries are uncertain. See “Material Tax Considerations—U.S. Federal Income Tax Considerations—U.S. Holders—Taxation of U.S. Holders Following the Merger—Related Person Insurance Income.

U.S. tax-exempt organizations that own Tower Ltd.’s shares may recognize unrelated business taxable income.

A U.S. tax-exempt organization may recognize unrelated business taxable income if a portion of Tower Ltd.’s non-U.S. subsidiaries’ insurance income is attributed to such organization. In general, insurance income will be attributed to a U.S. tax-exempt stockholder if either Tower Ltd. is a CFC and such tax-exempt stockholder is a 10 percent U.S. Shareholder or there is RPII and the exceptions described above do not apply. See “Material Tax Considerations—U.S. Federal Income Tax Considerations—U.S. Holders—Taxation of U.S. Holders Following the Merger—Related Person Insurance Income.

U.S. tax-exempt investors should consult their tax advisors as to the U.S. tax consequences of an investment in Tower Ltd. shares.

Changes in U.S. federal income tax law could be retroactive and may subject Tower Ltd. or its non-U.S. subsidiaries to U.S. federal income taxation.

Legislation has been introduced in the U.S. Congress intended to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the United States but have

 

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certain U.S. connections. There are currently pending legislative proposals which, if enacted, could have a material adverse effect on Tower Ltd. and its shareholders. It is possible that broader-based or new legislative proposals could emerge in the future that could have an adverse effect on Tower Ltd., its non-U.S. subsidiaries and its shareholders.

The tax laws and interpretations regarding whether a company is engaged in a U.S. trade or business or whether a company is a CFC or PFIC or has RPII or subject to the inversion tax rules are subject to change, possibly on a retroactive basis. There are currently no regulations regarding the application of the PFIC rules to an insurance company. Additionally, the regulations regarding RPII are still in proposed form and the regulations regarding inversion transactions are in temporary form. New regulations or pronouncements interpreting or clarifying such rules will likely be forthcoming from the IRS. We are not able to predict if, when or in what form such guidance will be provided and whether such guidance will be applied on a retroactive basis.

There is uncertainty regarding the application of the U.S. Foreign Account Tax Compliance Act (“FATCA”) to Tower Ltd. and its subsidiaries.

FATCA requires certain foreign financial institutions and other foreign entities to undertake due diligence procedures to identify and provide information about shareholders and accounts held by US persons. In cases of non-compliance, a 30% withholding tax may be imposed. The application of FATCA to Tower Ltd., its subsidiaries and their operations is uncertain.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement/prospectus contains certain forward-looking information about Tower, Canopius Bermuda and Tower Ltd. Forward-looking information about Tower is intended to be covered by the safe harbor for “forward-looking statements” provided by the Private Securities Litigation Reform Act of 1995, while forward-looking information about Canopius Bermuda is not intended to be covered by such safe harbor. Forward-looking statements may be made directly in this proxy statement/prospectus or may be incorporated into this proxy statement/prospectus by reference to other documents and may include statements for the period after the completion of the merger. Representatives of Tower and Canopius Bermuda may also make forward-looking statements. Forward-looking statements are statements that are not historical facts. Words such as “expect,” “believe,” “will,” “may,” “anticipate,” “plan,” “estimate,” “intend,” “should,” “can,” “likely,” “could” and similar expressions are intended to identify forward-looking statements. These statements include statements about the expected benefits of the merger, the expected ownership of Tower Ltd., information about the combined company’s objectives, plans and expectations, the likelihood of satisfaction of certain conditions to the completion of the merger and whether and when the merger will be completed. Forward-looking statements are not guarantees of performance. These statements are based upon the current beliefs and expectations of the management of each of Tower and Canopius Bermuda and are subject to risks and uncertainties, including the risks described in this proxy statement/prospectus under the section “Risk Factors” and those that are incorporated by reference into this proxy statement/prospectus, that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements.

In light of these risks, uncertainties, assumptions and factors, the results anticipated by the forward-looking statements discussed in this proxy statement/prospectus or made by representatives of Tower or Canopius Bermuda may not occur. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof or, in the case of statements incorporated by reference, on the date of the document incorporated by reference, or, in the case of statements made by representatives of Tower or Canopius Bermuda, on the date those statements are made. All subsequent written and oral forward-looking statements concerning the merger or the combined company or other matters addressed in this proxy statement/prospectus and attributable to Tower or Canopius Bermuda or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable law or regulation, neither Tower nor Canopius Bermuda undertakes any obligation to update or publish revised forward-looking statements to reflect events or circumstances after the date hereof or the date of the forward-looking statements or to reflect the occurrence of unanticipated events.

 

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THE MERGER

Transactions Related to the Merger

Investment in Canopius

On April 25, 2012, Tower entered into an Investment and Shareholders’ Agreement, which is referred to in this proxy statement/prospectus as the investment agreement, with the principal shareholders of Canopius, a privately-owned insurance holding company domiciled in Guernsey, Channel Islands that is the parent company of Canopius Bermuda. Pursuant to the investment agreement, Canopius sold 31,766,961 Canopius Class A ordinary shares to Tower for approximately $75 million that Canopius used in connection with its acquisition of Omega. Tower’s purchase of Canopius Class A ordinary shares pursuant to the investment agreement is referred to in this proxy statement/prospectus as the investment. As of the date of this proxy statement/prospectus, such Canopius shares represented approximately 10.7% of the issued and outstanding common share capital of Canopius.

Master Transaction Agreement

In addition, on April 25, 2012 and in connection with Tower’s investment in Canopius, Tower entered into a Master Transaction Agreement, which is referred to in this proxy statement/prospectus as the MTA, with Canopius, Canopius Bermuda and Delaware Purchaser. The following is a summary of certain material terms of the MTA and is qualified in its entirety by reference to the complete text of the MTA, which is included as Annex B to this proxy statement/prospectus.

Upon the terms and subject to the conditions set forth in the MTA, Tower has the right to effect certain transactions with Canopius and its subsidiaries, including:

(a) Merger Right. Tower’s right to merge with a newly formed subsidiary of Delaware Purchaser, exercisable in Tower’s sole discretion upon delivery of written notice and payment of a $1 million fee to Canopius, is referred to in this proxy statement/prospectus as the merger right. On July 30, 2012, Tower exercised the merger right by delivering a written notice to Canopius, which right may be rescinded and the merger abandoned by Tower in its sole discretion at any time prior to the effective time. In addition, on July 30, 2012, Tower, Canopius Bermuda, Delaware Purchaser and Merger Sub entered into the original merger agreement. On November 8, 2012 the original merger agreement was amended to reflect changes to the merger consideration to be received by Tower stockholders.

(b) SPS Transactions Right. Tower’s right (referred to as the SPS transactions right), exercisable in its sole discretion until January 1, 2016, to cause Canopius to use its reasonable best efforts to establish a special purpose syndicate, or SPS, at Lloyd’s of London (referred to as Lloyd’s), and to take certain actions in connection therewith, including the appointment of Canopius subsidiaries to act as the sole corporate member of the SPS (referred to as the corporate member) and the underwriting agent of the SPS, which will consist of either a newly-formed Lloyd’s underwriting agent or Omega Underwriting Agents Limited (referred to as OUAL). In addition, the MTA provides that, at Tower’s election until January 1, 2016, the SPS and Canopius Syndicate 4444 at Lloyd’s (referred to as Syndicate 4444) will enter into a quota share reinsurance agreement whereby the SPS will reinsure a portion of Syndicate 4444’s business for the 2013, 2014 and 2015 years of account and Tower may, subject to receipt of applicable regulatory approvals, cause Canopius to transfer the corporate member to Tower for an amount equal to the tangible net asset value of the corporate member. Initially, Canopius Managing Agents Limited, a Canopius group company, will be the managing agent, and in due course, subject to Tower exercising the Acquisition Right as described below under the MTA, there is intent to form a new managing agency or to permit OUAL to manage the SPS.

(c) Acquisition Right. Tower’s right (referred to as the acquisition right), exercisable in its sole discretion until January 1, 2016, to cause Canopius (i) to use its reasonable best efforts to obtain permission from Lloyd’s for the SPS to operate as a stand-alone syndicate to underwrite business at Lloyd’s and (ii) unless the managing

 

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agency is a new entity formed by Tower, to transfer 100% of the issued and outstanding shares of the managing agency to Tower for an amount equal to the tangible net asset value of the managing agency. It is the right to take ownership of the new managing agency or OUAL as the case may be.

Exercising the SPS transactions right and the acquisition right is not necessary to achieve Tower’s business goals in connection with the merger, as described further in this proxy statement/prospectus. The SPS transactions right and the acquisition right survive the merger until January 1, 2016. Neither prior to nor after giving effect to the merger will Tower Ltd. have direct underwriting access to the Lloyd’s of London market.

As consideration for its investment in Canopius, the merger right, the SPS transactions right and the acquisition right, Tower paid $74.5 million to Canopius at the closing of the investment on August 20, 2012. Tower has also agreed to reimburse Canopius and its affiliates for their reasonable out-of-pocket costs and expenses incurred in connection with the merger right, the SPS transactions right and the acquisition right. This reimbursement obligation will survive termination of the merger agreement.

In connection with the investment, the MTA includes certain customary representations and warranties regarding Canopius and its business, operations and financial condition, including with respect to Canopius’s financial statements, absence of certain changes, material contracts, compliance with law and undisclosed liabilities.

In addition, Canopius has agreed to indemnify Tower for any of its losses resulting from certain matters, including, among other things, (i) any inaccuracy in or breach of any representation or warranty made by Canopius in the MTA, (ii) any failure of Canopius to perform any covenant or agreement under the MTA other than any such failure of Canopius arising out of any action taken or not taken at the written direction of Tower, (iii) if the merger occurs, any liability of Canopius Bermuda or any of its subsidiaries arising out of any action, omission or event occurring, or any circumstance existing, prior to the closing date, other than insurance liabilities under the express terms of any insurance contract or reinsurance agreement constituting a part of the retained business.

On July 30, 2012, Tower, Canopius, Canopius Bermuda and Delaware Purchaser entered into a letter agreement, which is referred to in this proxy statement/prospectus as the letter agreement, that amended and supplemented certain provisions of the MTA. The letter agreement permits Tower to exercise the merger right under the MTA and cause the merger agreement to be executed prior to the closing of Canopius’s acquisition of Omega, which occurred on August 20, 2012. The acquisition of Omega was a condition to Tower’s exercise of the merger right because the acquisition of Omega allowed Canopius to acquire another Bermuda-based reinsurance company, and, therefore, Canopius did not need to continue to own Canopius Bermuda. In addition, the acquisition of Omega was made possible in part by Tower’s investment in Canopius. The acquisition of Omega as a condition of Tower’s exercise of the merger right was waived by Canopius because all essential regulatory approvals had already been obtained or were expected to be received imminently and accordingly the risk of the Omega acquisition not closing was significantly reduced. Tower agreed to waive the condition that Canopius acquire Omega before it would exercise the merger right because such waiver allowed Tower to significantly accelerate the merger and related transactions. In addition, the letter agreement sets forth the parties’ current intention and expectations with respect to certain terms of the restructuring and the third party sale. A copy of the letter agreement was attached as an exhibit to Tower’s Current Report on Form 8-K filed on July 31, 2012.

As previously announced by Tower and in connection with the SPS transactions right, Canopius has established Syndicate 6115, a non-marine short-tail orientated Special Purpose Syndicate (the SPS) underwriting a whole account and additional class quota shares of Canopius Syndicate 4444, which will commence trading in January 2013 with initial capacity of £70m ($113m) and 100% supported by Tower.

Restructuring

Prior to the effective time, Tower, Canopius and Canopius Bermuda will effect a restructuring of the insurance operations of Canopius Bermuda , as contemplated by the MTA and as subsequently agreed among Tower, Canopius and Canopius Bermuda, such that, as of the effective time, Canopius Bermuda will continue to own certain business and assets to be identified by the parties and will have transferred to Canopius all other business and assets of Canopius Bermuda. This restructuring of Canopius Bermuda prior to the effective time is referred to in this proxy statement/prospectus as the restructuring. The business retained by Canopius Bermuda in

 

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connection with the restructuring is referred to in this proxy statement prospectus as the retained business. Canopius has agreed in the MTA to indemnify Tower for all pre-closing liabilities of Canopius Bermuda and its subsidiaries, including CBL, other than insurance liabilities under the express terms of any insurance contract or reinsurance agreement constituting a part of the retained business.

After the restructuring, the business and assets to be retained by Canopius Bermuda are expected to include the following:

 

   

32% of the Syndicate 4444 year of account 2009 and prior business Canopius Bermuda originally assumed from Canopius;

 

   

32% of the Syndicate 4444 year of account 2010 business Canopius Bermuda originally assumed from Canopius;

 

   

10.14% of the Syndicate 4444 year of account 2011 business Canopius Bermuda originally assumed from Canopius;

 

   

10.33% of the Syndicate 4444 year of account 2012 business Canopius Bermuda originally assumed from Canopius;

 

   

Funds withheld assets, other assets and net reserves and unearned premiums associated with the retained business in each of the Syndicate 4444 year of accounts; and

 

   

Fixed maturity securities and investment income receivables.

For more information about the restructuring, see “The Restructuring.”

Third Party Sale

Effective immediately prior to the consummation of the merger, Canopius will sell 100% of its equity ownership of Canopius Bermuda in a private placement to a group of yet-to-be identified third party equity investors with whom the placement agents have a pre-existing relationship, referred to in this proxy statement/prospectus as the third party investors, who will be the sole shareholders of Canopius Bermuda prior to the effective time. The third party investors will pay Canopius an aggregate purchase price in cash equal to the sum of the target TNAV amount, plus such additional amount equal to the agreed value of the retained business. The sale to the third party investors for cash consideration permits Canopius to monetize its investment in Canopius Bermuda, which it is able to do because it has acquired Omega Insurance Holdings Limited, which is referred to in this proxy statement/prospectus as Omega, and therefore has a Bermuda-domiciled insurance company available for sale. This transaction is referred to as the third party sale.

Tower expects that the third party sale will be effected on terms that include (i) a 5% placement fee to the placement agents, which will be paid by the third party investors, but will dilute the stock conversion number for existing Tower stockholders and (ii) certain economic concessions to the third party investors reflecting a negotiated discount to the fair market value of Tower’s common stock as of a relevant pricing date (such discount is referred to in this proxy statement/prospectus as the investment discount). This investment discount, which will be determined through arm’s-length negotiations with the third party investors, will not affect the purchase price paid by such third party investors for Canopius Bermuda but will instead be included as a factor in the formula used to determine the per share merger consideration in the merger. As a result, the investment discount will have a dilutive effect on current Tower stockholders by reducing the amount of stock such stockholders will receive in the merger and therefore increasing the percentage ownership of the third party investors in Tower Ltd. following the merger. Because the third party sale has not occurred as of the date of this proxy statement/prospectus, no assurances can be given as to what investment discount the third party investors will require in order to effect the third party sale. Canopius Bermuda believes third party investors will require an economic concession in the form of a discount in order to participate in the sale of shares by Canopius Bermuda. The magnitude of the discount will result from a number of factors, which include (i) the size of the sale, (ii) the

 

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context of the private placement and (iii) the liquidity of the shares following the transaction, including any potential periods when an investor’s ability to freely trade such acquired shares may be restricted. Such discounts are typical in follow-on offerings for public companies, and tend to be somewhat greater for private placements in public entities. Canopius Bermuda believes that the third party investors may view this investment as having some similarities to those transactions.

It is anticipated that a marketing of Canopius Bermuda’s shares in the third party sale will be conducted following the effectiveness of the registration statement of which this proxy statement/prospectus is a part, in a manner consistent with other private placement transactions, to a group of yet-to-be identified institutional investors with whom the placement agents have a pre-existing relationship. It is expected that such process will result in a book of orders that reflects demand for the shares at various prices indicated by such third party investors. This book of orders may comprise a range of investors who choose to participate in the private placement on an arm’s-length basis. The placement agents will then make a recommendation to Canopius and Tower regarding both the price of the private placement and the allocations of shares to the third party investors. Canopius, in consultation with Tower, will then determine the price of the private placement and the allocations of such shares to the third party investors.

While the third party investors, in the aggregate, will own more than 20% but less than or equal to 24% of the outstanding shares of Tower Ltd. immediately following the effective time of the merger, Canopius Bermuda will impose controls on the initial private placement intended to ensure that each of the third party investors and its affiliates will own less than 5% of the outstanding shares of Tower Ltd., except for any existing stockholders of Tower that decide to participate in the third party sale and already own 5% or more of the outstanding shares of Tower common stock. In addition, Canopius Bermuda will impose controls on the initial private placement by reviewing investor subscription agreements to also ensure that no third party investor will hold 10% or more of Tower Ltd. at the effective time of the merger. Each subscription agreement entered into in connection with the third party sale will contain a representation from the relevant investor that its purchase of shares of Canopius Bermuda will not cause it (taken together with its affiliates) to own the foregoing ownership thresholds of Tower Ltd. immediately following the merger. The subscription agreements will also specify that any breach of such representation will cause the sale of Canopius Bermuda shares to such investor to be void and of no effect. However, Tower Ltd. will not limit the ability of its shareholders (including the third party investors) to purchase additional shares in the secondary market following the effective time of the merger. To the extent that a third party investor acquires additional shares and thereby holds more than 5% of the outstanding shares of Tower Ltd. following the merger, such investor will be required to make the applicable Section 13 filing with the SEC pursuant to the Exchange Act.

It is expected that the purchase and sale agreements entered into by such investors and Canopius will contain, among other provisions, a bring-down condition with respect to the accuracy of representations and warranties as of the closing of the third party sale, as well as a condition that the closing of the merger be imminent. The third party sale will occur when (i) all conditions to the merger shall have been satisfied or waived, (ii) Tower has delivered the closing notice under the merger agreement and (iii) the parties to the merger agreement are ready, willing and able to consummate the merger immediately after the closing of the third party sale. Under the MTA, Tower may terminate the third party sale for any reason or no reason at any time up until its closing.

Because the third party sale has not occurred as of the date of this proxy statement/prospectus, no assurances can be given as to what investment discount the third party investors will require in order to effect the third party sale and whether the third party sale will be consummated. See “Risk Factors—Risks Related to the Merger—Existing Tower stockholders will own a smaller share of Tower Ltd. following completion of the merger.

 

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The Merger

Overview

CUBL was a subsidiary of Canopius Bermuda at the time of the merger agreement. Canopius Bermuda has transferred CUBL to another Canopius company. Prior to the merger, Canopius Bermuda plans to transfer certain other business to another Canopius company as outlined in the “The Restructuring.” Following completion of the third party sale described above, Merger Sub will merge with and into Tower, with Tower as the surviving corporation becoming an indirect wholly owned subsidiary of Canopius Bermuda. The diagrams set forth below depict the organizational structure of Canopius Bermuda prior to the merger pre- and post-restructuring, as well as the relationship of Tower Ltd., Tower, the third party investors and Tower’s former stockholders following the merger:

Pre-Restructuring Structure of Canopius Bermuda

 

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Post-Restructuring Structure of Canopius Bermuda

 

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Post-Merger Structure

 

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Merger Consideration

At the effective time, among other things, each issued and outstanding share of Tower common stock will be cancelled and converted automatically into the right to receive a number of common shares of Tower Ltd. equal to the stock conversion number.

“Stock conversion number” means the quotient obtained by dividing (x) the closing price per share of Tower common stock on NASDAQ on the pricing date of the third party sale by (y) the adjusted Canopius Bermuda price per share.

 

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“Adjusted Canopius Bermuda price per share” means the quotient obtained by dividing (i) the sum of (a) the target TNAV amount, (b) the value of the retained business (determined in accordance with the MTA), (c) the aggregate amount of the placement fees received by the placement agents in connection with the third party sale and (d) the aggregate amount, expressed in dollars, equal to the absolute value of the discount from the closing price of Tower’s common stock on the pricing date of the third party sale, or on another reasonably current date (as agreed by Tower, Canopius Bermuda and the third party investors), that Tower, Canopius Bermuda and the third party investors have agreed is necessary in order to effect the third party sale, by (ii) the aggregate number of Canopius Bermuda common shares sold in the third party sale.

“Target TNAV amount” means the amount that Tower specifies in a written notice delivered to Canopius prior to the signing date of the purchase and sale agreements for the third party sale, as the target amount of the tangible net asset value of Canopius Bermuda as of the closing date of the third party sale.

The stock conversion number, the adjusted Canopius Bermuda price per share and the target TNAV amount are not known at this time and will not be known until the pricing date of the third party sale, which is after the date of this proxy statement/prospectus. Many unknown factors are used in calculating the stock conversion number, the adjusted Canopius Bermuda price per share and the target TNAV amount, including the (i) the value of the retained business, (ii) the closing price per share of Tower common stock on NASDAQ on the pricing date of the third party sale and (iii) the investment discount received by the third party investors in the third party sale. See “Risk Factors—Risks Related to the Merger—Existing Tower stockholders will own a smaller share of Tower Ltd. following completion of the merger.”

Notwithstanding these unknown factors, however, Tower will not consummate the merger if the former stockholders and optionholders of Tower, as well as holders of Tower’s convertible senior notes, could own 80% or more or less than 76% of the fully diluted capital stock of Tower Ltd. immediately following the effective time. Tower believes that the merger is less desirable from a business perspective outside of this 76-80% ownership range and has committed not to consummate the merger if the ownership of Tower Ltd. by the former stockholders and optionholders of Tower, as well as holders of Tower’s convertible notes, could fall outside of such range immediately following the effective time. For instance, Tower believes that ownership by such parties of 80% or more of the fully diluted capital stock of Tower Ltd. could result in certain adverse tax consequences. See “Risk Factors—Risks Related to the Tax Consequences of the Merger—The merger may have adverse U.S. federal income tax consequences on Tower Ltd. under certain circumstances.” Conversely, the larger the percentage of Tower Ltd. common shares owned by the third party investors following the merger, the more dilutive the merger will be for current Tower stockholders. See “Risk Factors—Risks Related to the Merger—Existing Tower stockholders will own a smaller share of Tower Ltd. following completion of the merger.”

The merger will result in Tower stockholders and optionholders receiving between 44,416,970 and 56,101,993 common shares of Tower Ltd., which range is based on the 76-80% permitted ownership range discussed above and the resultant stock conversion number ranging from approximately 0.9598 to 1.2123. However, Tower stockholders voting on the merger will not know at the time of the special meeting the exact number of common shares of Tower Ltd. they will receive as merger consideration.

For a discussion in determining the factors to be used in the stock conversion number, see the footnotes to the illustrative example on page 45.

