PREM14A 1 nt10018387x2_prem14a.htm PREM14A

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant ☒
Filed by a Party other than the Registrant  
Check the appropriate box:

Preliminary Proxy Statement

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

Definitive Proxy Statement

Definitive Additional Materials

Soliciting Material under Rule 14a-12
WATFORD HOLDINGS LTD.
(Name of Registrant as Specified In Its Charter)
 
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
No fee required.
Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
 
(1)
Title of each class of securities to which transaction applies:
 
 
Common shares, $0.01 par value per share
 
 
 
 
(2)
Aggregate number of securities to which transaction applies:

17,386,979 common shares issued and outstanding that are subject to the transaction (which is the difference between the 19,886,979 common shares that are issued and outstanding and the 2,500,000 common shares that are beneficially owned by Arch Capital Group Ltd. and/or its subsidiaries (collectively, the “Arch Group”)); 23,370 common shares issuable upon the vesting or settlement of outstanding restricted share units (“RSUs”) subject to performance metrics (with vesting of any performance-based RSUs vesting as if performance goals had been achieved at target level); and 84,255 common shares issuable upon the vesting or settlement of outstanding RSUs not subject to performance metrics.
 
 
 
 
(3)
Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined):

The maximum aggregate value was determined based upon the sum of: (1) 17,386,979 common shares issued and outstanding that are subject to the transaction (which is the difference between the 19,886,979 common shares that are issued and outstanding and 2,500,000 common shares that are beneficially owned by the Arch Group) multiplied by $35.00 per common share; (2) 23,370 common shares issuable upon the vesting or settlement of outstanding RSUs subject to performance metrics (with vesting of any performance-based RSUs vesting as if performance goals had been achieved at target level) multiplied by $35.00 per common share; and (3) 84,255 common shares issuable upon the vesting or settlement of outstanding RSUs not subject to performance metrics multiplied by $35.00 per common share. In accordance with Section 14(g) of the Securities Exchange Act of 1934, as amended, the filing fee was determined by multiplying the sum calculated in the preceding sentence by 0.0001091.
 
 
 
 
(4)
Proposed maximum aggregate value of transaction:
 
 
$612,311,140.00
 
(5)
Total fee paid:
 
 
$66,803.15
Fee paid previously with preliminary materials.
Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
 
(1)
Amount Previously Paid:
 
 
 
 
(2)
Form, Schedule or Registration Statement No.:
 
 
 
 
(3)
Filing Party:
 
 
 
 
(4)
Date Filed:
 
 
 

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PRELIMINARY PROXY STATEMENT—SUBJECT TO COMPLETION
DATED JANUARY 4, 2021

Waterloo House, 1st Floor
100 Pitts Bay Road
Pembroke HM 08, Bermuda
[•], 2021
Dear Shareholder:
We cordially invite you to attend a special general meeting (the “Special Meeting”) of the shareholders of Watford Holdings Ltd. (the “Company,” “Watford” or “we,” “us” and “our”) to be held on [•], 2021 starting at [•] Atlantic time, at our offices at 100 Pitts Bay Road, 1st Floor, Pembroke HM 08, Bermuda.
At the Special Meeting, the holders of our common shares and our preference shares will be asked to consider and vote on the Agreement and Plan of Merger, dated as of October 9, 2020 (as amended by Amendment No. 1 thereto, dated November 2, 2020, the “Merger Agreement”), among the Company, Arch Capital Group Ltd. (“Arch”) and Greysbridge Ltd. (“Merger Sub”), which is a wholly-owned subsidiary of Arch, and on the statutory merger agreement that is an exhibit to the Merger Agreement. Arch has assigned its rights under the Merger Agreement to Greysbridge Holdings Ltd. (“Holdco”), a newly-formed company organized by Arch for the purpose of facilitating the merger. However, as provided in the Merger Agreement, Arch remains contractually responsible for the performance of its obligations under the Merger Agreement.
The Merger Agreement provides that, subject to our shareholders approving the Merger Agreement and subject to certain other conditions, Merger Sub will be merged with and into the Company, with the Company surviving the merger as a wholly-owned subsidiary of Holdco (the “Merger”) and, at the effective time of the Merger (the “Effective Time”), (i) each holder of common shares of the Company, $0.01 par value per share (the “common shares”), issued and outstanding immediately prior to the Effective Time (other than any common shares that are owned by the Company as treasury shares or by Arch, Merger Sub or any of their respective direct or indirect wholly-owned subsidiaries) will be entitled to receive, with respect to each such common share, $35.00 in cash, without interest and (ii) each of the 8½% Cumulative Redeemable Preference Shares of the Company, $0.01 par value per share (the “preference shares”), issued and outstanding immediately prior to the Effective Time will continue as a preference share of the surviving company and will be entitled to the same dividend and other relative rights, preferences, limitations and restrictions as currently apply to the preference shares. Our common shares are currently quoted on the Nasdaq Global Select Market under the symbol “WTRE.” Our preference shares are currently quoted on the Nasdaq Global Select Market under the symbol “WTREP.”
We are soliciting proxies for use at the Special Meeting or any adjournment thereof to consider and vote upon a proposal to approve the Merger Agreement, the statutory merger agreement and the Merger (the “Merger Proposal”).
Our board of directors (the “Board” or “board of directors”) has carefully reviewed and considered the terms and conditions of the Merger Agreement and the transactions contemplated by the Merger Agreement, including the merger. Our Board has (1) determined that the Merger Agreement, the statutory merger agreement and the transactions contemplated thereby, including the Merger, are fair to, and in the best interests of, the Company and our shareholders (other than Arch and its subsidiaries), (2) approved the Merger Agreement, the statutory merger agreement and the Merger, and (3) resolved to recommend that our shareholders approve the Merger Agreement, the statutory merger agreement and the merger.
Two members of our board of directors were appointed to serve on our board by Arch (the “Arch Directors”). The Arch Directors did not participate in the Board’s deliberations relating to the Merger Agreement, the statutory merger agreement and the transactions contemplated thereby, and did not participate in the vote to approve the Merger Agreement, the statutory merger agreement or the merger.

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At the Special Meeting, shareholders also will be asked to vote on proposals to approve (i) on an advisory (non-binding) basis, as required by the rules of the Securities and Exchange Commission, the compensation that may be paid or become payable to the Company’s named executive officers in connection with the Merger, as described in the accompanying proxy statement (the “Compensation Advisory Proposal”) and (ii) an adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies, in the event that there are insufficient votes to approve the Merger Proposal at the Special Meeting (the “Adjournment Proposal”).
Holders of common shares will be entitled to vote on all three proposals. Holders of preference shares will be entitled to vote on the Merger Proposal and the Adjournment Proposal. The affirmative vote of shares carrying not less than 50% of the total voting rights of all issued and outstanding common shares and preference shares, voting together as a single class, will be required to approve the Merger Proposal. Arch and Enstar, our two largest shareholders, have entered into separate voting and support agreements pursuant to which they have agreed to vote such shares in favor of the Merger Proposal. Our board of directors recommends that the Company’s shareholders vote “FOR” the Merger Proposal, “FOR” the Compensation Advisory Proposal and “FOR” the Adjournment Proposal.
The accompanying proxy statement provides you with detailed information about the Special Meeting, the Merger Agreement, the Merger and the Compensation Advisory Proposal. A copy of the Merger Agreement is attached as Annex A to the accompanying proxy statement. A copy of the statutory merger agreement is included as Exhibit A to the Merger Agreement attached as Annex A to the proxy statement. Your vote is important. We urge all shareholders to read the proxy statement and the documents included with the proxy statement carefully and in their entirety and to vote your shares by proxy as soon as possible prior to the Special Meeting.
Thank you for your support of Watford Holdings Ltd.
Important note regarding the COVID-19 pandemic: Our bye-laws prohibit us from conducting a virtual meeting of our shareholders if any of our shareholders who are based in the United States participate in the meeting. In order to allow all of our shareholders an equal opportunity to participate in the Special Meeting, we intend to hold the Special Meeting in person. Although shareholders of record will be entitled to attend the Special Meeting and vote in person, in light of the rapidly changing COVID-19 pandemic, attendance in person may be discouraged or prohibited by government regulations or action or based on general health and safety considerations. Your vote is important and, regardless of whether you plan to attend the Special Meeting in person, we encourage you to review the proxy materials and vote your shares by proxy as soon as possible prior to the Special Meeting.
 
Sincerely,
 
 
Walter Harris
Chairman of the Board
Jonathan Levy
Chief Executive Officer
The proxy statement is dated [•], 2021, and is first being mailed to Watford’s shareholders on or about [•], 2021.
NONE OF THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION, THE REGISTRAR OF COMPANIES IN BERMUDA OR THE BERMUDA MONETARY AUTHORITY HAS APPROVED OR DISAPPROVED THE MERGER, PASSED UPON THE MERITS OR FAIRNESS OF THE MERGER AGREEMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE INFORMATION CONTAINED IN THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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PRELIMINARY PROXY STATEMENT—SUBJECT TO COMPLETION
DATED JANUARY 4, 2021

Waterloo House, 1st Floor
100 Pitts Bay Road
Pembroke HM 08, Bermuda
Notice of Special General Meeting of Shareholders
To Our Shareholders:
Watford Holdings Ltd. (the “Company,” “Watford” or “we,” “us” and “our”) will hold a special general meeting (the “Special Meeting”) on [•], 2021, starting at [•] Atlantic time at our offices at 100 Pitts Bay Road, 1st Floor, Pembroke HM 08, Bermuda. The matters to be considered and acted upon at the Special Meeting, which are described in detail in the accompanying materials, are:
1.
To consider and vote on a proposal to approve and adopt the Agreement and Plan of Merger, dated as of October 9, 2020, as amended by Amendment No. 1 thereto dated November 2, 2020 (the “Merger Agreement”), and the related statutory merger agreement, by and among the Company, Arch Capital Group Ltd. (“Arch”), a Bermuda exempted company, and Greysbridge Ltd. (“Merger Sub”), a Bermuda exempted company limited by shares and wholly-owned subsidiary of Holdco (as defined below), and the transactions contemplated thereby, including the merger (the “Merger Proposal”);
2.
To approve, on an advisory (non-binding) basis, specified compensation that may become payable to the named executive officers of the Company in connection with the merger (the “Compensation Advisory Proposal”);
3.
To approve the adjournment of the Special Meeting, if necessary, to solicit additional proxies if there are insufficient votes at the time of the Special Meeting to approve the Merger Proposal (the “Adjournment Proposal”); and
4.
To act upon any other business that may properly come before the Special Meeting or any adjournment or postponement thereof.
The Merger Agreement and the merger are more fully described in the accompanying proxy statement, which you should read carefully in its entirety before voting. Arch has assigned its rights under the Merger Agreement to Greysbridge Holdings Ltd. (“Holdco”), a newly-formed company organized by Arch for the purpose of facilitating the merger, however, as provided in the Merger Agreement, Arch remains contractually responsible for the performance of its obligations under the Merger Agreement.
Two members of our board of directors were appointed to serve on our board by Arch (the “Arch Directors”). The Arch Directors did not participate in any deliberations of our board of directors or any committee thereof relating to the Merger Agreement, the statutory merger agreement and the transactions contemplated thereby, and did not participate in the vote to approve the Merger Agreement, the statutory merger agreement or the merger.
Our board of directors has fixed the close of business on [•], 2021 as the record date used to determine the shareholders entitled to notice of, and to vote at, the Special Meeting and any adjournment thereof. Only holders of our common shares or preference shares at the close of business on the record date are entitled to vote at the Special Meeting.
Our board of directors has approved the Merger Agreement, the statutory merger agreement, the merger and the other transactions contemplated by the Merger Agreement and has determined that the Merger Agreement, the merger and the other transactions contemplated by the Merger Agreement are fair to, and in the best interests of, the Company and our shareholders (other than Arch and its affiliates).

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OUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE “FOR” THE MERGER PROPOSAL, “FOR” THE COMPENSATION ADVISORY PROPOSAL AND “FOR” THE ADJOURNMENT PROPOSAL.
Our bye-laws prohibit us from conducting a virtual meeting of our shareholders if any of our shareholders who are based in the United States participate in the meeting. In order to allow all of our shareholders an equal opportunity to participate in the Special Meeting, we intend to hold the Special Meeting in person. Although shareholders of record will be entitled to attend the Special Meeting and vote in person, in light of the rapidly changing COVID-19 pandemic, attendance in person may be discouraged or prohibited by government regulations or action or based on general health and safety considerations.
Whether or not you plan to attend the Special Meeting in person, please complete, date, sign and return, as promptly as possible, the enclosed proxy card in the enclosed prepaid envelope, or submit your proxy through the Internet or by telephone by following the instructions in the enclosed proxy materials. Properly executed and dated proxy cards with no instructions indicated on the proxy card will be voted FOR approval of the Merger Proposal, FOR approval of the Compensation Advisory Proposal and FOR approval of the Adjournment Proposal.
Your vote is very important, regardless of the number of shares you own. Approval of the Merger Proposal is necessary to complete the merger. The Merger Proposal cannot be approved (and the merger cannot be completed) without the affirmative vote of shares carrying not less than 50% of the total voting rights of all issued and outstanding common shares and preference shares, voting together as a single class. Holders of common shares and preference shares each have one vote per share. A quorum of two or more persons present in person at the start of the Special Meeting and representing in person or by proxy in excess of 50% of the total voting rights of all issued and outstanding common and preference shares in the Company is required for the Merger Proposal to be put to a vote at the Special Meeting. If you fail to attend the Special Meeting or submit your proxy, your shares will not be counted when determining whether a quorum is present at the Special Meeting.
You may revoke your proxy at any time before the vote at the Special Meeting by following the procedures outlined in the enclosed proxy statement. If you are a shareholder of record, attend the Special Meeting and wish to vote in person, you may revoke your proxy and vote in person (subject to any COVID-19 related restrictions).
If you are a shareholder who holds your common shares and/or preference shares, as applicable, in “street name” through a broker, bank or other nominee, please be aware that you will need to follow the directions provided by such broker, bank or nominee regarding how to instruct it to vote your common shares at the Special Meeting.
 
By order of the Board of Directors,
 
 
 
Shane Reynolds
 
 
 