TNAV Adjustment Mechanism

At the closing of the third party sale, the third party investors will pay to Canopius a specified aggregate purchase price, which amount will be calculated based on the target TNAV amount plus the value of Canopius Bermuda’s retained business. It is possible, however, that the tangible net asset value of Canopius Bermuda as of the third party sale closing date will be greater than the target TNAV amount. Tower, Canopius and Canopius Bermuda had initially agreed in the MTA that, as part of the restructuring, Canopius Bermuda would declare and

 

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pay to Canopius or one of its affiliates a dividend in the amount of the excess, if any, of the tangible net asset value of Canopius Bermuda as of the third party sale closing date over the target TNAV amount. Such excess is referred to in this proxy statement/prospectus as the excess capital. The amount of excess capital to be held back from Canopius will reflect changes to the tangible net asset value of Canopius Bermuda and the target TNAV amount, as of the closing date, as well as a reasonable cushion with respect to any such changes.

Subsequently, Tower, Canopius and Canopius Bermuda agreed to an adjustment mechanism to account for changes in the tangible net asset value of Canopius Bermuda from its calculation prior to the pricing date of the third party sale to the third party sale closing date. Pursuant to this adjustment mechanism, immediately prior to the closing of the third party sale, and in lieu of paying a dividend in the full amount of the excess capital as part of the restructuring immediately prior to the third party sale closing date as described in the preceding paragraph, Canopius Bermuda will declare two dividends payable to Canopius:

(i) a dividend payable immediately prior to the third party sale closing as part of the restructuring in an amount equal to the excess capital less a holdback amount to be agreed by the parties (the amount of such dividend is referred to as the pre-closing dividend); and

(ii) a dividend payable promptly after the final determination of the tangible net asset value of Canopius Bermuda as of the third party sale closing date pursuant to a customary post-closing adjustment (such finally determined amount is referred to in this proxy statement/prospectus as the final TNAV amount) in an amount equal to the excess of the final TNAV amount (calculated as of the third party sale closing date and after giving effect to the payment of the pre-closing dividend) over the target TNAV amount, plus interest on such amount calculated using an agreed rate (the amount of such dividend is referred to as the post-closing true-up amount).

If Canopius Bermuda needs to rely on a distribution from CBL in order for it to pay any such dividend in whole or in part, then, under Bermuda law, approval of the BMA will be required to the extent that CBL’s total statutory capital (as set out in its previous year’s statutory financial statements) is reduced by 15% or more as a result of the payment of any such distribution by CBL to Canopius Bermuda. At September 30, 2012, based on statutory capital of $291.4 million as set out in its 2011 statutory financial statements, and surplus at September 30, 2012 of $144.6 million, it is calculated that approximately $188.3 million would be available for dividend and distribution without the prior approval of the BMA. If BMA approval is required for any such distribution and such approval cannot be obtained, then the tangible net asset value of Canopius Bermuda as of the third party sale closing date may be greater than the maximum amount permitted under the third party sale agreements and the third party sale may not occur. If the third party sale does not occur, Tower will exercise its right to terminate the merger agreement and abandon the merger.

 

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Illustrative Examples of Stock Conversion Number

The table below sets forth two illustrative examples to calculate the stock conversion number using indicative values for the closing price per share of Tower common stock on NASDAQ on the pricing date of the third party sale, the adjusted Canopius Bermuda price per share, the target TNAV amount and other factors. The values set forth below are illustrative only and, accordingly, actual values used to calculate the stock conversion number in connection with the merger may differ materially from those used in the illustrative examples.

 

     Example 1     Example 2  

Tower—Stock Consideration

    

(x) Illustrative Tower Share Price on NASDAQ on the pricing date of the third party sale

   $ 18.50      $ 19.50   

CHBL Balance Sheet

    

Canopius Bermuda TNAV (as of closing)(1)

   $ 339,921,000      $ 339,921,000   

(a) Target TNAV amount (determined by Tower at the time of the closing of the third party sale)(2)

   $ 196,705,886      $ 196,705,886   

TNAV Adjustment Mechanism

    

Pre-Closing Dividend

   $ 133,215,114      $ 133,215,114   

Post-Closing True-Up Amount(3)

     10,000,000        10,000,000   
  

 

 

   

 

 

 

Excess Capital

   $ 143,215,114      $ 143,215,114   

Adjusted Canopius Bermuda price per share

    

(a) Target TNAV amount (determined by Tower at the time of the closing of the third party sale)

   $ 196,705,886      $ 196,705,886   

(b) Value of the retained business (determined in accordance with the MTA)(4)

     8,027,966        8,027,966   

(c) Aggregate amount of the placement fees received by the placement agents in connection with the third party sale(5)

     10,775,466        10,775,466   

(d) Assumed illustrative investment discount for third party investors

     11,342,596        11,342,596   
  

 

 

   

 

 

 

Total(6)

   $ 226,851,914      $ 226,851,914   

(e) The aggregate number of Canopius Bermuda common shares sold in the third party sale(7)

     14,025,737        14,025,737   

(f) Adjusted Canopius Bermuda price per share (a + b + c + d) / e

   $ 16.17      $ 16.17   

(g) Stock Conversion Number (x / f)

     1.1438x        1.2056x   

Ownership Assuming No Conversion of Tower Convertible

    

(h) Tower shares outstanding(8)

     39,232,375        39,232,375   

(i) Canopius Bermuda shares issued to Tower shareholders (g x h)

     44,873,991        47,298,551   

(j) Pro Forma Tower Ltd. shares outstanding (e + i)

     58,899,728        61,324,288   

Percentage of shares of Tower Ltd. held by existing Tower shareholders (i / j)

     76.2     77.1

Percentage of shares of Tower Ltd. held by third party investors (e / j)

     23.8     22.9

Ownership Assuming Conversion of Tower Convertible

    

(k) Tower shares outstanding(9)

     46,244,337        46,244,337   

(l) Canopius Bermuda shares issued to Tower shareholders (g x k)

     52,894,273        55,752,173   

(m) Pro Forma Tower Ltd. shares outstanding (e + l)

     66,920,010        69,777,910   

Percentage of shares of Tower Ltd. held by existing Tower shareholders (l / m)

     79.0     79.9

Percentage of shares of Tower Ltd. held by third party investors (e / m)

     21.0     20.1

 

(1) For illustrative purposes, in this exhibit Canopius Bermuda TNAV amount as of closing is assumed to be equivalent to that as of September 30, 2012.
(2)

Tower intends to specify the target TNAV amount to Canopius Bermuda as of the signing date of the third party sale. Therefore, the numbers in this exhibit are illustrative. Tower will principally consider the amount of capital that it believes will be required to maintain its ratings and to operate the combined business. Based on its current

 

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  market price, Tower believes this capital amount to be between $160 million and $200 million. If Tower’s share price decreases, the desired amount of capital to be retained may be reduced as well. Tower has relationships with its primary rating agencies (AM Best, Fitch and Demotech) and continually discusses proprietary rating capital models that these agencies have developed. Tower also has internally developed capital models that it believes provide outputs similar to the rating agencies’ proprietary models. Tower evaluated the business plan associated with the merged companies in light of these rating capital models to determine an appropriate amount of capital, which it currently estimates to be between $160 million and $200 million.
(3) For illustrative purposes, in this exhibit the post closing true-up amount assumes the final TNAV amount is equal to the Canopius Bermuda TNAV less the pre-closing dividend, and that no interest is due.
(4) Represents Tower and Canopius current estimate of the value of retained business. Such value may change before this registration statement becomes effective. Tower believes that the retained assets will consist primarily of reinsurance balances due from Canopius as a result of the restructuring transaction, restricted cash, cash and marketable investment securities. The restricted cash balances will support Tower’s net insurance liabilities retained as a result of the restructuring transaction. Tower believes that the risks associated with these assets are consistent with the volatility of the assets employed in its U.S. based business, and with modest incremental risk associated with the marketable securities, which will be exposed to currency risk in addition to credit risk and duration risk.
(5) Tower has agreed to pay the placement agents in connection with the third party sale a 5% fee. Calculated on the basis of the sum of the target TNAV amount and the value of the retained business.
(6) For illustrative purposes, this exhibit assumes a 5% discount for third party investors and is subject to market conditions. Actual discount may be larger or smaller. Calculated on the basis of the sum of the target TNAV amount, the value of the retained business and the placement fee.
(7) Canopius Bermuda currently has 150,000,000 shares authorized and 100 shares issued and outstanding. Prior to the closing of the transaction and in conjunction with the restructuring Canopius Bermuda intends to increase its shares issued and outstanding. The 14,025,737 Canopius Bermuda shares herein reflect the current estimate of Canopius Bermuda’s post-restructuring outstanding shares.
(8) Assumes for illustrative purposes 38,376,845 Tower common shares outstanding and 855,530 options to purchase common shares as of September 30, 2012. Assumes that no holders of Tower’s convertible notes will elect to received merger consideration in connection with the merger. At some Tower share prices, holders of the convertible notes may decide to elect merger consideration. See “—Conversion of the convertible notes may dilute the ownership interest of existing Tower stockholders in Tower Ltd.”
(9) Assumes for illustrative purposes 39,232,375 Tower common shares outstanding as of September 30, 2012 (including 855,530 options to purchase common shares) and 7,011,962 shares issued under exercise of “make-whole fundamental change” provision as of September 30, 2012.

Treatment of Tower Stock Options

At the effective time, each outstanding option to acquire Tower common stock, whether vested or unvested and whether granted under Tower’s Long-Term Equity Plan or otherwise, will automatically vest and become free of any forfeiture conditions and will constitute a fully vested option to acquire, on the same terms and conditions (other than vesting and performance conditions) as were applicable to such Tower stock option immediately prior to the merger, that number (rounded down to the nearest whole number) of Tower Ltd. common shares determined by multiplying (a) the number of shares of Tower common stock subject to such option immediately prior to the effective time by (b) the stock conversion number. The per share exercise price for Tower Ltd. common shares issuable upon exercise of such Tower Ltd. options will be an amount (rounded up to the nearest cent) equal to (i) the exercise price per share of Tower common stock at which the assumed Tower stock options were exercisable immediately prior to the effective time divided by (ii) the stock conversion number.

Treatment of Tower Restricted Stock

At the effective time, each outstanding share of Tower restricted stock that is outstanding and subject to vesting or forfeiture conditions, whether granted under the Long-Term Equity Plan or otherwise, will

 

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automatically vest and become free of any forfeiture conditions and be converted into the right to receive, as soon as reasonably practicable after the effective time, the merger consideration attributable to such share of restricted stock, without interest.

Treatment of Tower Convertible Senior Notes

On September 20, 2010, Tower issued $150 million aggregate principal amount of 5.00% Convertible Senior Notes scheduled to mature on September 15, 2014 pursuant to an indenture with U.S. Bank National Association, as trustee. The convertible note indenture, including the form of convertible note, and the convertible note hedging transactions entered into by Tower in connection therewith were filed by Tower on Form 8-K on September 20, 2010 and are incorporated herein by reference.

Pursuant to the terms of the convertible note indenture, consummation of the merger will constitute a “fundamental change,” which will entitle the holders of convertible notes to elect to require Tower to repurchase all or a portion of their notes within 35 days at 100% of the principal amount. In addition, consummation of the merger will also constitute a “make-whole fundamental change, ” which will entitle the holders of convertible notes to elect to convert all or a portion of their notes within three business days following satisfaction of the conversion procedures at an increased conversion rate for merger consideration. For instance, if the price on NASDAQ of Tower common stock is $21.56 or below, holders of the convertible notes will be entitled to an additional 10.0039 shares of Tower common stock per $1,000 of principal, which shares would be exchangeable for the merger consideration.

Any common shares of Tower Ltd. issued upon conversion of the convertible notes will not be registered under the registration statement of which this prospectus/proxy statement is a part. Tower expects but is not required to file a resale registration statement covering such shares following the merger.

If holders do not elect to convert their convertible notes for cash or merger consideration as described above, under the terms of the convertible note indenture, Tower will remain the primary obligor of the convertible notes. In addition, concurrent with the closing of the merger, Tower Ltd. will be required to fully and unconditionally guarantee any obligations of Tower under the convertible notes and the convertible note indenture.

Background of the Transaction

Negotiations regarding the Master Transaction Agreement

On April 27, 2011, Tower expressed interest in providing qualifying quota share capacity for Canopius. As a result of this expression of interest, Michael Lee, Chairman, President, and Chief Executive Officer of Tower and James Roberts, Senior Vice President, Corporate Underwriting of Tower, participated in discussions with executives of Canopius, including Michael Watson, Executive Chairman of Canopius, and Robert Law, Chief Financial Officer of Canopius, about a qualifying quota share transaction in May 2011.

On July 14, 2011, representatives of Canopius, including Michael Watson, invited Tower to provide capacity to Syndicate 4444 for the second half of 2011 in order to free up a portion of Canopius’s capital used to support this syndicate’s underwriting.

On July 15, 2011, Tower and Flectat Limited, a Canopius affiliate, entered into a non-disclosure agreement in connection with the negotiation of a quota share agreement between the parties. Soon thereafter, Tower refreshed the due diligence that it had performed earlier in the year on Canopius and, in concert with an advisor, negotiated the terms of the quota share reinsurance that it subsequently provided to Canopius for the second half of 2011.

On September 28, 2011, Michael Watson, Michael Lee and James Roberts discussed by telephone a project to broaden Tower’s relationship with Canopius with respect to Lloyd’s of London in connection with a possible acquisition of Omega by Canopius.

In October 2011, Michael Watson and James Roberts had a follow-up discussion by telephone indicating that the acquisition of Omega by Canopius was not likely to occur in the near-term.

 

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On December 1, 2011, Tower and Flectat Limited entered into a quota share agreement pursuant to which Tower agreed to provide 6.8% whole account quota share support for Syndicate 4444 for the 2011 year of account.

In connection with negotiating the 2011 Quota Share Agreement, both parties understood that Tower would be offered the opportunity to provide whole account quota share support to Syndicate 4444 for the 2012 year of account. To that end, additional on-site due diligence was performed by Tower in the second week of October 2011, following which Tower committed to provide 6% whole account quota share support for Syndicate 4444 for 2012.

Between December 2011 and March 2012, Tower considered a business combination transaction with another insurance holding company before deciding not to pursue such transaction. Under the proposed business combination structure, Tower would have merged with a subsidiary of such business combination candidate, with Tower becoming a subsidiary of the top holding company and Tower stockholders becoming the majority owners of the top holding company. In connection with the potential transaction, Tower expected that its Board of Directors and its management would continue in the same roles for the combined company following completion of the transaction. However, the transaction was not pursued because Tower’s management, in their business judgment, ultimately determined that the potential terms of such business combination, including the financial terms, were not in the best interests of Tower and its stockholders.

On January 20, 2012, Tower and Canopius entered into a non-disclosure agreement in connection with discussions relating to potential transactions between the parties.

Between January 20 and 27, 2012, Robert Law sent emails to Elliot Orol, Senior Vice President, General Counsel and Secretary of Tower and William Hitselberger, Executive Vice President and Chief Financial Officer of Tower, with an attachment containing financial information regarding Canopius Group, as well as publicly available pertinent information on Omega, following Canopius’s renewed interest in acquiring Omega. Tower did not pursue a potential combination transaction with Omega’s Bermuda domiciled reinsurance subsidiary because any such transaction would have involved materially different economics and potential benefits to Tower and its stockholders.

On January 23, 2012, Michael Watson, Robert Law, Michael Lee, William Hitselberger and James Roberts participated in a conference call to discuss how Tower could assist Canopius in its potential acquisition of Omega by making an investment in Canopius.

On January 30, 2012, Michael Watson corresponded by email with Michael Lee and James Roberts that Canopius had sent Omega a letter of interest and mentioning a potential third party investor to help fund the acquisition, but did not disclose Tower by name.

On February 1, 2012, Michael Watson corresponded by email with Michael Lee, William Hitselberger and James Roberts regarding a positive discussion with the majority shareholder of Canopius, Bregal Capital LLP, about a potential investment by Tower in Canopius. A preliminary term sheet was attached to the email. The principal terms covered by the term sheet related to the size of Tower’s proposed investment, the terms of the securities being offered to Tower and their place in the capital structure of Canopius and various governance and shareholder liquidity rights.

On February 2, 2012, Michael Watson, Michael Lee, William Hitselberger and Robert Law had a follow-up discussion by telephone about Tower’s investment in Canopius and Tower’s right to effect a merger with a subsidiary of Canopius Bermuda. The topics discussed included the capital investment size needed by Canopius to allow it to acquire Omega, and how Tower could assist in this capital raise. It was also discussed how Tower could merge with a Bermuda domiciled reinsurance subsidiary of Omega were Canopius to succeed in its acquisition of Omega.

 

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On February 8, 2012, Robert Law provided certain financial and investor information to Tower, including the identities of the shareowners of Canopius, the management structure of Canopius and whether the shareowners of Canopius were U.S. persons.

On February 9, 2012, Michael Lee, William Hitselberger, Elliot Orol, James Roberts, Michael Watson, and Robert Law participated in a conference call to discuss the structure of a potential merger of Tower with a subsidiary of Canopius Bermuda.

On February 15, 2012, No Duty Access Agreements were signed by William Hitselberger on behalf of Tower Group, granting Tower access to certain accounting and tax due diligence reports on Omega as prepared for Canopius.

On February 15, 2012, Michael Lee, William Hitselberger, Elliot Orol and James Roberts of Tower and Michael Watson and Robert Law of Canopius participated in a conference call to discuss the timetable for completing Tower’s investment in Canopius, Tower’s right to effect a merger with a subsidiary of Canopius Bermuda and potential next steps.

On February 15, 2012, Michael Watson corresponded by email with James Roberts to confirm that Tower’s investment in Canopius would not be subject to capital raising efforts by Tower.

On February 19, 2012, Keefe, Bruyette & Woods Limited, Canopius’s financial advisor, emailed William Hitselberger, requesting information regarding regulatory consents required for Tower to invest in Canopius.

On February 20, 2012, Michael Watson corresponded by email with Michael Lee, William Hitselberger, James Roberts, Tower’s financial advisor, Guy Carpenter & Company LLP, and Canopius’s financial advisors, Aon Benfield Securities Limited and Keefe, Bruyette & Woods Limited, outlining proposed mechanics for Canopius to assist Tower in acquiring a Lloyd’s platform in connection with Tower’s investment in Canopius. The correspondence included a discussion about Lloyd’s syndicates and the role of the managing agency structure in the Lloyd’s market. Such correspondence provided a basis for further discussions concerning the terms of the MTA.

On February 21, 2012, Michael Watson, Michael Lee, William Hitselberger, Elliot Orol and James Roberts, participated in a conference call and corresponded by email to discuss further the potential transaction structure, including the merger option, the SPS transactions right and the acquisition right. A preliminary term sheet, the principal terms of which covered the size of Tower’s proposed investment, the terms of the offered security and the proposed capital structure, shareholder liquidity and governance rights was circulated by Canopius to facilitate the discussion.

On February 22, 2012, Michael Lee, William Hitselberger and Elliot Orol of Tower, Michael Watson and Robert Law of Canopius and Adam Barron of Bregal Capital LLP participated in a conference call to discuss the terms of the investment in Canopius. The discussion focused on the valuation of Canopius and the size of Tower’s proposed investment relative to such valuation.

Between February 22 and 24, 2012, Canopius provided diligence materials for Syndicate 4444, Canopius’s management and related matters to Tower to assist in its due diligence of Canopius.

On February 27, 2012, Michael Watson, Michael Lee, William Hitselberger, and James Roberts corresponded by email about the possibility that Canopius could combine its Bermuda business with Tower rather than the Omega Bermuda business.

From February 29 to March 2, 2012, Michael Lee, William Hitselberger, James Roberts and Elliot Orol together with Tower’s financial advisor, Guy Carpenter & Company LLP, and, Michael Watson and Robert Law,

 

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and Canopius’s financial advisors, Keefe, Bruyette & Woods Limited, met in London to discuss the transaction timetable, the terms of Tower’s investment, the merger option, the terms of the Lloyd’s options and the Canopius corporate structure, and held business due diligence meetings with the Canopius management, underwriters, actuaries and risk management team.

On March 7, 2012, the Tower Board of Directors held a teleconference to discuss the MTA and the investment agreement.

On March 9, 2012, Michael Watson corresponded by email with Michael Lee, William Hitselberger, Elliot Orol, James Roberts, and other advisors regarding a progress update regarding the potential Omega transaction and Tower’s potential investment in Canopius.

On March 9, 2012, Dewey & LeBoeuf LLP, then counsel to Tower in connection with the negotiation of the MTA and investment agreement, distributed an initial draft of the MTA to Canopius, Canopius Bermuda and their outside counsel, Clyde & Co.

From March 13 to April 25, 2012, management for Tower and Canopius, including Elliot Orol and Robert Law, and from March 17, Tower’s transaction counsel, Willkie Farr & Gallagher LLP, and tax counsel, Debevoise & Plimpton LLP, and Tower’s financial advisor, Guy Carpenter & Company LLP, and Canopius’s legal counsel, Clyde & Co., and its financial advisors, Aon Benfield Securities Limited and Keefe, Bruyette & Woods Limited, participated in conference calls and exchanged emails in connection with negotiating the documentation relating to Tower’s investment in Canopius and the MTA as described below. On March 17, 2012 Willkie Farr & Gallagher LLP replaced Dewey & LeBoeuf LLP as counsel to Tower in connection with the negotiation of the MTA and the investment agreement.

On March 14 and 15, 2012, the Tower Board of Directors held a meeting at the principal executive offices of Tower to discuss the MTA and the investment documentation. Michael Lee reviewed the various transactions that Tower would have the right to effect with Canopius and its subsidiaries pursuant to the MTA, including the proposed investment in Canopius, the merger right, the SPS transactions right and the acquisition right, and confirmed that Tower could effect the proposed investment in Canopius without proceeding with the other proposed transactions, Dewey & LeBoeuf LLP, counsel to Tower in connection with the negotiation of the MTA and investment agreement, reviewed the material terms of the MTA and the investment agreement and Debevoise & Plimpton LLP discussed the tax structure of the proposed merger transaction set forth in the MTA. Certain investment banking firms who may be retained as placement agents in connection with the third party sale discussed the financing process, including timing. Guy Carpenter & Company, LLC, financial advisor to Tower, reviewed recent valuation metrics for publicly traded mid-sized Lloyd’s syndicates and Lloyd’s managing agency transactions. James Roberts and William Dove, Senior Vice President, Chief Risk Officer and Chief Actuary of Tower, summarized the results of Tower’s due diligence review of Canopius. William Hitselberger discussed the financial aspects of the proposed investment in Canopius.

On March 27, 2012, William Dove, Chief Actuary, Chief Risk Officer and Senior Vice President, the financial advisors of Tower, representatives of Canopius and Keefe, Bruyette & Woods Limited participated in a conference call with Gaynore Moss, Chief Actuary of Canopius, to conduct Omega and Canopius due diligence.