For and on behalf of
Conyers Corporate Services (Bermuda) Limited
Secretary

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SUMMARY TERM SHEET
This Summary Term Sheet discusses certain material information contained in this proxy statement, including with respect to the Agreement and Plan of Merger, dated as of October 9, 2020, by and among Watford Holdings Ltd. (the “Company,” “Watford” or “we,” “us” and “our”), a Bermuda exempted company, Arch Capital Group Ltd. (“Arch”), a Bermuda exempted company limited by shares, and Greysbridge Ltd. (“Merger Sub”), a Bermuda exempted company limited by shares and a wholly-owned subsidiary of Arch (the “Initial Merger Agreement,” and as amended by Amendment No. 1, dated November 2, 2020 (“Amendment No. 1”), the “Merger Agreement”). We encourage you to carefully read this entire proxy statement, including its annexes and the documents referred to or incorporated by reference in this proxy statement, as this Summary Term Sheet may not contain all of the information that may be important to you. Each item in this Summary Term Sheet includes page references directing you to a more complete description of that item in this proxy statement.
Arch has assigned its rights under the Merger Agreement to Greysbridge Holdings Ltd. (“Holdco”), however, as provided in the Merger Agreement, Arch remains contractually responsible for the performance of its obligations under the Merger Agreement. If the merger is completed, all of the surviving company’s common shares will be owned by Holdco, and Holdco will be owned by Arch Reinsurance Limited, a wholly owned subsidiary of Arch (“ARL”), certain investment funds managed by Kelso & Company (“Kelso”) and certain investment funds managed by Warburg Pincus LLC (“Warburg Pincus”).
Two members of our current board of directors were appointed to serve on our board by Arch (the “Arch Directors”). The Arch Directors did not participate in the Board’s or any Board committee’s deliberations relating to the Merger Agreement, the statutory merger agreement or any transaction contemplated by either agreement (including the merger), and did not participate in the vote to approve the Merger Agreement, the statutory merger agreement, or any transaction contemplated by either agreement (including the merger). Accordingly, as used in this summary, references to the “Board” or the “board of directors” or the “transaction committee” or to any action taken by “directors” of the Company or any recommendation made by the “Board” or “board of directors” means the board of directors or Watford’s transaction committee acting without the participation of the Arch Directors.
The Parties to the Merger and Their Principal Affiliates
Watford Holdings Ltd.
Watford Holdings Ltd. is a Bermuda exempted company that was formed in 2013. Watford is a global property and casualty (“P&C”) insurance and reinsurance company with approximately $1.1 billion in capital as of September 30, 2020 and with operations in Bermuda, the United States and Europe. For information about the Company, see “Important Information Regarding the Company—Company Background” beginning on page [88].
The principal executive office of Watford Holdings Ltd. is located at Waterloo House, 1st Floor, 100 Pitts Bay Road, Pembroke HM 08, Bermuda.
Additional information about Watford is contained in its public filings, certain of which are incorporated by reference into this proxy statement. See “Where You Can Find Additional Information” beginning on page [111].
Arch Capital Group Ltd. and Certain Affiliates
Arch Capital Group Ltd., a Bermuda exempted company limited by shares (“ACGL” or “Arch”), with approximately $15.2 billion in capital at September 30, 2020, provides insurance, reinsurance and mortgage insurance on a worldwide basis through its wholly-owned subsidiaries. Certain of Arch’s subsidiaries manage Watford’s insurance and reinsurance underwriting operations and part of Watford’s investment grade portfolio. Arch Reinsurance Ltd., a Bermuda exempted company limited by shares (“ARL” or “Arch Re Bermuda”), is a wholly owned direct subsidiary of ACGL. ARL owns 2,500,000 shares (or approximately 12.6%) of Watford’s outstanding common shares. Gulf Reinsurance Limited, a company limited by shares incorporated in the United Arab Emirates (“Gulf Re”), is a wholly owned indirect subsidiary of ACGL. Gulf Re owns 141,985 shares (or approximately 6.6%) of Watford’s outstanding preference shares. The registered offices of ACGL and ARL are located at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. The registered offices of Gulf Re are located at Unit 304, Level 3, Park Towers, Dubai International Financial Centre, Dubai, 506766, United Arab Emirates.
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See “The Parties to the Merger and Their Principal Affiliates—Arch Capital Group Ltd. and Certain Affiliates” beginning on page [1] and “Important Information Regarding the Arch Filing Persons” beginning on page [95].
Merger Sub
Greysbridge Ltd. (“Merger Sub”), a newly formed Bermuda exempted company limited by shares and a wholly-owned direct subsidiary of ACGL, has been organized by ACGL for the sole purpose of facilitating the merger. Merger Sub has not engaged in any business other than in connection with the merger. Merger Sub’s corporate existence will terminate upon consummation of the merger. The registered office of Merger Sub is c/o Carey Olsen Services Bermuda Limited, 2nd Floor, Atlantic House, 11 Par-la-Ville Road, Hamilton HM 11, Bermuda. See “The Parties to the Merger and Their Principal Affiliates—Greysbridge Ltd.” beginning on page [1] and “Important Information Regarding the Arch Filing Persons” beginning on page [95].
Greysbridge Holdings Ltd.
Greysbridge Holdings Ltd. (“Holdco”), a newly formed Bermuda exempted company limited by shares and a wholly-owned indirect subsidiary of ACGL, has been organized by ACGL for the purpose of facilitating the merger and other related transactions. Arch has assigned its rights under the Merger Agreement to Holdco, however, as provided in the Merger Agreement, Arch remains contractually responsible for the performance of its obligations under the Merger Agreement. Holdco has not engaged in any business other than in connection the merger and related transactions. The registered office of Holdco is c/o Carey Olsen Services Bermuda Limited, 2nd Floor, Atlantic House, 11 Par-la-Ville Road, Hamilton HM 11, Bermuda. See “The Parties to the Merger and Their Principal Affiliates— Greysbridge Holdings Ltd.” beginning on page [2].
Kelso & Company
Kelso is a leading private equity firm focused on the North American middle market. Since 1980, Kelso has invested approximately $14 billion of equity capital in over 125 transactions. See “The Parties to the Merger and Their Principal Affiliates—Kelso & Company LLC” beginning on page [2].
Kelso’s principal executive offices are located at 320 Park Avenue, New York, NY 10022.
Warburg Pincus LLC
Warburg Pincus is a leading global private equity firm focused on growth investing. The firm has more than $56 billion in private equity assets under management. See “The Parties to the Merger and Their Principal Affiliates—Warburg Pincus LLC” beginning on page [2].
Warburg Pincus’ principal executive offices are located at 450 Lexington Avenue, New York, NY 10017.
The Merger Proposal
You are being asked to consider and vote upon a proposal to approve and adopt the Merger Agreement, the related statutory merger agreement (the “Statutory Merger Agreement”) and the transactions contemplated thereby, including the merger (the “Merger Proposal”).
The Merger Agreement and the Statutory Merger Agreement provide that, at the closing of the merger, Merger Sub will be merged with and into the Company, with the Company as the surviving entity in the merger. Upon completion of the merger, (i) each of the common shares of the Company, par value $0.01 per share (the “common shares”) then issued and outstanding (other than (x) shares to be canceled pursuant to the Merger Agreement and (y) restricted share units (“RSUs”) to be canceled and exchanged pursuant to the Merger Agreement, as described more fully under “The Merger Agreement—Effect of the Merger on the Shares of the Company and Merger Sub” beginning on page [68]), will be converted into the right to receive $35.00 per common share, in cash, without interest and less any required withholding taxes (the “Merger Consideration”) and (ii) each of the 8½% Cumulative Redeemable Preference Share of the Company, $0.01 par value per preference share (the “preference shares”) then issued and outstanding will continue as a preference share of the surviving company and will be entitled to the same dividend and other relative rights, preferences, limitations and restrictions as currently apply to the preference shares. Upon completion of the merger, the holders of Watford common shares (other than ARL) will cease to have any ownership interest in the common shares of the Company.
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The special general meeting of our shareholders will be held at Watford’s offices at 100 Pitts Bay Road, 1st Floor, Pembroke HM 08, Bermuda, on [•], 2021, starting at [•] Atlantic time.
Record Date and Quorum (Page [63])
The holders of record of the common shares and preference shares as of the close of business on [•], 2021 (the record date for determination of shareholders entitled to notice of and to vote at the special general meeting) are entitled to receive notice of and to vote at the special general meeting.
At the special general meeting, the presence of two or more persons at the start of the meeting representing, in the aggregate, in person or by proxy, in excess of 50% of the total voting rights of all issued and outstanding common and preference shares in the Company will form a quorum for the transaction of business. If a quorum is not present, the special general meeting may be adjourned from time to time until a quorum is obtained. Abstentions and broker non-votes are counted as present for determining whether a quorum exists. A broker non-vote occurs when a bank, broker or other intermediary holding shares for a beneficial owner (a “custodian”) does not vote on a particular proposal because the custodian does not have discretionary voting power for that particular proposal and has not received instructions from the beneficial owner as to how the shares should be voted. The Company has been advised that the New York Stock Exchange’s rules, which apply to banks, brokers and other member organizations, do not permit custodians that are subject to those rules to exercise discretionary voting authority with respect to any of the proposals to be voted on at the special general meeting. Accordingly, if any beneficial owner of common shares or preference shares fails to instruct the custodian of those shares as to how the shares should be voted, those shares may not be voted at the special general meeting.
Required Shareholder Votes for the Merger (Page [63])
If a quorum is present at the special general meeting, (i) the approval of the Merger Proposal will require the affirmative votes of shares carrying not less than 50% of the total voting rights of all issued and outstanding common shares and preference shares, voting together as a single class; (ii) the approval of the Adjournment Proposal will require the affirmative vote of a majority of the votes cast by the holders of common shares and preference shares, voting together as a single class; and (iii) the approval of the Compensation Advisory Proposal will require the affirmative vote of a majority of the votes cast by the holders of common shares.
Holders of common shares and preference shares will be entitled to vote on the merger proposal and the adjournment proposal. Common shares carry one vote per share and preference shares carry one vote per share. The affirmative vote of shares carrying not less than 50% of the total voting rights of all issued and outstanding common shares and preference shares, voting together as a single class, will be required to approve the merger proposal. In accordance with the Company’s bye-laws, if the votes conferred by the “controlled shares” (as defined below), directly or indirectly or by attribution, to any shareholder would represent more than 9.9% of the voting power of all shares entitled to vote, the votes conferred by the controlled shares on such shareholder will be reduced by whatever amount is necessary so that after any such reduction the votes conferred by the controlled shares of such shareholder will constitute 9.9% of the total voting power of all shares of the Company entitled to vote.
The approval of the Merger Proposal by the holders of common shares and preference shares as described above is a condition to the parties’ obligations to consummate the merger.
As of the record date, there were [19,886,979] common shares issued and outstanding and [2,145,202] preference shares issued and outstanding.
As of the record date, Arch beneficially owned 2,500,000 common shares (or approximately 12.6% of the issued and outstanding common shares) and 141,985 preference shares (or approximately 6.6% of the issued and outstanding preference shares). Arch has agreed to vote those common and preference shares in favor of the Merger Proposal. Arch will not be entitled to vote all those shares at the special general meeting, however, because the Company’s bye-laws contain provisions that limit the voting power of “controlled shares” to 9.9% of the combined voting power of all shares eligible to vote. All common and preference shares eligible to be voted at the special general meeting by Arch or its subsidiaries are “controlled shares” for this purpose. The Company’s Board has determined that after giving effect to these bye-law provisions, Arch and its subsidiaries will be entitled to cast an aggregate of [  ] votes on the Merger Proposal and the Adjournment Proposal, and they will be entitled to cast an aggregate of [  ] votes on the Compensation Advisory Proposal.
Enstar beneficially owns 1,815,858 common shares (or approximately [9.1]% of the issued and outstanding common shares as of the record date) and has agreed to vote those shares in favor of the Merger Proposal.
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For a description of the voting agreements with Arch and Enstar, see “Voting and Support Agreements” below.
After giving effect to the reduction in Arch’s voting power required under the Company’s bye-laws, and assuming no other shareholder will own shares in excess of the 9.9% limit specified in the Company’s bye-laws, the aggregate number of votes eligible to be cast by all shareholders on the Merger Proposal will be [ ]. Because the Merger Agreement requires the merger be approved by the affirmative vote of not less than 50% of the holders of the issued and outstanding common shares and preference shares, voting as a single class, [ ] votes will be required to approve the Merger Proposal.
Each of the directors and executive officers of the Company has informed the Company that, as of the date of this proxy statement, he or she intends to vote the Watford common shares and preference shares owned by them in favor of the Merger Proposal.
Conditions to the Merger (Page [67])
Each party’s obligation to complete the merger is subject to the satisfaction or, to the extent permitted by law, waiver of the following conditions:
approval and adoption of the Merger Proposal by the affirmative votes of shares carrying not less than 50% of the total voting rights of all issued and outstanding common shares and preference shares, voting together as a single class at the special general meeting at which a quorum is present (the “Company Shareholder Approval”);
the expiration or termination of any waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), the receipt of pre-clearance or similar approvals under the antitrust or competition laws of certain other jurisdictions, the receipt of regulatory clearances required under other applicable laws including laws regulating insurance companies, without the imposition of “Burdensome Conditions” (as defined in the Merger Agreement) and all such required regulatory approvals being in full force and effect; and
no law or order being in effect that prevents, makes illegal or prohibits the consummation of the merger and the other transactions contemplated by the Merger Agreement (the “Absence of Legal Restraints Condition”).
The obligations of the Company to consummate the merger are subject to the satisfaction or, to the extent permitted by law, waiver of the following conditions:
the representations and warranties of Arch and Merger Sub in the Merger Agreement must be true and correct, subject to materiality thresholds set forth therein, as of the closing as if made at and as of such time (except with respect to certain representations and warranties made as of a specified earlier date) (the “Arch Representation Condition”);
Arch and Merger Sub shall have performed in all material respects all obligations required to be performed under the Merger Agreement at or prior to the closing of the merger (the “Arch Covenant Condition”); and
Arch shall have delivered to the Company a certificate, dated as of the closing date of the merger and signed by an authorized officer of Arch, certifying to Arch’s compliance with the above described conditions.
The obligations of Arch and Merger Sub to consummate the merger are subject to the satisfaction or, to the extent permitted by law, waiver of the following conditions:
the representations and warranties of the Company in the Merger Agreement must be true and correct, subject to materiality thresholds set forth therein, as of the closing as if made at and as of such time (except with respect to certain representations and warranties made as of a specified earlier date) (the “Company Representation Condition”);
the Company shall have performed in all material respects all obligations required to be performed by it under the Merger Agreement at or prior to the closing of the merger (the “Company Covenant Condition”);
the Company shall have delivered to Arch a certificate, dated as of the closing date of the merger and signed by its Chief Executive Officer or Chief Financial Officer, certifying to the Company’s compliance with the above described conditions;
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no “Company Material Adverse Effect” (as defined in the Merger Agreement) shall have occurred since the date of the Merger Agreement: and
the net investment loss (defined as net interest income plus realized and unrealized losses (if any) and net of realized and unrealized gains (if any)) on the Company’s non-investment grade portfolio between September 30, 2020 and the date that is two business days before the closing date (the “Non-Investment Grade Portfolio Loss”) must be less than $208 million.
Expected Timing of the Merger (Page [61])
We anticipate completing the merger in the first quarter of 2021, subject to approval of the Merger Proposal by the Company’s shareholders as specified herein, receipt of required regulatory approvals and the satisfaction or waiver of the other conditions to closing, although the Company cannot assure completion by any particular date, if at all.
Governmental Approvals (Page [59])
Consummation of the merger is subject to obtaining required regulatory approvals from the U.S. Federal Trade Commission, the European Commission, the Turkish Competition Authority, the Bermuda Monetary Authority, the New Jersey Department of Banking and Insurance, the California Department of Insurance and the Financial Services Commission of Gibraltar.
Purpose and Reasons of the Company for the Merger; Position of the Company as to Fairness of the Merger; Recommendation of the Board of Directors (Page [28])
Watford’s Board of Directors (the “Board of Directors” or the “Board”) after considering various factors described herein, adopted resolutions at a meeting duly called at which a quorum of directors was present (i) determining that the Merger Consideration constitutes fair value for each common share in accordance with the Companies Act 1981 of Bermuda (the “Bermuda Companies Act”), (ii) determining that the continuation of each issued and outstanding preference share as a preference share of the surviving company with the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares constitutes fair value for each preference share in accordance with the Bermuda Companies Act, (iii) determining that the terms of the Merger Agreement and the Statutory Merger Agreement and the transactions contemplated thereby, including the merger, are fair to and in the best interests of the Company and its shareholders, (iv) approving and declaring advisable the execution, delivery and performance of the Merger Agreement and the Statutory Merger Agreement and the consummation of the transactions contemplated thereby, including the merger, and (v) subject to the right of the Board of Directors to change its recommendation in certain circumstances, recommending that the Company’s shareholders vote in favor of the Merger Proposal at a duly held meeting of such shareholders for such purpose.
The Board of Directors recommends that you vote “FOR” the Merger Proposal.
For purposes of Section 106(2)(b)(i) of the Bermuda Companies Act, the Board of Directors considers that $35.00 per common share, without interest and less any applicable withholding taxes, represents fair value for each issued and outstanding common share and that the continuation of each issued and outstanding preference share as a preference share of the surviving company with the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares represents fair value for each issued and outstanding preference share.
For a more complete discussion of the factors considered by the Board of Directors in reaching its decision to approve and adopt the Merger Proposal, see “Special Factors—Purpose and Reasons of the Company for the Merger; Position of the Company as to Fairness of the Merger; Recommendation of the Board of Directors” beginning on page [28].
Opinion of Morgan Stanley & Co. LLC (Page [32] and Annex D)
Morgan Stanley & Co. LLC (“Morgan Stanley”) was retained by the Board of Directors to act as its financial advisor in connection with the merger. On November 1, 2020, Morgan Stanley rendered its oral opinion, which was subsequently confirmed in writing, to the Board of Directors to the effect that, as of that date and based upon and subject to the assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of review undertaken by Morgan Stanley as set forth in its written opinion, the consideration to be received
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by the holders of the common shares (other than shares held in treasury or held by Arch, Merger Sub, Watford or any of their respective direct or indirect wholly-owned subsidiaries or as to which dissenters’ rights have been perfected (the “Excluded Shares”)) pursuant to the Merger Agreement was fair from a financial point of view to such holders (as described more fully under “Special Factors—Opinion of Morgan Stanley & Co. LLC” on page [32]).
The full text of the written opinion of Morgan Stanley, dated November 2, 2020, is attached as Annex D and is incorporated by reference into this proxy statement in its entirety. The opinion sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of the review undertaken by Morgan Stanley in rendering its opinion. The summary of the opinion of Morgan Stanley in this proxy statement is qualified in its entirety by reference to the full text of the opinion. You are encouraged to, and should, read Morgan Stanley’s opinion and the section below captioned “Special Factors—Opinion of Morgan Stanley & Co. LLC” on page [32], summarizing Morgan Stanley’s opinion, carefully and in their entirety. Morgan Stanley’s opinion was directed to the Board of Directors, in its capacity as such, and addresses only the fairness from a financial point of view of the consideration to be received by the holders of common shares of Watford (other than Excluded Shares) pursuant to the Merger Agreement, as of the date of the opinion, and does not address any other aspects or implications of the merger. Morgan Stanley expressed no opinion or recommendation as to how the shareholders of Watford should vote at the shareholders meeting to be held in connection with the merger. Morgan Stanley’s opinion was not intended to, and does not, constitute advice or a recommendation to any shareholder as to how to vote at any shareholders meeting to be held in connection with the merger or whether to take any other action with respect to the merger.
For more information, see the section entitled “Special Factors—Opinion of Morgan Stanley & Co. LLC” beginning on page [32].
Purposes and Reasons of the Purchaser Filing Persons for the Merger (Page [38])
For the Purchaser Filing Persons, the purpose of the merger is to enable Holdco to acquire all of the common shares of Watford so that Holdco can operate Watford as a privately held company while retaining access to Watford’s underwriting platform and its licenses in Bermuda, the United States and Europe. For more information, see “Special Factors—Purposes and Reasons of the Purchaser Filing Persons for the Merger” beginning on page [38].
Certain Effects of the Merger (Page [46])
If shareholders approve the Merger Proposal and the other conditions to the closing of the merger are either satisfied or (to the extent permissible) waived, Merger Sub will be merged with and into the Company with the Company being the surviving company. If the merger is completed, at the effective time, (i) each common share issued and outstanding immediately prior to the effective time (other than (x) shares to be canceled pursuant to the Merger Agreement and (y) RSUs to be canceled and exchanged pursuant to the Merger Agreement) will automatically be canceled and converted into the right to receive the Merger Consideration and (ii) each preference share issued and outstanding immediately prior to the effective time will continue as a preference share of the surviving company and will be entitled to the same dividend and other relative rights, preferences, limitations and restrictions as currently apply to the preference shares. When this happens, all of the Company’s common shares will be owned by Holdco. None of the Company’s current common shareholders (other than ARL) will have any ownership interest in, or be a holder of, the Company’s common shares after the completion of the merger. As a result, our current holders of common shares will no longer benefit from any increase in the Company’s value or bear the risk of any decrease in the Company’s value. Following the merger, only Holdco and its owners (and potentially the holders of preference shares, until those shares are redeemed) will benefit from any increase in the Company’s value and also will bear the risk of any decrease in the Company’s value. Following the merger, the Watford common shares will no longer be publicly traded.
For more information about certain effects of the merger, see “The Merger Agreement—Effect of the Merger on the Shares of the Company and Merger Sub” beginning on page [68].
Treatment of Company Equity Awards (Page [69])
The Merger Agreement provides that effective as of immediately prior to the effective time of the merger, each outstanding performance-based RSU and time-based RSU granted under the Company’s 2018 Stock Incentive Plan (the “2018 Incentive Plan”) will become fully vested, with vesting of any performance-based RSUs vesting as if
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performance goals had been achieved at target level, and be canceled in exchange for the right to receive a single lump sum cash payment, without interest, equal to (i) the Merger Consideration, less (ii) any applicable taxes required to be withheld.
All such payments are required to be made by the surviving company, without interest, on or as soon as practicable following the effective time of the merger, and in no event later than five business days following the effective time of the merger.
Interests of the Company’s Directors and Executive Officers in the Merger (Page [47])
In considering the recommendations of the Board of Directors with respect to the Merger Proposal, you should be aware that, aside from their interests as shareholders of the Company, certain of the Company’s directors and executive officers have interests in the merger that are different from, or in addition to, those of shareholders of the Company generally.
Two members of Watford’s board of directors (the “Arch Directors”) were appointed to serve on our board by Arch. At a board meeting on June 17, 2020, the Arch Directors recused themselves from further discussions regarding strategic alternatives potentially available to Watford, recognizing that in any potential transaction that might result from those discussions, the interests of Arch could diverge from the interests of the Company and its other shareholders. Accordingly, the Arch Directors did not participate in the Board’s deliberations regarding acquisition proposals submitted by Arch or by other parties or in the Board’s deliberations relating to the Merger Agreement, and did not participate in the vote to approve the Merger Agreement or recommend that the shareholders approve the Merger Proposal.
In addition, certain facts that may cause the interests of the Company’s executive officers and directors to be different from or in addition to the interests of the Company’s shareholders include the following:
the Company’s executive officers hold unvested performance-based RSUs and time-based RSUs that will become fully vested (with vesting of any performance-based RSUs vesting as if performance goals had been achieved at target level) and canceled in exchange for the right to receive the Merger Consideration;
the Company’s executive officers have entered into amended and restated employment agreements that provide for certain severance protections upon a qualifying termination;
the Company’s executive officers may receive retention payments and will receive pro-rated annual bonus payments, in each case in connection with the merger;
the Company’s executive officers may enter into arrangements with Arch prior to or following the closing; and
the Company’s directors and executive officers are entitled to continued indemnification and insurance coverage under the Merger Agreement, and the Company’s directors and certain executive officers are entitled to continued indemnification and insurance coverage under indemnification agreements.
These interests are discussed in more detail in the section entitled “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page [7]. The Board of Directors was aware of the different or additional interests described herein and considered those interests along with other matters in recommending and/or approving, as applicable, the Merger Proposal.
Voting and Support Agreements (Page [54])
As a condition to the Company’s willingness to enter into the Initial Merger Agreement and to proceed with the transactions contemplated thereby, including the merger, Arch Reinsurance Ltd. (“ARL”) and Gulf Reinsurance Limited (“Gulf Re” and together with ARL, the “Arch Parties”), each of which is a wholly-owned subsidiary of Arch, entered into a Voting and Support Agreement dated as of October 9, 2020 with the Company (the “Arch Voting and Support Agreement”). In the Arch Voting and Support Agreement, the Arch Parties agreed (among other things) to vote their common shares and preference shares in favor of the Merger Proposal. At the date of this proxy statement, Arch Parties beneficially own in the aggregate 2,641,985 shares (consisting of 2,500,000 common shares and 141,985 preference shares), representing approximately 12.0% of Watford’s total issued and outstanding shares. However, the Company’s bye-laws contain provisions that limit the voting power of “controlled shares” to 9.9% of the voting power of all shares entitled to vote and all common and preference shares owned by Arch or its subsidiaries