On March 29, 2012, the Tower Board of Directors held a teleconference to discuss the MTA and the investment agreement. Elliot Orol updated the Board on the negotiations between Tower and Canopius regarding the investment, and Willkie Farr & Gallagher LLP, Tower’s transaction counsel, reviewed the material changes to the MTA and the investment agreement, since the meetings of the Tower Board of Directors on March 14 and 15, 2012. The material changes to the investment agreement related to the warranties and limitations on indemnification in the event of any breach of such warranties, the actions of Canopius requiring consent of its shareholders, and the permitted transfers and restrictions applicable to shareholders of Canopius. Among the changes to the draft MTA that were reviewed at such meeting were the time periods during which the merger

 

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right, the SPS transactions right and the acquisition right would remain available to Tower, the scope of Canopius’s obligation to use its efforts to effect the transactions contemplated by such rights if they are exercised by Tower and the allocation of the consideration to be paid by Tower among the investment, the merger right, the SPS transactions right and the acquisition right. In addition, Willkie Farr & Gallagher LLP reviewed with the Board of Directors the consideration for the transaction, the allocation of the consideration, the indemnification provisions and the time periods for that exercise by Tower of its option with respect to the merger and the establishment of the Lloyd’s syndicate. With respect to the investment agreement, Willkie Farr & Gallagher LLP confirmed that Tower would be entitled to one seat on Canopius’s Board of Directors and described the limitations on Tower’s ability to sell shares of Canopius for a three-year period, as well as preemption, tag-along, drag-along and other minority shareholder protection rights that Tower had been able to negotiate. After discussing this information, the Tower Board of Directors unanimously approved the MTA and the investment agreement with such changes as Messrs. Lee, Hitselberger or Orol determined appropriate.

On April 2, 2012, Michael Watson and Michael Lee corresponded by email regarding the progress of the draft investment agreement and MTA.

On April 4, 2012, Michael Lee, William Hitselberger, Elliot Orol, Michael Watson, and Robert Law participated in a conference call to discuss the investment agreement and the MTA and related matters.

Also, on April 4, 2012, Michael Watson corresponded with Michael Lee and James Roberts by email to outline the substance of his meeting with Lloyd’s regarding a potential Tower special purpose syndicate and next steps with Lloyd’s with respect to the creation of a special purpose syndicate.

From April 4 to April 12, 2012, Clyde & Co., outside legal counsel for Canopius, Willkie Farr & Gallagher LLP, transaction counsel to Tower, Canopius and Tower continued to negotiate the drafting of the investment agreement and the MTA.

On April 12, 2012, Michael Watson, Elliot Orol, and James Roberts corresponded by email regarding the status of the Omega transaction.

On April 13, 2012, Michael Lee, William Hitselberger, and Elliot Orol of Tower, Michael Watson and Robert Law of Canopius and Adam Barron of Bregal Capital LLP participated in a conference call to discuss a potential increase in the size of Tower’s investment of $5 million, from $70 million to $75 million, in order to provide Canopius with additional capital support in its bid for Omega.

From April 13 to April 23, 2012, Tower, its transaction counsel, Willkie Farr & Gallagher LLP, Canopius and its outside legal counsel, Clyde & Co., continued to negotiate the drafting of the investment agreement and the MTA. The principal terms negotiated included the representations and warranties to be included in the MTA and investment agreement, closing conditions, the scope of the indemnities to be provided by Canopius for the benefit of Tower, the scope of Canopius’s obligation to facilitate Tower’s participation in the Lloyd’s market, the merger option, Tower’s governance rights and minority shareholder rights in Canopius, the time periods during which the merger right, the SPS transaction right and the acquisition right would remain available to Tower, the scope of Canopius’s obligation to use its efforts to effect the transactions contemplated by such rights after they are exercised by Tower and the allocation of responsibility for costs and expenses incurred by the parties in connection with the exercise of such rights. In connection with the investment agreement, the parties also discussed the requirement under UK takeover practice for Canopius to provide cash confirmations to Omega and, as a result, Tower to place certain investment funds in a segregated account prior to the investment closing.

On April 23, 2012, Michael Watson, Michael Lee, William Hitselberger, Elliot Orol, James Roberts, and representatives of Tower’s financial advisor corresponded by email regarding the Omega acquisition.

On April 24, 2012, Elliot Orol and Michael Watson discussed by telephone potential insurance regulatory filings in connection with the Omega transaction and related transactions.

 

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On April 25, 2012, Tower, Canopius, Canopius Bermuda and Delaware Purchaser entered into the MTA and the investment agreement.

Negotiations Regarding Exercise of Merger Right and Execution of the Merger Agreement

Between March 25 and May 14, 2012, Tower evaluated a merger with an insurance holding company, including performing due diligence on such company and submitting a business combination proposal. Under the proposed business combination structure, Tower would have merged with a subsidiary of such business combination candidate, with Tower becoming a subsidiary of the top holding company and Tower stockholders becoming the majority owners of the top holding company. In connection with the potential transaction, Tower expected that its Board of Directors and its management would continue in the same roles for the combined company following completion of the transaction. However, the transaction was not pursued because Tower’s management, in their business judgment, ultimately determined that the potential terms of such business combination, including the financial terms, were not in the best interests of Tower and its stockholders.

On May 25, 2012, Robert Law and William Hitselberger corresponded by email, with Canopius providing certain financial information and other details regarding Canopius’s Bermuda operations, and agreeing to provide such further financial information and assistance as may be required by Tower in connection with a potential merger with Canopius Bermuda.

On June 11, 2012, Michael Watson, William Hitselberger, Elliot Orol and James Roberts participated in a conference call to discuss the exercise of the merger right, including the timing of the Omega merger and the status of Omega Bermuda employees.

On June 12 and July 6, 7 and 19, 2012 Robert Law provided to Elliot Orol resumes and employment agreements of certain staff employed by Omega Bermuda, as identified as potential employees of Tower’s Bermuda operations following the merger transaction. Prior to the execution of the original merger agreement, representatives of Tower met with certain employees of Omega.

On June 15, 2012, Robert Law, William Hitselberger and Elliot Orol discussed by telephone the CBL business to be retained by Tower following the closing of a merger with Canopius Bermuda and the transaction timetable.

On June 15, 2012, Michael Lee and James Roberts met with Lloyd’s to discuss the relationship between Canopius and Tower.

On June 15, 2012, Willkie Farr & Gallagher LLP, transaction counsel for Tower, distributed an initial draft of the original merger agreement to Canopius, Canopius Bermuda and their outside counsel, Drinker Biddle & Reath LLP.

On June 25, 2012, Steve Ciardiello, Managing Vice President of Tower, corresponded by email with Robert Law and others attaching a coordination document for the preparation of audited consolidated financial statements for Canopius Bermuda.

On June 27, 2012, Robert Law and William Hitselberger corresponded via email regarding certain information relevant to the merger transaction, including with respect to employees, premises and valuation.

On July 2, 2012, Michael Lee, William Hitselberger, Elliot Orol, James Roberts, Catherine Wragg, Senior Vice President, Human Resources and Administration of Tower, Michael Watson and Robert Law participated in a conference call to discuss the business, staffing and Lloyd’s option issues.

On July 13, 2012, Michael Watson, Michael Lee and Elliot Orol discussed the possibility of exercising the merger right prior to completion of the acquisition of Omega by Canopius.

 

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From July 13 to July 30, 2012, Tower, its transaction counsel, Willkie Farr & Gallagher LLP, Canopius and its transaction counsel, Drinker Biddle & Reath LLP, negotiated the drafting of the original merger agreement. The principal terms negotiated included the scope of the representations and warranties, interim operating limitations and conditions to closing.

On July 19, 2012, Robert Law and Elliot Orol had a telephone conversation on matters relating to the original merger agreement.

On July 20, Canopius provided Tower and its outside legal advisors with access to electronic due diligence materials for Canopius Bermuda and its subsidiaries.

On July 23, 2012, the Tower Board of Directors held a meeting at the principal executive offices of Tower to discuss the original merger agreement and review the terms of the proposed merger transaction. Michael Lee provided an update on the status of the merger negotiations between Tower and Canopius, and confirmed that the Tower Board of Directors would review the proposed merger transaction again prior to the sale of shares by Canopius Bermuda to third party investors and would receive a fairness opinion prior to such time. William Hitselberger reviewed the financial terms of the proposed merger transaction, and James Roberts discussed Tower’s post-merger business plan in the U.S. and Bermuda. Willkie Farr & Gallagher LLP, Tower’s transaction counsel, discussed the material terms of the original merger agreement and Debevoise & Plimpton LLP, Tower’s special tax counsel, discussed the tax structure of the proposed transaction.

On July 24 and July 26, 2012, Robert Law, William Hitselberger, and Elliot Orol discussed issues related to the restructuring and the original merger agreement, including the composition of the Retained Business and Tower’s quota share participation in Syndicate 4444.

On July 28, 2012, the Canopius Board of Directors held a meeting to approve the original merger agreement at which Drinker Biddle & Reath LLP discussed the material terms of the original merger agreement.

On July 29, 2012, the Tower Board of Directors held a teleconference to further discuss the original merger agreement. Elliot Orol confirmed that there had been no material changes to the original merger agreement since the meeting of the Tower Board of Directors on July 23, 2012. Willkie Farr & Gallagher LLP, transaction counsel to Tower, and Debevoise & Plimpton LLP, special tax counsel to Tower, also participated in the telephonic meeting of the Board. After discussion, the Tower Board of Directors unanimously approved the original merger agreement.

On July 30, 2012, Tower, Canopius Bermuda, Delaware Purchaser and Merger Sub entered into the original merger agreement and a letter agreement amending the MTA, copies of which are attached as exhibits to Tower’s Current Report on Form 8-K filed on July 31, 2012.

On November 6, 2012 the Board of Directors of Tower met with members of management and representatives of Barclays Capital Inc., an investment banking firm engaged to render to the Tower Board of Directors an opinion with respect to the fairness, from a financial point of view, of the merger consideration to be offered to Tower stockholders in the transaction; Willkie Farr & Gallagher LLP, Tower’s special transaction counsel; and Debevoise & Plimpton LLP, Tower’s special tax counsel. Willkie Farr & Gallagher LLP and Debevoise & Plimpton LLP participated by phone.

At the meeting the Board of Directors approved an amendment to the original merger agreement, which provides that the consideration to be received by Tower stockholders will consist entirely of Tower Ltd. common shares and eliminates the $1.25 per share cash consideration provided for in the original merger agreement. In connection with the deliberation by the Tower Board of Directors, representatives of Barclays rendered to the Tower Board of Directors the oral opinion of Barclays, which was subsequently confirmed by delivery of a written opinion dated November 6, 2012, as described under “— Opinion of Barclays to the Tower Board of

 

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Directors,” that, as of November 6, 2012, and based upon and subject to the factors, procedures, assumptions, qualifications and limitations set forth in the written opinion, the merger consideration to be offered to the stockholders of Tower in the transaction was fair, from a financial point of view, to such stockholders.

Between November 6 and November 8, 2012 the amendment to the original merger agreement was reviewed by Canopius and its counsel, Drinker Biddle & Reath LLP. The amendment was approved by Canopius’ Board on November 8, 2012 and signed by the parties on November 8, 2012 in substantially the form presented to the Tower Board of Directors.

Tower’s Reasons for the Merger and Recommendation of Tower’s Board of Directors

The Tower Board of Directors has determined that consummating the merger on the terms of the merger agreement is in the best interests of Tower and its stockholders. The Tower Board of Directors consulted with its management as well as its external advisors in reaching its decision to adopt and declare advisable the merger agreement and recommends to the Tower stockholders that they vote “FOR” adoption of the merger agreement and approval of the merger.

In reaching its conclusion to approve the merger agreement, the Tower Board of Directors reviewed a significant amount of information and considered a number of factors in its deliberations and concluded that the merger is likely to result in significant strategic and financial benefits to Tower Ltd., which would accrue to the Tower stockholders, as shareholders of Tower Ltd., including that:

 

   

the merger will create a more efficient global, diversified specialty insurance company that supports Tower’s expansion plans in that:

 

   

the merger will create a more efficient international holding company structure from a business and tax perspective;

 

   

the combination of Tower’s and Canopius Bermuda’s businesses through the merger will result in a diversified product platform consisting of commercial, specialty and personal lines, reinsurance and international specialty products;

 

   

the establishment of a Bermuda domicile will provide Tower with an international platform with access to U.S., Bermuda and Lloyd’s markets;

 

   

Tower Ltd. is expected to have improved profitability and financial strength;

 

   

the merger will strengthen the combined group’s competitive position and will support growth opportunities since;

 

   

Bermuda provides Tower with a better business platform to grow its existing and newly created businesses;

 

   

the merger improves the profitability of new assumed reinsurance business from insurance companies in the U.S. and Lloyds’ syndicates; and

 

   

the abilities and international experience of the insurance professionals expected to be employed by CBL will complement the strengths of Tower’s personnel and expand the international reach of the combined group.

These expected benefits and others cause the Tower Board of Directors to believe that the combination of the businesses of Canopius Bermuda and Tower will create more value for the Tower stockholders in the long term than Tower could create as a standalone business. This belief is based in part on the following factors that the Tower Board of Directors considered:

 

   

the anticipated market capitalization, strong balance sheet and capital structure of Tower Ltd.;

 

   

its knowledge of the Tower business, operations, financial condition, earnings, strategy and future prospects;

 

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the abilities, experience and qualifications of the insurance professionals expected to be employed by CBL;

 

   

its understanding of the Canopius Bermuda business, operations, financial condition, earnings, strategy and future prospects based on results of Tower’s due diligence review of Canopius Bermuda and Tower’s participation in the restructuring;

 

   

Canopius’s indemnification of Tower in the MTA for any liability of Canopius Bermuda or any of its subsidiaries prior to the effective time, other than insurance liabilities under the express terms of any insurance contract or reinsurance agreement constituting a part of the retained business in the restructuring;

 

   

the current and anticipated competitive and economic climate in the industry in which Tower and Canopius Bermuda operate;

 

   

the tax efficient corporate structure of Tower Ltd. as a Bermuda tax resident and incorporated corporation;

 

   

its consideration of potential alternatives to the merger, the availability of alternatives, the extent to which any alternatives might increase the value of Tower and the timing and likelihood of effecting any alternative;

 

   

the fact that the Tower Ltd. Board of Directors is expected to be composed initially of current directors of Tower, led by Michael H. Lee, who is currently serving as the Chairman of the Board of Directors, President and Chief Executive Officer of Tower;

 

   

its belief that the terms and conditions of the merger agreement, including the parties’ representations and warranties, covenants, deal protection provisions and closing conditions, are reasonable for a transaction of this nature;

 

   

the fact that Tower’s obligation to consummate the merger is in Tower’s sole discretion;

 

   

the limited number and nature of the conditions to Canopius Bermuda’s obligation to complete the transactions contemplated by the merger agreement;

 

   

the fact that any Tower Ltd. common shares issued to the Tower stockholders as a result of the merger will be registered on Form S-4 and will be generally unrestricted for resale by the Tower stockholders;

 

   

the fact that the merger is subject to the adoption of the merger agreement by the Tower stockholders; and

 

   

the likelihood that the merger will be completed on a timely basis.

The Tower Board of Directors weighed these factors against a number of uncertainties, risks and potentially negative factors relevant to the merger, including:

 

   

that the combination and integration of the businesses currently conducted by Tower and Canopius Bermuda will create numerous risks and uncertainties that could adversely affect Tower Ltd.’s operating results;

 

   

that managing a multi-national company will be significantly more complex and require greater resources than managing Tower alone, including in light of the costs, complexities and inefficiencies of having personnel located across a larger geographical area;

 

   

that integrating Canopius Bermuda will require the allocation of resources away from the core business of Tower Ltd.;

 

   

the risk that revenue forecasts for Tower Ltd. are not attained;

 

   

the potential disruption of employees and the ability to train and integrate employees;

 

   

that Tower Ltd. will be subject to substantially more tax complexity than Tower;

 

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that the merger will be a taxable transaction for U.S. stockholders of Tower;

 

   

the risk that other anticipated benefits to Tower Ltd. might not be realized;

 

   

the U.S. federal excise tax on reinsurance premiums paid to Bermuda reinsurers;

 

   

the risk that the merger might not be consummated in a timely manner, or at all;

 

   

that failure to complete the merger would cause Tower to incur significant fees and expenses related to the transaction and could lead to negative perceptions among investors, potential investors and customers; and

 

   

the risks of the type and nature described or referred to under the section entitled “Risk Factors.”

The Tower Board of Directors concluded that the uncertainties, risks and potentially negative factors relevant to the transactions contemplated by the merger agreement were outweighed by the potential benefits that it expected Tower and the Tower stockholders would achieve as a result of the merger. Further, Tower’s management completed a review of two alternative acquisitions, which it ultimately determined to abandon. In addition, Tower’s Board of Directors also considered the benefits of not pursuing a business combination transaction (which, because of its termination rights under the merger agreement with Canopius Bermuda, is still a possibility at this time).

This discussion of the information and factors considered by the Tower Board of Directors includes the principal positive and negative factors considered by the Tower Board of Directors, but is not intended to be exhaustive and may not include all of the factors considered by the Tower Board of Directors. In view of the wide variety of factors considered in connection with its evaluation of the merger and the transactions contemplated by the merger agreement, and the complexity of these matters, the Tower Board of Directors did not attempt to quantify or assign any relative or specific weights to the various factors that it considered in reaching its determination to approve the merger and to make its recommendations to the Tower stockholders. Rather, the Tower Board of Directors viewed its decisions as being based on the totality of the information presented to it and the factors it considered. In addition, individual members of the Tower Board of Directors may have given differing weights to different factors.

As discussed above, as one of its reasons for determining to approve the merger, Tower’s Board of Directors considered that the merger would help create a more efficient international holding company structure from a business and tax perspective. From a business perspective, Tower believes that because of the substantial concentration of insurance and reinsurance companies in Bermuda, which is a hub for global reinsurance markets, Canopius Bermuda’s presence as a reinsurer in Bermuda will enable it to identify new and innovative international business opportunities for growth and profitability in a more efficient manner than is currently the case. From a tax perspective, Tower believes the Bermuda holding company has benefits and detriments. As described under “Bermuda Tax Considerations—Tower Ltd. and its Subsidiaries—Taxation of Tower Ltd. and its Subsidiaries Following the Merger”, Tower Ltd. and its Bermuda-domiciled subsidiaries have obtained assurances from the Bermuda Minister of Finance that they will be exempt from Bermuda income taxes, if any, until March 31, 2035. On the other hand, organizing Tower Ltd. outside of the United States causes the merger to be fully taxable to non-exempt U.S. Tower shareholders. In addition, the United States may tax the income of Tower Ltd. and its Bermuda-domiciled subsidiaries under certain limited circumstances either directly or in part at the shareholder level. See “Risk Factors—Risks Related to the Tax Consequences of the Merger —Tower Ltd. and Tower Ltd.’s non-U.S. subsidiaries may be subject to U.S. tax, which may have a material adverse effect on Tower Ltd.’s financial condition and operating results.” “Risk Factors—Risks Related to the Tax Consequences of the Merger—If you own or are treated as owning 10 percent or more of Tower Ltd.’s shares and Tower Ltd. or one or more of its non-U.S. subsidiaries is classified as a controlled foreign corporation (a “CFC”), your taxes could increase.” “Risk Factors—Risks Related to the Tax Consequences of the Merger—The merger may have adverse U.S. federal income tax consequences on Tower Ltd. under certain circumstances.” Finally, the U.S. imposes an excise tax on certain premiums paid to non-U.S. reinsurers.

 

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As also discussed above, Tower’s Board of Directors considered that the merger could enhance the profitability and financial strength of the combined company. For instance, Tower believes that Tower Ltd., if successful in executing its business plan, may be able to harness the potential business and tax efficiencies of its Bermuda holding company structure to lower its overall operating costs and enhance its competitiveness in the global insurance and reinsurance markets. In addition, Tower believes that Tower Ltd.’s presence as a reinsurer in Bermuda, as well as the experience of Tower Ltd.’s Bermuda-based employees following the merger, will facilitate further access to international insurance and reinsurance markets, including the Lloyd’s market, and enable it to source new international business opportunities for growth and profitability in a more efficient manner. As a consequence of the merger, Tower’s Bermuda reinsurance operation will have a significantly larger balance sheet than it currently does. This will enable Tower to transact all of its future third-party reinsurance business through its Bermuda platform.

Currently, Tower writes the substantial majority of its third-party reinsurance business, including all of its Lloyd’s and international reinsurance business, through its domestic insurance companies due to capacity constraints in its Bermuda reinsurance company. In addition, because a majority of Tower’s third-party reinsurance consists of business sourced from Lloyd’s of London or from Bermuda itself, Tower believes that the consolidation of its reinsurance operations in Bermuda will permit it to hire employees from a much deeper pool of experienced reinsurance professionals. Tower’s current Bermuda platform is CastlePoint Reinsurance Bermuda Limited, which is consolidated in Tower’s current organization. The capacity constraint with respect to Tower’s existing Bermuda reinsurance company is due to the fact that its capital is fully utilized to reinsure direct Tower business underwritten by Tower’s domestic insurance companies. The merger transaction will provide additional capital to permit the third-party reinsurance business that is currently underwritten through Tower’s domestic insurance companies to be underwritten through its new Bermuda operating company. Tower expects that the underwriting income from this third-party reinsurance business will be sufficient to provide the capital growth necessary to allow for additional future reinsurance opportunities.

Opinion of Barclays to the Tower Board of Directors

Tower engaged Barclays to render an opinion with respect to the fairness, from a financial point of view, to Tower’s stockholders of the merger consideration to be offered to such stockholders in the transaction. On November 6, 2012, Barclays rendered its oral opinion (which was subsequently confirmed in writing) to Tower’s Board of Directors that, as of such date and based upon and subject to the qualifications, limitations and assumptions stated in its opinion, from a financial point of view, the merger consideration to be offered to the stockholders of Tower in the transaction was fair to such stockholders.

The full text of Barclays’ written opinion, dated as of November 6, 2012, is attached as Annex F to this proxy statement/prospectus. Barclays’ written opinion sets forth, among other things, the assumptions made, procedures followed, factors considered and limitations upon the review undertaken by Barclays in rendering its opinion. Tower’s stockholders are encouraged to read the opinion carefully in its entirety. The following is a summary of Barclays’ opinion and the methodology that Barclays used to render its opinion. This summary is qualified in its entirety by reference to the full text of the opinion.

Barclays’ opinion, the issuance of which was approved by Barclays’ Fairness Opinion Committee, is addressed to the Tower Board of Directors, addresses only the fairness, from a financial point of view, of the merger consideration to be offered to the stockholders of Tower in the transaction and does not constitute a recommendation to any stockholder of Tower as to how such stockholder should vote with respect to the transaction or any other matter. The terms of the transaction were determined through arm’s-length negotiations among Tower, Canopius and Canopius Bermuda and were unanimously approved by the Tower Board of Directors. Barclays was not requested to opine as to, and its opinion does not in any manner address, Tower’s underlying business decision to proceed with or effect the transaction, the likelihood of consummation of the transaction, Tower’s purchase of ordinary shares of Canopius, or any of the other transactions or agreements contemplated by or arising out of the MTA, including, without limitation, the restructuring, the third party sale,

 

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the SPS transactions right or the acquisition right (in each case as defined in this proxy statement/prospectus). Barclays was solely engaged for the purpose of rendering an opinion with respect to the fairness, from a financial point of view, of the merger consideration to be offered to Tower’s stockholders in the transaction, and not as a financial advisor and, accordingly, Barclays did not consider, and its opinion does not address, the merits of the transaction. Barclays did not express any opinion as to any tax, regulatory or other consequences that might result from the transaction, nor does its opinion address any legal, tax, regulatory or accounting matters, as to which Barclays understands that Tower has obtained such advice as it deemed necessary from qualified professionals. In addition, Barclays expressed no opinion on, and its opinion does not in any manner address, the fairness of the amount or the nature of any compensation to any officers, directors or employees of any parties to the transaction, or any class of such persons, relative to the consideration to be offered to the stockholders of Tower in the transaction. Moreover, Barclays expressed no opinion as to the fairness of the merger consideration to the holders of Tower’s convertible notes in their capacity as such, nor did Barclays express any view or recommendation as to whether any such holder should exercise any rights that may arise under the terms of the convertible notes as a result of the transaction. No limitations were imposed by the Tower Board of Directors upon Barclays with respect to the investigations made or procedures followed by it in rendering its opinion.