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are “controlled shares” for this purpose. The Company’s Board has determined that after giving effect to these bye-law provisions, Arch and its subsidiaries will be entitled to cast an aggregate of [  ] votes on the Merger Proposal and the Adjournment Proposal, and they will be entitled to cast an aggregate of [  ] votes on the Compensation Advisory Proposal.
Under the Arch Voting and Support Agreement, the same voting obligations will apply to any additional common shares or preference shares acquired by the Arch Parties between October 9, 2020 and the termination of the Arch Voting and Support Agreement.
As a condition to Arch’s willingness to execute Amendment No. 1 (and thereby agree to an increase in the Merger Consideration from $31.10 per common share to $35.00 per common share), Enstar Group Limited (“Enstar”) and its wholly-owned subsidiary Cavello Bay Reinsurance Ltd. (“Cavello”) entered into a Voting and Support Agreement dated as of November 2, 2020 with Arch and the Company (the “Enstar Voting and Support Agreement”). In the Enstar Voting and Support Agreement, Enstar and Cavello agreed (among other things) that Cavello will vote in favor of the Merger Proposal. At the date of this proxy statement, Cavello beneficially owns 1,815,858 common shares, representing approximately 9.1% of the issued and outstanding common shares. Under the Enstar Voting and Support Agreement the same voting obligations will apply to any additional common shares or preference shares acquired by Cavello or Enstar between November 2, 2020 and the termination of the Enstar Voting and Support Agreement. Under the Enstar Voting and Support Agreement, Enstar has agreed not to pursue any other proposal to acquire the Company.
For more information, see “Voting and Support Agreements” beginning on page [54] and “Special Factors—Background of the Merger” beginning on page [18].
Certain U.S. Federal Income Tax Consequences of the Merger (Page [55])
The receipt of cash in exchange for common shares pursuant to the merger will be a taxable transaction for U.S. federal income tax purposes. Although not free from doubt due to a lack of directly governing authority, we believe that the Company should not be treated as a “passive foreign investment company,” or a “PFIC,” for U.S. federal income tax purposes under current law because we believe that the income of Watford Re Ltd. (“Watford Re”) should qualify for an exception to the PFIC rules for income that is derived in the active conduct of an insurance business by a corporation satisfying certain requirements, which we refer to as the “Insurance Company Exception.” Assuming that our view on the application of the PFIC rules is correct, subject to the possible application of Section 1248 of the Code (as discussed in more detail in the section entitled “Special Factors—Certain U.S. Federal Income Tax Consequences of the Merger”), U.S. holders (as defined in such section) should generally recognize capital gain or loss on the receipt of cash in exchange for common shares pursuant to the merger equal to the difference, if any, between (1) the amount of cash received and (2) the U.S. holder’s adjusted tax basis in those shares (determined separately for each share). Notwithstanding the foregoing, the ability of the Company to qualify for the Insurance Company Exception will depend on the Company’s continuing operations and operating results. Furthermore, there is a lack of currently applicable authority interpreting the Insurance Company Exception, and as a result no assurance can be provided that the Insurance Company Exception has applied to the Company to date. Moreover, the Insurance Company Exception has been subject to a number of proposed changes of law in recent years. Most recently, on December 4, 2020, the Treasury released certain final regulations (the “2020 Final Regulations”) and proposed regulations (the “2020 Proposed Regulations”) regarding the application of the Insurance Company Exception. We believe that the 2020 Final Regulations should not adversely impact the Company’s ability to satisfy the Insurance Company Exception and avoid being treated as a PFIC with respect to periods prior to the merger. In addition, although the 2020 Proposed Regulations could adversely impact the Company’s ability to satisfy the Insurance Company Exception if finalized in their current form, the 2020 Proposed Regulations are proposed to apply on a prospective basis after they are finalized, and as a result it is not expected that the 2020 Proposed Regulations would apply to the Company with respect to periods prior to the merger. As a result, we do not believe that these regulations should adversely impact the Company’s ability to satisfy the Insurance Company Exception with respect to periods prior to the merger. Notwithstanding the foregoing, no assurance can be provided that future guidance or legislation regarding the Insurance Company Exception will not apply retroactively in a manner that could cause the Company to fail to satisfy the Insurance Company Exception with respect to periods prior to the merger. Furthermore, given the lack of currently applicable authority regarding the Insurance Company Exception, no assurance can be provided that that taxing authorities may not seek to apply principles similar to the 2020 Proposed Regulations in interpreting the Insurance Company Exception for prior periods, notwithstanding the prospective application of those regulations. In addition, it is possible that the 2020 Proposed Regulations, if finalized in their current form, could adversely
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impact the ability of the Company to satisfy the Insurance Company Exception in future years, and as a result could impact the tax consequences of U.S. holders holding shares of the Company in the event that the merger closes later than planned. As a result, no assurance can be provided that the Internal Revenue Service (the “IRS”) would not assert that the Company should be classified as a PFIC.
If the Company were treated as a PFIC for U.S. federal income tax purposes at any time during a U.S. holder’s holding period, any gain recognized by such U.S. holder would be subject to special adverse tax rules if the U.S. holder has not made a timely “qualified electing fund” election. In addition, it is possible that Section 1248 could cause any gain recognized by a U.S. holder in the merger to be treated as ordinary income, as discussed in the section entitled “Special Factors—Certain U.S. Federal Income Tax Consequences of the Merger” beginning on page [55], which you should read in its entirety.
Holders of preference shares should not be treated as disposing of or exchanging their preference shares in the merger. Instead, the preference shares should be treated as remaining outstanding for U.S. federal income tax purposes. As a result, holders of the preference shares should not recognize gain or loss with respect to such shares in the merger.
The tax consequences of the merger to you will depend upon your own personal circumstances. You should consult your tax advisors for a full understanding of the U.S. federal, state, local, non-U.S. and other tax consequences of the merger to you.
Appraisal Rights (Page [54] and Annex E)
Under Bermuda law, the Company’s shareholders of record have rights of appraisal, pursuant to which those Company shareholders who do not vote in favor of the Merger Proposal and who are not satisfied that they have been offered fair value for their shares will be permitted to apply to the Supreme Court of Bermuda (the “Bermuda Court”) for an appraisal of the fair value of their shares. Company shareholders intending to exercise such appraisal rights must file their application for appraisal of the fair value of their shares with the Bermuda Court within one month from the giving of the notice convening the special general meeting. For the avoidance of doubt, this proxy statement constitutes such notice. See the sections of this proxy statement titled “Special Factors—Appraisal Rights” beginning on page [9] and “Appraisal Rights” beginning on page [9] for a more detailed description of the appraisal rights available to Company shareholders.
No Solicitation; No Adverse Recommendation Change (Page [76])
This section of the Summary Term Sheet uses the terms “alternative proposal,” “superior proposal,” and “intervening event” all of which are defined in the later section entitled “The Merger Agreement—Other Covenants and Agreements—No Solicitation; No Adverse Recommendation Change” beginning on page [9].
In the Merger Agreement, the Company agreed that subject to certain exceptions, none of the Company, its subsidiaries, or its or their officers, directors, managers, employees or representatives will: (i) solicit, initiate, knowingly encourage or facilitate any inquiry, discussion, offer or request that constitutes, or would reasonably be expected to lead to, an alternative proposal (an “inquiry”); (ii) furnish non-public information regarding the Company or its subsidiaries to any person in connection with an inquiry or an alternative proposal; (iii) enter into, continue or maintain discussions or negotiations with any person with respect to an inquiry or an alternative proposal; (iv) otherwise cooperate with or assist or participate in or facilitate any discussions or negotiations regarding, or furnish or cause to be furnished to any person or group any non-public information with respect to, or take any other action to facilitate any inquiries or the making of any proposal that constitutes, or could be reasonably expected to result in, an alternative proposal; (v) approve, agree to, accept, endorse or recommend any alternative proposal; (vi) submit to a vote of its shareholders, approve, endorse or recommend any alternative proposal; (vii) effect any adverse recommendation change; or (viii) enter into any letter of intent, agreement in principle, term sheet, acquisition agreement, merger agreement, option agreement, joint venture agreement, partnership agreement or other Contract (as such term is defined in the Merger Agreement) or agreement relating to any alternative proposal.
The Merger Agreement provides, however, that at any time before the special general meeting, the Board of Directors may, subject to certain conditions, if the Company has received a superior proposal, change the Company’s recommendation that its shareholders give the Company Shareholder Approval (the “Company Recommendation”), in each case, if the Board of Directors has determined in good faith, after consultation with outside legal counsel, that the failure to take such action would be inconsistent with the directors’ exercise of their fiduciary duties under
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applicable law, subject to complying with certain notice and other specified conditions set forth therein, including negotiating with Holdco (to the extent Holdco desired to so negotiate) with respect to the terms and conditions of the Merger Agreement in response to such a superior proposal. If the Company has received a superior proposal (after taking into account the terms of any revised offer by Holdco), the Company may terminate the Merger Agreement to enter into a definitive written agreement providing for such superior proposal simultaneously with the termination of the Merger Agreement. Doing so would require the Company to pay Holdco a fee of $28,100,000 prior to or simultaneously with such termination as described in “The Merger AgreementTermination Fee” beginning on page [11].
For a full description of the no solicitation and no adverse recommendation, see “The Merger Agreement—Other Covenants and Agreements—No Solicitation; No Adverse Recommendation Change” beginning on page [9].
Financing (Page [53])
Arch has assigned its rights and obligations under the Merger Agreement to Holdco; however, as provided in the Merger Agreement, Arch remains contractually responsible for the performance of its obligations under the Merger Agreement. Holdco has obtained equity commitments as follows: (i) funds managed by Kelso have committed to make an aggregate cash contribution of up to $210,000,000, (ii) funds managed by Warburg Pincus have committed to make an aggregate cash contribution of up to $210,000,000, and (iii) ARL has committed to make a cash contribution of up to $192,500,000 and to contribute the 2,500,000 shares of common stock of Watford already owned by ARL (the foregoing, collectively, being referred to herein as the “Equity Financing”). Upon consummation of the Equity Financing, ARL will own 40% of Holdco, funds managed by Kelso will own 30% of Holdco, and funds managed by Warburg Pincus will own 30% of Holdco. Arch’s obligation to pay the Merger Consideration as and when required under the Merger Agreement is not conditioned upon obtaining any financing, including the Equity Financing.
Watford and Arch estimate that the total amount of funds required to complete the merger and pay related fees and expenses will be approximately $[•] million. Arch expects that Holdco will fund such amount with cash proceeds from the Equity Financing at the effective time of the merger and cash on hand at Watford.
See “Special Factors—Financing” beginning on page [10].
Termination (Page [82])
The Company and Holdco may terminate the Merger Agreement by mutual written consent at any time prior to the effective time of the merger. The Company or Holdco may also terminate the Merger Agreement:
if the merger is not consummated on or before October 10, 2021 (the “end date”); provided, however, that if all of the conditions to closing have been satisfied or waived (other than those conditions that by their nature are to be satisfied at the closing) except for the condition that the Non-Investment Grade Portfolio Loss (as such term is defined in the Merger Agreement) is less than $208 million (the “Non-Investment Grade Portfolio Loss Condition”), the Company may elect at any time, or from time to time, during the three months following the date on which the conditions to Closing, other than the Non-Investment Grade Portfolio Loss Condition, have first been satisfied or waived (the “Extended Condition Date”), to deliver another certificate setting forth the Non-Investment Grade Portfolio Loss with a view to satisfying the Non-Investment Grade Portfolio Loss Condition before the expiration of the Extended Condition Date;
if the Absence of Legal Restraints Condition is not satisfied and the legal restraint that causes the condition not to be satisfied is final and non-appealable; or
if the Company Shareholder Approval shall not have been obtained at a duly convened meeting of the Company’s shareholders (or any adjournment or postponement thereof) at which the Merger Agreement was submitted to the shareholders for adoption.
The Company may terminate the Merger Agreement:
if Arch, Holdco or Merger Sub has breached any representation, warranty, covenant or agreement contained in the Merger Agreement, or if any representation or warranty of Arch or Merger Sub has become untrue, in each case, such that the Arch Representation Condition or the Arch Covenant Condition could not be satisfied and, in either such case, such breach is incapable of being cured by the end date or, if curable, has not been cured by the earlier of (i) 60 days after receipt of notice of such breach or (ii) the end date; or
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at any time prior to receipt of the Company Shareholder Approval, in order to enter into a definitive written agreement providing for a superior proposal in accordance with the Merger Agreement, provided that the Company pays the termination fee of $28,100,000 prior to or simultaneously with such termination (as described in “The Merger AgreementTermination Fee” beginning on page [10]).
Holdco may terminate the Merger Agreement:
if the Company has breached any representation, warranty, covenant or agreement contained in the Merger Agreement, or if any representation or warranty of the Company has become untrue, in each case, such that the Company Representation Condition or the Company Covenant Condition could not be satisfied and, in either such case, such breach is incapable of being cured by the end date or, if curable, has not been cured by the earlier of (i) 60 days after receipt of notice of such breach or (ii) the end date;
if at any time prior to the time the Company holds a shareholders meeting to approve the Merger Agreement, the Company’s Board of Directors shall have acted in a way that constitutes an adverse recommendation change; or
if any condition to closing has not been satisfied by the end date (as extended, if applicable).
Termination Fee (Page [83])
Except as specifically provided in the Merger Agreement, all fees and expenses incurred in connection with the merger and the other transactions contemplated by the Merger Agreement will be paid by the party incurring such fees or expenses, whether or not such transactions are consummated.
The Company will be required to pay to Holdco a fee of $28,100,000 if:
the Company terminates the Merger Agreement prior to receipt of the Company Shareholder Approval in order to enter into a definitive written agreement providing for a superior proposal;
Holdco terminates the Merger Agreement before the Company holds a shareholders meeting to approve the Merger Agreement and after the Company’s Board of Directors has acted in a way that constitutes an adverse recommendation change; or
(i) an alternative proposal is made by a third party to the Company or directly to the Company’s shareholders and in either case the alternative proposal is not publicly withdrawn before the Company holds a shareholders meeting to approve the Merger Agreement; (ii) subsequently, the Merger Agreement is terminated because at the shareholders meeting held to approve the Merger Agreement the Company Shareholder Approval is not obtained; and (iii) within 12 months after the Merger Agreement is terminated, (x) the Company enters into a definitive letter of intent, agreement in principle, term sheet, acquisition agreement, merger agreement, option agreement, joint venture agreement, partnership agreement or other Contract or agreement relating to any alternative proposal or (y) an “alternative proposal” (as defined below) is consummated, provided that for purposes of this bullet, the references to 20% in the definition of “alternative proposal” shall be deemed to be references to 50.1%.
The Merger Agreement provides that payment of the termination fee will be the sole and exclusive remedy available to Arch, Holdco and Merger Sub with respect to the Merger Agreement and the transactions contemplated thereby in the event any such payment becomes due and payable, and, upon payment of the termination fee, the Company (and the Company’s affiliates and its and their respective directors, officers, employees, shareholders and representatives) will have no further liability to Arch, Holdco and Merger Sub under the Merger Agreement, but this does not limit (i) the Company’s right to seek specific performance of the Merger Agreement before termination of the Merger Agreement or (ii) each party’s right to seek damages for any wilful breach of the Merger Agreement. In no event will the Company be obligated to pay the termination fee on more than one occasion. See “The Merger Agreement—Termination Fee” beginning on page [11].
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QUESTIONS AND ANSWERS ABOUT THE SPECIAL GENERAL MEETING AND THE MERGER
The following questions and answers address briefly some questions you may have regarding the special general meeting, the Merger Agreement, the Statutory Merger Agreement and the merger. These questions and answers may not address all questions that may be important to you as a shareholder of Watford. Please refer to the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to or incorporated by reference in this proxy statement for further information.
Q:
What is the proposed transaction?
A:
The proposed transaction is the merger of Merger Sub with and into Watford pursuant to the Merger Agreement. If the merger is consummated, (i) each common share issued and outstanding immediately prior to the effective time (other than (x) shares to be canceled pursuant to the Merger Agreement and (y) RSUs to be canceled and exchanged pursuant to the Merger Agreement) will automatically be canceled and converted into the right to receive the Merger Consideration and each preference share issued and outstanding immediately prior to the effective time will continue as a preference share of the surviving company and will be entitled to the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares. Accordingly, immediately after the effective time of the merger all of the Company’s common shares will be owned by Holdco and the preference shares will remain issued and outstanding.
Q:
What will holders of common shares receive in the merger?
A:
If the merger is completed and a holder of common shares does not properly exercise appraisal rights, such holder will be entitled to receive the $35.00 cash consideration, without interest and less any applicable withholding taxes, for each common share that it owns.
Q:
What will holders of preference shares receive in the merger?
A:
If the merger is completed and a holder of preference shares does not properly exercise appraisal rights, such holder will continue as a preference share of the surviving company and will be entitled to the same dividend and other relative rights, preferences, limitations and restrictions as currently apply to the preference shares.
Q:
When and where is the special general meeting?
A:
The special general meeting will take place on [•], 2021, starting at [•] Atlantic time, at the Company’s offices at 100 Pitts Bay Road, 1st Floor, Pembroke HM 08, Bermuda.
Q:
What matters will be voted on at the special general meeting?
A:
At the special general meeting, the holders of common shares and preference shares will be asked to vote:
to approve and adopt the Merger Proposal; and
if necessary, to approve the Adjournment Proposal.
Also at the special general meeting, the holders of common shares will be asked:
to vote to approve the Compensation Advisory Proposal, on an advisory (non-binding) basis; and
to act upon any other business that may properly come before the special general meeting or any adjournment or postponement thereof.
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Q:
Who will be entitled to vote on these matters at the special general meeting?
A:
All common shares owned by our shareholders as of the record date, which is the close of business on [    ], 2021, may be voted by those shareholders on the Merger Proposal, the Compensation Advisory Proposal and the Adjournment Proposal, and all preference shares owned by our shareholders as of the record date may be voted by those shareholders on the Merger Proposal and the Adjournment Proposal, in each case, subject to certain restrictions on “controlled shares” described under the heading, “Will I be entitled to vote all of my shares at the Annual General Meeting?” below. Our shareholders may cast one vote per common share and one vote per preference share that they held on the record date at the special general meeting. These shares include shares that are:
held directly in their name as the shareholder of record; and
held for them as the beneficial owner through a broker, bank or other nominee.
Q:
Will I be entitled to vote all my shares at the special general meeting?
A:
If your shares are treated as “controlled shares” of any person (which generally includes shares owned directly or indirectly by such person and, in the case of a person treated as a United States person for U.S. federal income tax purposes, shares attributed to such United States person under section 958 of the Internal Revenue Code of 1986, as amended (the “Code”)) and the votes conferred by the controlled shares represent more than 9.9% of the voting power of all shares entitled to vote, the votes conferred by the controlled shares will be reduced by whatever amount is necessary so that after any such reduction the votes conferred by the controlled shares to such person shall constitute 9.9%. In addition, the Board of Directors may limit a shareholder’s voting rights when it deems it appropriate to do so to: (i) avoid the existence of any 9.9% shareholder; and (ii) avoid certain material adverse tax, legal or regulatory consequences to us, any of our subsidiaries or any direct or indirect shareholder or its affiliates. Any reduction in the voting power of a shareholder as required by the controlled shares provisions will have the effect of increasing the percentage voting power of all other shareholders. To the extent this causes another shareholder’s voting power to exceed 9.9%, that other shareholder’s voting power also will be reduced. These controlled share adjustments continue until no shareholder has voting power in excess of 9.9%. The applicability of the voting power reduction provisions to any particular shareholder depends on facts and circumstances that may be known only to the shareholder or related persons. Accordingly, we request that any holder of shares with reason to believe that they are a 9.9% shareholder contact us promptly so that we may determine whether the voting power of such holder’s shares should be reduced. By submitting a proxy, a holder of shares will be deemed to have confirmed that, to their knowledge, they are not, and are not acting on behalf of, a 9.9% shareholder. The Board of Directors is empowered to require any shareholder to provide information as to that shareholder’s beneficial ownership of shares, the names of persons having beneficial ownership of the shareholder’s shares, relationships with other shareholders or any other facts the Board of Directors may consider relevant to the determination of the number of shares attributable to any person. The Board of Directors may disregard the votes attached to shares of any holder who fails to respond to such a request or who, in their judgment, submits incomplete or inaccurate information. The Board of Directors retains certain discretion to make such final adjustments that they consider fair and reasonable in all the circumstances as to the aggregate number of votes attaching to the shares of any shareholder to ensure that no person has voting power in excess of 9.9% at any time.
Q:
What constitutes a quorum for the special general meeting?
A:
The presence of two or more persons at the start of the meeting and representing, in the aggregate, in person or by proxy, in excess of 50% of the total voting rights of all issued and outstanding common and preference shares in the Company will form a quorum for the transaction of business.
Q:
What vote of the Company’s shareholders is required to approve the Merger Agreement?
A:
The consummation of the merger is conditioned upon the approval of the Merger Proposal by the affirmative vote of not less than 50% of the issued and outstanding common shares and preference shares, voting as a single class. Common shares carry one vote per share and preference shares carry one vote per share. As of the record date, there were [19,886,979] issued and outstanding common shares and [2,145,202] issued and outstanding preference shares.
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Arch beneficially owns 2,500,000 common shares (or approximately 12.6% of the issued and outstanding common shares) and 141,985 preference shares (or approximately 6.6% of the issued and outstanding preference shares) and has agreed to vote such shares in favor of the Merger Proposal. Arch has agreed to vote those common and preference shares in favor of the Merger Proposal. Arch will not be entitled to vote all those shares at the special general meeting, however, because the Company’s bye-laws contain provisions that limit the voting power of “controlled shares” to 9.9% of the combined voting power of all shares eligible to vote. All common and preference shares eligible to be voted at the special general meeting by Arch or its subsidiaries are “controlled shares” for this purpose. The Company’s Board has determined that after giving effect to these bye-law provisions, Arch and its subsidiaries will be entitled to cast an aggregate of [  ] votes on the Merger Proposal and the Adjournment Proposal, and they will be entitled to cast an aggregate of [  ] votes on the Compensation Advisory Proposal.
Enstar beneficially owns 1,815,858 common shares (or approximately [9.1]% of the issued and outstanding common shares as of the record date) and has agreed to vote those shares in favor of the Merger Proposal.
For a description of the voting agreements with Arch and Enstar, see “Voting and Support Agreements” below.
After giving effect to the reduction in Arch’s voting power required under the Company’s bye-laws, and assuming no other shareholder will own shares in excess of the 9.9% limit specified in the Company’s bye-laws, the aggregate number of votes eligible to be cast by all shareholders on the Merger Proposal will be [ ]. Because the Merger Agreement requires the merger be approved by the affirmative vote of not less than 50% of the holders of the issued and outstanding common shares and preference shares, voting as a single class, [ ] votes will be required to approve the Merger Proposal.
Q:
What effect do abstentions and “broker non-votes” have on the proposals?
A:
Abstentions and “broker non-votes” will be counted toward the presence of a quorum at the special general meeting. Abstentions and “broker non-votes” will not be considered votes cast on any proposal brought before the special general meeting. Because the vote required to approve the Merger Proposal at the special general meeting is the affirmative vote of shares carrying not less than 50% of the total voting rights of all issued and outstanding common shares and preference shares, voting together as a single class assuming a quorum is present, an abstention or a “broker non-vote” with respect to the Merger Proposal at the special general meeting will have the effect of a vote against the Merger Proposal. Because (i) the vote required to approve the Compensation Advisory Proposal at the special general meeting is the affirmative vote of a majority of the votes cast by holders of issued and outstanding common shares present in person or represented by proxy and entitled to vote at the special general meeting or any adjournment thereof assuming a quorum is present and (ii) the vote required to approve the Adjournment Proposal at the special general meeting is the affirmative vote of a majority of the votes cast by holders of issued and outstanding common shares and preference shares, voting as a single class, present in person or represented by proxy and entitled to vote at the special general meeting or any adjournment thereof assuming a quorum is present, an abstention or a “broker non-vote” with respect to either of those proposals at the special general meeting will not have the effect of a vote for or against the applicable proposal, but will reduce the number of votes cast and therefore increase the relative influence of those shareholders who do vote.
Q:
If I do not favor the adoption and approval of the Merger Agreement, what are my appraisal rights?
A:
If you are a shareholder of the Company as of the close of business on [•], 2021, which is the record date, and you do not vote your common shares or your preference shares, as applicable, in favor of the Merger Proposal and you are not satisfied that you have been offered fair value for your common shares or your preference shares, as applicable, you will have the right under Section 106(6) of the Bermuda Companies Act to apply to the Bermuda Court for an appraisal of the fair value of your shares within one month of the giving of notice convening the special general meeting (and such notice is constituted by this proxy statement). The right to make this demand is known as an “appraisal right.” Shareholders of the Company who wish to exercise their appraisal rights must: (i) not vote affirmatively in favor of the Merger Proposal (either in person or by proxy), and (ii) apply to the Bermuda Court to appraise the fair value of their common shares and/or preference shares, as applicable, within one month after the giving of the notice of the special general meeting at which the Merger