Management of Tower advised Barclays, and Barclays assumed for the purposes of its opinion, that:

 

   

Tower will not consummate the transaction if the holders of Tower’s common stock and options to purchase common stock, as well as holders of the convertible notes, could own 80% or more or less than 76% of the fully diluted capital stock of Tower Ltd. immediately after the completion of the merger;

 

   

Tower will not consummate the transaction if the amount that is equal to (i) the closing price per share of Tower common stock on the pricing date of the third party sale, minus (ii) the investment discount (expressed on a per share basis), minus (iii) the placement fee of 5% to be received by the placement agents in connection with the third party sale (expressed on a per share basis) (the result of such calculation to be referred to in this proxy statement/prospectus as the net proceeds to Canopius per Tower equivalent share), is less than $14.54;

 

   

the target TNAV amount will not exceed $294.6 million;

 

   

the value of the retained business for purposes of determining the stock conversion number will be $5.4 million; and

 

   

the aggregate number of shares of Canopius Bermuda sold in the third party sale will be 14,025,737.

In arriving at its opinion, Barclays reviewed and analyzed, among other things:

 

   

the merger agreement, a draft of the amendment, dated November 4, 2012, the MTA and the letter agreement, as well as the specific financial terms of the transaction;

 

   

publicly available information concerning Tower that Barclays believed to be relevant to its analysis, including its Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and its Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2012 and June 30, 2012;

 

   

the Registration Statement on Form S-4 of Canopius Bermuda filed on August 31, 2012 and Amendment No. 1 thereto filed on October 10, 2012;

 

   

financial and operating information with respect to the business, operations and prospects of Tower furnished to Barclays by Tower, including financial projections of Tower for the five years ended December 31, 2017 as prepared by management of Tower;

 

   

financial and operating information with respect to the business, operations and prospects of Canopius Bermuda furnished to Barclays by Canopius Bermuda and Tower, including financial projections of Canopius Bermuda for the five years ended December 31, 2017 as prepared by management of Tower;

 

   

the recent trading history of Tower common stock;

 

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a comparison of the historical financial results and present financial condition of Tower and Canopius Bermuda with those of other companies that Barclays deemed relevant;

 

   

a comparison of the financial terms of the transaction with the financial terms of certain other transactions that Barclays deemed relevant;

 

   

a comparison of the value of a holder of Tower common stock’s interest in Tower with the value of such holder’s interest in Tower Ltd. after giving effect to the transaction in terms of certain financial metrics;

 

   

the pro forma impact of the transaction on the future financial performance of the combined company, including cost savings and tax benefits, operating synergies and other strategic benefits expected by the management of Tower to result from a combination of the businesses; and

 

   

published estimates of independent research analysts with respect to the future financial performance and price targets of Tower.

In addition, Barclays had discussions with the management of Tower concerning its business, operations, assets, liabilities, financial condition and prospects and undertook such other studies, analyses and investigations as Barclays deemed appropriate.

In arriving at its opinion, Barclays assumed and relied upon the accuracy and completeness of the financial and other information used by Barclays without any independent verification of such information (and did not assume responsibility or liability for any independent verification of such information) and further relied upon the assurances of the management of Tower that they were not aware of any facts or circumstances that would make such information inaccurate or misleading. With respect to the financial projections of Tower and Canopius Bermuda, upon the advice of Tower, Barclays assumed that such projections were reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of Tower as to the future financial performance of Tower and of Canopius Bermuda, respectively. Furthermore, upon the advice of Tower, Barclays assumed that the amounts and timing of the anticipated cost savings and tax benefits were reasonable and that the anticipated cost savings and tax benefits would be realized in accordance with such estimates. Barclays assumed no responsibility for and expressed no view as to any such projections or estimates or the assumptions on which they were based. In arriving at its opinion, Barclays did not conduct a physical inspection of the properties and facilities of Tower and did not make or obtain any evaluations or appraisals of the assets or liabilities (contingent or otherwise) of Tower. Barclays is not an actuarial firm and its services did not include any actuarial determination or evaluation by Barclays or any attempt to evaluate actuarial assumptions and Barclays relied on Tower’s and Canopius Bermuda’s actuaries with respect to the adequacy of reserves for Tower’s and Canopius Bermuda’s respective insurance liabilities. Barclays’ opinion was necessarily based upon market, economic and other conditions as they existed on, and could be evaluated as of, November 6, 2012. Barclays assumed no responsibility for updating or revising its opinion based on events or circumstances that may occur after November 6, 2012. Barclays expressed no opinion as to the prices at which shares of Tower common stock would trade following November 6, 2012 or ordinary shares of Tower Ltd. would trade following the consummation of the transaction. Barclays’ opinion should not be viewed as providing any assurance that the market value of the ordinary shares of Tower Ltd. to be held by the stockholders of Tower after the consummation of the transaction would be in excess of the market value of the shares of Tower common stock owned by such holders at any time prior to the announcement or consummation of the transaction.

Barclays assumed that the amendment would be executed, and that such executed amendment would conform in all material respects to the last draft reviewed by it. Barclays assumed the accuracy of the representations and warranties contained in the merger agreement, as amended by the amendment, the MTA and the letter agreement and all agreements related thereto. Barclays also assumed, upon the advice of Tower, that all material governmental, regulatory and third party approvals, consents and releases for the transaction would be obtained within the constraints contemplated by such agreements and that the transaction would be consummated in accordance with the terms of such agreements without waiver, modification or amendment of any term, condition or agreement thereof that would have a material impact on Barclays’ opinion.

 

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Summary of Barclays’ Analyses

In connection with rendering its opinion, Barclays performed certain financial, comparative and other analyses as summarized below. In arriving at its opinion, Barclays did not ascribe a specific range of values to the shares of Tower common stock but rather made its determination as to the fairness, from a financial point of view, to Tower stockholders of the merger consideration to be offered to such stockholders in the transaction on the basis of various financial and comparative analyses. The preparation of a fairness opinion is a complex process and involves various determinations as to the most appropriate and relevant methods of financial and comparative analyses and the application of those methods to the particular circumstances. Therefore, a fairness opinion is not readily susceptible to summary description.

In arriving at its opinion, Barclays did not attribute any particular weight to any single analysis or factor considered by it but rather made qualitative judgments as to the significance and relevance of each analysis and factor relative to all other analyses and factors performed and considered by it and in the context of the circumstances of the transaction. Accordingly, Barclays believes that its analyses must be considered as a whole, as considering any portion of such analyses and factors, without considering all analyses and factors as a whole, could create a misleading or incomplete view of the process underlying its opinion.

The following is a summary of the material financial analyses used by Barclays in preparing its opinion to the Tower Board of Directors and does not purport to be a complete description of the analysis undertaken by Barclays. Certain financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses used by Barclays, the tables must be read together with the text of each summary, as the tables alone do not constitute a complete description of the financial analyses. In performing its analyses, Barclays made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of Tower or any other parties to the transaction. None of Tower, Canopius, Canopius Bermuda, Barclays or any other person assumes responsibility if future results are materially different from those discussed. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth below. In addition, analyses relating to the value of the businesses do not purport to be appraisals or reflect the prices at which the businesses may actually be sold.

Tower Valuation

Has/Gets Analysis

Barclays reviewed and compared the value of a holder of Tower common stock’s interest in Tower prior to the completion of the transaction with the value of what such holder will be receiving in the transaction (i.e., the value of such holder’s interest in Tower Ltd. after giving effect to the transaction), in terms of the following financial metrics: (i) earnings per share, or EPS; (ii) return on tangible equity, or ROTE; (iii) return on equity, or ROE; (iv) tangible book value per share, or TBVPS; and (v) book value per share, or BVPS. Barclays evaluated the impact of the transaction with respect to each metric based on projections provided by the management of Tower assuming net proceeds to Canopius per Tower equivalent share of $14.54 and $16.50.

The following table summarizes the results of Barclays’ “Has/Gets” analysis, in each case assuming Tower stockholders own 76.0% (assuming no conversion by the holders of Tower’s convertible notes into Tower Ltd. shares) of the fully diluted capital stock of Tower Ltd. immediately following the consummation of the transaction (the minimum ownership level at which Tower would consummate the transaction). In order to derive a stock conversion number that resulted in a 76.0% pro forma ownership percentage for Tower stockholders, Barclays assumed that, in the scenario where net proceeds to Canopius per Tower equivalent share are $14.54, the sum of the target TNAV amount and the value of the retained business would be $178.2 million, and in the scenario where net proceeds to Canopius per Tower equivalent share are $16.50, the sum of the target TNAV amount and the value of the retained business would be $202.4 million.

 

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Has/Gets Analysis

 

          TNAV + Value of the
Retained Business = $178.2mm
    TNAV + Value of the
Retained Business = $202.4mm
 
          $14.54 Net Proceeds to Canopius
per Tower Equivalent Share
    $16.50 Net Proceeds to Canopius
per Tower Equivalent Share
 
    Has             Gets                     % Change                      Gets                     % Change           

EPS

         

2013E EPS

  $ 2.87      $ 3.05        6.3   $ 3.08        7.3

2014E EPS

    3.34        3.97        18.9     4.06        21.5

2015E EPS

    3.81        4.63        21.3     4.75        24.6

ROTE

         

2013E ROTE

    15.4     17.5     2.1     17.2     1.8

2014E ROTE

    15.9     19.7     3.8     19.6     3.7

2015E ROTE

    16.0     19.5     3.5     19.4     3.5

ROE

         

2013E ROE

    10.4     12.3     1.9     12.1     1.8

2014E ROE

    11.2     14.5     3.2     14.5     3.3

2015E ROE

    11.7     14.9     3.2     15.0     3.3

TBVPS

         

12/31/12 TBVPS

  $ 17.37      $ 16.10        (7.3 %)    $ 16.57        (4.6 %) 

12/31/13 TBVPS

    19.78        18.62        (5.9 %)      19.12        (3.3 %) 

12/31/14 TBVPS

    22.44        21.91        (2.4 %)      22.49        0.2

12/31/15 TBVPS

    25.53        25.81        1.1     26.51        3.8

BVPS

         

12/31/12 BVPS

  $ 26.45      $ 23.59        (10.8 %)    $ 24.06        (9.0 %) 

12/31/13 BVPS

    28.71        25.99        (9.5 %)      26.49        (7.7 %) 

12/31/14 BVPS

    31.21        29.16        (6.5 %)      29.75        (4.7 %) 

12/31/15 BVPS

    34.15        32.97        (3.5 %)      33.67        (1.4 %) 

Stock Conversion Number

      1.1437       1.1437  

PF Tower Ownership (excl. Convert)

      76.0       76.0  

PF Tower Ownership (incl. Convert)(1)

      78.9       78.9  

 

1. The pro forma Tower Ownership assumes that holders of Tower’s convertible notes convert the notes into Tower Ltd. shares with no share repurchases by Tower.

Barclays also conducted a regression analysis to evaluate the implied valuation of the transaction to Tower stockholders based on the correlation between (i) the multiple of trading price to TBVPS and (ii) estimated ROTE for 2013 for Tower and other property and casualty insurers deemed by Barclays to be comparable to Tower, referred to in this proxy statement/prospectus as the P&C peers, including:

 

   

Alleghany Corporation;

 

   

W. R. Berkley Corporation;

 

   

HCC Insurance Holdings, Inc.;

 

   

The Hanover Insurance Group, Inc.;

 

   

AmTrust Financial Services, Inc.;

 

   

RLI Corp.;

 

   

OneBeacon Insurance Group, Ltd.;

 

   

Selective Insurance Group, Inc.;

 

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Argo Group International Holdings, Ltd.; and

 

   

The Navigators Group, Inc.

Barclays observed that, among Tower and the P&C peers, the multiple of trading price to TBVPS tended to increase as ROTE increased, and, accordingly, although the transaction will be dilutive to TBVPS at the closing of the transaction, as illustrated by the “Has/Gets” analysis, the improvement in ROTE would imply a higher trading multiple to TBVPS for the combined company. As a result, Barclays calculated an implied increase in valuation per share of 8.2% to 27.8% to Tower stockholders, as illustrated in the following table:

 

     2013E     2013PF     2014PF  

ROTE

     15.4     17.5     19.7

Implied P/TBV

     1.04 x(1)      1.21 x(2)      1.38 x(2) 

TBVPS(3)

   $ 17.37      $ 16.10         $18.62   

Implied Valuation

   $ 18.01      $ 19.48         $25.79   

Present Value (PV) Discount (12%)(4)

         ($2.76

Implied Valuation with PV Discount

   $ 18.01      $ 19.48         $23.02   

% Improvement

       8.2 %      27.8 % 

 

Source for information relating to P&C peers: SNL Financial and Factset. Financial data as of the most recent quarter and based on estimates of Institutional Brokers’ Estimate System. Market data as of November 1, 2012.

1. Represents Tower’s trading multiple as of November 1, 2012.
2. Implied P/TBV assumes Tower continues to trade on a similar basis relative to the P&C peers as it traded as of November 1, 2012.
3. TBVPS shown for 2013E, 2013PF and 2014PF represents 12/31/12 estimated standalone TBVPS, 12/31/12 pro forma TBVPS and 12/31/13 pro forma TBVPS, respectively.
4. Based on Barclays’ review of the cost of equity for Tower and the P&C peers.

Barclays also did a “Has/Gets” analysis assuming that holders of Tower’s convertible notes choose to either (i) put the notes to Tower at par, in which case Barclays assumed, based on the advice of Tower management, that Tower would pay the holders of the convertible notes $150 million in cash by drawing on its credit facility at a rate of 2.06% to fund such payment; or (ii) convert the notes into Tower Ltd. shares, in which case Barclays assumed, based on the advice of Tower management, that Tower would exercise a $150 million share repurchase at repurchase prices of $17.00 and $19.30 per share (such repurchase to be funded by Tower drawing on its credit facility at a rate of 2.06%). For purposes of its analysis, Barclays assumed net proceeds to Canopius per Tower equivalent share of $14.54 and the sum of the target TNAV amount and the value of the retained business to be $178.2 million. The results of this analysis are as follows:

 

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Has/Gets Analysis

(Convertible Scenario at $14.54 Net Proceeds to Canopius Per Tower Equivalent Share)

 

                                  Convert Holders Convert to Equity and
Tower Executes a Share Buyback
 
          Pro Forma
No Convert
    Convert Holders Put     Buyback @ $17.00     Buyback @ $19.30  
    Has(1)     Gets     % Change     Gets     % Change     Gets     % Change     Gets     % Change  

EPS

                 

2013E EPS

  $ 2.87      $ 3.05        6.3   $ 3.17        10.6   $ 3.28        14.6   $ 3.22        12.2

ROTE

                 

2013E ROTE

    15.4     17.5     2.1     18.2     2.8     18.2     2.8     18.2     2.8

ROE

                 

2013E ROE

    10.4     12.3     1.9     12.7     2.4     12.7     2.4     12.7     2.4

TBVPS

                 

12/31/12 TBVPS

  $ 17.37      $ 16.10        (7.3 %)    $ 16.10        (7.3 %)    $ 16.70        (3.9 %)    $ 16.35        (5.9 %) 

BVPS

                 

12/31/12 BVPS

  $ 26.45      $ 23.59        (10.8 %)    $ 23.59        (10.8 %)    $ 24.46        (7.5 %)    $ 23.95        (9.5 %) 

 

1. Based on Tower management’s estimates.

Discounted Cash Flow Analysis

As part of its “Has/Gets” analysis, Barclays performed and compared a discounted cash flow analysis of Tower common stock on a standalone basis and pro forma for the consummation of the transaction. A discounted cash flow analysis is a traditional valuation methodology used to derive a valuation of an asset by calculating the “present value” of estimated future cash flows of the asset. “Present value” refers to the current value of the future cash flows or amounts and is obtained by discounting those future cash flows or amounts by a discount rate that takes into account macroeconomic assumptions and estimates of risk, the opportunity cost of capital, expected returns and other appropriate factors.

Barclays calculated a reference range of per share values for Tower stockholders on a standalone basis using:

 

   

earnings estimates provided by Tower management for the five-year period ending December 31, 2017 of $2.87, $3.34, $3.81, $4.35 and $4.81 per share, respectively;

 

   

a required premium-to-total capital ratio of 1.05x, based on Tower management’s estimated premium-to-total capital ratio for Tower as of December 31, 2012 before adjustment for Tower management’s estimated losses stemming from Hurricane Sandy;

 

   

discount rates of 10%, 12% and 14% based on Barclays’ review of the cost of equity for Tower and the P&C peers; and

 

   

a range of terminal P/TBVPS multiples of 1.0x to 1.2x, based on the historic valuation ranges for Tower and the P&C peers.

Barclays also calculated a reference range of per share values for Tower stockholders pro forma for the consummation of the transaction using the same assumptions used for the Tower standalone analysis, except that:

 

   

Barclays made adjustments to reflect the change in outstanding shares resulting from the transaction, based on the stock conversion number, and scaled earnings provided by Tower management to reflect changes in the target TNAV amount, as appropriate;

 

   

Barclays used earnings estimates for the pro forma entity provided by Tower management for the five-year period ending December 31, 2017 of $3.05, $3.97, $4.63, $5.28 and $5.95 per share, respectively; and

 

 

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since the ROE and ROTE of the combined entity is expected to be higher than Tower’s ROE and ROTE on a standalone basis, Barclays used a range of terminal P/TBVPS multiples of 1.2x to 1.4x (as opposed to 1.0x to 1.2x).

For purposes of its analysis, Barclays assumed (i) a sum of the target TNAV amount and the value of the retained business of $178.2 million and (ii) net proceeds to Canopius per Tower equivalent share of $14.54.

This analysis resulted in the following reference ranges of indicated per share values:

 

Tower Standalone DCF Value Per Share:

   $ 18.99 to $28.73   

Pro Forma DCF Value Per Share:

   $ 25.08 to $35.24   

Barclays noted that the pro forma discounted cash flow valuation is 23% to 32% higher than the standalone valuation.

Quantifying Transaction Costs

Barclays also conducted an analysis to calculate the costs of the transaction on a tangible book value basis based on estimates provided by Tower management. For purposes of its analysis, Barclays assumed (i) net proceeds to Canopius per Tower equivalent share of $14.54 and (ii) a sum of the target TNAV amount and the value of the retained business of $178.2 million.

Barclays noted that the transaction results in a reduction to estimated tangible book value as of December 31, 2012 of $1.27 per share, or $49.2 million in the aggregate. Based on the estimated annual tax benefits and synergies for the benefit of Tower stockholders of $24.3 million in the first year and $29.7 million in the second year following the closing (calculated as 76% (the minimum ownership level for Tower stockholders at which Tower would consummate the transaction) of the estimates provided by Tower management of $32 million in the first year and $39 million in the second year), Barclays noted that the reduction to tangible book value would be reversed within 1.8 years of the closing.

Canopius Bermuda Valuation

Barclays also reviewed certain comparable company trading metrics and comparable transaction metrics, and performed a discounted cash flow analysis, to determine a valuation range for Canopius Bermuda after giving effect to the restructuring. Barclays noted that the transaction is structured as an acquisition of Tower by Canopius Bermuda. However, since Tower stockholders will hold a majority of the ordinary shares of Tower Ltd. following the closing, Barclays also provided certain financial analyses with respect to the purchase price to be received by Canopius for its interest in Canopius Bermuda.

Under the terms of the MTA, Canopius has agreed to value Canopius Bermuda at the target TNAV amount plus the value of the retained business. Tower management advised Barclays that, as of the date of its opinion, it estimated that Canopius Bermuda’s target TNAV amount would be equal to $172.8 million and the value of the retained business would be equal to $5.4 million, for a total Canopius Bermuda valuation of $178.2 million, assuming (i) net proceeds to Canopius per Tower equivalent share of $14.54 and (ii) pro forma ownership of 76% for Tower stockholders in the combined company.

For purposes of its analysis, Barclays did not include the placement fee or the investment discount as part of Tower’s valuation of Canopius Bermuda.

 

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Comparable Company Analysis

Barclays compared the valuation for Canopius Bermuda in the transaction with the valuation implied by the application of certain public market multiples for certain other Bermuda insurers deemed by Barclays to be comparable to Canopius Bermuda, including:

 

   

Arch Capital Group Ltd.;

 

   

Everest Re Group, Ltd.;

 

   

PartnerRe Ltd.;

 

   

AXIS Capital Holdings Limited;

 

   

RenaissanceRe Holdings Ltd.;

 

   

Validus Holdings, Ltd.;

 

   

Allied World Assurance Company Holdings, AG;

 

   

Alterra Capital Holdings Limited;

 

   

Aspen Insurance Holdings Limited;

 

   

Endurance Specialty Holdings Ltd.;

 

   

Platinum Underwriters Holdings, Ltd.; and

 

   

Montpelier Re Holdings Ltd.

Barclays reviewed, in respect of the Bermuda insurance company peers, the following information:

 

   

the multiple of market price per share to estimated 2012 EPS;

 

   

the multiple of market price per share to estimated 2013 EPS;

 

   

the multiple of market price per share to BVPS;

 

   

the multiple of market price per share to TBVPS; and

 

   

estimated 2013 return on average equity, or ROAE.

The following table summarizes the results of Barclays’ analysis:

 

Metric

   Median for Comparable
Companies
 

P/2012E EPS

     8.5x   

P/2013E EPS

     9.9x   

P/BVPS(1)

     0.81x   

P/TBVPS(1)

     0.84x   

2013E ROAE

     7.9%   

 

Source: SNL Financial, FactSet. Market data as of November 1, 2012.

1. Includes accumulated other comprehensive income.

Barclays selected the comparable companies listed above because their business and operating profiles are reasonably similar to that of Canopius Bermuda. However, because of the inherent differences between the business, operations and prospects of Canopius Bermuda and those of the selected comparable companies, Barclays believed that it was inappropriate to, and therefore did not, rely solely on the quantitative results of the selected comparable company analysis. Accordingly, Barclays also made qualitative judgments concerning differences between the business, financial and operating characteristics and prospects of Canopius Bermuda and the selected comparable companies that could affect the valuation of each in order to provide a context in which

 

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to consider the results of the quantitative analysis. These qualitative judgments related primarily to the differing sizes, growth prospects, profitability levels and degrees of operational risk between Canopius Bermuda and the selected companies included in the comparable company analysis. Based on these judgments, Barclays selected a range of P/2013E EPS multiples of 8.0x to 11.0x, P/BV multiples of 0.8x to 1.0x and P/TBV multiples of 0.8x to 1.0x, and applied them to corresponding financial data for Canopius Bermuda to calculate, after applying change of control premiums of 15% and 25%, selected by Barclays based on its experience with merger and acquisition transactions, a valuation range for Canopius Bermuda of $150 million to $190 million, as compared to the value being ascribed to Canopius Bermuda in the transaction of $178.2 million.