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Proposal will be voted upon. For additional information regarding appraisal rights, see “Special Factors—Appraisal Rights” beginning on page [54] of this proxy statement, “Appraisal Rights” beginning on page [54] of this proxy statement and the complete text of the applicable sections of the Bermuda Companies Act attached to this proxy statement as Annex E.
Q:
What vote of the Company’s shareholders is required to approve other matters to be presented at the special general meeting?
A:
The advisory (non-binding) Compensation Advisory Proposal requires the affirmative vote of a majority of the votes cast by holders of issued and outstanding common shares at the special general meeting or any adjournment thereof assuming a quorum is present. The Adjournment Proposal requires the affirmative vote of a majority of the votes cast by holders of issued and outstanding common shares and preference shares, voting together as a single class, at the special general meeting or any adjournment thereof assuming a quorum is present.
Q:
With respect to the advisory (non-binding) Compensation Advisory Proposal to approve specified compensation that may be payable to the named executive officers of the Company in connection with the merger, why am I being asked to cast an advisory (non-binding) vote to approve specified compensation that may become payable to the named executive officers of the Company in connection with the merger?
A:
The SEC’s rules require us to seek an advisory, non-binding vote with respect to certain categories of compensation that may be provided to named executive officers in connection with a merger transaction.
Q:
What will happen if shareholders do not approve the advisory (non-binding) Compensation Advisory Proposal regarding compensation matters?
A:
Approval of the advisory (non-binding) proposal regarding compensation matters is not a condition to the completion of the merger. This vote is an advisory vote and will not be binding on the Company. Therefore, if shareholders approve the Merger Proposal by the requisite majority and the merger is completed, the payments that are the subject of the vote may become payable to the named executive officers regardless of the outcome of the vote on the Compensation Advisory Proposal.
Q:
How does the Board of Directors recommend that I vote?
A:
The Board of Directors recommends that the Company’s shareholders vote:
FOR the Merger Proposal;
FOR the Compensation Advisory Proposal; and
FOR the Adjournment Proposal, if necessary, to solicit additional proxies if there are insufficient votes at the time of the special general meeting to approve the Merger Proposal.
The Arch Directors did not participate in the Board’s deliberations relating to the Merger Agreement, the statutory merger agreement or any transaction contemplated by either agreement (including the merger), or to the compensation arrangements described in the Compensation Advisory Proposal, and did not participate in the vote to approve the Merger Agreement, the statutory merger agreement or any transaction contemplated by either agreement (including the merger), or the vote to approve such compensation arrangements.
Jonathan Levy, the Company’s CEO, did not vote with respect to the compensation arrangements described in the Compensation Advisory Proposal.
You should read “Special Factors—Purpose and Reasons of the Company for the Merger; Position of the Company as to Fairness of the Merger; Recommendation of the Board of Directors” beginning on page [28] for a discussion of the factors that the Board of Directors considered in deciding to recommend and/or approve, as applicable, the Merger Agreement. See also “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page [47].
Q:
What effects will the merger have on the Company?
A:
If the merger is completed, at the effective time, (i) each common share issued and outstanding immediately prior to the effective time (other than (x) shares to be canceled pursuant to the Merger Agreement and (y) RSUs
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to be canceled and exchanged pursuant to the Merger Agreement) shall automatically be canceled and converted into the right to receive the Merger Consideration and (ii) each preference share issued and outstanding immediately prior to the effective time will continue as a preference share of the surviving company and will be entitled to the same dividend and other relative rights, preferences, limitations and restrictions as currently apply to the preference shares. The common shares and the preference shares are currently registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are quoted on the Nasdaq Global Select Market under the symbols “WTRE” and “WTREP,” respectively. As a result of the merger, the only holder of common shares will be Holdco.
Following the consummation of the merger, Watford’s common shares will be delisted from the Nasdaq Global Select Market and the registration of the common shares and our reporting obligations with respect to the common shares under the Exchange Act will be terminated upon application to the SEC. Watford’s preference shares will remain outstanding and, so long as the preference shares remain outstanding, Watford will remain obligated to file reports under the Exchange Act. See “Special Factors – Plans for the Company.”
Q:
What will happen to my RSUs under the 2018 Incentive Plan?
A:
If the merger is completed, all RSUs will become fully vested, with vesting of any performance-based RSUs vesting as if performance goals had been achieved at target level, and be canceled in exchange for the right to receive a single lump sum cash payment, without interest, equal to (i) the Merger Consideration, less (ii) any applicable taxes required to be withheld.
Q:
What will happen if the merger is not consummated?
A:
If the merger is not consummated for any reason, the holders of Watford common shares will not receive any payment for their common shares in connection with the merger. Instead, Watford will remain a public company and the common shares and preference shares will continue to be registered under the Exchange Act, and listed and traded on the Nasdaq Global Select Market. Under specified circumstances, if the Merger Agreement is terminated, the Company may be required to pay Holdco a termination fee of $28,100,000. See “The Merger Agreement—Termination” beginning on page [82] and “The Merger Agreement—Termination Fee” beginning on page [83].
Q:
What do I need to do now?
A:
We urge you to read this entire proxy statement carefully, including its annexes and the documents referred to or incorporated by reference in this proxy statement, as well as the related Schedule 13E-3, including the exhibits thereto, filed with the SEC, and to consider how the merger affects you.
If you are a shareholder of record, you can ensure that your shares are voted at the special general meeting by submitting your proxy via:
telephone, using the toll-free number listed on your proxy and voting instruction card;
the Internet, at the address provided on your proxy and voting instruction card; or
mail, by completing, signing, dating and mailing your proxy and voting instruction card and returning it in the envelope provided.
If you hold your shares in “street name” through a broker, bank or other nominee, you should follow the directions provided by it regarding how to instruct it to vote your shares. Without those instructions, your shares will not be voted, which will have the same effect as voting against the Merger Proposal.
Q:
How can I attend the special general meeting?
A:
Our bye-laws prohibit us from conducting a virtual meeting of our shareholders if any of our shareholders who are based in the United States participate in the meeting. In order to allow all of our shareholders an equal opportunity to participate in the special general meeting, we intend to hold the special general meeting in person. Although shareholders of record will be entitled to attend the special general meeting and vote in person, in light of the rapidly changing COVID-19 pandemic, attendance in person may be discouraged or prohibited by government regulations or action or based on general health and safety considerations. Your vote is important, and we encourage you to review this entire proxy statement and the related documents and vote your shares by proxy as soon as possible prior to the special general meeting.
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Q:
Should I send in evidence of ownership now?
A:
No. After the merger is completed, if you hold common shares you will be sent a letter of transmittal with detailed written instructions for exchanging your common shares for the Merger Consideration. If your common shares are held in “street name” by your broker, bank or other nominee, you may receive instructions from your broker, bank or other nominee as to what action, if any, you need to take to effect the surrender of your “street name” common shares in exchange for the Merger Consideration. Please do not send in your common share certificates now. If you hold preference shares, you need take no action because your shares will remain outstanding following the effective time of the merger. If Holdco elects after the effective time of the merger to cause the Company to redeem your preference shares, you will be sent instructions for how to receive the redemption price for your preference shares.
Q:
Can I revoke my proxy and voting instructions?
A:
Yes. You may revoke your proxy or change your voting instructions at any time prior to the vote at the special general meeting by:
providing written notice to the Secretary of the Company;
delivering a valid, later-dated proxy by mail or altering your voting instructions via the Internet or by telephone; or
attending the special general meeting and voting in person (subject to any COVID-19 related restrictions).
Please note that your attendance at the special general meeting in person will not cause your previously granted proxy to be revoked unless you specifically so request. Shares held in “street name” may be voted in person by you at the special general meeting only if you obtain a signed proxy from the broker, bank or other nominee that is the registered shareholder of record of the shares, giving you the right to vote the shares.
Q:
What does it mean if I get more than one proxy and voting instruction card?
A:
It means your shares are registered differently or are in more than one account. Please provide voting instructions for all proxy and voting instruction cards you receive.
Q:
Who will count the votes?
A:
A representative of American Stock Transfer & Trust Company, LLC (“AST”), the Company’s transfer agent, will tabulate the votes and act as the inspector of the election.
Q:
Who can help answer my other questions?
A:
If you have more questions about the merger, or require assistance in submitting your proxy or voting your common shares or need additional copies of the proxy statement or the enclosed proxy and voting instruction card(s), please contact D.F. King & Co., which is acting as the proxy solicitation agent and information agent in connection with the merger.
Proxy solicitation agent contact info
D.F. King & Co., Inc.
48 Wall Street, 22nd Floor
New York, New York 10005
Banks and Brokers may call: (212) 269-5550
Stockholders may call toll free: (866) 207-3648
watford@dfking.com
If your broker, bank or other nominee holds your common shares, you can also call your broker, bank or other nominee for additional information.
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SPECIAL FACTORS
Background of the Merger
Background of the Company
Watford was formed in Bermuda in 2013 to operate as a “total return insurer.” Total return insurers are insurance companies that aim to generate higher investment returns for their shareholders than traditional insurers by investing their financial assets in higher yielding asset classes than traditional insurers.
Watford was initially capitalized with $1.1 billion raised in private offerings of Watford common shares and preference shares in March 2014. As one of Watford’s founding investors, Arch’s subsidiary, ARL, purchased $100 million in Watford common shares at a price of $40 per common share. Since March 2014, Arch, through one or more of its subsidiaries, has exclusively managed Watford’s insurance and reinsurance underwriting portfolio pursuant to exclusive services agreements and HPS Investment Partners, LLC (“HPS”) has exclusively managed Watford’s non-investment grade portfolio, which represents the majority of Watford’s financial assets, pursuant to exclusive investment management agreements. Pursuant to various agreements, Arch, through its subsidiaries, also provides services critical to Watford’s insurance underwriting operations, including underwriting, accounting, collections, actuarial, reserve recommendations, claims, legal, information technology and other administrative services, and manages a portion of Watford’s investment grade portfolio. As subsequently amended, the services agreements with Arch and the investment management agreements with HPS have terms ending on December 31, 2025. By contracting with Arch for its underwriting operations and with HPS and Arch for its investment management functions, Watford has been able to maintain an efficient operational structure while benefitting from access to Arch’s underwriting expertise, global underwriting infrastructure and distribution platform and HPS’s investment management expertise. At the same time, Watford’s ability to deliver attractive risk-adjusted returns for shareholders in accordance with its strategy depends upon the services performed for it by Arch and HPS. For the years ended December 31, 2019 and 2018, Watford paid Arch and its subsidiaries approximately $45.4 million and $41.1 million respectively in fees and other compensation for services provided. For the years ending December 2019 and 2018, Watford paid HPS $29.5 million and $15.9 million in fees and other compensation for services provided. For additional information about the existing agreements between Arch and the Company, see the Company’s Definitive Proxy Statement on Schedule 14A, as supplemented, filed with the SEC on April 14, 2020, under the caption “Certain Relationships and Related Party Transactions” which disclosure is incorporated herein by reference.
Since Watford’s inception, its officers and its Board have regularly reviewed and assessed, among other things, Watford’s long-term strategic goals and opportunities, the competitive environment in which it operates and industry trends, and its past and projected future short- and long-term performance, with the goal of maximizing shareholder value. In connection with these activities, the Company’s officers and its Board periodically have evaluated potential strategic alternatives, including acquisitions, sales of portions of its liabilities, and other changes to the Company’s business model. During these reviews, the Company’s officers and its Board have noted that the Company’s financial performance has not consistently been at levels that the Company would like to have seen. In March 2019, Watford completed a “direct listing” of its common shares, which began trading on the Nasdaq Global Select Market. Since then, the Company’s common shares have consistently traded at a substantial discount to book value per common share. From time to time since Watford's inception, Arch has taken actions outside of its original services agreement to improve Watford's financial performance. Examples include the development and expansion of Watford's U.S. and European insurance franchises, novations of certain insurance contracts, and modifications to the initial collateral requirements for certain business ceded to Watford.
Background of the Merger
The following summarizes certain events and contacts that led to the signing of the Merger Agreement. It does not describe every conversation among the members of the Company’s Board of Directors or between the Company’s officers or representatives and other parties or between the Company’s affiliates and other parties.
On April 23, 2020, Watford announced that its 2020 first quarter earnings would include a net investment loss of approximately $300 million, predominantly comprised of unrealized mark-to-market losses, due to investment market volatility following the global economic shutdown related to the COVID-19 pandemic. On May 1, 2020, rating company A.M. Best announced that, following Watford’s April 23 announcement, A.M. Best had “placed under review with negative implications” its financial strength and other ratings applicable to Watford and certain of its subsidiaries.
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Since Watford’s direct listing, some of the Company’s shareholders have expressed dissatisfaction to the Company’s officers and Board regarding the Company’s performance. These expressions of dissatisfaction became more assertive after the Company’s April 23, 2020 announcement. For example, in a letter dated May 15, 2020, one shareholder stated “Watford’s capital has been allocated to unprofitable reinsurance underwriting opportunities and below investment grade investment allocations that have destroyed capital.” The shareholder also criticized the amounts of fees paid to Arch and HPS and their impact on Watford’s net income. When the Company’s officers and its Board discussed these comments, they agreed that the observations had merit. They also noted, however, that the Company’s ability to address the highlighted issues was limited by its long-term contracts with Arch and HPS. The Board noted that the shareholder who sent the May 15, 2020 letter previously had advocated that the Board should seek to enhance shareholder value through share buybacks but now appeared to be advocating for a “self-administered run-off.” The Board further noted that absent concessions by Arch and HPS, an economically efficient “self-administered” run-off would not be feasible because under the terms of their agreements with Watford, during any “run-off” Arch and HPS would be entitled to continue managing substantial parts of Watford’s business and to receive substantial fees. On May 15, 2020, the closing price per share for the Company’s common shares on the Nasdaq Global Select Market was $11.63.
In early or mid-May 2020, an investment management firm (“Party A”) contacted certain senior executives of Arch, including Maamoun Rajeh, who is Chairman and CEO of Arch Worldwide Reinsurance Group and is also a member of Watford’s Board, to discuss Party A’s abilities to act as a potential capital provider. Party A broached the possibility of a capital transaction involving Watford and the Arch senior executives indicated to Party A that it would need to discuss any such role with respect to Watford with Watford’s Board.
In May 2020, the Board asked HPS and Arch to present to the Board, at its regularly-scheduled meeting on May 22, 2020, potential changes to the Company’s business model that could improve its risk-adjusted performance. At the May 22 Board meeting, HPS presented a conceptual strategy to upgrade the Company’s investment portfolio by transitioning to higher quality bonds and redeploying capital from near-term maturities into strategies with lower mark-to-market volatility, all with a view to increasing liquidity and limiting exposure to further capital market downturns. Arch presented a conceptual underwriting plan with increased expected margins to Watford that would benefit from an anticipated improved underwriting environment for insurers and reinsurers, adjusting certain pricing parameters for underwriting transactions that require posting of substantial collateral to ensure the transactions were sufficiently profitable to the Company, generally reducing the amount of collateral the Company is required to post, and potentially expanding into different classes of insurance business.
Also at the May 22, 2020 Board meeting, Walter Harris, the chairman of the Board, advised the Board that on May 16, 2020, he had been contacted by Party A, which inquired whether there might be a role for Party A to act as a “value added capital provider” to the Company. The Board authorized management to explore a possible transaction with Party A. On May 22, 2020, the closing price per share for the Company’s common shares on the Nasdaq Global Select Market was $13.91.
On May 24, 2020, Mr. Harris, Mr. Rajeh, Jonathan Levy, who is Watford’s CEO, and representatives of Party A participated in a conference call. Party A expressed potential interest in various types of financing transactions including investing in the Company’s common shares or its preference shares. Following the call, on May 27, 2020, Watford and Party A signed a confidentiality agreement and Party A subsequently was provided access to non-public information about Watford.
On June 12, 2020, representatives of Party A spoke to Mr. Harris and Mr. Levy and conveyed Party A’s interest in two possible transactions. The first possible transaction was a take-private transaction that would lead to Party A owning a majority of the Company’s common equity and Arch owning a substantial minority interest with all of the Company’s other common shareholders being cashed out. Party A’s representatives advised that in this transaction, holders of common shares would receive an all-cash price representing a “more than 30% premium to the Company’s current share price.” The closing share price for the Company’s common shares that day was $15.71, so Mr. Harris and Mr. Levy understood this to mean Party A proposed to pay approximately $21 per common share (an approximately 34% premium to the $15.71 per common share price). The second possible transaction was a purchase by Party A of Watford’s underwriting platform, operating infrastructure and insurance licenses. Party A’s representatives requested the Company’s permission for it to discuss with Arch potential changes to the terms of the services agreements between Watford and Arch’s subsidiaries that Party A would want to make in connection with any potential transaction.
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On June 14, 2020, Mr. Harris and Mr. Levy called Mr. Rajeh, who confirmed to them that Arch was willing to discuss potential transactions with Party A. Mr. Levy then called Party A to authorize Party A having discussions with Arch as it had requested, subject to Party A agreeing to keep the Company informed regarding its discussions with Arch.
On June 17, 2020, the Board held a telephonic meeting at which Mr. Harris and Mr. Levy briefed the other directors on the discussions with Party A. During the meeting, the Board determined that it should engage a financial advisor. Also, during the meeting, Mr. Rajeh and Nicolas Papadopoulo determined that they would recuse themselves from any further discussions regarding strategic alternatives potentially available to Watford, recognizing that in any potential transaction that might result from those discussions, the interests of Arch could diverge from the interests of the Company and its other shareholders.
As hereinafter used in this summary, references to the “Board” or the “board of directors” or the “transaction committee” or any action taken by “directors” of the Company after June 17, 2020, means the board of directors acting without the participation of Maamoun Rajeh and Nicolas Papadopoulo, the directors appointed to the Watford board by Arch (the “Arch Directors”). The Arch Directors did not participate in the Board’s or any Board committee’s deliberations relating to the Merger Agreement, the statutory merger agreement or any transaction contemplated by either agreement (including the merger), and did not participate in the Board’s or any Board committee’s vote to approve the Merger Agreement, the statutory merger agreement or any transaction contemplated by either agreement (including the merger).
On June 22, 2020, the Board received presentations from Morgan Stanley and another investment bank. Subsequently, at the direction of the Board, the Company retained Morgan Stanley as its financial advisor. The Board selected Morgan Stanley based on its relevant experience, familiarity with the insurance industry including the specialty reinsurance segment, and reputation.
On June 28, 2020, Mr. Rajeh called Mr. Harris and Mr. Levy to report that while Arch remained open to discussions with Party A, Arch would also be exploring potential transactions in which it would partner with Kelso and/or Warburg Pincus. Mr. Harris and Mr. Levy agreed that the Company would provide access to non-public information to Kelso and Warburg Pincus subject to their entering into customary confidentiality agreements. Watford signed a confidentiality agreement with Warburg Pincus on June 30, 2020 and with Kelso on July 1, 2020. Subsequently, Watford provided each of them with access to non-public information. In late June 2020, Arch also entered into separate confidentiality agreements with each of Party A, Kelso and Warburg Pincus with respect to a possible Watford transaction.
On July 1, 2020, Francois Morin, a senior Arch executive, called Mr. Harris and Mr. Levy to advise that Arch wished to explore a transaction in which Arch would acquire a majority of the common equity of the Company. On July 2, 2020, on a telephonic Board meeting, Mr. Harris and Mr. Levy advised the Board of this development. On July 1, 2020, the closing price per share for the Company’s common shares on the Nasdaq Global Select Market was $16.62.
During July 2020, there were periodic calls between Arch and Watford to check-in and confirm the parties’ interest in continuing discussions with respect to a possible transaction. Arch informed Watford that it intended to review Watford’s second quarter operating results, including its non-investment grade portfolio valuations, and that a proposal would be forthcoming after such review. Arch continued discussions with Kelso and Warburg Pincus with respect to a potential transaction.
On August 13, 2020, Mr. Morin called Mr. Levy to advise him that Arch expected it shortly would deliver a verbal indication of the price per common share Arch and its co-investors would be willing to pay to acquire Watford. Mr. Morin further advised that Arch was considering various structures and that, in a transaction involving Arch, Kelso and Warburg Pincus, Arch would likely hold an equity interest representing less than 50% of the surviving entity.
On August 14, 2020, at the request of the Company’s Board, representatives of Morgan Stanley made a presentation to the Board regarding various potential strategic alternatives that might be available to the Company. The principal alternatives discussed at the meeting were (i) a “stay the course” strategy, (ii) a “hybrid strategy” with various potential modifications to the Company’s business model being made that could be pursued individually or in combination, including adjustments to the terms of the Company’s agreements with Arch and HPS that would include financial concessions by Arch and HPS, de-risking the Company’s investment portfolio, and reallocating the
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Company’s “risk capital” to increase insurance underwriting risk while decreasing investment risk, (iii) placing the Company into “run-off” (in other words, ceasing to write new insurance risk and thereafter managing the incurred or possible claims under previously written policies with a view to realizing for shareholders the net value of the Company’s investment assets that remain after paying or providing for those claims), and (iv) establishing a new insurance franchise that would operate independently of Arch. In its discussion of these alternatives, the Board noted that the benefits to be derived from the various potential changes to the Company’s business model in the stay the course strategy and the hybrid strategy were difficult to forecast with certainty, for the most part could be executed only with cooperation from Arch and HPS, and would still leave the Company dependent on how well Arch and HPS performed for the Company. The Board further noted that the projected returns from a run-off strategy were lower as a percentage of book value than intuitively would be expected, and this appeared to be attributable principally to the length of time before the run-off generated cash flows that could be returned to shareholders, and to the amount of fees that the Company would have to pay Arch and HPS during the run-off absent their agreement to accept reduced fees. The Board asked Morgan Stanley to perform some additional analyses regarding the alternatives discussed at the meeting.
On August 16, 2020, Mr. Morin called Mr. Levy to convey a verbal indication of interest by Arch and its co-investors in taking the Company private for $25.00 per common share in cash. The following day, August 17, 2020, the Board held a regularly scheduled meeting at which Mr. Levy communicated Arch’s indication of interest. On August 17, 2020, the closing price per share for the Company’s common shares on the Nasdaq Global Select Market was $16.45.
On or about August 14, 2020, Kelso and Warburg Pincus separately agreed that they would exclusively partner with Arch in any transaction involving Watford. On or about August 17, 2020, Arch informed Party A that Arch would no longer pursue a potential transaction with Party A.
On August 19, 2020, the Board held a telephonic meeting at which representatives of Morgan Stanley provided an updated presentation that took into account the discussions at the August 14 meeting and also addressed Arch’s indication of interest. At the meeting, members of the Board expressed disappointment with the $25.00 per common share price presented by Arch. The members of the Board agreed that the Company should continue to explore all the possible alternatives it had discussed at its August 14 meeting and in that connection should press Arch and HPS to agree to potential changes to their agreements with Watford, including changes to the fees paid under their respective services agreements in various scenarios including run-off.
On August 21, 2020, in order to further explore the strategic options and alternatives discussed at Board meetings on August 14 and 19, 2020, Mr. Levy called Mr. Morin to ask for an update on the potential changes to Watford’s business model that Arch had presented to the Board at its May 22, 2020 meeting. Mr. Levy also asked Mr. Morin whether Arch was willing to engage with Watford in discussing modifications to the services agreements so as to improve Watford’s profitability. Mr. Levy asked Mr. Morin to arrange for coordination between representatives of Morgan Stanley, Watford’s financial advisor, and Goldman Sachs & Co. LLC (“Goldman Sachs”), Arch’s financial advisor, regarding the various strategic alternatives being considered by Watford’s Board.
On August 24, 2020, the Board met telephonically with its advisors, including representatives of Morgan Stanley, to discuss the shareholder value implications of the various alternatives being considered. Management presented its analyses of the feasibility and potential financial implications of implementing the conceptual changes presented by Arch and HPS at the May 22, 2020 Board meeting; a run-off strategy; and the “hybrid” options previously discussed. Management advised the Board that in its opinion all of these approaches had the potential to deliver a better result for shareholders than the $25.00 per common share buyout suggested by Arch. The Board concluded that the Company should press Arch for a substantial improvement in its $25.00 per common share indication of interest and, at the same time, press for Arch’s cooperation in exploring the other strategic alternatives potentially available to the Company.
On August 26, 2020, Mr. Harris and Mr. Levy met with Mr. Rajeh and Mr. Papadopoulo by video conference. In the meeting Mr. Rajeh and Mr. Papadopoulo conveyed that the conceptual business plan Arch had presented to the Board on May 22, 2020 would be difficult to implement because (i) the A.M. Best ratings review with negative implications was making Watford’s insurance and reinsurance underwriting activities more challenging than anticipated and (ii) the market was re-evaluating “total return insurers” such as Watford and clients were resisting accepting Watford as a counterparty, thus potentially requiring Arch to front more of the business that was intended to be Watford business.