Comparable Transaction Analysis

Barclays reviewed and compared the purchase prices and financial multiples in selected transactions that Barclays, based on its experience with merger and acquisition transactions, deemed relevant. Barclays chose such transactions based on, among other things, the similarity of the applicable target companies in the transactions to Canopius Bermuda with respect to the size, mix, growth prospects and other characteristics of their businesses.

The following table sets forth the transactions analyzed based on such characteristics and the results of such analysis:

Selected Offshore Comparable Transactions

 

Target

   Acquiror      Year        Size        P/TBV        P/BV  

Atrium

   Ariel        2007         $ 391           2.00        1.62

Kiln

   Tokio Marine        2007           884           1.90           1.74   

Talbot

   Validus        2007           382           1.85           1.85   

IPC

   Validus        2009           1,670           0.90           0.89   

Chaucer

   Hanover        2011           501           1.10           0.93   

Transatlantic

   Alleghany        2012           3,431           0.82           0.82   

Hardy

   CNA        2012           227           1.55           1.36   

Omega

   Canopius        2012           262           0.91           0.80   

Flagstone

   Validus        2012           623           0.75           0.72   

Mean

                     $ 930           1.31        1.19

Median

                     $ 501           1.10        0.93

 

Source: SNL Financial, FactSet, SDC M&A Data.

The reasons for and the circumstances surrounding each of the selected comparable transactions analyzed were diverse and there are inherent differences between the businesses, operations, financial conditions and prospects of Canopius Bermuda and those included in the comparable transactions analysis. Accordingly, Barclays believed that a purely quantitative comparable transactions analysis would not be particularly meaningful in the context of considering the transactions. Barclays therefore made qualitative judgments concerning differences between the characteristics of the selected precedent transactions and the transaction which would affect the acquisition values of the selected target companies and Canopius Bermuda. Based on Barclays’ experience and knowledge of merger and acquisition transactions in the insurance industry, Barclays believed that the IPC-Validus and Transatlantic-Alleghany transactions set forth in the table above were most comparable to this transaction and, accordingly, were used for the purposes of determining the applicable P/TBV and P/BV multiple ranges to be applied to the expected target TNAV amount of $172.8 million. Barclays selected the IPC-Validus and Transatlantic-Alleghany transactions, as opposed to certain other transactions set forth in the table above, due to Barclays’ determination that these transactions were consummated more recently, did not involve a distressed situation and/or were comprised of companies with a similar business mix as Canopius Bermuda. Based on these judgments, Barclays applied P/TBV and P/BV multiple ranges of 0.8x to 0.9x to the expected target TNAV amount of $172.8 million, resulting in a valuation range for Canopius Bermuda of $140 million to $160 million, as compared to the value being ascribed to Canopius Bermuda in the transaction of $178.2 million. Barclays noted that this comparable transaction analysis does not capture the synergies to be recognized in this transaction and the scarcity of properties that meet Tower’s business objectives, in each case as described to Barclays by Tower management.

 

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Discounted Cash Flow Analysis

Barclays performed a discounted cash flow analysis of Canopius Bermuda. Barclays calculated a reference range of values for Canopius Bermuda using:

 

   

earnings estimates provided by Tower management for the five-year period ending December 31, 2017;

 

   

discount rates of 10%, 12% and 14%; and

 

   

a range of terminal P/TBV multiples of 1.0x to 1.2x, and the application of a price to last 12 months earnings multiple of 8.0x to expected year 5 synergies.

The analysis resulted in a reference range of indicated values for Canopius Bermuda of $556 million to $703 million, as compared to the value being ascribed to Canopius Bermuda in the transaction of $178.2 million.

General

Barclays is an internationally recognized investment banking firm and, as part of its investment banking activities, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, investments for passive and control purposes, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. The management of Tower recommended, and the Tower Board of Directors determined, to select Barclays because of its familiarity with Tower, its historical relationship with Tower and its qualifications, reputation and experience in the valuation of businesses and securities in connection with mergers and acquisitions generally and knowledge of the industries in which Tower and Canopius Bermuda operate.

Barclays was retained solely for the purposes of rendering its opinion, and received a fee of $1.5 million upon delivery of its opinion. In addition, Tower agreed to reimburse Barclays for its expenses and to indemnify Barclays for certain liabilities that could arise out of its engagement. Barclays performed various investment banking and financial services for Tower and Canopius in the past, and expects to perform such services in the future, and received, and expects to receive, customary fees for such services. Specifically, in the past two years, Barclays performed the following investment banking and financial services: (i) in November 2011, Barclays Corporate Bank provided Tower a $125 million secured Fund at Lloyd’s Credit Facility to support a series of reinsurance transactions with certain Lloyd’s syndicates, and such Facility was later amended to include a $25 million unsecured component, and in connection with such Facility Barclays received a fee of $0.4 million; (ii) in April 2012, Barclays executed a $78 million contingent foreign exchange hedge with respect to Tower’s investment in Canopius, which transaction was closed in August 2012 and which hedge was unwound at such time, and in connection with such hedge Barclays received a fee of $0.7 million; and (iii) in November 2010, Barclays Corporate Bank, as part of a three bank syndicate, provided Canopius £25 million of an aggregate £75 million Funds at Lloyd’s Credit Facility to support Canopius’ Lloyd’s syndicates, and such Facility was later increased to £35 million of an aggregate £105 million to fund Canopius’ acquisition of Omega, and in connection with such Facility Barclays received a fee of £0.9 million and £1.1 million in 2011 and 2012, respectively. In addition, Barclays has been advised by Tower’s management that Tower, Canopius Bermuda and Canopius expect to engage Barclays and other investment banking firms as determined by Tower, Canopius Bermuda and Canopius as placement agents in connection with the third party sale, for which Barclays would receive an expected fee of approximately $4.2 million from the expected aggregate placement agent fees of approximately $10.4 million (based on the sum of the target TNAV amount and the value of the retained business as of September 30, 2012) and indemnification in respect of certain matters.

Barclays and its affiliates engage in a wide range of businesses from investment and commercial banking, lending, asset management and other financial and non-financial services. In the ordinary course of its business, Barclays and affiliates may actively trade and effect transactions in the equity, debt and/or other securities (and any derivatives thereof) and financial instruments (including loans and other obligations) of Tower, Canopius Bermuda and Canopius for its own account and for the accounts of its customers and, accordingly, may at any time hold long or short positions and investments in such securities and financial instruments.

 

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Tower Projections and Assumptions for Barclays Fairness Opinion

In connection with the “Has/Gets” analysis performed by Barclays in its fairness opinion as described above, Tower provided Barclays with certain consolidated projections for the Tower base plan without the merger (“Tower Has”) and Tower’s plan following the proposed merger with Canopius Bermuda (“Tower Gets”). These financial projections, which are set forth below, were not prepared with a view toward public disclosure. This financial information, and the assumptions underlying such information, may have changed since their original preparation.

Consolidated Pro Forma Projections

 

 

(In millions, except per share amounts)    Tower
Has
2012
    Tower
Has
2013
    Tower
Has
2014
    Tower
Has
2015
   

 

   Tower
Gets
2012
     Tower
Gets
2013
    Tower
Gets
2014
    Tower
Gets
2015
 

Revenues

                    

Gross Premiums Written

     $ 2,100.0      $ 2,339.7      $ 2,599.2              $ 2,270.0      $ 2,576.7      $ 2,912.7   

Net Premiums Written

       1,920.2        2,135.4        2,378.4                2,072.3        2,372.4        2,691.9   

Net Premiums Earned

       1,791.3        2,071.7        2,259.3                1,878.0        2,275.2        2,534.6   

Ceding Commission Revenue

       36.3        29.4        27.1                36.3        29.4        27.1   

Insurance Service Revenue

       2.0        2.1        2.2                2.0        2.1        2.2   

Net Investment Income

       141.0        144.1        147.1                154.7        161.9        169.9   

Policy Billing Fees

       16.6        18.1        20.8                16.6        18.1        20.8   
    

 

 

   

 

 

   

 

 

   

 

     

 

 

   

 

 

   

 

 

 

Total Revenue

       1,987.2        2,265.4        2,456.5                2,087.6        2,486.7        2,754.6   
    

 

 

   

 

 

   

 

 

   

 

     

 

 

   

 

 

   

 

 

 

Expenses

                      

Loss and Expenses Incurred

       1,096.4        1,275.2        1,390.0                1,153.8        1,399.3        1,556.1   

Acquisition and Operating Expenses

       683.6        747.8        792.9                718.4        814.1        880.2   

Corporate and Other Expenses

       12.4        12.7        13.1                10.0        10.4        10.4   

Interest Costs

       30.3        34.8        34.8                30.3        34.8        34.8   
    

 

 

   

 

 

   

 

 

   

 

     

 

 

   

 

 

   

 

 

 

Total Expenses

       1,822.7        2,070.5        2,230.8                1,912.5        2,258.6        2,481.5   
    

 

 

   

 

 

   

 

 

   

 

     

 

 

   

 

 

   

 

 

 

Income before Taxes

       164.5        194.9        225.7                175.1        228.1        273.1   
    

 

 

   

 

 

   

 

 

   

 

     

 

 

   

 

 

   

 

 

 

Taxes

       48.1        58.5        67.7                14.4        18.5        26.4   
    

 

 

   

 

 

   

 

 

   

 

     

 

 

   

 

 

   

 

 

 

Net Income

       116.4        136.4        158.0                160.7        209.6        246.7   
    

 

 

   

 

 

   

 

 

   

 

     

 

 

   

 

 

   

 

 

 

Less: Non-controlling Interests

       5.5        5.6        7.3                5.5        5.6        7.3   
    

 

 

   

 

 

   

 

 

   

 

     

 

 

   

 

 

   

 

 

 

Net Income—Tower Stockholders

     $ 110.9      $ 130.8      $ 150.7              $ 155.2      $ 204.0      $ 239.4   
    

 

 

   

 

 

   

 

 

   

 

     

 

 

   

 

 

   

 

 

 

Shares Outstanding

     38.83        38.77        39.17        39.57             51.10         51.04        51.44        51.83   

Weighted Average Shares Outstanding (WASO)

       38.70        39.11        39.51                50.96        51.38        51.78   

Earnings Per Share (EPS) (1)

     $ 2.87      $ 3.34      $ 3.81              $ 3.05      $ 3.97      $ 4.62   

Ending GAAP Equity (1)

     1,027.2        1,113.0        1,222.4        1,351.5             1,205.4         1,326.4        1,499.8        1,708.3   

Ending Tangible Equity (1)

     674.5        767.0        879.1        1,010.3             822.8         950.4        1,126.5        1,337.2   

Return on Equity (ROE) (1)

       10.4     11.2     11.7             12.3     14.4     14.9

Return on Tangible Equity
(ROTE) (1)

       15.4     15.9     16.0             17.5     19.6     19.4

Book Value Per Share (BVPS) (1)

   $ 26.45      $ 28.71      $ 31.21      $ 34.15           $ 23.59       $ 25.99      $ 29.16      $ 32.96   

Tangible Book Value Per Share (TBVPS) (1)

   $ 17.37      $ 19.78      $ 22.44      $ 25.53           $ 16.10       $ 18.62      $ 21.90      $ 25.80   

Consolidated Combined Ratios

                      

Net Loss Ratio

       61.2     61.6     61.5             61.4     61.5     61.4

Net Expense Ratio

       35.2     33.8     33.0             35.4     33.7     32.8
    

 

 

   

 

 

   

 

 

   

 

     

 

 

   

 

 

   

 

 

 

Net Combined Ratio

       96.4     95.4     94.5             96.8     95.2     94.2
    

 

 

   

 

 

   

 

 

   

 

     

 

 

   

 

 

   

 

 

 

Combined Ratio, excluding reciprocals

                      

Net Loss Ratio

       61.1     61.4     61.4             61.4     61.4     61.2

Net Expense Ratio

       35.6     34.2     33.4             35.8     34.0     33.2
    

 

 

   

 

 

   

 

 

   

 

     

 

 

   

 

 

   

 

 

 

Net Combined Ratio

       96.7     95.6     94.8             97.2     95.4     94.4
    

 

 

   

 

 

   

 

 

   

 

     

 

 

   

 

 

   

 

 

 

 

(1) Tower consolidates the reciprocals in its financial statements. However, EPS, ROE, ROTE, BVPS, TBVPS and the non-consolidated combined ratio metrics are calculated based off Net Income Attributable to Tower Group, Inc. and Tower Group, Inc. stockholders’ equity and exclude the results and financial position of the reciprocals.

 

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Tower’s projections reflect numerous assumptions relating to industry performance, general business, economic, market and financial conditions and other matters, all of which are highly subjective and difficult to predict with any degree of accuracy. Specifically, these projections reflect the principal forward-looking assumptions set forth below with respect to Tower’s base plan without the merger and Tower’s plan following the proposed merger with Canopius Bermuda. Stockholders are urged not to rely on these projections or assumptions to predict the future results of Tower or the combined company following the merger. Please see the sections of this proxy statement/prospectus entitled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements” for important cautionary language regarding the reliance on forward-looking information, such as these projections and assumptions, and for factors that may cause actual results to differ from such projections and assumptions. No one has made or makes any representation to you regarding these projections or assumptions.

Tower Has

 

   

Continuation of Tower’s organic growth strategy with modest premium growth of 7% in 2013 and increasing to 11% in subsequent years;

 

   

A combined ratio of 97% was projected for 2013 graduating down to 95% with modest expense savings;

 

   

The investment strategy will continue to be consistent with Tower’s 2012 performance; and

 

   

A stockholders’ dividend rate of $0.75 a share.

Tower Gets

 

   

Following the merger, the results of CBL and Tower Group will be consolidated for financial accounting purposes. The opening balance sheet of CBL will include primarily insurance assets and liabilities reflective of its reduced participation in Canopius’ treaties;

 

   

New premium production to be written by CBL will allow Tower Ltd. to expand its third party reinsurance assumed book. Initially, approximately 34% of such third party reinsurance assumed book will be sourced from the Canopius group, 34% from a limited number of other Lloyd’s syndicates, 12% from property catastrophe treaties, approximately 7% from a limited number of quota share participations of risk previously identified by Tower management, and 13% split evenly between Bermuda sourced low frequency/high severity, short tail risks. Subsequent year’s premium volume is expected to increase by 30-40%;

 

   

The combined ratio of new production for the first year following the merger is projected to be approximately 96%, reflecting start-up costs. In subsequent years, the combined ratio is expected to decrease to approximately 90%;

 

   

Expenses associated with the new merged structure will be modest, reflecting the small staff expected to be based in Bermuda;

 

   

Investment yield on new cash flow from new insurance and reinsurance production is expected to be approximately 4.25%;

 

   

An assumed stockholders’ dividend rate for Tower Ltd. consistent with Tower’s dividend policy for 2012;

 

   

The merger will permit several synergies to be achieved, including from a business and tax perspective;

 

   

CastlePoint Reinsurance Company’s (“CPRE”) insurance assets, liabilities and capital will be combined into CBL. CBL will replace CPRE as the quota share reinsurer of Tower’s U.S. Pool (Tower’s domestic insurance companies). In addition, other treaties are being considered in which CBL

 

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will provide additional reinsurance support to the U.S. companies on a property catastrophe and excess basis. This transfer of insurance to the Bermuda based platform is expected to be more tax efficient than the current structure; and

 

   

At closing, the fair value of Canopius Bermuda’s assets and liabilities is projected to result in an approximately $30 million increase in goodwill for Tower Ltd. This includes a fair value provision of the loss and expense reserves of approximately $20 million and approximately $10 million for the value of the retained business of Canopius Bermuda.

Determination of Merger Consideration

The formula for merger consideration to be received by Tower stockholders was determined by Tower and Canopius Bermuda in a manner that reflects the various components of the business deal among the parties, including the value of Canopius Bermuda following the restructuring and the prospective terms of the third party sale, many of which are not known at this time. The value of Canopius Bermuda following the restructuring, which is an integral component of the stock conversion number, was initially established at Canopius Bermuda’s tangible net asset value and as negotiations progressed, was expanded to include consideration for the economic value of the business retained. This economic value is defined to be the present value of the loss reserves as well as the value of the loss reserves determined to be in excess of the central estimate of the reserves as determined by an independent actuary.

Canopius Bermuda’s Reasons for the Merger

The Canopius Bermuda Board of Directors carefully evaluated the merger agreement and the transactions contemplated thereby. The Canopius Bermuda Board of Directors determined that the merger agreement and the transactions contemplated thereby, including the proposed merger, are in the best interests of Canopius Bermuda and its shareholder.

In reaching these determinations, the Canopius Bermuda Board of Directors consulted with Canopius Bermuda’s management and its legal, financial and other advisors, and also considered a number of substantive factors, both positive and negative, and potential benefits and detriments of the merger to Canopius Bermuda. The Canopius Bermuda Board of Directors believes that, taken as a whole, the following factors supported its decision to approve the proposed merger:

 

   

As noted in the “Acquisition of Omega” section below, Canopius has acquired Omega and therefore has a Bermuda insurance company available for sale and can realize value on that sale;

 

   

its belief that the terms and conditions of the merger agreement, including the parties’ representations and warranties, covenants, deal protection provisions and closing conditions, are reasonable for a transaction of this nature;

 

   

the fact that Tower is obligated to pay for Canopius’s expenses incurred in connection with the merger and certain other transactions contemplated by the MTA; and

 

   

the fact that the merger agreement includes certain provisions relating to indemnification and insurance for Canopius Bermuda’s current or former officers and directors as described under “Agreements and Plan of Merger—Directors’ and Officers’ Indemnification and Insurance.

This explanation of Canopius Bermuda’s reasons for the merger and other information presented in this section is forward-looking in nature and, therefore, should be read in light of the risks and uncertainties that could cause actual results to differ materially from the results contemplated by these forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” beginning on page 35.

 

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Acquisition of Omega

In August 2012 Canopius acquired Omega, a UK-listed, Bermuda-domiciled insurance and reinsurance group with operations at Lloyd’s, via Syndicate 958, and in Bermuda, the United States and Germany. Canopius acquired Omega primarily for the opportunity to build the scale of the Canopius business, both geographically and monetarily, and to achieve certain expense and capital efficiencies. Canopius already owns CBL, which is a Bermuda-domiciled insurer, but CBL does not have operations in the United States. Canopius’s management believes that the increased scale and future expense and capital efficiencies provided by the Omega acquisition will increase the value of Canopius to its shareholders.

Following the strategic acquisition of Omega, Canopius owns two Bermuda-domiciled reinsurance companies. Canopius only needs one Bermuda-domiciled insurer and the transaction with Tower provides Canopius the opportunity to sell CBL and thereby monetize its investment in CBL through the proceeds of the sale of shares of Canopius Bermuda.

Interests of Certain Persons in the Merger

Management

Tower—Employment Following the Merger

Pursuant to the merger agreement, the officers of Tower Ltd. immediately following the merger will be as designated by Tower. As of the date of this proxy statement/prospectus, it is expected that the following current executive officers of Tower will be the executive officers of Tower Ltd.: Michael H. Lee, Chairman of the Board, President and Chief Executive Officer; William E. Hitselberger, Executive Vice President and Chief Financial Officer; Gary S. Maier, Executive Vice President and Chief Underwriting Officer; Salvatore V. Abano, Senior Vice President and Chief Information Officer; William F. Dove, Senior Vice President, Chief Risk Officer and Chief Actuary; Scott T. Melnik, Senior Vice President, Claims; Elliot S. Orol, Senior Vice President, General Counsel and Secretary; Laurie A. Ranegar, Senior Vice President, Operations; Catherine M. Wragg, Senior Vice President, Human Resources and Administration. Other current Tower officers may either continue to be employed by Tower and be compensated by Tower or may be employed by Tower Ltd. and compensated by Tower Ltd. Their positions at Tower or Tower Ltd. may entitle these individuals to equity awards from Tower Ltd.

In addition, the compensation committee of the Tower Ltd. Board of Directors may consider the role that Tower’s executive officers played in securing and executing the merger in connection with its determinations of payments under the Tower annual bonus award program. In determining annual bonus awards for the above-named Tower executive officers for the year ending December 31, 2012, the compensation committee of the Tower Ltd. Board of Directors may consider a mix of various individual and company performance metrics. The compensation committee of the Tower Ltd. Board of Directors will have discretion to adjust downward, but not upward, the annual equity bonus award payable to the Chief Executive Officer under Tower’s Long-Term Equity Plan.

Tower—Merger-Related Compensation

Pursuant to the Long-Term Equity Plan, the vesting of all unvested stock options and restricted stock awards will be accelerated upon the closing of the merger. As described below—see ‘‘The Merger Agreement— Treatment of Tower Stock Options”—the merger agreement provides that, at the effective time, each outstanding option to acquire Tower common stock, whether vested or unvested and whether granted under Tower’s Long-Term Equity Plan or otherwise, will automatically vest and become free of any forfeiture conditions and will constitute a fully vested option to acquire, on the same terms and conditions (other than vesting and performance conditions) as were applicable to such Tower stock option immediately prior to the merger, that number (rounded down to the nearest whole number) of Tower Ltd. common shares determined by multiplying (a) the number of shares of Tower common stock subject to such option immediately prior to the effective time by (b) the stock

 

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conversion number. The per share exercise price for Tower Ltd. common shares issuable upon exercise of such Tower Ltd. options will be an amount (rounded up to the nearest cent) equal to (i) the exercise price per share of Tower common stock at which the assumed Tower stock options were exercisable immediately prior to the effective time divided by (ii) the stock conversion number.

The merger agreement also provides that, at the effective time, all unvested shares of restricted stock will vest and become free of restrictions immediately prior to the effective date and will be canceled and converted into the right to receive the merger consideration, less any required withholding taxes. The estimated aggregate value for all executive officers and directors of such restricted stock is anticipated to be $8,159,752.

The following table summarizes the number of outstanding unvested shares of restricted stock held by Tower’s executive officers and directors as of November 30, 2012:

 

Name

   Shares of
Unvested
Restricted Stock
     Total Fair Market
Value of
Consideration
Received
 

Directors

     

Charles A. Bryan

     2,382       $ 40,256   

William F. Fox Jr.

     2,382         40,256   

William A. Robbie

     2,382         40,256   

Steven W. Schuster

     2,382         40,256   

Robert S. Smith

     2,382         40,256   

Jan R. Van Gorder

     2,382         40,256   

Austin P. Young III

     2,382         40,256   

Executive Officers

     

Salvatore V. Abano

     18,418         311,264   

William F. Dove

     35,541         600,643   

William E. Hitselberger

     41,295         697,886   

Michael H. Lee (Chairman of the Board)

     202,408         3,420,695   

Gary S. Maier

     30,870         521,703   

Scott T. Melnik

     16,148         272,901   

Elliot S. Orol

     22,823         385,709   

Christian K. Pechmann

     12,075         204,068   

Laurie Ranegar

     16,754         283,143   

Catherine M. Wragg

     16,454         278,073   

Each of Tower’s named executive officers, including Mr. Lee, Mr. Hitselberger, Mr. Maier, Mr. Orol and Mr. Dove, is party to separate employment agreements with Tower, which provide for certain payments and benefits upon a change of control. Under each of the employment agreements with Mr. Lee, Mr. Hitselberger, Mr. Maier, Mr. Orol and Mr. Dove, if the executive’s employment is terminated in anticipation of, or within the 24-month period following, a change in control (which the merger will constitute), the executive or his designated beneficiary or administrator, as applicable, would be entitled to:

 

   

accrued salary through the termination date and a prorated target bonus;

 

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all stock-based awards would vest;

 

   

a cash severance payment equal to (i) in the case of Mr. Lee, three times annual base salary plus three times highest annual bonus paid in the three fiscal years preceding termination and (ii) in the case of Mr. Hitselberger, Mr. Maier, Mr. Orol and Mr. Dove, 100% of the sum of his annual base salary and his target annual bonus;

 

   

the continuation of health and welfare benefits for one year, except that, other than in the case of Mr. Maier, those benefits will be reduced to the extent comparable benefits are received by or made available to the executive by a subsequent employer; and

 

   

three months (or until the last day of the stock option term, whichever occurs first) to exercise any vested stock options.

Each of Tower’s other executive officers is party to a separate employment agreement or severance and change in control agreement with Tower providing for payments and benefits comparable to those described above.

The employment agreements for Mr. Lee, Mr. Hitselberger, Mr. Maier, Mr. Orol and Mr. Dove do not provide for an excise tax gross-up payment.

The estimated cost of the payments and benefits described above (including the cost of any “gross-up” payments that may be required) assuming the termination of each executive’s employment following the consummation of the merger on November 30, 2012 to Tower’s executive officers would be: Mr. Lee, $11,082,095; Mr. Hitselberger, $1,878,221; Mr. Maier $1,464,716; Mr. Orol, $1,207,649; Mr. Dove, $1,275,220; and for other executive officers in the aggregate, $4,476,635.

Directors

Pursuant to the merger agreement, the directors of Tower Ltd. immediately following the effective time will be designated by Tower. It is expected that the current directors of Tower will become directors of Tower Ltd. following the completion of the merger, and the non-employee directors of Tower Ltd. may be entitled to compensation from Tower Ltd. for such services. However, a final determination as to who will be appointed to the Tower Ltd. Board of Directors has not been made as of the date of this proxy statement/prospectus and the requisite corporate action to appoint the persons who will serve as directors of Tower Ltd. following the completion of the merger has not been effected; accordingly, the persons who will serve as directors of Tower Ltd. following the completion of the merger may differ from the persons currently expected to serve in such capacity. See “Management and Other Information of Tower Ltd.—Directors of Tower Ltd.”

Indemnification

Tower. Tower’s amended and restated certificate of incorporation provides that, to the fullest extent permitted by law, Tower will indemnify any person made, or threatened to be made, a party to or otherwise involved in any action, suit or proceeding (whether civil, criminal, administrative or investigative), by reason of the fact that such person is or was a director or officer of Tower. To the fullest extent permitted by law, no director of Tower will be personally liable to Tower or its stockholders for monetary damages for any breach of fiduciary duty by such a director as a director. Notwithstanding the foregoing sentence, however, a director will be liable to the extent provided by applicable law (1) for any breach of the director’s duty of loyalty to Tower or its stockholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) pursuant to Section 174 of the DGCL, or (4) for any transaction from which such director derived an improper personal benefit. Tower maintains insurance for the benefit of Tower’s officers and directors insuring such persons against certain liabilities, including liabilities under the securities laws.

 

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Canopius Bermuda. Canopius Bermuda’s bye-laws provide that, to the fullest extent permitted by law, the directors, officers, employees and agents of Canopius Bermuda will be indemnified and held harmless out of the assets of Canopius Bermuda against all liabilities, loss, damage or expense (including but not limited to liabilities under contract, tort and statute or any applicable foreign law or regulation and all reasonable legal and other costs and expenses properly payable) incurred or suffered by such person or by reason of any act done, conceived in or omitted in the conduct of Canopius Bermuda’s business or in the discharge of such person’s duties. In addition, Canopius Bermuda’s bye-laws provide that each shareholder of Canopius Bermuda agreed to waive any claim or right of action it might have, whether individually or by or in the right of Canopius Bermuda, against any director or officer on account of any action taken by such director or officer, or the failure of such director or officer to take any action in the performance of his duties with or for Canopius Bermuda, provided that such waiver shall not extend to any matter in respect of any fraud of such director or officer or to recover any gain, personal profit or advantage to which such director or officer is not legally entitled.

Golden Parachute Compensation

The following table and the related footnotes present information about the compensation payable to Tower’s named executive officers in connection with the merger as of November 30, 2012. The compensation shown in this table is subject to a vote, on a non-binding advisory basis, of the stockholders of Tower at the special meeting, as described herein under “Stockholder Advisory Vote on Certain Compensatory Arrangements.”

 

Name

  Cash1
($)
    Equity2
($)
    Pension/
NQDC
($)
    Perquisites/
Benefits3
($)
    Tax
Reimbursement
($)
    Other ($)     Total
($)
 

Michael H. Lee Chairman of the Board, President and Chief Executive Officer

  $ 7,606,778      $ 3,420,695        —        $ 54,622        —          —        $ 11,082,095   

William E. Hitselberger, Executive Vice President, Chief Financial Officer

  $ 1,161,759      $ 697,885        —        $ 18,577        —          —        $ 1,878,221   

Gary S. Maier, Executive Vice President, Chief Underwriting Officer

  $ 924,806      $ 521,703        —        $ 18,207          —        $ 1,464,716   

William F. Dove, Senior Vice President, Chief Risk Officer and Chief Actuary

  $ 656,000      $ 600,643        —        $ 18,577        —          —        $ 1,275,220   

Elliot S. Orol, Senior Vice President, General Counsel and Secretary

  $ 803,793      $ 385,709        —        $ 18,147          —        $ 1,207,649   

 

1 Represents cash severance benefits that executive would receive if the executive’s employment is terminated in anticipation of, or within the 24-month period following, a change in control (which the merger will constitute).
2 Represents the aggregate dollar value of stock awards for which vesting would be accelerated and in-the-money option awards for which vesting would be accelerated.
3 Represents continued welfare benefits that executive would receive if the executive’s employment is terminated in anticipation of, or within the 24-month period following, a change in control (which the merger will constitute).

 

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Security Ownership of Certain Beneficial Owners and Management of Tower

The following table sets forth certain information regarding the beneficial ownership of Tower common stock as of November 30, 2012 (except as noted) by: (i) each of Tower’s current directors; (ii) each of Tower’s current named executive officers; (iii) all current executive officers and directors of Tower as a group; and (iv) all those known by Tower to be beneficial owners of more than five percent of its common stock.

 

Name(1)

   Shares
Beneficially
Owned(2)
     Percent
Beneficially
Owned
 

Michael H. Lee(3)

     4,011,441         10.0 %

BlackRock Inc.(4)

     2,935,435         7.4 %

Franklin Resources, Inc.(5)

     2,686,855         6.8 %

Vaughan Nelson Investment Management, L.P.(6)

     2,321,731         5.9 %

LSV Asset Management(7)

     2,146,326         5.4 %

Vanguard Group, Inc.(8)

     2,080,261         5.3 %

Charles A. Bryan

     22,204           *

William F. Dove

     40,769           *

William W. Fox, Jr.

     13,822           *

William E. Hitselberger

     56,021           *

Gary S. Maier

     82,325           *

Elliot S. Orol

     44,064           *

William A. Robbie

     31,347           *

Steven W. Schuster

     11,703           *

Robert S. Smith

     28,087           *

Jan R. Van Gorder

     16,751           *

Austin P. Young, III

     18,204           *

Total Directors and Executive Officers

     4,472,666         11.1 %

 

* Less than 1%
(1) Each named stockholder’s business address is 120 Broadway, New York, New York 10271, with the exceptions of BlackRock, Inc., the business address of which is 40 East 52nd Street, New York, NY 10022, Franklin Resources, Inc., the business address of which is One Franklin Parkway, San Mateo, CA 94403, Vaughan Nelson Investment Management, L.P., the business address of which is 600 Travis Street, Suite 6300, Houston, TX 77002, LSV Asset Management, the business address of which is 155 N. Wacker Drive, Suite 4600, Chicago, IL 60606, and Vanguard Group, Inc., the business address of which is 100 Vanguard Blvd., Malvern PA 19355.
(2) To Tower’s knowledge, the persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, unless otherwise noted in the footnotes to this table.
(3) Includes 608,505 shares issuable upon the exercise of stock options held by Mr. Lee. Mr. Lee has pledged 2,862,735 shares in connection with a loan agreement.
(4) Based solely on the Schedule 13G filing made by BlackRock Inc. on February 10, 2012.
(5) Based solely on the Schedule 13G filing made by Franklin Resources, Inc. on February 9, 2012.
(6) Based solely on the Schedule 13G filing made by Vaughan Nelson Investment Management, L.P. on February 14, 2012.
(7) Based solely on the Schedule 13G filing made by LSV Asset Management on February 8, 2012.
(8) Based solely on the Schedule 13G filing made by Vanguard Group, Inc. on February 9, 2012.

 

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Conditions to Completion of the Merger

Under the terms of the merger agreement, the closing date of the merger will be as specified by Tower in a written notice (referred to as the closing notice) to Canopius Bermuda, subject to the satisfaction or (to the extent permitted by applicable law) waiver by Canopius Bermuda, Delaware Purchaser and Merger Sub of certain conditions to their respective obligations to consummate the merger.

Pursuant to the terms of the merger agreement, the obligations of Canopius Bermuda, Delaware Purchaser and Merger Sub to consummate the merger are subject to certain conditions, including conditions with respect to (i) the accuracy of representations and warranties of Tower to the applicable standard provided by the merger agreement, (ii) the receipt of all authorizations, consents, orders or approvals of all governmental authorities that are required to have been obtained in connection with the consummation of the merger, and the making of all declarations or filings with all governmental approval required to be made in connection therewith, (iii) the absence of any material injunctions, judgments or rulings by any governmental authority that has the effect of enjoining or otherwise prohibiting consummation of the merger and (iv) the adoption of the merger agreement and approval of the merger by Tower’s stockholders.

Although the merger agreement contains no conditions precedent to Tower’s obligations to consummate the merger, Tower will not proceed with the merger in the event that (i) the third party sale cannot be effected, or can only be effected on terms that would make the stock conversion number, and therefore the merger, unattractive to Tower, (ii) the adjusted Canopius Bermuda price per share declines to a point such that the third party investors would own 20% or less of the fully diluted capital stock of Tower Ltd. immediately following the effective time, (iii) Tower stockholders and optionholders, as well as holders of Tower’s convertible notes, would own less than 76% of the fully diluted capital stock of Tower Ltd. immediately following the effective time, (iv) the parties to the merger agreement fail to obtain the necessary regulatory approvals on terms acceptable to Tower, (v) Tower’s stockholders fail to adopt the merger agreement and approve the merger, (vi) Tower’s Board of Directors does not approve certain of the transactions contemplated by the merger agreement and (vii) Tower has not received an opinion of a nationally recognized law firm, in form and substance satisfactory to Tower, to the effect that the merger should not cause Tower Ltd. to be treated as a domestic corporation under Section 7874(b) of the Internal Revenue Code of 1986, as amended. Tower has the explicit right in the merger agreement to terminate that agreement and not complete the merger at any time and for any or no reason prior to the effective time of the merger.

In the event that Tower exercises its right to terminate the merger agreement, it will nonetheless be obligated to reimburse Canopius Bermuda and its affiliates for their reasonable out-of-pocket costs incurred in connection with negotiating, documenting and implementing the merger agreement and the transactions contemplated thereby to the extent that such costs exceed the $1,000,000 option exercise fee paid by Tower.

Regulatory Approvals Required

General

Consummation of the merger and the transactions contemplated thereby, including the third party sale, by Tower, Canopius Bermuda, Delaware Purchaser and Merger Sub will require (i) the consent of, notification to, approval for or other authorization from the U.K. Financial Services Authority, Lloyd’s, the U.S. Federal Trade Commission and the U.S. Department of Justice, (ii) “Form A” change of control, disclaimers of control or similar filings to the applicable insurance regulator in the various states of domicile or commercial domicile of Tower’s insurance subsidiaries and (iii) notification to other market or governmental authorities.

As previously announced by Tower, Tower has received or made, as applicable, all required insurance regulatory consents, notifications and approvals with respect to the merger.

 

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Hart-Scott-Rodino

Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which is referred to in this proxy statement/prospectus as the HSR Act, and the rules and regulations promulgated thereunder by the Federal Trade Commission, which is referred to in this proxy statement/prospectus as the FTC, the parties will be required to notify the transaction to the FTC and the Antitrust Division, and the merger cannot be consummated until notifications have been submitted and certain information has been furnished to the Antitrust Division and the FTC, and specified waiting period requirements have been satisfied.

Tower and Canopius Bermuda each filed a Pre-Merger Notification and Report Form pursuant to the HSR Act with the Antitrust Division and the FTC. On October 19, 2012, Tower and Canopius Bermuda were granted early termination by the FTC.

Accounting Treatment of the Merger

The merger will be accounted for using the acquisition method of accounting, with Tower being treated as the accounting acquirer under U.S. GAAP. Under the acquisition method of accounting, assets and liabilities of Canopius Bermuda will be, as of completion of the merger, recorded at their respective fair values and added to those of Tower, including an amount for goodwill representing the difference between the acquisition consideration and the fair value of the identifiable net assets. Financial statements of Tower Ltd. issued after the completion of the merger will include the operations of Canopius Bermuda beginning with the closing date. The historical financial statements of Tower Ltd. will continue to be those of Tower and will not be restated retroactively to include the historical financial position or results of operations of Canopius Bermuda for the periods prior to the closing.

Following the completion of the merger, the earnings of Tower Ltd. will reflect acquisition accounting adjustments. Goodwill resulting from the merger will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present). The final determination of acquisition consideration will be determined after the closing and after completion of an analysis to determine the fair values of Canopius Bermuda assets and liabilities. Accordingly, the final merger consideration may be materially different from the amounts reflected in the unaudited pro forma condensed combined financial statements contained in this proxy statement/prospectus.

Restrictions on Resales

All Tower Ltd. common shares received by Tower stockholders in the merger will be freely tradable, except that Tower Ltd. common shares received in the merger by persons who become affiliates of Tower Ltd. for purposes of Rule 144 under the Securities Act may be resold by them only in transactions permitted by Rule 144, or as otherwise permitted under the Securities Act. Persons who may be deemed affiliates of Tower Ltd. generally include individuals or entities that control, are controlled by or are under common control with, Tower Ltd. and may include the executive officers and directors of Tower Ltd. as well as its principal shareholders.

 

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MATERIAL TAX CONSIDERATIONS

The following is a discussion of the material Bermuda and U.S. federal income tax considerations relating to (i) Tower Ltd., (ii) the exchange of Tower common stock for Tower Ltd. common shares (the “Shares”) by Holders (as defined below) pursuant to the merger and (iii) the ownership and disposition by Holders (as defined below) of Shares received by them in exchange for their Tower common stock pursuant to the merger. This discussion addresses only Holders that hold the Shares and Tower common stock as capital assets and that acquire the Shares in exchange for Tower common stock pursuant to the merger. This discussion is based on the laws of Bermuda, the Code, U.S. Treasury regulations thereunder, administrative and judicial interpretations thereof and the income tax treaty between the United States of America and Bermuda, as amended (the “Tax Treaty”), all as in effect on the date hereof and all of which are subject to change, possibly with retroactive effect, or to different interpretation. The discussion of U.S. federal income tax considerations does not address all of the U.S. federal income tax considerations that may be relevant to specific Holders in light of their particular circumstances or to Holders subject to special treatment under U.S. federal income tax law (such as banks, insurance companies, dealers in securities or other Holders that generally mark their securities to market for U.S. federal income tax purposes, tax-exempt entities, retirement plans, regulated investment companies, real estate investment trusts, foreign governments, international organizations, certain former citizens or residents of the United States, Holders that hold the Shares or the Tower common stock as part of a straddle, hedge, conversion or other integrated transaction, Holders that have a “functional currency” other than the U.S. dollar, Holders that own (or are deemed to own) 10% or more (by voting power) of Tower’s or Tower Ltd.’s stock or persons that received the Tower common stock or the Shares as compensation). This discussion does not address any U.S. state or local tax considerations or non-U.S. tax considerations (other than Bermuda tax considerations) or any U.S. federal estate, gift or alternative minimum tax considerations.

As used in this discussion, the term “U.S. Holder” means a beneficial owner of Shares acquired in exchange for Tower common stock pursuant to the merger that for U.S. federal income tax purposes is (i) an individual who is a citizen or resident of the United States, (ii) a corporation created or organized in or under the laws of the United States, any state thereof, or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income tax regardless of its source or (iv) a trust (x) with respect to which a court within the United States is able to exercise primary supervision over its administration and one or more United States persons have the authority to control all of its substantial decisions or (y) that has in effect a valid election under applicable U.S. Treasury regulations to be treated as a United States person.

The term “Non-U.S. Holder” means a beneficial owner of Shares acquired in exchange for Tower common stock pursuant to the merger that is neither a U.S. Holder nor a partnership for U.S. federal income tax purposes. The term “Holder” means a U.S. Holder or a Non-U.S. Holder.

If an entity treated as a partnership for U.S. federal income tax purposes acquires Shares in exchange for Tower common stock pursuant to the merger, the U.S. federal income tax considerations relating to such acquisition and the ownership and disposition of the Shares will depend in part upon the status and activities of such entity and the particular partner. Any such entity should consult its own tax advisor regarding the U.S. federal income tax considerations applicable to it and its partners relating to the acquisition, ownership and disposition of the Shares.

Except where specifically described below under “Passive Foreign Investment Company Considerations,” this discussion assumes that Tower Ltd. is not and will not be a passive foreign investment company for U.S. federal income tax purposes.

PERSONS CONSIDERING THE CONSEQUENCES OF THE MERGER SHOULD CONSULT THEIR OWN TAX ADVISERS REGARDING THE U.S. FEDERAL, STATE AND LOCAL AND NON-U.S. TAX CONSIDERATIONS RELATING TO THE MERGER AND THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE SHARES IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES.

 

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BERMUDA TAX CONSIDERATIONS

Tower Ltd. and its Subsidiaries

Taxation of Tower Ltd. and its Subsidiaries as a Result of the Merger

Under current Bermuda law, there is no income, corporate or profits tax or withholding tax, capital gains tax or capital transfer tax, estate duty or inheritance tax payable by Tower Ltd. or its Bermuda domiciled subsidiaries arising solely as a result of the merger.

Taxation of Tower Ltd. and its Subsidiaries Following the Merger

Bermuda does not currently impose any income, corporation or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by Tower Ltd. or its Bermuda domiciled subsidiaries. There is currently no Bermuda withholding or other tax on principal, interest or dividends paid to holders of the shares, other than holders ordinarily resident in Bermuda, if any. Tower Ltd. and its existing Bermuda domiciled subsidiaries have obtained an assurance from the Bermuda Minister of Finance, under The Exempted Undertakings Tax Protection Act 1966 of Bermuda, that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to Tower Ltd. and its existing Bermuda domiciled subsidiaries or to any of their operations or their shares, debentures or other obligations, until March 31, 2035. Tower Ltd. and its existing Bermuda domiciled subsidiaries could be subject to taxes in Bermuda after that date. This assurance is subject to the proviso that it is not to be construed so as to prevent the application of any tax or duty to such persons as are ordinarily resident in Bermuda or to prevent the application of any tax payable in accordance with the provisions of the Land Tax Act 1967 or otherwise payable in relation to any property leased to Tower Ltd. and its Bermuda domiciled subsidiaries. Tower Ltd. and its Bermuda domiciled subsidiaries each pay annual Bermuda government fees, and Tower Ltd.’s Bermuda domiciled insurance subsidiaries pay annual insurance license fees. In addition, all entities employing individuals in Bermuda are required to pay a payroll tax, and there are other sundry taxes payable, directly or indirectly, to the Bermuda government.

U.S. and Non-U.S. Holders

Exchange of Tower Common Stock for the Merger Consideration

Under current Bermuda law, there is no income, corporate or profits tax or withholding tax, capital gains tax or capital transfer tax, estate duty or inheritance tax payable by the holders of Tower common stock arising solely as a result of the merger.

U.S. FEDERAL INCOME TAX CONSIDERATIONS

Tower Ltd. and its Subsidiaries

Taxation of Tower Ltd. and its Subsidiaries as a Result of the Merger

Inversion Transactions. Section 7874 of the Code provides that in certain instances a non-U.S. corporation may be treated as a U.S. corporation for U.S. federal income tax purposes. Specifically, section 7874(b) provides that a non-U.S. corporation will be treated as a U.S. corporation if, pursuant to a plan or a series of related transactions:

 

   

the non-U.S. corporation acquires, directly or indirectly, substantially all of the properties held directly or indirectly by a U.S. corporation;

 

   

after the acquisition, at least 80% of the stock (by vote or value) of the non-U.S. corporation is held by former shareholders of the domestic corporation by reason of holding stock in the domestic corporation; and

 

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after the acquisition, the expanded affiliated group which includes the foreign corporation does not have substantial business activities in the foreign country in which the non-U.S. corporation is organized.

Alternatively, if under the above test, former shareholders of the expatriated U.S. corporation own at least 60 percent, but less than 80 percent, of the stock (by vote or value) of the non-U.S. corporation after the acquisition, section 7874 of the Code will instead impose a minimum level of tax on the “inversion gain” of the expatriated entity. Specifically, section 7874(a) of the Code provides that the taxable income of an expatriated entity for any tax year that includes any portion of the “applicable period” (generally the 10-year period that begins with a corporate inversion transaction) cannot be less than the inversion gain of the entity for that tax year. Generally, inversion gain is defined as (1) the income or gain recognized by reason of the transfer during the applicable period of stock or other properties by an expatriated entity and (2) any income received or accrued during the applicable period by reason of a license of any property by an expatriated entity. Section 7874 of the Code provides that this tax on inversion gain cannot be offset by net operating losses or other tax attributes.