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Later on August 26, 2020, Arch delivered a letter to Watford confirming and reiterating the verbal preliminary indication of interest that Arch had conveyed on August 16, 2020, pursuant to which Arch proposed, together with its co-investors, Kelso and Warburg Pincus, to take the Company private for $25.00 per common share in cash. In the August 26 letter Arch noted that $25.00 per common share represented a premium of 49.3% over the closing price of the common shares on August 14, 2020 and 51.3% over the volume-weighted average trading price of the common shares over the period of 30 trading days ended August 14, 2020, that a buyout “would eliminate the significant risks to Watford and its shareholders currently posed by its ratings status,” and that the proposal was subject to internal approvals of all three investors and satisfactory completion of diligence.
On or about August 28, 2020, representatives of Goldman Sachs conveyed, as directed by the Arch Board, to representatives of Morgan Stanley that Arch would continue to operate under the terms of the existing services agreements and that Arch would not agree to discussing modifications to the services agreement related to fees for services or related to establishing or entering into arrangements with insurance franchises independent of Arch. On August 28, 2020 the Board met telephonically with its advisors, including representatives of Morgan Stanley. Mr. Harris and Mr. Levy provided a summary to the Board of their August 26, 2020 meeting with Mr. Rajeh and Mr. Papadopoulo. Additionally, representatives of Morgan Stanley provided a summary to the Board of their discussions with representatives of Goldman Sachs. The Board directed representatives of Morgan Stanley to continue to press on these points while at the same time explaining to representatives of Goldman Sachs why the Board believed that Arch should be willing to pay a substantially higher price for Watford than the $25.00 per common share it had proposed. The Board discussed various means by which Arch’s proposal could be improved, including by offering Watford common shareholders the choice of either being paid cash for their common shares or, alternatively, having an option to “roll over” their Watford common shares into shares of the surviving company following the purchase of Watford by Arch.
On September 1, 2020, Mr. Levy delivered a letter to Arch notifying Arch that Watford’s Board, after consultation with its financial advisors, determined that $25.00 per common share was inadequate. Subsequently, representatives of Morgan Stanley conveyed the Board’s views on the Arch proposal to representatives of Goldman Sachs.
On September 3, 2020, representatives of Goldman Sachs, as directed by the Arch Board, told representatives of Morgan Stanley that Arch was willing to raise the price Arch and its co-investors proposed to pay to $27.00 in cash per common share, with no equity roll-over option for Watford common shareholders that Arch had substantial concerns about the possibility of future declines in the value of Watford's non-investment grade fixed income portfolio and that it was Arch's view that Watford would likely struggle as a public company if it remained independent, which could limit the types of underwriting opportunities it would be able to provide to Watford. The Board discussed this revised indication of interest with Morgan Stanley and its other advisors in a telephonic meeting held on September 4, 2020.
On September 8, 2020, various press stories were published describing rumors that Arch had offered $26.00 per common share for Watford.
On September 9, 2020, following further discussions between the Board and its advisors, representatives of Morgan Stanley conveyed a counteroffer on behalf of the Board to representatives of Goldman Sachs of $32.00 per common share, subject to a reduction to $30.00 and increase to $34.00 based on future movements in the value of Watford’s investment portfolio between signing and closing, and including an equity roll-over option for Watford common shareholders.
On September 15, 2020, representatives of Goldman Sachs, as directed by the Arch Board, told representatives of Morgan Stanley that Arch was willing to raise the price Arch and its co-investors proposed to pay to $28.25 per common share in cash, with no equity roll-over option for Watford common shareholders.
On September 20, 2020, at the Board’s direction, representatives of Morgan Stanley conveyed a counteroffer to representatives of Goldman Sachs of $32.00 per common share, with a hedging mechanism intended to protect Arch from major declines in the value of Watford’s investment portfolio between signing and closing, coupled with an equity roll-over option for Watford common shareholders. Later that evening, representatives of Goldman Sachs, as directed by the Arch Board, indicated that Arch would propose an alternative structure in the coming days to address Arch’s concern about declines in the value of Watford’s non-investment grade portfolio.
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On September 21, 2020, Enstar, a 5% shareholder of the Company, filed a statement on Schedule 13D with the SEC in which they reported that in the previous 60 days they had purchased an aggregate of 735,480 common shares of Watford at prices between $22.61 and $25.35 per common share, increasing their beneficial ownership of Watford’s outstanding common shares from approximately 5.2% to approximately 9.1%, and making them Watford’s second largest shareholder. Enstar had previously disclosed their 5% ownership on a Form 13F filed with the SEC (indicating passive investment intent).
On September 22, 2020, representatives of Goldman Sachs, as directed by the Arch Board, told representatives of Morgan Stanley that Arch was willing to offer $30.00 per common share in cash, with downside protection to Arch: if Watford’s non-investment grade portfolio’s realized and unrealized losses exceeded $85 million, the purchase price would be reduced dollar for dollar, with a closing condition that Watford’s non-investment grade portfolio’s realized and unrealized losses did not exceed $170 million. The alternative structure did not include an equity roll-over option for Watford common shareholders.
Also on September 22, 2020, at the Board’s direction following a telephonic meeting of the Board that evening, representatives of Morgan Stanley contacted senior executives at Enstar to inquire as to its objectives in announcing its recent acquisitions of Watford common shares. Enstar responded that it made the purchases because it considered the common shares to be undervalued. Later that evening, Mr. Levy, Mr. Morin and representatives of Morgan Stanley and representatives of Goldman Sachs held a telephonic meeting in which Mr. Levy conveyed a counteroffer of $31.00 per common share, with two alternative mechanisms intended to protect Arch from major declines in the value of Watford’s non-investment grade portfolio between signing and closing, coupled with an equity roll-over option for Watford common shareholders.
On September 24, 2020, Mr. Harris called Mr. Grandisson and conveyed to Mr. Grandisson the Board’s views on the September 22 proposal, as well as the Board’s reasoning with respect to the value to Watford’s common shareholders of having an equity roll-over component. On or about September 25, 2020, Arch directed its counsel and financial advisors to analyze whether an equity roll-over for Watford common shareholders was feasible. After reviewing various permutations, and taking into consideration the requirements of Bermuda corporate law, Arch determined that an equity roll-over available to all existing Watford common shareholders would be complex to execute and would jeopardize the primary purpose of its proposed transaction, which was to take Watford private.
On September 26, 2020, Mr. Morin called Mr. Levy to convey that Arch and its co-investors remained willing to pay $30.00 per common share in cash, with no equity roll-over option for Watford common shareholders, but the price reduction mechanism and closing condition from the September 22 proposal did not adequately protect Arch and its co-investors and would be replaced with a closing condition that Watford’s book value had not declined by more than 29% as a result of net realized and unrealized losses in Watford’s non-investment grade portfolio. On September 29, 2020, at the Board’s direction, representatives of Morgan Stanley conveyed a counteroffer to representatives of Goldman Sachs of $31.00 per common share, with no equity roll-over option for Watford common shareholders, and subject to a closing condition that Watford’s book value had not declined to below $31.00 per common share due to losses in Watford’s non-investment grade portfolio.
On September 30, 2020, Watford received a letter from Enstar, addressed to Watford’s Board, setting forth a “non-binding indicative proposal” to acquire all of the outstanding common shares of the Company for $31.00 per common share in cash, “subject to the satisfactory completion of our diligence and the agreement of definitive transaction documents.” Enstar filed the letter with the SEC the following day, as an exhibit to a Schedule 13D amendment.
In its letter, Enstar stated:
Our purchase price is based on the assumption that the key contracts with Arch Capital Group and HPS Investment Partners would remain in place, but we are willing to discuss the early termination of those agreements if that would be preferable to such parties.
Enstar’s letter also contained this statement:
We would require the opportunity to conduct detailed due diligence that is commensurate with an acquisition of this size in all key areas including financial, actuarial, claims, legal, regulatory diligence. In addition, we would seek to engage with Arch and HPS on the potential for an early termination or restructuring of their contracts with the Company, particularly in light of any potential changes to the Company’s business plan following the consummation of the transaction.
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On October 1, 2020, at the Board’s direction, representatives of Morgan Stanley held a call with senior executives at Enstar to further explore their offer.
Later that day, Mr. Morin told Mr. Levy that Arch was willing to raise the price Arch and its co-investors proposed to pay to $31.00 per common share, with no equity roll-over option for Watford common shareholders, and subject to a closing condition that Watford’s book value had not declined to below $31.00 per common share due to losses in Watford’s non-investment grade portfolio. Mr. Morin noted that Arch would not stand by while Watford attempted to negotiate with Enstar and if it appeared that Enstar was to engage in a bidding war, Arch would abandon discussions regarding a potential acquisition of Watford. Mr. Morin also noted that outside of any requirements to continue to perform under its services agreements with Watford if Enstar were to acquire Watford, Arch was not willing to work with Enstar to facilitate a transaction between Watford and Enstar. Finally, he said that if Watford agreed in principle to Arch’s offer, Arch believed a definitive agreement could be reached within a few days. On October 1, 2020, the closing price per share for the Company’s common shares on the Nasdaq Global Select Market was $28.81 per share.
On October 2, 2020, Watford’s Board met telephonically with its advisors to discuss the recent proposals from Arch and Enstar. At the meeting, representatives of Morgan Stanley reported on their October 1, 2020 conversation with Enstar. They noted that it was clear to them that Enstar had done a fair amount of diligence on Watford based on publicly available information. Morgan Stanley’s representatives also reported that they sought clarity from Enstar on the extent to which Enstar’s interest was contingent on reaching some accommodation with Arch and HPS, and that Enstar’s responses were inconclusive. Finally, they noted that Enstar expressed concern about proceeding if Arch was unwilling to cooperate with their proposal for Watford. The Board members agreed that ideally, Watford would quickly engage with Enstar to assess the level of its interest in a transaction at a price higher than $31.00 per common share, and also would use Enstar’s public expression of interest to extract a higher price from Arch. The Board noted, however, that Arch had stated it would abandon its potential acquisition of Watford if it felt that it was engaging in a bidding war. The Board noted that Enstar’s September 30 letter appeared to convey a need on Enstar’s part to “engage with Arch and HPS” before proceeding with a transaction, and therefore, and in light of Arch having conveyed that it would not be cooperative with Enstar (outside of any requirements to continue to perform under its services agreements with Watford if Enstar were to acquire Watford), there was substantial uncertainty as to how viable Enstar’s proposal would prove to be. Also, Enstar’s initial Schedule 13D filing had disavowed any plans or proposals to seek to acquire Watford, raising questions as to Enstar’s level of seriousness. The Board noted it was possible that Enstar had made public a $31.00 per common share proposal in order to drive up the price of Watford common shares and the price that Arch would be willing to pay in its rumored negotiations with Watford, for the purpose of making a profit on Enstar’s investment in Watford common shares. Finally, the Board took seriously Arch’s expression that it would not stand by while Watford attempted to negotiate with Enstar.
After deliberating, the Board determined to take actions necessary to secure a deal with Arch while preserving the Board’s flexibility to entertain a higher bid from Enstar later, if Enstar’s interest proved to be robust. The Board did so in the belief that if it engaged with Enstar and Enstar then proved unwilling to proceed with an offer (including potentially because Arch or HPS declined to engage with Enstar in the way Enstar’s letter contemplated), Watford could be left with no buyout transaction and a fractured relationship with Arch (which was an especially unappealing prospect given Watford’s substantial dependence on Arch to manage its insurance and reinsurance underwriting operations). At its October 2, 2020 meeting, the Board also authorized certain adjustments to the compensation arrangements of Watford’s management team (involving an incremental compensation expense of approximately $2 million in the aggregate). The Board took this action after discussing the need to induce employees to stay with the Company to ensure Watford remained able to operate and fulfill its merger-related obligations after the announcement of any change of control transaction.
At the Board’s direction, later on October 2, 2020, Mr. Levy contacted Mr. Morin to propose a transaction at $32.00 per common share in cash coupled with a closing condition that Watford’s book value had not declined below $32.00 per common share due solely to losses in the non-investment grade portfolio. Mr. Levy also advised Mr. Morin that the Board had authorized certain adjustments to the compensation arrangements of Watford’s management team (involving an incremental compensation expense of approximately $2 million in the aggregate), and that the Board sought assurances that Watford’s junior employees would receive customary contractual protections. Later that same day, October 2, 2020, Mr. Grandisson contacted Mr. Harris and noted that $31.00 was Arch’s final offer and if Watford did not accept before the end of the day, Arch would withdraw its proposal.
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Mr. Levy and Mr. Morin subsequently reached an agreement in principle on a price of $31.10 per share with a closing condition that the value of Watford’s non-investment grade fixed income portfolio had not declined by more than $238 million, coupled with an ability for Watford to postpone the closing in order to allow the portfolio time to recover from any such decline. Thereafter, Arch proposed that Watford enter into an exclusivity agreement that would have prevented Watford from engaging with competing bidders while the parties negotiated a definitive agreement, but no such agreement was executed.
On October 4, 2020, Arch’s counsel, Cahill Gordon & Reindel LLP (“Cahill”) sent Watford’s counsel, Clifford Chance US LLP (“Clifford Chance”), a draft merger agreement. On October 6, 2020, lawyers from Cahill, Arch and Clifford Chance held a call to discuss the draft. On the call, the Clifford Chance lawyers explained that the draft merger agreement was problematic from Watford’s perspective for a variety of reasons including because (i) it contemplated that the acquirer would be a newly-formed entity to be owned by Arch and its co-investors, raising questions as to the viability of remedies in case of a default; (ii) it contained several “deal protection” provisions, including a “force the vote” provision that would prevent Watford from terminating the merger agreement to enter into an agreement for a transaction it deemed superior, a termination fee (or “break fee”) of 4.5% of transaction value, and a requirement for Watford to reimburse all of Arch’s transaction expenses (in an unlimited amount) if Watford’s shareholders voted against the merger; (iii) it required Watford to comply with operating covenants covering aspects of Watford’s business that are run by Arch under the services agreements; (iv) it required detailed representations on aspects of Watford’s business handled by Arch; and (v) some of the closing conditions proposed by Arch could allow Arch to not close under circumstances where Watford deemed such refusal inappropriate. Clifford Chance subsequently sent Cahill a revised draft of the merger agreement containing changes addressing these objections. On the call, representatives of Clifford Chance also said Watford expected Arch would commit to vote its Watford shares in favor of the transaction, and Clifford Chance subsequently sent a draft of a voting and support agreement to Cahill.
On October 5, 2020, Enstar delivered a letter addressed to the Board that said in part:
“Following-up on our non-binding indicative proposal dated September 30, 2020, for an all-cash acquisition of 100% of the ordinary share capital of Watford Holdings Ltd. (“Watford”) at $31.00 per share, and our subsequent conversations with Morgan Stanley, we are pleased to reconfirm our continued interest in a potential transaction. We believe that the appropriate next step would be to enter into a non-disclosure agreement to allow us to complete our due diligence in an expeditious manner.
On completion of due diligence, it is likely that we may be able to increase our offer.”
Enstar filed the letter with the SEC as an exhibit to a Schedule 13D amendment on the same day.
Arch, Watford and their respective advisors continued negotiating the terms of the merger agreement through the week of October 5, 2020. On October 7, 2020, the Board met telephonically for a briefing on the status of negotiations and to discuss Enstar’s latest letter. The Board noted that Enstar had not increased its $31.00 per common share price, and that the suggestion in Enstar’s letter of a possible increase in price seemed non-committal and highly conditional, with no material changes in price or certainty of execution since their prior letter. Representatives of Clifford Chance participated in the meeting and reported that negotiations on the merger agreement were proceeding well. The Board determined to continue to work toward a deal with Arch that gave sufficient flexibility to engage with Enstar later, should Enstar wish to do so. The Board noted that Arch and its advisors had indicated a willingness to eliminate many of the “deal protection” provisions contained in Arch’s initial draft of the merger agreement that would have limited this flexibility.
On October 8, 2020, the Board met telephonically to receive a further briefing on negotiations. Representatives of Clifford Chance participated in the meeting and reported that the issues it had previously raised with Arch’s proposal had been satisfactorily addressed, with a handful of items, including the size of the break fee, remaining to be resolved. Representatives of Morgan Stanley and Clifford Chance and the members of the Board then discussed certain reasons for the merger, including both positive and negative factors, that the members of the Board had considered and discussed at prior meetings. Representatives of Morgan Stanley made a presentation to the Board on the financial aspects of the transaction. Morgan Stanley rendered its oral opinion, subsequently confirmed in writing, by delivery of a written opinion dated October 8, 2020, to the effect that, as of such date, and based upon and subject to the various assumptions, procedures, matters, qualifications and limitations on the scope of the review undertaken by Morgan Stanley as set forth in the written opinion, the consideration to be received by the holders of common shares (other than Excluded Shares) pursuant to the Initial Merger Agreement was fair from a financial point of view
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to such holders. The Board also discussed that, due to provisions in Watford’s bye-laws and because of COVID-19 related travel restrictions, formal approval of the definitive merger agreement and the transactions contemplated by it would have to be taken by the three directors who were physically present in Bermuda, acting on their own behalf and as representatives of the other directors pursuant to authorizations granted by those other directors in accordance with the Company’s bye-laws and Bermuda law. The terms of the merger agreement were finalized in accordance with the Board’s directions overnight.
On the morning of October 9, 2020, at a Board meeting held telephonically in Bermuda using the procedures and appointed representatives as described above, the Board approved the Initial Merger Agreement and the transaction contemplated thereby, including a merger in which the holders of Watford common shares would receive $31.10 per common share in cash. After the Board meeting, the Company, Arch, Merger Sub and their respective affiliates entered into the Initial Merger Agreement and the Arch Voting and Support Agreement. Before market open in the U.S. on October 9, 2020, the Company issued a press release announcing it had entered into the Initial Merger Agreement and the Arch Voting and Support Agreement, and describing the $31.10 per common share consideration provided for in the Initial Merger Agreement.
On October 15, 2020, Enstar delivered a letter addressed to Watford’s directors which included the following statement: “Subject to satisfactory completion of diligence, Enstar is hereby providing a revised indicative, non-binding proposal to acquire 100% of the outstanding common shares of Watford at $34.50 per share, payable in all cash.” Enstar filed the letter with the SEC on the same day, as an exhibit to a Schedule 13D amendment.
On October 19, 2020 the Board, using the procedures and appointed representatives as described above, determined that Enstar’s $34.50 per common share proposal reasonably could be expected to lead to a “Superior Proposal” as defined in the Initial Merger Agreement and that, subject to entering into a suitable confidentiality agreement and complying with the terms of the Initial Merger Agreement, Watford should furnish non-public information to Enstar and discuss Enstar’s proposal with Enstar. Watford issued a press release reporting this development later the same day. Also on October 19, 2020, the Board appointed a transaction committee comprising all of the then-current members of the Board, other than the Arch Directors, and delegated to the transaction committee the authority to take any and all actions under or with respect to the Initial Merger Agreement. Later that day, Watford sent Enstar a proposed form of confidentiality agreement and, on October 24, 2020, Watford entered into a confidentiality agreement with Enstar. Watford subsequently provided Enstar access to non-public information about Watford and, at the Board’s direction, representatives of Morgan Stanley engaged with Enstar to seek more information about its proposal.
Between October 22 and October 26, 2020, representatives of Arch and representatives of Enstar had discussions, and Enstar indicated it would be willing to support an Arch proposal of $35.00 per common share.
On October 27, 2020, Arch advised Watford that Arch was willing to increase the Merger Consideration from $31.10 per common share in cash to $35.00 per common share in cash if Enstar would agree to vote its shares in favor of the revised deal. Arch advised that Enstar had indicated a willingness to consider such an arrangement, contingent on its being satisfied with the revised terms of the merger agreement. Cahill subsequently sent Clifford Chance a draft amendment to the Initial Merger Agreement and a draft voting and support agreement to be signed by Enstar.
At a telephonic meeting of Watford’s transaction committee held on October 28, 2020, Clifford Chance reported that the draft documents provided by Cahill provided for amendments to the “deal protection” provisions of the Initial Merger Agreement that would eliminate the ability of Watford’s Board (and the transaction committee) to (i) respond to unsolicited alternative proposals that appeared potentially to be superior, (ii) change the Board’s recommendation to shareholders in response to a superior proposal, and (iii) terminate the merger agreement to enter into an agreement for a superior proposal. The drafts also provided for an increase in the break fee payable under certain circumstances by Watford from 3.0% of the equity value implied by the transaction terms to 5.0%, and for payment by Watford of an expense reimbursement of up to $5.0 million if Watford’s shareholders voted against the Arch merger. The draft documents also reduced the size of the maximum permitted non-investment grade portfolio net investment loss that would be a closing condition from $238 million to $160 million, and removed Arch’s consent to executive compensation arrangements costing approximately $2.0 million and to certain junior employee compensation protections that were expressly permitted under the Initial Merger Agreement. The transaction committee directed management and its advisors to reject the non-price terms reflected in the draft documents and
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to propose instead an amendment to the Initial Merger Agreement in which the only changes would be an increase in the Merger Consideration from $31.10 per common share to $35.00 per common share and an increase in the break fee payable by Watford under certain circumstances from 3.0% of the equity value implied by the transaction terms to 3.5%.
Representatives of Clifford Chance conveyed the transaction committee’s position in two conference calls held on October 29, 2020 with representatives of Cahill. During the calls, in addition to discussing their respective clients’ positions, Cahill and Clifford Chance discussed the status of Watford’s discussions with Enstar. Cahill advised that Enstar had not yet reviewed the amendment containing the revised merger terms as proposed by Arch, and that Enstar’s review and approval of the revised deal terms agreed by Watford and Arch would be required prior to its execution of a voting and support agreement. At the direction of the Board, representatives of Morgan Stanley held separate discussions with representatives of Goldman Sachs, including regarding the closing condition tied to losses in Watford’s non-investment grade portfolio and Arch’s proposal to reduce the maximum permitted loss from $238 million to $160 million. The transaction committee received periodic email updates regarding the status and substance of these discussions.
On November 1, 2020, following a series of discussions between the respective representatives of Arch and Watford, Mr. Morin and Mr. Levy reached an agreement in principle under which Arch would agree to pay $35.00 per common share in cash; the ability of Watford’s Board to deal with unsolicited competing offers would remain unchanged from the Initial Merger Agreement except that the termination fee would be increased from 3.0% of the equity value implied by the transaction terms to 4.0%; the closing condition tied to the maximum permitted net investment losses in Watford’s non-investment grade portfolio would be reduced from $238 million to $208 million but Watford would be granted additional flexibility under the amended merger agreement to “de-risk” its non-investment grade portfolio; and Watford’s ability to make specified adjustments to executive and junior employee compensation arrangements as provided in the Initial Merger Agreement would remain unchanged. This understanding was subject to approval by Watford’s transaction committee (acting pursuant to authority delegated by the Board) and also was subject to Enstar’s willingness to agree to the Enstar Voting and Support Agreement.
On November 1, 2020, the transaction committee met telephonically with its advisors to discuss the proposed amendment to the Initial Merger Agreement. Representatives of Morgan Stanley made a presentation to the Board on the financial aspects of the transaction and advised the Board that Morgan Stanley was prepared to deliver its opinion as to the fairness from a financial point of view of the terms of the proposed merger at a price per common share of $35.00. The transaction committee members discussed that, due to provisions in Watford’s bye-laws and because of COVID-19 related travel restrictions, formal approval of the proposed amendment to the Initial Merger Agreement and the transactions contemplated by it would have to be taken by the three directors (other than the Arch Directors) who were physically present in Bermuda, acting on their own behalf and as representatives of the other directors (other than the Arch Directors) pursuant to authorizations granted by those other directors in accordance with the Company’s bye-laws and Bermuda law. Morgan Stanley rendered its oral opinion, subsequently confirmed in writing by delivery of a written opinion dated November 1, 2020, and attached to this proxy statement as Annex D, to the effect that, as of such date, and based upon and subject to the various assumptions, procedures, matters, qualifications and limitations on the scope of the review undertaken by Morgan Stanley as set forth in the written opinion, the consideration to be received by the holders of the common shares (other than Excluded Shares) pursuant to the Merger Agreement was fair from a financial point of view to such holders. Thereafter, at a duly called transaction committee meeting held in Bermuda using the procedures described above at which a quorum of directors was present, the transaction committee (acting on behalf of the Board pursuant to authority delegated by the Board), after considering various factors described herein, adopted resolutions (i) determining that the revised Merger Consideration of $35.00 per common share constitutes fair value for each common share in accordance with the Bermuda Companies Act, (ii) determining that the continuation of each outstanding preference share as a preference share of the surviving company with the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares constitutes fair value for each preference share in accordance with the Bermuda Companies Act, (iii) determining that the terms of the Merger Agreement (as amended by Amendment No. 1) and the Statutory Merger Agreement and the transactions contemplated thereby, including the merger, are fair to and in the best interests of the Company and its shareholders, (iv) approving and declaring advisable the execution, delivery and performance of the Merger Agreement and the Statutory Merger Agreement and the consummation of the transactions contemplated thereby, including the merger, (v) subject to the right of the Board
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of Directors to change its recommendation in certain circumstances, recommending that the Company’s shareholders vote in favor of the Merger Proposal at a duly held meeting of such shareholders for such purpose and (vi) approving and authorizing the Enstar Voting and Support Agreement.
After being advised that Watford’s transaction committee had approved Amendment No. 1 and the Enstar Voting and Support Agreement, Arch furnished Enstar with a copy of Amendment No. 1 and the latest draft of the Enstar Voting and Support Agreement. Enstar subsequently advised that after reviewing Amendment No. 1 it was willing to sign the Enstar Voting and Support Agreement.
Before market open in the U.S. on November 2, 2020, the parties executed Amendment No. 1 and the Enstar Voting and Support Agreement, and Arch and Watford issued press releases announcing them. In addition, on November 2, 2020, Arch assigned its rights under the Merger Agreement to Holdco.
Separately, on or about November 2, 2020, each of Arch, Kelso and Warburg Pincus entered into an equity commitment letter dated November 2, 2020 with Holdco, pursuant to which Arch, Kelso and Warburg Pincus each agreed to fund equity contributions to Holdco on the closing date of the merger, in an aggregate amount sufficient to enable Holdco to pay the cash purchase price under the Merger Agreement.
Purpose and Reasons of the Company for the Merger; Position of the Company as to Fairness of the Merger; Recommendation of the Board of Directors
Two members of our board of directors (the “Arch Directors”) were appointed to serve on our board by Arch. The Arch Directors did not participate in the Board’s deliberations relating to the merger agreement, the statutory merger agreement or any transaction contemplated by either agreement (including the merger), did not participate in the vote to approve the merger agreement, the statutory merger agreement or any transaction contemplated by either agreement (including the merger), and are not making any recommendation with respect to any proposal in this proxy statement. Accordingly, all references in this section to the “Board” or the “board of directors” or the “transaction committee” or to any action taken by or recommendation made by the “Board”, the “board of directors”, the “transaction committee” or any “directors” of the Company in connection with the merger and related transactions means the board of directors acting without the participation of the Arch Directors.
Watford’s Board concluded and believes, based on its consideration of the factors relating to the substantive and procedural fairness described below, that the Merger Agreement, the Statutory Merger Agreement and the transactions contemplated thereby, including the merger, are fair to, and in the best interests of, the Company. The Company’s purpose and reasons for undertaking the merger at this time are to enable holders of common shares to realize the value of their investment in the Company in cash at a favorable price.
Recommendation of our Board of Directors
The Board recommends that you vote “FOR” the Merger Proposal.
For purposes of Section 106(2)(b)(i) of the Bermuda Companies Act, the Board considers $35.00 in cash, without interest and less any applicable withholding taxes, to be fair value for each issued and outstanding common share. The Board also considers that the continuation of each issued and outstanding preference share as a preference share of the surviving company with the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares constitutes fair value for each preference share in accordance with the Bermuda Companies Act.
Watford’s Reasons for the Merger
On November 1, 2020, Watford’s transaction committee (acting on behalf of the Board pursuant to authority delegated by the Board), after considering various factors described herein, adopted resolutions at a meeting duly called at which a quorum of directors was present (i) determining that the Merger Consideration constitutes fair value for each common share in accordance with the Bermuda Companies Act, (ii) determining that the continuation of each outstanding preference share as a preference share of the surviving company with the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares constitutes fair value for each preference share in accordance with the Bermuda Companies Act, (iii) determining that the terms of the Merger Agreement and the Statutory Merger Agreement and the transactions contemplated thereby, including the merger, are fair to and in the best interests of the Company and its shareholders, (iv) approving and declaring advisable the execution, delivery and performance of the Merger Agreement and the Statutory Merger Agreement and
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the consummation of the transactions contemplated thereby, including the merger, and (v) subject to the right of the Board to change its recommendation in certain circumstances, recommending that the Company’s shareholders vote in favor of the Merger Proposal at a duly held meeting of such shareholders for such purpose.
In evaluating the Merger Agreement and the Statutory Merger Agreement and the transactions contemplated thereby, including the merger, the Board consulted with Watford’s senior management, outside counsel and independent financial advisors. In recommending that Watford’s shareholders vote their common shares in favor of the Merger Proposal, the Board also considered the following potentially positive factors, which are not intended to be exhaustive and are not presented in any relative order of importance:
The belief of the directors who participated in the Board’s deliberations, after a thorough review of, and based on the directors’ knowledge of, Watford’s current and historical financial condition, results of operations, prospects, business strategy, competitive position, industry trends, long-term strategic goals and opportunities, properties and assets, including the potential impact of those factors on the trading price of Watford common shares, and discussions with Watford’s senior management and outside financial and legal advisors, that the value to be provided to Watford’s shareholders pursuant to the Merger Agreement and the Statutory Merger Agreement is significantly more favorable to Watford’s shareholders than the potential value that might reasonably be expected to result from the alternatives considered by the directors, specifically remaining an independent public company, changing Watford’s business model or executing a “run-off” process.
The current and historical market prices of the Company’s common shares, including the fact that the Merger Consideration of $35.00 per common share constituted a premium of:
approximately 128.5% over the volume weighted average share price of the common shares during the 90 days ended September 8, 2020, the last trading day before rumors of Arch’s proposal to acquire Watford first appeared in the press;
approximately 95.9% over the closing share price on September 8, 2020, the last trading day before rumors of Arch’s proposal to acquire Watford first appeared in the press;
approximately 21.1% over the highest trading price of the Company’s common shares in the 52 weeks preceding September 8, 2020, the last trading day before rumors of Arch’s proposal to acquire Watford first appeared in the press; and
approximately 222.3% over the lowest trading price of the Company’s common shares in the 52 weeks preceding September 8, 2020, the last trading day before rumors of Arch’s proposal to acquire Watford first appeared in the press.
The fact that, prior to the announcement of Watford’s entry into the Merger Agreement, Watford common shares had never traded at a price higher than the Merger Consideration of $35.00 per common share.
The fact that the recent trading prices of Watford common shares may have reflected market expectations of an announcement of a potential strategic transaction involving Watford, and that absent such announcement it is likely that the trading price of Watford common shares would decline materially.
The fact that the Board and Watford’s senior management, in coordination with Watford’s independent legal and financial advisors, carefully analyzed the strategic alternatives potentially available to Watford including the feasibility of those alternatives and the likely consequences of implementing those alternatives.
The potential risks to Watford of remaining as an independent public company, including risks and uncertainties relating to:
successfully implementing Watford’s business strategy in light of the likelihood of continued volatility in the financial markets and the resulting impacts on the future performance of Watford’s investment portfolio, and the recent underperformance of Watford’s underwriting portfolio relative to its peers and the potential for it to continue;
Watford’s substantial reliance on Arch and HPS; and
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the “risk factors” set forth in Watford’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and other filings with the SEC.
The financial analyses of Morgan Stanley, financial advisor to Watford in connection with the merger, and the oral opinion rendered by Morgan Stanley to the Board, which was confirmed by delivery of a written opinion, dated November 2, 2020, to the effect that, as of that date and based on and subject to various assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken by Morgan Stanley as set forth in its written opinion, the Merger Consideration was fair, from a financial point of view, to the holders of Company common shares (other than holders of Excluded Shares). For more information, see the section entitled “Special Factors—Opinion of Morgan Stanley & Co. LLC” beginning on page [32].
The fact that the Merger Consideration per common share consists solely of cash, which will provide certainty of value and liquidity to Watford common shareholders.
The fact that the Merger Consideration of $35.00 per common share provided for in the Merger Agreement represents an increase of 12.5% from the $31.10 per common share cash consideration in the Initial Merger Agreement and 40% from Arch’s initial indicative bid of $25.00 per common share.
The fact that each issued and outstanding preference share will be continued as a preference share of the surviving company with the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares.
Based on their review of Watford’s strategic alternatives, the exploration of those alternatives and related discussions and negotiations with Arch, all as overseen by the Board and undertaken by Watford’s management and its financial advisor, including that the Merger Agreement was the product of extensive, arm’s-length negotiations, and taking into account the advice of the Company’s financial and legal advisors, the belief of the Board that the $35.00 per common share Merger Consideration was the highest price per common share that Arch was willing to pay, that the proposed transaction had a relatively high degree of certainty of consummation and that the terms and conditions of the Merger Agreement were the most favorable to Watford and its shareholders that Arch would be willing to agree to.
The availability of appraisal rights to Watford’s shareholders who do not vote in favor of the Merger Proposal, which rights provide eligible shareholders with the opportunity to have the Bermuda Court determine the fair value of their shares.
The view of the Board that, despite the termination fee payable to Holdco under certain circumstances, the terms of the Merger Agreement would be unlikely to deter any other third party from making an unsolicited superior proposal (other than Enstar, as result of its agreements under the Enstar Voting and Support Agreement), and the fact that Watford successfully negotiated with Arch for the right to terminate the Merger Agreement in order to enter into a new agreement for an alternative transaction that the Board determines to be a superior proposal, subject to certain conditions.
The other terms of the Merger Agreement, including:
The limited termination rights available to Holdco;
The obligation of each of Holdco and Arch to use its reasonable best efforts to take all actions and do all things necessary, proper or advisable to obtain applicable antitrust and other regulatory approvals, except that neither Holdco nor Arch is required to take any action that could result in a Burdensome Condition (as defined in the Merger Agreement);
The inclusion of provisions that permit the Board, under certain circumstances and subject to certain conditions, to withdraw, qualify or modify its recommendation that Watford’s shareholders approve and adopt the Merger Agreement; and
The other terms and conditions of the Merger Agreement, as discussed in the section entitled The Merger Agreement” beginning on page [66], which the Board (other than the Arch Directors), after consulting with the Company’s legal advisor, considered to be reasonable.
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The Board also considered a number of factors that are discussed below relating to the procedural safeguards that it believes were and are present to ensure the fairness of the merger. The Board believe these factors support its determinations and recommendations and provide assurance of the procedural fairness of the merger to the Company’s shareholders who are unaffiliated with Holdco and Arch:
the Merger Proposal must be approved by the affirmative votes of shares carrying not less than 50% of the total voting rights of all issued and outstanding common shares and preference shares, voting together as a single class, at the special general meeting;
the fact that the Arch Directors did not participate in any meetings of the Board or any board committee relating to the Board’s review of strategic alternatives after June 17, 2020 and did not participate in any of the Board’s or any board committee’s discussions or deliberations related to that review or in any of the Board’s or any board committee’s discussions or deliberations or negotiations related to Arch’s merger proposal and the negotiations leading to the execution of the Merger Agreement;
the Board held numerous meetings and met regularly to discuss and evaluate the strategic alternatives potentially available to Watford, as discussed in more detail in the section entitled “Special Factors—Background of the Merger” beginning on page [18], and each member of the Board (other than the Arch Directors) was actively engaged in the process on a regular basis;
the opinion, dated November 2, 2020, of Morgan Stanley as described above and as more fully described in the section entitled “Special Factors—Opinion of Morgan Stanley & Co. LLC” beginning on page [32]; and
the recognition by the Board that it had no obligation to approve or recommend the approval of the merger or any other transaction.
The Board also considered and balanced against the potentially positive factors a number of uncertainties, risks and other potentially negative factors in its deliberations concerning the merger and the other transactions contemplated by the Merger Agreement and the Statutory Merger Agreement, which are not intended to be exhaustive and are not presented in any relative order of importance:
The fact that the holders of the Company’s common shares (other than ARL) will have no ongoing equity participation in the Company following the merger, and that such common shareholders would forgo the opportunity to participate in the potential future earnings or growth of the Company, if any.
The fact that the Merger Consideration of $35.00 per common share represents a discount of approximately 2.8% to the closing price of the common shares on October 30, 2020, the last trading day before the Board’s approval of Amendment No. 1.
The fact that the Merger Consideration of $35.00 per common share represents a discount of approximately 20% to the Company’s book value per common share at September 30, 2020.
The fact that receipt of the all-cash Merger Consideration would be taxable, for U.S. federal income tax purposes, to Watford common shareholders that are subject to U.S. federal income taxation.
The fact that, under specified circumstances, Watford may be required to pay a termination fee, which is larger than the termination fee provided for in the Initial Merger Agreement, and to bear various expenses incurred by it, in the event the Merger Agreement is terminated and the effect this could have on Watford.
The fact that, while Watford expects the merger to be consummated if the Merger Proposal is approved by Watford’s shareholders, there can be no assurance that all conditions to the parties’ obligations to consummate the merger, including the receipt of regulatory approvals without the imposition of any Burdensome Condition, will be satisfied on a timely basis, or at all.
The significant costs involved in connection with entering into and completing the merger and the substantial time and effort of management required to consummate the merger, which could disrupt Watford’s business operations.
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The fact that the announcement and pendency of the merger, or the failure to complete the merger, may cause substantial harm to Watford’s relationships with its employees (including making it more difficult to attract and retain key personnel and the possible loss of key management and other personnel), and its relationships with Arch and HPS (on whom Watford is substantially dependent).
The restrictions in the Merger Agreement on Watford’s ability to actively solicit competing bids to acquire it and to entertain other acquisition proposals unless certain conditions are satisfied and the requirement that, if the Board elects to terminate the Merger Agreement to accept a superior proposal, Watford will be required to pay a termination fee.
The restrictions imposed under the Merger Agreement on Watford’s conduct of business before completion of the merger, which could delay or prevent Watford from undertaking business opportunities that may arise or taking other actions with respect to its operations during the pendency of the merger, whether or not the merger is completed.
The fact that, as a result of the Enstar Voting and Support Agreement, Enstar would be prohibited from submitting further proposals to acquire Watford common shares.
The fact that Arch’s obligation to consummate the merger is conditioned on the Non-Investment Grade Portfolio Loss (as such term is defined in the Merger Agreement) being less than $208 million.
The members of the Board were also aware of the fact that certain of Watford’s directors and executive officers may have interests in the merger that may be deemed to be different from, or in addition to, those of Watford’s shareholders. The members of the Board were made aware of and considered these interests; for more information about such interests, see below under the heading “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page [53].
After taking into account all of the factors set forth above, and others, the Board concluded that the potential benefits of the merger to Watford and its shareholders outweighed the risks, uncertainties, restrictions and potentially negative factors associated with the merger.
The Arch Directors did not participate in any of the above-described analyses and deliberations of the Board or the transaction committee.
The foregoing discussion of factors considered by Watford’s Board is not intended to be exhaustive, but summarizes the material factors considered by the members of the Board, including the substantive and procedural factors considered by those Board members as discussed above. In light of the variety of factors considered in connection with their evaluation of the merger, the Board did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific factors considered in reaching their determinations and recommendations. Moreover, each director who participated in these analyses and deliberations applied his or her own personal business judgment to the process and may have given different weight to different factors. The Board did not undertake to make any specific determination as to whether any factor, or any particular aspect of any factor, supported or did not support their ultimate determinations. The Board based its recommendations on the totality of the information presented, including thorough discussions with, and questioning of, Watford’s senior management, and outside financial advisor and counsel. This explanation of the reasoning of the Board and certain information presented in this section is forward-looking in nature and should be read in light of the factors set forth in “Cautionary Statement Concerning Forward-Looking Information” beginning on page [61].
Opinion of Morgan Stanley & Co. LLC
Watford retained Morgan Stanley to provide it with financial advisory services in connection with the merger. The Board selected Morgan Stanley based on its relevant experience, familiarity with the insurance industry including the reinsurance industry specifically, and reputation. Morgan Stanley rendered its oral opinion, which was subsequently confirmed by delivery of a written opinion, dated November 2, 2020, to the Board to the effect that, as of such date and based upon and subject to the assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of review undertaken by Morgan Stanley as set forth in its written opinion, the consideration to be received by the holders of common shares of Watford, other than shares held in treasury by Watford or held by Arch, Merger Sub, Watford or any of their respective direct or indirect wholly owned subsidiaries or as to which dissenters’ rights have been perfected (the “Excluded Shares”), pursuant to the Merger Agreement was fair from a financial point of view to such holders.
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The Arch Directors did not participate in any of the Board or transaction committee meetings or deliberations discussed in this section.
The full text of the written opinion of Morgan Stanley, dated November 2, 2020, is attached to this proxy statement as Annex D, and is incorporated by reference into this proxy statement in its entirety. The opinion sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations on the scope of the review undertaken by Morgan Stanley in rendering its opinion. The summary of the opinion of Morgan Stanley in this proxy statement is qualified in its entirety by reference to the full text of the opinion. You are encouraged to, and should, read Morgan Stanley’s opinion and this section summarizing Morgan Stanley’s opinion carefully and in their entirety. Morgan Stanley’s opinion was directed to the Board, in its capacity as such, and addresses only the fairness to the holders of common shares of Watford (other than Excluded Shares), from a financial point of view, of the consideration to be received by such holders pursuant to the Merger Agreement, as of the date of the opinion, and does not address any other aspects or implications of the merger. Morgan Stanley expressed no opinion or recommendation as to how the shareholders of Watford should vote at the shareholders meeting to be held in connection with the merger. Morgan Stanley’s opinion was not intended to, and does not, constitute advice or a recommendation to any shareholder as to how to vote at any shareholders meeting to be held in connection with the merger or whether to take any other action with respect to the merger.
The reports, opinions or appraisals referenced in this section will be made available for inspection and copying at the principal executive offices of Watford during its regular business hours by any interested equity security holder of Watford or representative who has been so designated in writing.
In connection with rendering its opinion, Morgan Stanley, among other things:
reviewed certain publicly available financial statements and other business and financial information of Watford;
reviewed certain internal financial statements and other financial and operating data concerning Watford;
reviewed certain financial projections prepared by the management of Watford and approved by the Board, including both on a standalone basis and under a run-off scenario;
discussed the past and current operations and financial condition and the prospects of Watford with senior executives of Watford;
reviewed the reported prices and trading activity for the common shares of Watford;
compared the financial performance of Watford and the prices and trading activity of the common shares of Watford with that of certain other publicly-traded companies comparable with Watford, and their securities;
reviewed the financial terms, to the extent publicly available, of certain comparable acquisition transactions;
participated in certain discussions and negotiations among representatives of Watford and Arch and their financial and legal advisors;
reviewed the Merger Agreement and a draft, dated October 28, 2020 of the Enstar Voting and Support Agreement, and certain related documents; and
performed such other analyses, reviewed such other information and considered such other factors as Morgan Stanley deemed appropriate.
In arriving at its opinion, Morgan Stanley assumed and relied upon, without independent verification, the accuracy and completeness of the information that was publicly available or supplied or otherwise made available to it by Watford, and which formed a substantial basis for its opinion. With respect to the financial projections of Watford on a standalone basis, Morgan Stanley assumed that they had been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Watford of the future financial performance of Watford if Watford were to continue on a standalone basis. With respect to the financial projections of Watford under a run-off scenario, Morgan Stanley assumed that they had been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Watford of the future financial performance of
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Watford under a run-off scenario. In addition, Morgan Stanley assumed that the merger will be consummated in accordance with the terms set forth in the Merger Agreement without any waiver, amendment or delay of any terms or conditions, including, among other things, that the definitive Merger Agreement would not differ in any material respect from the draft thereof furnished to Morgan Stanley. Morgan Stanley assumed that in connection with the receipt of all the necessary governmental, regulatory or other approvals and consents required for the proposed merger, no delays, limitations, conditions or restrictions will be imposed that would have a material adverse effect on the contemplated benefits expected to be derived in the proposed merger. Morgan Stanley is not a legal, tax, regulatory or actuarial advisor. Morgan Stanley is a financial advisor only and relied upon, without independent verification, the assessment of Watford and its legal, tax, regulatory or actuarial advisors with respect to legal, tax, regulatory or actuarial matters. Morgan Stanley expressed no opinion with respect to the fairness of the amount or nature of the compensation to any of Watford’s officers, directors or employees, or any class of such persons, relative to the consideration to be received by the holders of common shares of Watford in the merger. Morgan Stanley expressed no opinion with respect to the treatment of Watford’s 8½% Cumulative Redeemable Preference Shares in the merger.
Morgan Stanley did not make any independent valuation or appraisal of the assets or liabilities of Watford, nor was it furnished with any such valuations or appraisals. Morgan Stanley’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Morgan Stanley as of, October 31, 2020. Events occurring after such date may affect Morgan Stanley’s opinion and the assumptions used in preparing it, and Morgan Stanley did not assume any obligation to update, revise or reaffirm its opinion. In arriving at its opinion, Morgan Stanley was not authorized to solicit, and did not solicit, interest from any party with respect to the acquisition, business combination or other extraordinary transaction, involving Watford, nor did Morgan Stanley negotiate with any of the parties, other than Arch and Enstar, which expressed interest to Morgan Stanley in the possible acquisition of Watford or certain of its constituent businesses.
Summary of Financial Analyses
The following is a brief summary of the material financial analyses performed by Morgan Stanley in connection with the preparation of its opinion to the Board. The following summary is not a complete description of Morgan Stanley’s opinion or the financial analyses performed and factors considered by Morgan Stanley in connection with its opinion, nor does the order of analyses described represent the relative importance or weight given to those analyses. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before October 30, 2020 (the last trading day immediately preceding the November 1, 2020 presentation by Morgan Stanley to the Board), and is not necessarily indicative of current market conditions. Some of the summaries of financial analyses below include information presented in tabular format. In order to fully understand the financial analyses used by Morgan Stanley, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses. The analyses listed in the tables and described below must be considered as a whole; considering any portion of such analyses and of the factors considered, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying Morgan Stanley’s opinion.
In performing the financial analysis summarized below and arriving at its opinion, Morgan Stanley used and relied upon certain financial projections provided by Watford’s management and approved by the Board and referred to in this proxy statement as the “Management Projections,” and certain financial projections based on Wall Street research reports.
Historical Trading Range Analysis
Morgan Stanley reviewed the historical trading range of Watford common shares on the Nasdaq Global Select Market for the 52-week period ending September 8, 2020 (the last trading day prior to the date on which information regarding Arch’s proposal became publicly known) and noted that, during such period, the maximum trading price per common share was $28.90 and the minimum trading price per common share was $10.86. Morgan Stanley also noted that with respect to trading of Watford common shares on the Nasdaq Global Select Market, the volume weighted average price per common share for the three-month period ending September 8, 2020 was $15.31 and the closing price per common share on September 8, 2020 was $17.87.
Comparable Company Analysis
Morgan Stanley performed a comparable company analysis, which attempts to provide an implied value of a company by comparing it to similar companies that are publicly traded.
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Morgan Stanley reviewed and compared, using publicly available information, certain current and historical financial information for Watford with corresponding current and historical financial information, ratios and public market multiples for certain total return reinsurance companies selected based on Morgan Stanley’s professional judgment and experience (we refer to these companies as the comparable companies). These companies were the following:
Total Return Reinsurers:
Third Point Reinsurance Ltd.
Greenlight Capital Re, Ltd.
For each of the comparable companies, Morgan Stanley calculated (i) the ratio of such company’s price per share of common equity divided by the tangible book value of such company’s common equity (“P/TBV”), (ii) the ratio of such company’s price per share of common equity divided by the book value of such company’s common equity (“P/BV”) and (iii) the ratio of such company’s price per share of common equity divided by the 2021 estimated earnings per share (utilizing publicly available estimates of earnings prepared by equity research analysts available as of October 30, 2020) (“P/2021E EPS”), in each case using market data as of October 30, 2020. The results of this analysis are summarized as follows:
 