After the effective time of the merger, the former stockholders of Tower are expected to hold more than 60 percent but less than 80 percent of the stock of Tower Ltd. by reason of their exchange of Tower common stock for the Shares. Although Tower expects the former stockholders of Tower to hold more than 60 percent of the stock (by vote and value) of Tower Ltd. immediately after the inversion transaction, Tower believes that it should not recognize current gain under section 7874 of the Code or otherwise as a result of the acquisition of Tower by Tower Ltd. It is possible that, as a result of certain transfers or licenses of stock or other properties, as the case may be, during the applicable period (including the transfer of any income received or accrued during the applicable period by reason of a license of any property by Tower), Tower could recognize inversion gain during the applicable period. However, Tower does not currently expect that the U.S. federal income tax consequences to Tower of Tower’s stockholders owning 60 percent or more (but less than 80 percent) of the stock of Tower Ltd. by reason of the merger will be material.

As described below, Tower expects that its special tax counsel for the transaction will render an opinion to the effect that the merger should not cause Tower Ltd. to be treated as a U.S. corporation under section 7874(b) of the Code. It is possible that the IRS will disagree with the opinion rendered by tax counsel. If the IRS were to assert successfully that Tower Ltd. should be treated as a U.S. corporation under section 7874(b) of the Code, Tower Ltd. would incur significant tax liability following the merger, and the U.S. tax consequences to Holders may differ significantly from those described below. Tower has not requested, nor will Tower obtain, any rulings from the IRS with respect to the tax consequences of the merger described herein. There can be no assurances that the IRS will not take positions concerning tax consequences of the merger that differ from the consequences described herein or that the IRS will not prevail if it were to take such positions.

Tax Opinion Regarding Inversion Rules. Tower does not intend to consummate the merger unless and until it has received a tax opinion from a nationally recognized law firm, dated as of the effective date of the merger, in form and substance reasonably satisfactory to Tower, to the effect that the merger should not cause Tower Ltd. to be treated as a U.S. corporation under section 7874(b) of the Code.

The opinion to be provided will be based upon factual representations and covenants made by Tower and Canopius (including those contained in tax representation letters to be provided by Tower and Canopius) and on certain facts and customary assumptions set forth in the opinions. The tax opinion will not be binding on the IRS or any court and will not preclude the IRS from asserting, or a court from sustaining, a contrary conclusion. Furthermore, if facts and covenants set forth in the representation letters or assumed in the opinion turn out to be incorrect, the tax results of the merger could be different from those set forth in the conclusion of the opinion.

The Treasury Department is in the process of writing regulations governing inversion transactions. The provisions of any such regulations may lead to conclusions materially different from the conclusions reached in the opinion.

 

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Taxation of Tower Ltd. and its Subsidiaries Following the Merger

In General. A non-U.S. corporation that is engaged in the conduct of a trade or business in the United States will be subject to U.S. federal income tax as described below, unless entitled to the benefits of an applicable tax treaty. Whether a trade or business is being conducted in the United States is an inherently factual determination. Because the Code, regulations and court decisions do not definitively identify activities that constitute being engaged in a trade or business in the United States, the IRS may assert that Tower Ltd. and/or its non-U.S. subsidiaries are or will be engaged in a trade or business in the United States for U.S. federal income tax purposes. A non-U.S. corporation deemed to be so engaged would be subject to U.S. federal income tax at regular corporate rates, as well as a branch profits tax, on its income that is treated as effectively connected with the conduct of that trade or business unless the corporation is entitled to relief under the permanent establishment provision of an applicable tax treaty, as discussed below. Such income tax, if imposed, would be based on effectively connected income computed in a manner generally analogous to that applied to the income of a U.S. corporation, except that a non-U.S. corporation generally may be entitled to deductions and credits only if it timely files a U.S. federal income tax return. The highest marginal federal income tax rates currently are 35% for a corporation’s effectively connected income and 30% for the additional “branch profits” tax.

If any of Tower Ltd.’s Bermuda domiciled insurance subsidiaries are entitled to benefits under the Tax Treaty, such subsidiaries would not be subject to U.S. federal income tax on any income from carrying on the business of insurance found to be effectively connected with a U.S. trade or business unless that trade or business were conducted through a permanent establishment in the United States. No regulations interpreting the Tax Treaty have been issued.

An insurance enterprise resident in Bermuda generally will be entitled to the benefits of the Tax Treaty if (i) more than 50% of its shares are owned beneficially, directly or indirectly, by individual residents of the United States or Bermuda or U.S. citizens and (ii) its income is not used in substantial part, directly or indirectly, to make disproportionate distributions to, or to meet certain liabilities to, persons who are neither residents of either the United States or Bermuda nor U.S. citizens. Tower cannot be certain that Tower Ltd.’s Bermuda domiciled insurance subsidiaries will be eligible for Tax Treaty benefits immediately following the merger or in the future because of factual and legal uncertainties regarding the residency and citizenship of Tower Ltd.’s shareholders. Tower Ltd. itself would not be eligible for treaty benefits because it is not an insurance company. Accordingly, Tower intends for Tower Ltd. and its Bermuda domiciled insurance subsidiaries to conduct substantially all of their operations outside the United States and to limit their U.S. contacts so that neither Tower Ltd. nor any of its Bermuda domiciled insurance subsidiaries should be treated as engaged in the conduct of a trade or business in the United States, but Tower cannot provide any assurance in this regard.

Non-U.S. insurance companies carrying on an insurance business within the United States are required to report a certain minimum amount of effectively connected net investment income, determined in accordance with a formula that depends, in part, on the quantity of U.S. risks insured or reinsured by such companies. If any of Tower Ltd.’s Bermuda domiciled insurance subsidiaries are considered to be engaged in the conduct of an insurance business in the United States and are not entitled to the benefits of the Tax Treaty in general (because they fail to satisfy one of the limitations on treaty benefits discussed above or otherwise), the Code could subject a significant portion of their investment income to U.S. federal income tax. In addition, while the Tax Treaty applies to premium income, it is uncertain whether the Tax Treaty applies to other income such as investment income. If any of Tower Ltd.’s Bermuda domiciled insurance subsidiaries is considered engaged in the conduct of an insurance business in the United States and is entitled to the benefits of the Tax Treaty in general, but the Tax Treaty is interpreted to not apply to investment income, a significant portion of their investment income could be subject to U.S. federal income tax.

Non-U.S. corporations not engaged in a trade or business in the U.S. (as well as those that are engaged in a U.S. trade or business, but only with respect to their non-effectively connected income) are subject to U.S. income tax imposed by withholding on certain “fixed or determinable annual or periodic gains, profits and income” derived from sources within the United States (such as dividends and certain interest on investments),

 

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unless an exemption or reduction under the Code or an applicable treaty is available. The Tax Treaty does not reduce the U.S. withholding rate on U.S.-source investment income. The standard non-treaty rate of U.S. withholding tax is currently 30%. Accordingly, dividends and interest, if any, paid by Tower Ltd.’s U.S. subsidiaries to Tower Ltd. or any of its Bermuda subsidiaries generally will be subject to a 30% U.S. withholding tax.

The United States also imposes an excise tax (i) on insurance and reinsurance premiums paid to non-U.S. insurers or reinsurers with respect to risks of a U.S. entity or individual risks located wholly or partly with the United States and (ii) with respect to risks of a foreign entity or individual engaged in a trade or business in the United States, on risks located within the United States. The rates of tax applicable to premiums paid to non-U.S. insurers are 4% for casualty insurance premiums and 1% for reinsurance premiums, unless exempted under an applicable tax treaty. The Tax Treaty does not provide for such an exemption. It is the position of the IRS that such tax applies each time such a U.S. risk is insured, reinsured or retroceded (even if the relevant agreement is between two non-U.S. entities).

Each of Tower Ltd.’s U.S. domiciled subsidiaries, including Tower, will be subject to taxation in the United States at regular corporate rates.

Under section 845 of the Code, the IRS may allocate income, deductions, assets, reserves, credits and any other items related to a reinsurance agreement among certain related parties, recharacterize such items, or make any other adjustment, in order to reflect the proper source, character or amount of the items for each party. In addition, if a reinsurance contract has a significant tax avoidance effect on any party to the contract, the IRS may make adjustments with respect to such party to eliminate the tax avoidance effect. No regulations have been issued under section 845 of the Code. Accordingly, the application of such provisions to Tower Ltd. and its subsidiaries is uncertain and Tower cannot predict what impact, if any, such provisions may have on Tower Ltd. and its subsidiaries either before or after completion of the merger.

Changes in U.S. Federal Income Tax Law. Legislation has been introduced in the U.S. Congress intended to eliminate certain perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the United States but have certain U.S. connections. There are legislative proposals which, if enacted, could have a material adverse effect on Tower Ltd. or its shareholders. It is possible that broader-based or new legislative proposals could emerge in the future that could have an adverse effect on Tower Ltd. or its shareholders.

In the insurance area, Congress has been considering legislation intended to eliminate certain perceived tax advantages of Bermuda and other non-U.S. insurance companies and U.S. insurance companies having Bermuda and other non-U.S. affiliates, including perceived tax benefits resulting principally from reinsurance between or among U.S. insurance companies and their Bermuda or other non-U.S. affiliates. Several legislative proposals would treat certain foreign corporations as U.S. corporations. There is no assurance that these proposals would not apply to Tower Ltd. In addition, Congress has conducted hearings relating to the tax treatment of reinsurance between affiliates and is reported to be considering legislation that would adversely affect reinsurance between U.S. and non-U.S. affiliates. One such proposal would increase the excise tax rate on reinsurance premiums paid to affiliated non-U.S. reinsurers. The Obama Administration’s Fiscal Year 2013 Revenue Proposals contained a provision that would deny deductions for all premiums ceded to affiliated non-U.S. reinsurers, offset by an exclusion for any ceding commissions received or reinsurance recovered from such affiliates. Enactment of such legislation or proposal as well as other changes in U.S. tax laws, regulations and interpretations thereof to address these issues could adversely affect Tower Ltd, its subsidiaries and its shareholders.

 

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U.S. Holders

Exchange of Tower Common Stock for the Merger Consideration

In General. Tower believes the merger is a fully taxable acquisition of the Tower common stock by Delaware Purchaser in exchange for the merger consideration. If this treatment is respected, subject to the discussion below relating to the application of section 304 of the Code, a U.S. Holder generally will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the fair market value of the merger consideration paid to such U.S. Holder (which will be the fair market value, at the time of the exchange, of the Shares paid to such U.S. Holder plus the amount of cash in lieu of fractional shares received by such U.S. Holder) and the adjusted basis of the Tower common stock surrendered by such U.S. Holder in the merger. A U.S. Holder will not receive any cash (other than cash in lieu of fractional shares) in the merger to fund the tax required to be paid as a result of the merger and will have to pay such tax from other sources. The tax basis of the Shares received by such U.S. Holder will be equal to the fair market value of such Shares at the time of the exchange, and such U.S. Holder’s holding period for such Shares will begin on the day following the effective date of the merger.

It is possible that the IRS could challenge the intended treatment of the merger as a taxable acquisition of the Tower common stock by Delaware Purchaser in exchange for the merger consideration. If the IRS were successful in any such challenge, a U.S. Holder may not be able to recognize a loss on such exchange, the calculation of the tax basis and holding period of the Shares received by a U.S. Holder in the merger would be affected, and a U.S. Holder may be required to file IRS Form 926 with respect to the merger.

Gains and Losses. Any gain or loss recognized by a U.S. Holder with respect to Tower common stock exchanged by such U.S. Holder in the merger generally will be capital gain or loss if such Tower common stock is held as a capital asset at the effective time of the merger. Such capital gain or loss generally will be long-term capital gain (taxable at a reduced rate for certain non-corporate U.S. Holders) or loss if, on the effective date of the merger, the Tower common stock was held by such U.S. Holder for more than one year. The deductibility of capital losses is subject to limitations. Such gain or loss generally will be sourced within the United States.

Section 304 of the Code. The receipt of the merger consideration by U.S. Holders will be subject to section 304 of the Code. Section 304 could cause the entire amount of the merger consideration received by a U.S. Holder to be treated as a dividend regardless of the gain realized on the merger. Under section 304, the merger consideration received by a U.S. Holder will be treated as the proceeds of a redemption of stock deemed issued by Delaware Purchaser to such U.S. Holder. This deemed redemption will be treated either as a distribution by Delaware Purchaser or, alternatively, a sale or exchange of shares if the deemed redemption is “substantially disproportionate” or “not essentially equivalent to a dividend.”

The deemed redemption will generally be “substantially disproportionate” with respect to a holder if the percentage described in (2) below is less than 80% of the percentage described in (1) below. Whether the deemed redemption is “not essentially equivalent to a dividend” with respect to a holder will depend upon the holder’s particular circumstances. At a minimum, however, for the deemed redemption to be “not essentially equivalent to a dividend,” the deemed redemption must result in a “meaningful reduction” in the holder’s deemed percentage stock ownership of Tower. In general, that determination requires a comparison of (1) the percentage of the outstanding stock of Tower that the holder is deemed actually and constructively to have owned immediately before the deemed redemption and (2) the percentage of the outstanding stock of Tower that is actually and constructively owned by the holder immediately after the deemed redemption. The IRS has indicated in a revenue ruling that a minority stockholder in a publicly traded corporation will experience a “meaningful reduction” if the minority stockholder (i) has a minimal percentage stock interest, (ii) exercises no control over corporate affairs and (iii) experiences any reduction in its percentage stock interest. In applying the above tests, a holder may, under the constructive ownership rules, be deemed to own stock that is owned by other persons or stock underlying a holder’s option to purchase stock in addition to the stock actually owned by the holder.

 

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A deemed distribution under section 304 will be taxable as a dividend to a U.S. Holder to the extent of such U.S. Holder’s allocable share of the earnings and profits of Delaware Purchaser, if any, and Tower. Assuming certain holding period requirements are satisfied, a reduced U.S. federal income tax rate may apply to dividends received by non-corporate U.S. Holders. While there is no controlling authority, such reduced rate should be available for a dividend that a non-corporate U.S. Holder is deemed to receive under section 304, subject to applicable holding period requirements. The portion of the deemed distribution not paid out of earnings and profits of Tower and Delaware Purchaser will be applied against such U.S. Holder’s tax basis in the Delaware Purchaser shares deemed received, and thereafter will be treated as gain from the sale of such shares.

To the extent that a corporate holder of Tower common stock is treated as having received a dividend as a result of section 304, such dividend will constitute an extraordinary dividend within the meaning of section 1059 of the Code. Section 1059 will require a corporate holder entitled to a dividends received deduction for such dividend to apply the amount of the non-taxed portion of the dividend against its tax basis in the Delaware Purchaser shares deemed received and recognize gain to the extent the dividend exceeds the tax basis in those shares.

If the deemed distribution under section 304 is taxable as a sale or exchange to a U.S. Holder, the results for such U.S. Holder should be similar to those described above under “Gains and Losses.”

The rules of section 304 are very complex and all U.S. Holders should consult their own tax advisors with respect to the applicability of section 304 to their particular circumstances.

Information Reporting and Backup Withholding. Under certain circumstances, information reporting and/or backup withholding may apply to U.S. Holders with respect to receipt of the merger consideration, unless an applicable exemption is satisfied. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules generally will be allowed as a refund or a credit against a U.S. Holder’s U.S. federal income tax liability if the required information is furnished by the U.S. Holder on a timely basis to the IRS.

Taxation of U.S. Holders Following the Merger

Distributions. A U.S. Holder that receives a distribution (other than certain distributions of Tower Ltd.’s stock or rights to acquire Tower Ltd.’s stock) with respect to a Share generally will be required to include the amount of such distribution in gross income as a dividend to the extent of Tower Ltd.’s current or accumulated earnings and profits (as determined for U.S. federal income tax purposes). To the extent the amount of such distribution exceeds such current and accumulated earnings and profits, it will be treated first as a non-taxable return of capital to the extent of such U.S. Holder’s adjusted tax basis in such Share and thereafter will be treated as gain from the sale or exchange of such Share. Tower Ltd. may not maintain calculations of earnings and profits for U.S. federal income tax purposes. As a result, a U.S. Holder may be required to include the entire amount of any such distribution in income as a dividend.

Distributions on the Shares that are treated as dividends generally will constitute income from sources outside the United States and generally will be categorized for U.S. foreign tax credit purposes as “passive category income” or, in the case of some U.S. Holders, as “general category income.” If, however, 50% or more (by vote or value) of Tower Ltd.’s stock is treated as being owned by United States persons, the amount of dividends constituting income from sources outside the United States may be limited to the amount attributable to the Tower Ltd.’s income from sources outside the United States.

Dividends paid by Tower Ltd. will not be eligible for the “dividends received” deduction generally allowed to corporate shareholders with respect to dividends received from U.S. corporations. Distributions treated as dividends that are received by certain non-corporate U.S. Holders (including individuals) from “qualified foreign corporations” or in respect of stock of a non-U.S. corporation (other than a corporation that is, in the taxable year during which the distributions are made or the preceding taxable year, a passive foreign investment company)

 

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that is readily tradable on an established securities market in the United States generally qualify for a reduced tax rate so long as certain holding period and other requirements are met. So long as the Shares are listed on NASDAQ, unless Tower Ltd. is treated as a passive foreign investment company with respect to such U.S. Holder, dividends received in respect of the Shares should qualify for the reduced rate. Each U.S. Holder that is a non-corporate taxpayer should consult its own tax advisor regarding the possible applicability of the reduced tax rate and the related restrictions and special rules.

Sale, Exchange or Other Disposition of the Shares. Subject to the discussion below under “—Related Person Insurance Income,” a U.S. Holder generally will recognize capital gain or loss for U.S. federal income tax purposes upon the sale, exchange or other disposition of a Share in an amount equal to the difference, if any, between the amount realized on the sale, exchange or other disposition and such U.S. Holder’s adjusted tax basis in such Share. Such capital gain or loss generally will be long-term capital gain (taxable at a reduced rate for certain non-corporate U.S. Holders) or loss if, on the date of such sale, exchange or other disposition, the Share was held by such U.S. Holder for more than one year. The deductibility of capital losses is subject to limitations. Such gain or loss generally will be sourced within the United States.

Passive Foreign Investment Company Considerations. As discussed below, Tower believes that Tower Ltd. was not in 2011, and Tower does not currently expect Tower Ltd. to become, a PFIC for U.S. federal income tax purposes. However, because this determination is made annually at the end of each taxable year and is dependent upon a number of factors, some of which are beyond Tower Ltd.’s control, such as the value of its assets and the amount and type of its income, there can be no assurance that Tower Ltd. will not be a PFIC in any taxable year or that the IRS will agree with Tower Ltd.’s conclusion regarding its PFIC status in any taxable year. If Tower Ltd. is a PFIC in any taxable year, U.S. Holders could suffer adverse consequences as discussed below.

In general, a non-U.S. corporation will be treated as a PFIC in any taxable year in which either (i) at least 75% of its gross income is “passive income” or (ii) on average at least 50% of the value of its assets is attributable to assets that produce passive income or are held for the production of passive income. Passive income for this purpose generally includes, among other things, dividends, interest, royalties, rents, and gains from commodities transactions and from the sale or exchange of property that gives rise to passive income. In determining whether a non-U.S. corporation is a PFIC, a proportionate share of the income and assets of each corporation in which it owns, directly or indirectly, at least a 25% interest (by value) is taken into account.

The PFIC rules also provide that income “derived in the active conduct of an insurance business by a corporation which is predominantly engaged in an insurance business … is not treated as passive income.” Tower expects, for purposes of the PFIC rules, that each Tower Ltd. insurance subsidiary will be predominantly engaged in the active conduct of an insurance business and is unlikely to have financial reserves in excess of the reasonable needs of its insurance business in each year of operations. Accordingly, Tower believes that Tower Ltd. should not be characterized as a PFIC. We cannot be certain, however, as there are currently no regulations regarding the application of the PFIC provisions to an insurance holding company and new regulations or pronouncements interpreting or clarifying these rules may be forthcoming, that the IRS will not challenge this position and that a court will not sustain such challenge.

If Tower Ltd. is a PFIC in any taxable year during which a U.S. Holder owns the Shares, such U.S. Holder could be liable for additional taxes and interest charges upon certain distributions by Tower Ltd. or upon a sale, exchange or other disposition of the Shares at a gain, whether or not Tower Ltd. continues to be a PFIC. The tax will be determined by allocating such distributions or gain ratably to each day of such U.S. Holder’s holding period. The amount allocated to the current taxable year and any holding period of such U.S. Holder prior to the first taxable year in which Tower Ltd. is a PFIC will be taxed as ordinary income (rather than capital gain) earned in the current taxable year. The amount allocated to other taxable years will be taxed at the highest marginal rates applicable to ordinary income for each such taxable year, and an interest charge will also be imposed on the amount of taxes so derived for each such taxable year. In addition, a person who acquires the Shares from a

 

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deceased U.S. Holder who held such Shares in a taxable year in which Tower Ltd. is a PFIC generally will be denied the step-up of the tax basis in such Shares for U.S. federal income tax purposes to fair market value of such Shares at the date of such deceased U.S. Holder’s death. Instead, such person will have a tax basis in such Shares equal to the lower of such fair market value or such deceased U.S. Holder’s tax basis in such Shares.

The tax consequences that would apply if Tower Ltd. were a PFIC would be different from those described above if a “mark-to-market” election is available and a U.S. Holder validly makes such an election as of the beginning of such U.S. Holder’s holding period. If such election were made, (i) such U.S. Holder generally would be required to take into account the difference, if any, between the fair market value of, and its adjusted tax basis in, the Shares at the end of each taxable year in which Tower Ltd. was a PFIC as ordinary income or, to the extent of any net mark-to-market gains previously included in income, ordinary loss, and to make corresponding adjustments to the tax basis in such Shares and (ii) any gain from a sale, exchange or other disposition of the Shares in a taxable year in which Tower Ltd. was a PFIC would be treated as ordinary income, and any loss from such sale, exchange or other disposition would be treated first as ordinary loss (to the extent of any net mark-to-market gains previously included in income) and thereafter as capital loss. A mark-to-market election is available to a U.S. Holder only if the Shares are considered “marketable stock”. Generally, stock will be considered marketable stock if it is “regularly traded” on a “qualified exchange” within the meaning of applicable U.S. Treasury regulations. A class of stock is regularly traded during any calendar year during which such class of stock is traded, other than in de minimis quantities, on at least 15 days during each calendar quarter. NASDAQ constitutes a qualified exchange.

The tax consequences that would apply if Tower Ltd. were a PFIC would also be different from those described above if a U.S. Holder is eligible for and timely makes a valid “qualified electing fund” (“QEF”) election. If a QEF election were made, such U.S. Holder generally would be required to include in income on a current basis its pro rata share of Tower Ltd.’s ordinary income and net capital gains in each taxable year in which Tower Ltd. is a PFIC. In order for a U.S. Holder to be able to make a QEF election, Tower Ltd. is required to provide such U.S. Holder with certain information. Because we do not expect Tower Ltd. to provide U.S. Holders with the required information, prospective investors should assume that a QEF election will not be available.

If Tower Ltd. is a PFIC in any taxable year during which a U.S. Holder owns Shares, such U.S. Holder (i) may also suffer adverse tax consequences under the PFIC rules described above with respect to any other PFIC in which Tower Ltd. has a direct or indirect equity interest and (ii) generally will be required to file annually a statement setting forth certain information with its U.S. federal income tax returns.