P/TBV
P/BV
P/2021E EPS
Mean
0.56x
0.56x
5.6x
Based on the analysis of the relevant metrics for each of the comparable companies, Morgan Stanley selected a representative range of financial multiples of the comparable companies and applied this range of multiples to the relevant Watford financial statistic. Morgan Stanley determined as a result of this analysis that the reference ranges that it would use in its analysis were approximately:
0.40x-0.60x for the P/TBV ratio, which indicates an implied per share valuation range of approximately $17.25 to $25.75 per common share;
0.40x-0.60x for the P/BV ratio, which indicates an implied per share valuation range of approximately $17.25 to $26.00 per common share; and
4.0x-7.0x for the P/2021E EPS ratio, which indicates an implied per share valuation range of approximately $15.75 to $27.50 per common share.
In each case, the implied per share valuation range for the common shares was compared to the closing price per common share of $17.87 on September 8, 2020, the consideration under the Initial Merger Agreement of $31.10 per common share and the Merger Consideration of $35.00 per common share.
No company included in the comparable company analysis is identical to Watford. In evaluating comparable companies, Morgan Stanley made judgments and assumptions with regard to industry performance, general business, economic, market and financial conditions and other matters, which are beyond the control of Watford. These include, among other things, the impact of competition on the business of Watford and the industry generally, industry growth, and the absence of any adverse material change in the financial condition and prospects of Watford and the industry, and in the financial markets in general. Mathematical analysis (such as determining the mean) is not, in itself, a meaningful method of using comparable company data.
Dividend Discount Analysis
Based on the Management Projections, Morgan Stanley performed a dividend discount analysis to calculate a range of implied present values of the distributable cash flows that Watford was forecasted to have the capacity to distribute during the period from June 30, 2020 through December 31, 2025 and a terminal value both on a standalone basis and in a run-off scenario.
In performing its analysis, Morgan Stanley estimated a cost of equity of 9.0% to 11.0% based on the Management Projections, which it used as the discount rate. Morgan Stanley calculated the terminal value for the common shares on a standalone basis by applying P/BV multiples of 0.4x to 0.6x, derived by Watford’s unaffected P/BV multiples based on the Management Projections as well as comparable company P/BV multiples. Morgan Stanley calculated the terminal value for the common shares in a run-off scenario by applying P/BV multiples from 0.7x to 0.9x, based upon the precedent P&C run-off transaction analysis. This analysis resulted in an implied
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per share equity value range of the common shares on a standalone basis of $27.50 to $35.00 per common share and in a run-off scenario of $27.25 to $30.25 per common share, in each case as compared to the closing price per common share of $17.87 on September 8, 2020, the consideration under the Initial Merger Agreement of $31.10 per common share and the Merger Consideration of $35.00 per common share.
Premiums Paid Analysis
Using publicly available information, Morgan Stanley reviewed the 25-year average of the percentage of premiums paid over unaffected stock price for announced all-cash bids for control of U.S. public targets with an aggregate value of $100 million or more (excluding terminated transactions, employee stock option plans, self-tenders, spin-offs, share repurchases, minority interest transactions, exchange offers, recapitalizations and restructurings) between January 1, 1996 and June 30, 2020, based on the annual mean percentage premiums paid during such period. The annual amount of mean percentage premiums paid over unaffected stock price during such period were calculated based on the target’s stock price as of four weeks prior to the earliest of the deal announcement, announcement of a competing bid and market rumors. Based on the results of this analysis and its professional judgment, Morgan Stanley applied a premium range of 20.0% to 40.0% to Watford’s unaffected share price of $17.87 per common share on September 8, 2020, which indicates an implied per share valuation range of $21.50 to $25.00 per common share.
Precedent Transactions
Morgan Stanley performed a precedent transactions analysis, which is designed to imply a value of a company based on publicly available financial terms and premia of selected transactions. Morgan Stanley compared publicly available statistics for five property and casualty insurance (“P&C”) run-off transactions that were announced since May 30, 2008. The following is a list of the transactions reviewed:
Selected Insurance Run-Off Transactions
Announcement Date
(Target/Acquiror)
P/TBV
P/BV
7/26/2016
Downloads Liability & HFPI/Catalina
0.83x
0.83x
6/2/2013
American Safety/Fairfax
0.95x
0.89x
8/30/2012
Flagstone/Validus Holdings
0.78x
0.74x
8/27/2012
SeaBright/Enstar Group
0.72x
0.71x
5/30/2008
Quanta/Catalina
0.85x
0.82x
For each of the precedent run-off transactions, Morgan Stanley calculated (i) the ratio of price to tangible book value and (ii) the ratio of price to book value. Based on its review of the financial terms of the precedent run-off transactions and its professional judgment, Morgan Stanley selected a representative range of financial multiples of the precedent run-off transactions and applied this range of multiples to the relevant Watford financial statistic. Morgan Stanley determined as a result of this analysis that the reference ranges that it would use in its analysis were approximately:
0.70x-1.0x for the P/TBV ratio, which indicates an implied per share valuation range of $30.00 to $43.00 per common share; and
0.70x-0.90x for the P/BV ratio, which indicates an implied per share valuation range of $30.25 to $39.00 per common share.
In each case this was compared to the closing price per common share of $17.87 on September 8, 2020, the consideration under the Initial Merger Agreement of $31.10 per common share and the Merger Consideration of $35.00 per common share.
No company or transaction utilized in the precedent transactions analysis is identical to Watford or the merger. In evaluating the precedent transactions, Morgan Stanley made numerous assumptions with respect to industry performance, general business, regulatory, economic, market and financial conditions and other matters, many of which are beyond our control. These include, among other things, the impact of competition on Watford’s business and the industry generally, industry growth, and the absence of any adverse material change in the financial condition and prospects of Watford and the industry, and in the financial markets in general, which could affect the public trading value of the companies and the aggregate value and equity value of the transactions to which they are being compared. The fact that points in the range of implied present value per share of Watford derived from the valuation
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of precedent transactions were less than or greater than the consideration is not necessarily dispositive in connection with Morgan Stanley’s analysis of the consideration for the merger, but is one of many factors Morgan Stanley considered.
Preliminary Presentations and October 8, 2020 Presentation and October 8, 2020 Opinion by Morgan Stanley
In addition to its November 2, 2020 opinion and presentation to the Board and the underlying financial analyses performed in relation thereto, Morgan Stanley also delivered preliminary presentation materials to the Board on August 14, 2020, August 19, 2020, August 24, 2020, August 28, 2020, September 4, 2020, September 16, 2020, September 20, 2020, September 23, 2020 and September 27, 2020 (the “Preliminary Presentation Materials”) and presentation materials, dated as of October 8, 2020 (the “October 8 Presentation Materials”), provided in connection with the delivery of Morgan Stanley’s October 8, 2020 opinion (the “October 8 Opinion”). The preliminary financial considerations and other information in the Preliminary Presentation Materials were based on information and data that was available as of the dates of the respective presentations. Morgan Stanley also continued to refine various aspects of its financial analyses. Accordingly, the results and other information presented in the Preliminary Presentation Materials differ from the November 1, 2020 financial analyses.
The Preliminary Presentation Materials were for discussion purposes only and did not present any findings or make any recommendations or constitute an opinion of Morgan Stanley with respect to the fairness of the Merger Consideration or otherwise. The financial analyses performed by Morgan Stanley in relation to its opinion dated November 2, 2020 superseded all analyses and information presented in the Preliminary Presentation Materials.
The October 8 Presentation Materials contained material financial analyses performed by Morgan Stanley in connection with the preparation of its October 8 Opinion that were substantially similar to the material financial analyses that were performed in connection with the preparation and delivery of Morgan Stanley’s opinion to the Board on November 2, 2020, as described above under “Opinion of Morgan Stanley—Summary of Financial Analyses,” except that the October 8 Presentation Materials and the October 8 Opinion were based on information and data that was available as of such date of such presentation.
General
In connection with the review of the merger by the Board, Morgan Stanley performed a variety of financial and comparative analyses for purposes of rendering its opinion. The preparation of a financial opinion is a complex process and is not necessarily susceptible to a partial analysis or summary description. In arriving at its opinion, Morgan Stanley considered the results of all of its analyses as a whole and did not attribute any particular weight to any analysis or factor it considered. Morgan Stanley believes that selecting any portion of its analyses, without considering all analyses as a whole, would create an incomplete view of the process underlying its analyses and opinion. In addition, Morgan Stanley may have given various analyses and factors more or less weight than other analyses and factors, and may have deemed various assumptions more or less probable than other assumptions. As a result, the ranges of valuations resulting from any particular analysis described above should not be taken to be Morgan Stanley’s view of the actual value of Watford. In performing its analyses, Morgan Stanley made numerous assumptions with respect to industry performance, general business, regulatory, economic, market and financial conditions and other matters, many of which are beyond Watford’s control. These include, among other things, the impact of competition on Watford’s business and the industry generally, industry growth, and the absence of any adverse material change in the financial condition and prospects of Watford and the industry, and in the financial markets in general. Any estimates contained in Morgan Stanley’s analyses are not necessarily indicative of future results or actual values, which may be significantly more or less favorable than those suggested by such estimates.
Morgan Stanley conducted the analyses described above solely as part of its analysis of the fairness from a financial point of view to the holders of common shares of Watford (other than Excluded Shares) of the consideration to be received by such holders pursuant to the Merger Agreement and in connection with the delivery of its opinion to the Board. These analyses do not purport to be appraisals or to reflect the prices at which the common shares might actually trade. The consideration to be paid by Arch pursuant to the Merger Agreement was determined through negotiations on an arms-length basis between the Board and Arch and was approved by the Board. Morgan Stanley provided advice to the Board during these negotiations but did not, however, recommend any specific consideration to the Board, nor did Morgan Stanley opine that any specific consideration to be received by shareholders constituted the only appropriate consideration for the merger. Morgan Stanley’s opinion and its presentation to the Board was one of many factors taken into consideration by the Board in deciding to approve the Merger Agreement and the
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transactions contemplated thereby. Consequently, the analyses as described above should not be viewed as determinative of the recommendation of the Board with respect to the consideration to be received by shareholders pursuant to the Merger Agreement or of whether the Board would have been willing to agree to a different form or amount of consideration. Morgan Stanley’s opinion was approved by a committee of Morgan Stanley investment banking and other professionals in accordance with Morgan Stanley’s customary practice.
Morgan Stanley’s opinion was not intended to, and does not, constitute advice or a recommendation to any shareholder of Watford as to how to vote in connection with the merger or whether to take any other action with respect to the merger. Morgan Stanley’s opinion did not address the relative merits of the merger as compared to any other alternative business transaction, or other alternatives, or whether or not such alternatives could be achieved or are available.
The Board retained Morgan Stanley based on its relevant experience, familiarity with the insurance industry including the reinsurance industry specifically, and reputation. Morgan Stanley is a global financial services firm engaged in the securities, investment management and individual wealth management businesses. Its securities business is engaged in securities underwriting, trading and brokerage activities, foreign exchange, commodities and derivatives trading and prime brokerage, as well as providing investment banking, financing and financial advisory services. Morgan Stanley and its affiliates, directors and officers may at any time invest on a principal basis or manage funds that invest, hold long or short positions and finance positions and may trade or otherwise structure and effect transactions, for their own account or the accounts of its customers, in debt or equity securities or loans of Watford, Arch and their respective affiliates, or any other company, or any currency or commodity, that may be involved in the merger, or any related derivative instrument.
Under the terms of its engagement letter, Morgan Stanley provided the Board with financial advisory services and a fairness opinion, described in this section and attached to this proxy statement as Annex D, in connection with the merger, and Watford has agreed to pay Morgan Stanley a fee of approximately $7 million for its services, $4.5 million of which is contingent upon the closing of the merger and $2.5 million of which was payable upon rendering its opinion. Watford has also agreed to reimburse Morgan Stanley for its reasonable and documented expenses, including reasonable fees of outside counsel and other professional advisors, incurred in connection with its engagement, up to an amount equal to $150,000. In addition, Watford has agreed to indemnify Morgan Stanley and its affiliates, their respective directors, officers, agents and employees and each person, if any, controlling Morgan Stanley or any of its affiliates against certain liabilities and expenses, including certain liabilities under the U.S. federal securities laws, relating to or arising out of Morgan Stanley’s engagement.
In the two years prior to the date of its opinion, Morgan Stanley and its affiliates have provided financing services to Watford and have received aggregate fees of less than $3 million from Watford in connection with such services. In the two years prior to the date of its opinion, Morgan Stanley and its affiliates have not been engaged on any financial advisory or financing assignments for Arch and have not received any fees for such services from Arch during this time. Morgan Stanley and its affiliates may seek to provide financial advisory and financing services to Arch and its affiliates in the future and would expect to receive fees for the rendering of these services. In addition, a Managing Director of Morgan Stanley, who was a member of the Morgan Stanley deal team advising Watford in connection with the transaction, is a member of the Morgan Stanley coverage team for Arch.
Purposes and Reasons of the Purchaser Filing Persons for the Merger
Under the SEC’s rules governing “going-private” transactions, including Rule 13e-3 under the Exchange Act, each of (i) Arch Capital Group Ltd. (“ACGL”), Arch Reinsurance Ltd. (“ARL”), Gulf Reinsurance Limited., Greysbridge Holdings Ltd. (“Holdco”), Greysbridge Ltd., Nicolas Papadopoulo and Maamoun Rajeh (collectively, the “Arch Filing Persons”), (ii) Kelso Investment Associates X, L.P., KEP X, LLC, and KSN Fund X, L.P. (collectively, the “Kelso Filing Persons”), and (iii) Warburg Pincus (Callisto) Global Growth (Cayman), L.P., Warburg Pincus (Europa) Global Growth (Cayman), L.P., Warburg Pincus Global Growth-B (Cayman), L.P., Warburg Pincus Global Growth-E (Cayman), L.P., Warburg Pincus Global Growth Partners (Cayman), L.P., WP Global Growth Partners (Cayman), L.P., Warburg Pincus Financial Sector (Cayman), L.P., Warburg Pincus Financial Sector-D (Cayman), L.P., Warburg Pincus Financial Sector Partners (Cayman), L.P. (collectively, the “Warburg Pincus Entities”) and WP Windstar Investments Ltd (together with the Warburg Pincus Entities, the “Warburg Pincus Filing Persons” and, together with the Arch Filing Persons and the Kelso Filing Persons, the “Purchaser Filing Persons”) is an “affiliate” of Watford and is required because of its affiliate status to disclose among other things its purpose for the merger, its reasons for structuring the transaction as proposed and any alternative structure that
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it considered, and its reasons for pursuing the merger at this time. Each of the Purchaser Filing Persons is making the statements included in this part of the proxy statement solely for the purpose of complying with the requirements of Rule 13e-3 and other rules under the Exchange Act. None of the Purchaser Filing Persons is making any recommendation to any shareholder of Watford as to how that shareholder should vote on the Merger Proposal or any other proposal considered at the special general meeting, and the Purchaser Filing Persons’ views as described in this part of the proxy statement should not be so construed as such a recommendation.
For the Purchaser Filing Persons, the purpose of the merger is to enable Holdco to acquire all of the common shares of Watford so that Holdco can operate Watford as a privately held company while retaining access to Watford’s underwriting platform and its licenses in Bermuda, the United States and Europe. When the Equity Financing and the merger are completed, all of Watford’s common shares will be owned by Holdco and Holdco will be owned 40% by ARL, 30% by the Kelso Filing Persons and 30% by the Warburg Pincus Filing Persons.
The Purchaser Filing Persons determined that structuring the transaction as a merger is efficient and appropriate because (i) it will enable Holdco to acquire all of the outstanding common shares that it does not already own, (ii) it allows the common shareholders of Watford (other than ARL) to receive cash in the amount of $35.00 per common share and (iii) the structure is consistent with recent precedent transactions involving publicly traded companies organized under Bermuda law. Because the transaction structure is consistent with the objectives of the Purchaser Filing Persons and with market practice, the Purchaser Filing Persons did not pursue or propose an alternative transaction structure.
The Purchaser Filing Persons decided to pursue the merger at this time due to (i) the generally unfavorable market conditions for alternative/total return reinsurers resulting in an undervalued stock price, and (ii) the fact that A.M. Best’s placing Watford under review with negative implications as a result of the volatility of Watford’s non-investment grade assets made insurance and reinsurance underwriting activities on behalf of Watford more challenging. Holdco will benefit from any future earnings and growth of Watford after the merger, and will bear the risk of its investment in Watford. Watford’s unaffiliated common shareholders will not benefit from any future earnings and growth of Watford after the merger, and they will no longer bear the risk of investment in Watford. The unaffiliated common shareholders’ receipt of cash in exchange for their common shares pursuant to the merger generally will be a taxable transaction for U.S. federal income tax purposes to the unaffiliated common shareholders that are subject to U.S. federal income taxation. See “Special Factors—Certain U.S. Federal Income Tax Consequences of the Merger”.
Position of the Purchaser Filing Persons as to Fairness of the Merger
Under the SEC’s rules governing “going-private” transactions, including Rule 13e-3 under the Exchange Act, the Purchaser Filing Persons are required to provide certain information regarding their position as to the substantive and procedural fairness of the merger to the unaffiliated shareholders of Watford, as described in Rule 13e-3 under the Exchange Act. The Purchaser Filing Persons are making the statements included in this section solely for the purposes of complying with such requirements. The views of the Purchaser Filing Persons as to the fairness of the merger should not be construed as a recommendation to any shareholder of Watford as to how that shareholder should vote on the Merger Proposal or any other proposal considered at the special general meeting.
The Purchaser Filing Persons did not participate in the deliberations of the Board or the transaction committee regarding, and did not receive advice from the Board’s or transaction committee’s legal or financial advisors as to, the fairness of the merger. Although Goldman Sachs generally acted as financial advisor to Arch and provided certain financial advisory services with respect to the proposed acquisition of Watford., Goldman Sachs was not requested to provide, and it did not provide, to Arch, the Company, the holders of any class of securities, creditors or other constituencies of Arch or the Company, or any other person any opinion as to the fairness, from a financial point of view or otherwise, of the transaction contemplated by the Merger Agreement or the Merger Consideration to Arch, any stockholder of common shares, or the holders of any other class of securities, creditors or other constituencies of Arch or the Company, any other valuation of Arch or the Company for the purpose of assessing the fairness of the Merger Consideration to any such person or any advice as to the underlying decision by Arch to engage in the transaction contemplated by the Merger Agreement, or as to any other matter.
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The Purchaser Filing Persons believe that the merger is substantively and procedurally fair, and that the Merger Consideration is fair, to the unaffiliated shareholders of Watford based on the following factors:
the Merger Consideration of $35.00 per common share in cash represents a premium of approximately 128.5% over the volume weighted average share price of the common shares during the 90 days ended September 8, 2020, the last trading day before rumors of Arch’s proposal to acquire Watford first appeared in the press; and approximately 95.9% over the closing share price on September 8, 2020, the last trading day before rumors of Arch’s proposal to acquire Watford first appeared in the press;
the Merger Consideration of $35.00 per common share represents an increase of approximately 40% over the price per common share initially proposed by Arch, and an increase of approximately 12.5% over the price per common share agreed to in the Initial Merger Agreement;
the Merger Consideration of $35.00 per common share in cash exceeds a subsequent conditional proposal of $34.50 per common share made by Enstar Group Limited (“Enstar”), and Enstar has agreed to vote its shares in favor of the merger;
by delivering merger consideration consisting entirely of cash to common shareholders, unaffiliated common shareholders of Watford that are subject to U.S. federal income taxation generally should be able to have cash on hand with which to pay all or a portion of their U.S. federal income taxes in connection with the sale of their common shares of Watford;
by delivering merger consideration consisting entirely of cash to common shareholders, the transaction eliminates the uncertainty in valuing the Merger Consideration and brokerage and other costs typically associated with market sales;
no external financing is required for the transaction, thus increasing the likelihood that the merger will be consummated and the cash merger consideration will be paid to the unaffiliated common shareholders;
subject to compliance with certain obligations under the Merger Agreement, each of the transaction committee and the board of directors of Watford retains the flexibility to explore and respond to an alternative transaction proposed by a third party that it concludes constitutes, or could reasonably be expected to constitute, a “Superior Proposal” (as defined in the Merger Agreement), to change its recommendation to the shareholders of Watford, and to terminate the Merger Agreement in order to approve a Superior Proposal, in each case upon the payment to Holdco of a termination fee of $28,100,000;
Watford’s board of directors established the transaction committee (comprising all of the then-current members of the Board, other than the Arch Directors) to negotiate with Arch, and the Purchaser Filing Persons believe the transaction committee was therefore able to represent the interests of the unaffiliated shareholders of Watford;
none of the Purchaser Filing Persons participated in or had any influence on the deliberative process of, or the conclusions reached by, or the negotiating positions of the transaction committee;
Watford’s board of directors retained its own nationally recognized financial advisor, and received an opinion from such financial advisor, attached to the proxy statement as Annex D, to the effect that, as of the date of the opinion, and based upon and subject to the factors and assumptions set forth in the opinion, the Merger Consideration to be received by the holders of common shares of Watford pursuant to the Merger Agreement was fair from a financial point of view to such holders;
the transaction committee had the authority to reject the transaction proposed by Arch;
The Arch Directors did not participate in the deliberations of the transaction committee and did not participate in the vote to approve the merger due to conflict of interest;
the financial and other terms and conditions of the Merger Agreement were the product of extensive negotiations between the transaction committee and its financial and legal advisors, on the one hand, and the Purchaser Filing Persons and their respective financial and legal advisors, on the other hand;
the merger will only occur if it is approved by a majority of Watford common and preference shares, voting as a single class, at Watford’s special general meeting; and
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the availability of appraisal rights to any shareholder of Watford who does not vote in favor of the Merger Agreement and the merger and who is not satisfied that it has been offered fair value for its shares, subject to such shareholder applying to the Supreme Court of Bermuda to appraise the fair value of its shares, within one month of the date of the giving of notice convening the Watford special general meeting.
In addition to the foregoing positive factors, the Purchaser Filing Persons also considered that:
The transaction committee did not conduct an auction process or solicit offers from other parties, and shareholders of Watford may believe that a transaction with a third party could deliver greater value than the merger. In considering this point, the Purchaser Filing Persons took into account the fact that third parties were free to make proposals and Watford was able to consider any such proposal that could reasonably be expected to constitute a “Superior Proposal” (as defined in the Merger Agreement).
The transaction committee did not structure the transaction to require approval of at least a majority of unaffiliated security holders. In considering this point, the Purchaser Filing Persons took into account the fact that the Arch Filing Persons beneficially own an aggregate of approximately 12.8% of the outstanding common and preference shares and, accordingly, unaffiliated security holders own approximately 87.2% of the outstanding common and preference shares (which is more than five times the combined voting power of the Arch Filing Persons and the other Purchaser Filing Persons). As noted above, Enstar has entered into an agreement with Arch and Watford pursuant to which Enstar agreed to vote its shares in support of the merger; however, Arch does not have a proxy to vote Enstar’s shares, and does not otherwise have or share the power to vote Enstar’s shares, and, accordingly, the Arch Filing Persons do not consider Arch to have beneficial ownership of such shares.