Prospective investors should consult their own tax advisors regarding the U.S. federal income tax consequences of an investment in a PFIC, including the potential extension of the period of limitations on assessment and collection of U.S. federal income taxes arising from a failure to file the statement described in the preceding paragraph.

Related Person Insurance Income. Certain adverse U.S. federal income and tax reporting rules may apply to a U.S. person that, directly or indirectly, owns stock of a non-U.S. corporation (any such U.S. person, a “U.S. Shareholder”) that earns RPII if (i) 25% or more (by vote or value) of the shares of such non-U.S. corporation are, directly or indirectly, owned by U.S. Shareholders, (ii) 20% or more (by vote or value) of the shares of such non-U.S. corporation are, directly or indirectly, owned by persons insured by any insurance or reinsurance policy issued by such non-U.S. corporation or by persons who are related to U.S. Shareholders and (iii) 20% or more of the non-U.S. corporation’s insurance income is RPII. RPII generally includes insurance income derived by a non-U.S. corporation that would be taxed as an insurance company if it were a U.S. corporation from insurance (or reinsurance) with respect to which the person insured is a U.S. Shareholder or is related to a U.S. Shareholder.

Currently, Canopius owns subsidiaries that are in the insurance business. Tower believes that, based on the current direct or constructive ownership and income of such insurance subsidiaries, it is unlikely that the RPII

 

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rules described above will apply to Tower Ltd. or its subsidiaries. However, because this determination is made annually and is dependent upon a number of factors, some of which are beyond Tower Ltd.’s control, including the ownership of its shares and the amount of RPII, there can be no assurance that the RPII rules described above will not apply in the future to income earned by Tower Ltd.’s insurance subsidiaries or that the IRS will agree with Tower Ltd.’s conclusion regarding the application of such rules. If the RPII rules described above apply to income earned by any of Tower Ltd.’s insurance subsidiaries, a U.S. Holder generally will be required to (x) include in taxable income each taxable year its pro rata share (as specially defined in the RPII rules) of any RPII earned by such insurance subsidiary for the taxable year, regardless of whether such U.S. Holder receives any distribution with respect to such income, and (y) file IRS Form 5471, disclosing certain information regarding its direct or indirect ownership of such insurance subsidiary. U.S. Holders that are tax-exempt entities would be required to treat any amount includible in income as a result of the application of the RPII rules described above as unrelated business taxable income.

In addition, if 25% or more (by vote or value) of the shares of any non-U.S. corporation that would be taxed as an insurance company if it were a U.S. corporation is, directly or constructively, owned by U.S. Shareholders, some or all of the gain recognized by a U.S. Shareholder on the disposition of shares in such non-U.S. corporation may be treated as ordinary income, rather than capital gain. The current U.S. Treasury regulations do not specifically address whether or how this ordinary income treatment rule would apply to dispositions of shares in a non-U.S. corporation that does not directly engage in the insurance business but owns a non-U.S. subsidiary that would be taxed as an insurance company if such subsidiary were a U.S. corporation. Although Tower Ltd. is not engaged in the insurance business, it owns a non-U.S. subsidiary that is engaged in the insurance business. There can be no assurance that, if 25% or more (by vote or value) of Tower Ltd.’s shares are directly or indirectly owned by U.S. Shareholders, the IRS will not interpret these rules, or that the U.S. Treasury regulations will not be amended, to apply this ordinary income treatment to a disposition of the Shares on account of Tower Ltd.’s ownership of such non-U.S. income subsidiary.

Information Reporting and Backup Withholding. Under certain circumstances, information reporting and/or backup withholding may apply to U.S. Holders with respect to payments made on or proceeds from the sale, exchange or other disposition of the Shares, unless an applicable exemption is satisfied. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules generally will be allowed as a refund or a credit against a U.S. Holder’s U.S. federal income tax liability if the required information is furnished by the U.S. Holder on a timely basis to the IRS.

Disclosure Requirements for Specified Foreign Financial Assets. Individual U.S. Holders (and certain U.S. entities specified in U.S. Treasury guidance) who, during any taxable year, hold any interest in any “specified foreign financial asset” generally will be required to file with their U.S. federal income tax returns certain information on IRS Form 8938 if the aggregate value of all such assets exceeds certain specified amounts. “Specified foreign financial asset” generally includes any financial account maintained with a non-U.S. financial institution and may also include the Shares if they are not held in an account maintained with a financial institution. Substantial penalties may be imposed, and the period of limitations on assessment and collection of U.S. federal income taxes may be extended, in the event of a failure to comply. U.S. Holders should consult their own tax advisors as to the possible application to them of this filing requirement.

Changes in U.S. federal Income Tax Law. The tax laws and interpretations regarding whether a company is engaged in a trade or business in the United States or whether a company is a controlled foreign corporation or PFIC or has RPII are subject to change, possibly on a retroactive basis. There are currently no regulations regarding the application of the PFIC rules to an insurance company. Additionally, the regulations regarding RPII are still in proposed form and the regulations regarding inversion transactions are in temporary form. New regulations or pronouncements interpreting or clarifying such rules will likely be forthcoming from the IRS. We are not able to predict if, when or in what form such guidance will be provided and whether such guidance will be applied on a retroactive basis.

 

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Medicare Tax

Certain U.S. Holders that are individuals, estates or trusts will be subject to a 3.8% tax on all or a portion of their “net investment income,” which may include all or a portion of their income from the exchange of Tower common stock for the merger consideration in the merger, dividend income on Shares and gain from the sale, exchange or other disposition of Shares.

Non-U.S. Holders

Exchange of Tower Common Stock for the Merger Consideration

In General. Subject to the discussion of section 304 of the Code below, a Non-U.S. Holder generally will not be subject to U.S. federal income tax on any gain recognized on its receipt of the merger consideration unless:

 

   

Tower is or has been a “United States real property holding corporation” for U.S. federal income tax purposes at any time during the shorter of (i) the five-year period ending on the date of such sale, exchange or disposition and (ii) such Non-U.S. Holder’s holding period with respect to such common stock, and certain other conditions are met;

 

   

such gain is effectively connected with the conduct of a trade or business in the United States by such Non-U.S. Holder, in which event such Non-U.S. Holder generally will be subject to U.S. federal income tax on such gain in substantially the same manner as a U.S. holder (except as provided by an applicable tax treaty) and, if it is a corporation, may also be subject to a branch profits tax at the rate of 30% (or a lower rate if provided by an applicable tax treaty); or

 

   

such Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of such sale, exchange or disposition and certain other conditions are met (except as provided by an applicable treaty).

Generally, a corporation is a “United States real property holding corporation” if the fair market value of its United States real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business (all as determined for U.S. federal income tax purposes). Tower does not believe it is, and does not currently anticipate that it will become prior to the effective time, a United States real property holding corporation.

Section 304 of the Code. As discussed above under “U.S. Holders—Exchange of Tower Common Stock for the Merger Consideration—Section 304 of the Code,” receipt of the merger consideration may be treated as a distribution by Delaware Purchaser to a Non-U.S. Holder and a dividend to a Non-U.S. Holder to the extent of such Non-U.S. Holder’s allocable share of the earnings and profits of Delaware Purchaser, if any, and Tower. Any such dividend that is paid to or for the account of a Non-U.S. Holder generally will be subject to U.S. federal withholding tax at the rate of 30%, or at a lower rate if provided by an applicable tax treaty and the Non-U.S. Holder provides the documentation (generally, IRS Form W-8BEN) required to claim benefits under such tax treaty to the applicable withholding agent.

If, however, a dividend is effectively connected with the conduct of a trade or business in the United States by a Non-U.S. Holder, such dividend generally will not be subject to the 30% U.S. federal withholding tax if such Non-U.S. Holder provides the appropriate documentation (generally, IRS Form W-8ECI) to the applicable withholding agent. Instead, such Non-U.S. Holder generally will be subject to U.S. federal income tax on such dividend in substantially the same manner as a U.S. holder (except as provided by an applicable tax treaty). In addition, a Non-U.S. Holder that is a corporation may be subject to a branch profits tax at the rate of 30% (or a lower rate if provided by an applicable tax treaty) on its effectively connected income for the taxable year, subject to certain adjustments.

 

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Given the uncertainty surrounding the application of section 304 of the Code to the merger and the treatment of any given Non-U.S. Holder, a broker or other applicable withholding agent may treat the entire merger consideration received by a Non-U.S. Holder as subject to U.S. federal withholding tax at the rate of 30%, unless such Non-U.S. Holder can establish a reduced rate for such withholding or that an exemption applies. Depending on the circumstances, the broker (or other applicable withholding agent) may obtain the funds necessary to remit any such withholding tax by asking the Non-U.S. Holder to provide the funds, by using funds in the Non-U.S. Holder’s account with the broker or by selling (on the Non-U.S. Holder’s behalf) all or a portion of the Shares.

The rules of section 304 are very complex and all Non-U.S. Holders should consult their own tax advisors with respect to the applicability of section 304 to their particular circumstances.

Information Reporting and Backup Withholding. Under certain circumstances, information reporting and/or backup withholding may apply to Non-U.S. Holders with respect to receipt of the merger consideration, unless an applicable exemption is satisfied. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules generally will be allowed as a refund or a credit against a Non-U.S. Holder’s U.S. federal income tax liability if the required information is furnished by the Non-U.S. Holder on a timely basis to the IRS.

 

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OTHER RELATED AGREEMENTS

Third Party Sale Agreements

In connection with the third party sale, Canopius Bermuda expects to enter into a separate purchase and sale agreement with each third party investor, which agreements are referred to in this proxy statement/prospectus as the purchase and sale agreements. It is expected that the purchase and sale agreements will contain, among other provisions, a bring-down condition with respect to the accuracy of representations and warranties as of the closing of the third party sale, as well as a condition that the closing of the merger be imminent. The third party sale will occur when (i) all conditions to the merger shall have been satisfied or waived, (ii) Tower has delivered the closing notice under the merger agreement and (iii) the parties to the merger agreement are ready, willing and able to consummate the merger immediately after the closing of the third party sale. Under the MTA, Tower may terminate the third party sale for any reason or no reason at any time up until its closing.

In addition, it is expected that Canopius Bermuda and the third party investors will enter into a registration rights agreement, which is referred to in this proxy statement/prospectus as the registration rights agreement, providing for the registration for resale under the Securities Act of the Tower Ltd. common shares held by the third party investors immediately following the closing.

Pursuant to the registration rights agreement, Tower Ltd. will agree to file a registration statement with the SEC covering the resale of all its shares sold in the third party sale as soon as reasonably practicable following the closing date of the merger, and to use its reasonable best efforts to cause such resale registration statement to become effective under the Securities Act as soon as reasonably practicable thereafter.

Under the registration rights agreement, Tower Ltd. will be required to register for resale under the Securities Act common shares acquired by third-party investors in connection with the third-party sale. Holders of registrable securities will be entitled to sell registrable securities under the resale registration statement for a specified period of time following the closing and the registration statement’s effectiveness, subject to Tower Ltd.’s ability to suspend such resales under specified circumstances set forth in the registration rights agreement. The registrable securities will not be subject to any lock-up period. In addition to registered sales, the registrable securities can also be sold at any time in transactions exempt under the Securities Act, including pursuant to Rule 144.

The registration rights agreement may also provide for cross-indemnification for some liabilities, including liabilities arising under the Securities Act. If the holders of registrable securities sell a large number of Tower Ltd. common shares following the merger, these sales could adversely affect the market price for Tower Ltd. common shares.

 

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VOTE REQUIRED TO ADOPT THE MERGER AGREEMENT; BOARD RECOMMENDATION

The affirmative vote of the holders of a majority of the shares of Tower common stock outstanding on the record date for the special meeting is required for the approval of the proposal to adopt the merger agreement and approve the merger.

The Tower Board of Directors recommends that the Tower stockholders vote “FOR” the proposal to adopt the merger agreement and approve the merger.

STOCKHOLDER ADVISORY VOTE ON CERTAIN COMPENSATORY ARRANGEMENTS

Background; Stockholder Resolution

Under the Dodd-Frank Act and Section 14A of the Exchange Act, Tower stockholders are entitled to vote to approve, on an advisory basis, the compensation of the named executive officers of Tower that is based on or otherwise relates to the merger as disclosed in this proxy statement/prospectus, which compensation is referred to in this proxy statement/prospectus as the merger-related compensation. The terms of the merger-related compensation subject to such advisory vote are described in this proxy statement/prospectus under “The Merger—Golden Parachute Compensation.”

In accordance with the above requirements, Tower is asking its stockholders to vote on the adoption of the following resolution:

“RESOLVED, that the compensation that may be paid or become payable to the named executive officers of Tower in connection with the merger, as disclosed in the Golden Parachute Compensation table and narrative discussion as set forth in this proxy statement/prospectus under “The Merger—Golden Parachute Compensation” beginning on page 74 is hereby APPROVED.”

Required Vote; Board Recommendation

The affirmative vote of the holders of a majority of the shares of Tower common stock represented and voting either in person or by proxy at the special meeting and entitled to vote is required for approval of the proposal to approve the merger-related compensation. However, because the vote on this proposal is advisory, it will not be binding on the Tower Board of Directors. The merger-related compensation is an obligation of Tower to each of the named executive officers of Tower. Thus, regardless of the outcome of this advisory vote, such compensation will be payable, subject only to the conditions applicable thereto, if the merger is approved.

None of Tower’s named executive officers is or will be entitled to additional compensation or accelerated benefits as a result of the merger, except with respect to unvested shares of Tower stock previously issued to such officers, which will vest, as provided pursuant to Tower’s long term equity compensation plan previously approved by shareholders, upon the closing of the merger. No compensation or benefits have been granted by Tower specifically in contemplation of the merger. In addition, Tower has recently adopted the practice of requiring newly hired employees to agree that, notwithstanding the provisions of the long term equity plan, vesting of their unvested shares will be accelerated only upon both a change in control and, within 24 months of such change, the loss of employment or substantial diminution of responsibilities.

The advisory vote on the merger-related compensation (which is referred to in this proxy statement/prospectus as Proposal 2) is a vote separate and apart from the vote to adopt the merger agreement and approve the merger and is a vote separate and apart from the votes on each of the other proposals. Accordingly, you may vote to approve this Proposal 2 and vote against any of the other proposals, or you may vote against this Proposal 2 and vote to adopt the merger agreement and approve the merger and to approve any of the other proposals. Advisory approval of this Proposal 2 to approve the merger-related compensation is not a condition to the completion of the merger and whether or not this Proposal 2 is approved will have no impact on the completion of the merger.

The Tower Board of Directors recommends that the Tower stockholders vote “FOR” the proposal to approve, on an advisory basis, the merger-related compensation as described in this proxy statement/prospectus.

 

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POSSIBLE ADJOURNMENT OF THE SPECIAL MEETING

If Tower fails to receive a sufficient number of votes to approve the proposal to adopt the merger agreement and approve the merger, Tower may propose to adjourn the special meeting, if a quorum is present, for a period of not more than 30 days for the purpose of soliciting additional proxies to approve the proposal to adopt the merger agreement and approve the merger.

The affirmative vote of the holders of a majority of the shares of Tower common stock represented and voting either in person or by proxy at the special meeting and entitled to vote is required for approval of the proposal to adjourn the special meeting, if necessary, if a quorum is present, to solicit additional proxies if there are not sufficient votes in favor of the proposal to adopt the merger agreement and approve the merger.

The Tower Board of Directors recommends that the Tower stockholders vote “FOR” the proposal to adjourn the special meeting, if necessary, if a quorum is present, to solicit additional proxies if there are not sufficient votes in favor of the proposal to adopt the merger agreement and approve the merger.

 

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THE COMPANIES

Tower Group, Inc.

Tower Group, Inc., or Tower, is a Delaware corporation formed in 1996 with its headquarters in New York, New York. Tower’s common stock is currently listed on NASDAQ under the ticker symbol “TWGP.”

The Tower group of companies is one of the 50 largest providers of property and casualty insurance products and services in the United States. Through its insurance subsidiaries, Tower offers a broad range of commercial, specialty and personal property and casualty insurance products and services to businesses in various industries and to individuals throughout the country. While Tower has maintained its headquarters in New York, its insurance company subsidiaries do business in all 50 states and the District of Columbia.

As a result of the merger, Tower will become an indirect wholly owned subsidiary of Tower Ltd.

Tower’s headquarters are located at 120 Broadway, 31st Floor, New York, New York, 10271 and its telephone number is (212) 655-2000. For additional information on Tower and its business, see “Where You Can Find More Information.”

Canopius Holdings Bermuda Limited

Canopius Holdings Bermuda Limited, or Canopius Bermuda, is a privately-held exempted company formed under the laws of Bermuda in 2007. Canopius Bermuda is a wholly owned subsidiary of Canopius Group Limited, which is referred to in this proxy statement/prospectus as Canopius. Canopius Bermuda is the holding company for Canopius Bermuda Limited, or CBL, a Class 3A Bermuda reinsurance company with assumed premiums written of approximately $309 million as of September 30, 2012. CBL currently writes structured reinsurance treaty business and provides capital support to Canopius’s underwriting operations at Lloyd’s of London. Following the restructuring, it is expected that CBL will continue to participate in Canopius’s Lloyd’s business through quota share reinsurance and will provide reinsurance to third party cedents. As of September 30, 2012, Canopius Bermuda was also the holding company for Canopius Underwriting Bermuda Limited, or CUBL, an insurance services company primarily underwriting excess of loss liability business and treaty property reinsurance business on behalf of Syndicate 4444 at Lloyd’s. Syndicate 4444 is managed by an affiliated company. CUBL also provides certain administrative services to CBL. CUBL was transferred in connection with the restructuring and is no longer a subsidiary of Canopius Bermuda. See “The Restructuring.”

Effective immediately prior to the consummation of the merger, Canopius will monetize its investment in CBL by selling 100% of its equity ownership of Canopius Bermuda to the third party investors, who will be the sole shareholders of Canopius Bermuda prior to the effective time. See “The Merger—Transactions Related to the Merger—Third Party Sale” above. Upon consummation of the merger, the former stockholders and optionholders of Tower, as well as holders of Tower’s convertible notes, will own 76% or more but less than 80% of the fully diluted capital stock of Tower Ltd. and the third party investors in Canopius Bermuda will own more than 20% but less than or equal to 24% of the fully diluted capital stock of Tower Ltd.

Concurrent with the completion of the merger, Canopius Bermuda will be renamed “Tower Group International, Ltd.” At and as of the effective time, Tower Ltd. will be a publicly traded company and its common shares are expected be listed on NASDAQ under the symbol “TWGP.”

Canopius Mergerco, Inc.

Canopius Mergerco, Inc., or Delaware Purchaser, is a Delaware corporation formed in April 2012. Delaware Purchaser is a direct wholly owned subsidiary of Condor 2 Corporation and an indirect wholly owned subsidiary of Canopius Bermuda.

 

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Condor 1 Corporation

Condor 1 Corporation, or Merger Sub, a direct wholly owned subsidiary of Delaware Purchaser and an indirect wholly owned subsidiary of Canopius Bermuda, is a Delaware corporation formed in July 2012 solely for the purpose of effecting the merger with Tower. Upon the terms and conditions set forth in the merger agreement, Merger Sub will be merged with and into Tower and the separate existence of Merger Sub will cease. Tower will be the surviving corporation in the merger as a wholly owned subsidiary of Tower Ltd. Merger Sub has not conducted any activities other than those incidental to its formation and the matters contemplated by the merger agreement. Merger Sub’s registered address is c/o Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, DE 19808.

 

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THE RESTRUCTURING

Overview

Pursuant to the MTA and in connection with the merger, Tower, Canopius and Canopius Bermuda will, prior to the closing of the third party sale, effect or cause to be effected the following restructuring transactions involving Canopius Bermuda, which are referred to collectively as the restructuring:

a. The ownership of all operating subsidiaries of Canopius Bermuda other than CBL will be transferred to another Canopius company, other than Canopius Bermuda and its subsidiaries.

b. All of CBL’s loss reserves, loss adjustment reserves and unearned premium reserves and the insurance and reinsurance obligations to which they relate, other than such reserves and obligations relating to the retained business, will be commuted, novated or retroceded to affiliates of Canopius, other than Canopius Bermuda or its subsidiaries. See “Retrocession and Novation Transactions” below.

c. Subject to obtaining any necessary consents and approvals from the Bermuda Monetary Authority, Canopius Bermuda will declare a dividend of excess capital in an amount specified by Tower.

The retained business will consist of:

a. The loss reserves, loss adjustment reserves and unearned premium reserves, and the insurance and reinsurance obligations to which they relate, under all insurance and reinsurance contracts written by CBL before 31 July 2012 with unaffiliated parties;

b. CBL’s 72.58% quota share participation in the 2010 underwriting year of account results of Syndicate 4444 (as described in greater detail below) under CBL’s quota share reinsurance agreement with Canopius’ affiliate Canopius Capital Two Limited, dated December 30, 2009 (referred to as the 2010 Quota Share Agreement), and the loss reserves, loss adjustment reserves and unearned premium reserves relating to such quota share participation, provided that 68% of such quota share participation shall have been retroceded to an affiliate of Canopius other than CBL, leaving CBL with a 32% net exposure to such quota share participation;

c. CBL’s 67.65% quota share participation in the 2011 underwriting year of account results of Syndicate 4444 under CBL’s quota share reinsurance agreement with Canopius’ affiliate Flectat Limited, dated December 15, 2010 (referred to as the 2011 Quota Share Agreement), and the loss reserves, loss adjustment reserves and unearned premium reserves relating to such quota share participation, provided that 89.86% of such quota share participation shall be retroceded to an affiliate of Canopius other than CBL, leaving CBL with a 10.14% net exposure to such quota share participation; if the 2010 underwriting year (including 2009 and prior year business reinsured to close into the 2010 underwriting year) is, in the normal course of business, reinsured to close into the 2011 underwriting year on January 1, 2013, then the retrocession percentages will be revised with respect to the 2010 underwriting year so that 68% of such quota share participation shall be retroceded to an affiliate of Canopius other than CBL, leaving CBL with a 32% net exposure to such quota share participation for the 2010 underwriting year; and

d. CBL’s 58.09% quota share participation in the 2012 underwriting year of account results of Syndicate 4444 under CBL’s quota share reinsurance agreement with Flectat Limited, dated December 1, 2011 (referred to as the 2012 Quota Share Agreement), and the loss reserves, loss adjustment reserves and unearned premium reserves relating to such quota share participation, provided that 89.67% of such quota share participation shall be retroceded to an affiliate of Canopius other than CBL, leaving CBL with a 10.33% net exposure to such quota share participation; if the 2011 underwriting year (including 2010 and prior year business reinsured to close into the 2011 underwriting year) is, in the normal course of business, reinsured to close into the 2012 underwriting year on January 1, 2014, then the retrocession percentages will be revised with respect to the 2010 underwriting year so that 68% of such quota share participation shall be retroceded to an affiliate of Canopius other than CBL, leaving CBL with a 32% net exposure to such quota share participation for the 2010 underwriting year.

 

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