The Purchaser Filing Persons believe the fact that Watford did not pursue these shareholder-protective actions does not outweigh the positive factors discussed above and does not change the Purchaser Filing Persons’ conclusion that the merger is substantively and procedurally fair, and that the Merger Consideration is fair, to the unaffiliated shareholders of Watford.
Given that the purpose of the Purchaser Filing Persons participating in the merger is to acquire Watford and continue to operate it as a going concern, the Purchaser Filing Persons did not consider the liquidation value, runoff value, or book value per common share relevant to their determination that the Merger Consideration is fair to the unaffiliated shareholders. The Purchaser Filing Persons did not find it practicable to assign, and did not assign, relative weights to the individual factors considered in reaching its conclusion as to the fairness of the merger to the unaffiliated shareholders of Watford. Rather, their determination that the Merger Consideration is fair to the unaffiliated shareholders of Watford was made after consideration of all of the above factors as a whole.
Summary of Certain Presentations Provided by Goldman Sachs
Arch retained Goldman Sachs as Arch’s financial advisor in connection with its consideration of the acquisition by Arch of the outstanding common shares of the Company that were not owned by Arch’s wholly owned subsidiary ARL. In this capacity, representatives of Goldman Sachs provided Arch with financial advice and assistance, including performing financial analyses and assisting Arch in negotiating the financial aspects of the transaction contemplated by the Merger Agreement. Although Goldman Sachs generally acted as financial advisor to Arch, Goldman Sachs was not requested to provide, and it did not provide, to the board of directors of Arch (the “Arch Board”), the Company, the holders of any class of securities, creditors or other constituencies of Arch or the Company, or any other person (i) any opinion as to the fairness, from a financial point of view or otherwise, of the transaction contemplated by the Merger Agreement or the Merger Consideration to Arch, any shareholder of the Company, or the holders of any other class of securities, creditors or other constituencies of Arch or the Company, (ii) any other valuation of Arch or the Company for the purpose of assessing the fairness of the Merger Consideration to any such person or (iii) any advice as to the underlying decision by Arch to engage in the transaction contemplated by the Merger Agreement. Because Goldman Sachs was not requested to, and did not, deliver a fairness opinion in connection with the transaction contemplated by the Merger Agreement, it did not perform financial analyses with a view towards those analyses supporting a fairness opinion. At various times during the course of Goldman Sachs’s engagement as financial advisor to Arch, representatives of Goldman Sachs discussed with the management of Arch various considerations with respect to the proposed acquisition by Arch of the outstanding common shares of the Company that were not owned by ARL, including what financial analyses would be helpful to the management of Arch and to the Arch Board, and Goldman Sachs produced various analyses during the course of Goldman Sachs’s engagement as financial advisor to Arch. References to the “management of Arch” in this section “Summary of
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Certain Presentations Provided by Goldman Sachs” refer to the limited subgroup of Arch’s executive management that were involved with the negotiation of the transaction contemplated by the Merger Agreement.
The full text of all presentations prepared by representatives of Goldman Sachs and provided to the Arch Board (the “Goldman Sachs Presentations”) have been filed as exhibits to the Schedule 13E-3 filed with the SEC in connection with the transaction contemplated by the Merger Agreement and are incorporated herein by reference. The Schedule 13E-3, including the Goldman Sachs Presentations, may be examined at, and copies may be obtained from, the SEC in the manner described under “—Where You Can Find Additional Information.” The information in each Goldman Sachs Presentation is subject to the assumptions, limitations, qualifications and other conditions contained therein and is necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to Goldman Sachs as of, the date of such presentation. The Goldman Sachs Presentations do not constitute a recommendation to the Arch Board, the Company, or any other entity with respect to the transaction contemplated by the Merger Agreement, or any other matter. The Goldman Sachs Presentations do not constitute, and are not intended to represent, any view or opinion as to the fairness, from a financial point of view or otherwise, of the transaction contemplated by the Merger Agreement or the Merger Consideration to Arch, the shareholders of the Company or to any other person.
The Goldman Sachs Presentations were provided for the benefit of the Arch Board for their information and assistance in connection with the Arch Board’s consideration of the transaction contemplated by the Merger Agreement. The Goldman Sachs Presentations do not convey rights or remedies upon the holders of any class of securities, creditors or other constituencies of Arch or the Company or any other person and should not be relied on as the basis for any other purpose or any investment decision.
In connection with the Goldman Sachs Presentations, Goldman Sachs reviewed, among other things, certain publicly available business and financial information concerning the Company, certain non-public information regarding the business and prospects of the Company prepared by management of the Company and approved for Goldman Sachs’s use by Arch, and certain financial analyses and forecasts for the Company prepared by management of Arch and approved for Goldman Sachs’s use by Arch. Goldman Sachs also held discussions with the management of Arch and the Arch Board regarding their assessment of the strategic and financial rationale for, and the potential benefits of, the transaction contemplated by the Merger Agreement and the past and current business operations, financial condition, and future prospects of Arch and the Company and considered such other factors as Goldman Sachs deemed appropriate. The management of Arch did not give any specific instructions nor impose any limitations on Goldman Sachs with respect to Goldman Sachs’s preparation of the Goldman Sachs Presentations.
In preparing the Goldman Sachs Presentations and providing the analysis set forth in the Goldman Sachs Presentations, Goldman Sachs, with Arch’s consent, relied upon and assumed, without assuming responsibility or liability for independent verification, the accuracy, completeness and reasonableness of all industry, financial, legal, regulatory, tax, accounting and other information that was publicly available or obtained from data suppliers and other third parties or was furnished to or discussed with Goldman Sachs by Arch or otherwise reviewed by or for Goldman Sachs. Goldman Sachs assumed with the consent of Arch that the financial analyses and forecasts for the Company prepared by the management of Arch have been reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of Arch. With respect to any financial projections, other estimates and/or other forward-looking information obtained by Goldman Sachs from public sources, data suppliers and other third parties, Goldman Sachs assumed that such information was reasonable and reliable. Goldman Sachs expressed no view as to any of the foregoing analyses, projections or forecasts or the assumptions on which they were based. No representation or warranty, express or implied, was made by Goldman Sachs in relation to the accuracy or completeness of the information presented in the Goldman Sachs Presentations or their suitability for any particular purpose.
Goldman Sachs (i) expressed no view, opinion, representation, guaranty or warranty (in each case, express or implied) regarding the reasonableness or achievability of any financial projections, other estimates and other forward-looking information or the assumptions upon which they are based and (ii) relied upon the assurances of the management of Arch that they were unaware of any facts or circumstances that would make such information (including, without limitation, any financial projections, other estimates and other forward-looking information) incomplete, inaccurate or misleading. Goldman Sachs did not conduct and was not provided with any independent valuation or appraisal of any assets or liabilities (including any contingent, derivative or other off-balance sheet assets
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and liabilities) of Arch, the Company or any other company or business, nor did Goldman Sachs evaluate the solvency of Arch, the Company or any other company or business under any state or federal laws relating to bankruptcy, insolvency or similar matters or the ability of Arch or the Company to pay their respective obligations when they come due.
Goldman Sachs expressed no opinion as to the prices at which shares of the Company will trade at any time, or as to the potential effects of volatility in the credit, financial and stock markets on Arch, the Company or the transaction contemplated by the Merger Agreement, or as to the impact of the transaction contemplated by the Merger Agreement on the solvency or viability of Arch or the Company or the ability of Arch or the Company to pay their respective obligations when they come due. The matters considered by Goldman Sachs in their financial analyses and reflected in the Goldman Sachs Presentations were necessarily based on various assumptions, including assumptions concerning general business, economic and capital markets conditions and industry-specific and company-specific factors as in effect on, and information made available to Goldman Sachs as of the date of such Goldman Sachs Presentation. Many such conditions are beyond the control of Arch, the Company and Goldman Sachs. Accordingly, the analyses included in the Goldman Sachs Presentations are inherently subject to uncertainty, and neither of Goldman Sachs nor any other person assumes responsibility if future results are different from those forecasted. Furthermore, it should be understood that subsequent developments may affect the views expressed in the Goldman Sachs Presentations and that Goldman Sachs does not have any obligation to update, revise or reaffirm its financial analyses or the Goldman Sachs Presentations based on circumstances, developments or events occurring after the date of such Goldman Sachs Presentation. With respect to the financial analyses performed by Goldman Sachs in the Goldman Sachs Presentations: (a) such financial analyses are not necessarily indicative of actual values or actual future results, which may be significantly more or less favorable than suggested by these analyses; (b) while none of the selected companies referred to in the Goldman Sachs Presentations are directly comparable to the Company, the companies were chosen because they are publicly traded companies with operations that for purposes of analysis may be considered similar to certain operations of the Company based on Goldman Sachs’s familiarity with the insurance industry in North America; (c) while none of the selected precedent transactions used in the premia paid analyses and the comparable precedent transactions analyses referred to below are identical to the transaction contemplated by the Merger Agreement and while none of the selected companies involved in such transactions is identical or directly comparable to the Company, the transactions were selected because they involved publicly traded companies with operations that for purposes of analysis may be considered similar to certain operations of the Company based on Goldman Sachs’s familiarity with the insurance industry in North America; and (d) such financial analyses do not purport to be appraisals or to reflect the prices at which shares or other securities or financial instruments of or relating to the common shares of the Company may trade or otherwise be transferable at any time.
The Goldman Sachs Presentations should not be viewed as a recommendation with respect to any matter pertaining to the transaction contemplated by the Merger Agreement. The terms of the transaction contemplated by the Merger Agreement, including the Merger Consideration, were determined solely through negotiations between the parties to the Merger Agreement. The Goldman Sachs Presentations did not address the relative merits of the transaction contemplated by the Merger Agreement or any other transaction contemplated in connection with the transaction contemplated by the Merger Agreement compared to other business strategies or transactions that may have been considered by the management of Arch.
The following is a summary of the Goldman Sachs Presentations, which is qualified in its entirety by the full text of the Goldman Sachs Presentations. The following summary does not, however, purport to be a complete description of the financial analyses or data presented by Goldman Sachs, nor does the order of analyses or presentations represent relative importance or weight given to those analyses or presentations by Goldman Sachs. Considering the summaries set forth below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying these analyses, could create a misleading or incomplete view of the Goldman Sachs Presentations.
The Goldman Sachs Presentations
The Goldman Sachs Presentations are presentations that representatives of Goldman Sachs presented to the Arch Board with respect to the transaction contemplated by the Merger Agreement and consisted of preliminary financial analyses related to such transaction as described below. During the course of Goldman Sachs’s engagement as financial advisor to Arch, representatives of Goldman Sachs prepared other presentations that were not presented to or considered by the Arch Board and are not summarized herein.
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The August 3 Presentation
The presentation that representatives of Goldman Sachs sent to the management of Arch and the Arch Board on August 3, 2020 included (i) an overview of the Company and its business model based on information Goldman Sachs obtained from AM Best, SNL Financial, and public filings; (ii) the Company’s historical financial performance over time based on information Goldman Sachs obtained from public filings; (iii) an overview of the Company’s non-investment grade portfolio based on information Goldman Sachs obtained from public filings; (iv) credit rating perspectives for the Company based on information Goldman Sachs obtained from AM Best; (v) the historical price performance of the Company’s common shares for the time period from March 28, 2019 (the “Company Listing Date”) to July 31, 2020 based on information Goldman Sachs obtained from Bloomberg; (vi) a comparison of the historical price performance of the Company’s common shares against share of common stock for hedge fund reinsurers and the S&P 500 Index based on information Goldman Sachs obtained from Bloomberg and Capital IQ; (vii) a comparison of the P/BV, P/TBV and P/E for the Company against certain total return reinsurers for the time period from the Company Listing Date to July 31, 2020 based on information Goldman Sachs obtained from Capital IQ, Bloomberg, and IBES; (viii) a review and comparison of certain financial information, ratios and public market multiples for the Company and other selected total return reinsurers and traditional reinsurers based on information Goldman Sachs obtained from Capital IQ, IBES, and public filings; (ix) a review of the acquisition premia for selected acquisition transactions announced from 2010 to July 2020 involving a public company based in the United States as the target where the disclosed equity value for the transaction was greater than $0.3 billion and less than $1.5 billion based on information Goldman Sachs obtained from Refinitiv Eikon; (x) an overview of certain publicly available research analyst reports for the Company based on information Goldman Sachs obtained from IBES, Capital IQ, and DataStream; and (xi) and overview of key issues to consider related to the proposed transaction.
The September 14 Presentation
The presentation that representatives of Goldman Sachs sent to the management of Arch and the Arch Board on September 14, 2020 included an assessment of a proposal from the Company with purchase price adjustments in the form of a collar based on the Company’s non-investment grade portfolio performance.
The September 18 Presentation
The presentation that representatives of Goldman Sachs sent to the management of Arch and the Arch Board on September 18, 2020 included certain hedging considerations and strategies.
The September 21 Presentation
The presentation that representatives of Goldman Sachs sent to the management of Arch and the Arch Board on September 21, 2020 included an overview of the proposed transaction structure based on the September 20, 2020 proposal from the Company and an illustration of the proposed purchase price at different book values for the Company.
The September 26 Presentation
The presentation that representatives of Goldman Sachs sent to the management of Arch and the Arch Board on September 26, 2020 included an overview of the revised proposed transaction structure based on the September 24, 2020 proposal from Arch and its co-investors and an illustration of the proposed purchase price at different book values for the Company.
Miscellaneous
As described above, Goldman Sachs was not asked to, and did not, render any opinion as to the fairness, from a financial point of view or otherwise, of the transaction contemplated by the Merger Agreement or the Merger Consideration to the Arch Board, the Company, the holders of any class of securities, creditors or other constituencies of Arch or the Company. The Goldman Sachs Presentations were one of many factors taken into consideration by the Arch Board in its deliberations in connection with the transaction contemplated by the Merger Agreement.
Goldman Sachs believes that the foregoing summary and its analyses must be considered as a whole and that selecting portions of the foregoing summary and these analyses, without considering all of these analyses as a whole, could create an incomplete view of the processes underlying the analyses. As a result, any potential indications of
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valuation resulting from any particular analysis or combination of analyses described above were merely utilized to create points of reference for analytical purposes. The order of analyses described does not represent the relative importance or weight given to those analyses by Goldman Sachs. In preparing the Goldman Sachs Presentations, Goldman Sachs did not attribute any particular weight to any analyses or factors considered and did not form an opinion as to whether any individual analysis or factor (positive or negative), considered in isolation, supported or failed to support the analysis set forth in the Goldman Sachs Presentations. Rather, Goldman Sachs considered the totality of the factors and analyses performed in preparing the Goldman Sachs Presentations.
Moreover, Goldman Sachs’s analyses are not and do not purport to be appraisals or otherwise reflective of the prices at which businesses actually could be acquired or sold. None of the selected transactions referred to in the above summaries is identical to the transaction contemplated by the Merger Agreement and no company used in the aforementioned analyses as a comparison is directly comparable to the Company. However, the transactions were chosen because they involve transactions that, for purposes of Goldman Sachs’s analysis, may be considered similar to the transaction contemplated by the Merger Agreement. The analyses necessarily involve complex considerations and judgments concerning differences in financial and operational characteristics of the companies involved and other factors that could affect the companies compared to the Company.
Goldman Sachs did not recommend any specific merger consideration to the Arch Board or that any specific amount constituted the only appropriate merger consideration for the transaction contemplated by the Merger Agreement.
Goldman Sachs and its affiliates are engaged in advisory, underwriting and financing, principal investing, sales and trading, research, investment management and other financial and non-financial activities and services for various persons and entities. Goldman Sachs and its affiliates and employees, and funds or other entities they manage or in which they invest or have other economic interests, or with which they co-invest, may at any time purchase, sell, hold or vote long or short positions and investments in securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments of Arch, the Company and any of their respective affiliates and third parties, including affiliates of the holders of common shares of the Company, or any currency or commodity that may be involved in the transaction contemplated by the merger agreement, as amended for the accounts of Goldman Sachs and its affiliates and employees and their customers.
During the two year period ended December 30, 2020, the Investment Banking Division of Goldman Sachs has not been engaged by the Company, Arch or their respective affiliates to provide financial advisory or underwriting services for which Goldman Sachs has recognized compensation. Goldman Sachs acted as financial advisor to Arch in connection with the transaction contemplated by the Merger Agreement. Goldman Sachs may also in the future provide financial advisor and/or underwriting services to Arch, the Company, and any of their respective affiliates and third parties, including affiliates of the holders of shares of the Company, for which the Investment Banking Division of Goldman Sachs may receive compensation.
Arch selected Goldman Sachs as its financial advisor because it is an internationally recognized investment banking firm that has substantial experience in transactions similar to the transaction contemplated by the Merger Agreement. Pursuant to a letter agreement, dated December 30, 2020 (the “Merger Engagement Letter”), Arch engaged Goldman Sachs to act as its financial advisor in connection with its consideration of the acquisition by Arch of the outstanding common shares of the Company that were not owned by Arch. The Merger Engagement Letter provides for a transaction fee of $4 million, all of which will become payable at the consummation of the Merger. Pursuant to a letter agreement, dated December 30, 2020 (the “Structuring Engagement Letter”), Arch engaged Goldman Sachs to act as structuring agent in connection with the proposed private offering, issue and sale of securities of a reinsurance sidecar or other vehicle that will own 50% or more of the stock or all or substantially all of the assets of the Company. The Structuring Engagement Letter provides for a structuring fee of $1.5 million, all of which will become payable at the consummation of the offering. In addition, Arch has agreed to reimburse Goldman Sachs for certain of its expenses, including reasonable attorneys’ fees and disbursements, and to indemnify Goldman Sachs and related persons against various liabilities, including certain liabilities under the federal securities laws.
Plans for the Company After the Merger
After the merger, it is anticipated that the Company will generally continue its current operations, but will cease to be an independent public company. As of the date of this proxy statement, other than the merger and as described in this section, the Purchaser Filing Persons have advised the Company that they do not have any specific plans or
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proposals or negotiations that relate to or would result in: (1) an extraordinary transaction, such as a merger, reorganization or liquidation, involving Watford or any of its subsidiaries; (2) any purchase, sale or transfer of a material amount of assets of Watford or any of its subsidiaries; (3) any material change in the present dividend rate or policy, or indebtedness or capitalization of Watford; (4) any change in the present board of directors or management of Watford, including, but not limited to, any plans or proposals to change the number or the term of directors or to fill any existing vacancies on the board or to change any material term of the employment contract of any executive officer; (5) any other material change in Watford’s corporate structure or business; (6) any class of equity securities of Watford to be delisted from a national securities exchange; (7) any class of equity securities of Watford becoming eligible for termination of registration under the Exchange Act; or (8) the suspension of Watford’s obligation to file reports under the Exchange Act.
Dividend rate or policy, or indebtedness or capitalization. Watford has not declared or paid dividends on its common shares prior to the merger. After the merger, Watford’s dividend policy with respect to its common shares will be determined by the board of the surviving company and the surviving company’s sole shareholder which will be Holdco. Holders of Watford preference shares will be entitled to the same dividend and other relative rights, preferences, limitations and restrictions after the merger as are applied to the preference shares prior to the merger. Holdco has advised the Company that Holdco intends to explore options to and may cause the surviving company to implement changes to lower its cost of capital including, potentially, subject to applicable capital requirements, incurring indebtedness and applying the proceeds thereof to redeem Watford’s preference shares.
Board of directors; management. At the effective time of the merger, the directors of Merger Sub immediately prior to the effective time will become the initial directors of the surviving company.
Delisting and deregistration of Watford equity securities. After the merger, the Watford common shares will be delisted from the Nasdaq Global Select Market, and the registration of the common shares under the Exchange Act will be terminated pursuant to Section 12(g)(4) of the Exchange Act. Watford’s preference shares will remain outstanding and, so long as the preference shares remain outstanding, Watford will remain obligated to file reports under the Exchange Act. As noted above, Holdco has advised the Company that it is exploring options which may include redemption of outstanding preference shares. If such redemption occurs, Watford’s preference shares thereafter would be delisted from the Nasdaq Global Select Market, registration of the preference shares under the Exchange Act would be terminated pursuant to Section 12(g)(4) of the Exchange Act and Watford’s obligation to file reports under Section 15(d) of the Act thereafter would be suspended.
Certain Effects of the Merger
If shareholders approve the Merger Proposal and the other conditions to the closing of the merger are either satisfied or waived, Merger Sub will be merged with and into the Company with the Company being the surviving company.
If the merger is completed, at the effective time,
each common share issued and outstanding immediately prior to the effective time (other than (i) shares to be canceled pursuant to the Merger Agreement and (ii) RSUs to be canceled and exchanged pursuant to the Merger Agreement) shall automatically be canceled and converted into the right to receive the Merger Consideration;
each RSU will become fully vested, with vesting of any performance-based RSUs vesting as if performance goals had been achieved at target level, and be canceled in exchange for the right to receive a single lump sum cash payment, without interest, equal to (A) the Merger Consideration, less (B) any applicable taxes required to be withheld; and
each preference share issued and outstanding immediately prior to the effective time will continue as a preference share of the surviving company and will be entitled to the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares.
Accordingly, immediately after the effective time of the merger all of the Company’s common shares will be owned by Holdco. None of the Company’s current common shareholders (other than ARL) will have any ownership interest in, or be a holder of, the Company’s common shares after the completion of the merger. As a result, our
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current holders of common shares will no longer benefit from any increase in the Company’s value or bear the risk of any decrease in the Company’s value. Following the merger, only Holdco and its affiliates (and potentially the holders of preference shares, until those shares are redeemed) will benefit from any increase in the Company’s value and also will bear the risk of any decrease in the Company’s value.
Interests of the Company’s Directors and Executive Officers in the Merger
In considering the recommendations of the Board of Directors with respect to the Merger Proposal, you should be aware that, aside from their interests as shareholders of the Company, certain of the Company’s directors and executive officers have interests in the merger that are different from, or in addition to, those of other shareholders of the Company generally.
Two members of Watford’s board of directors (the “Arch Directors”) were appointed to serve on our board by Arch. At a board meeting on June 17, 2020, the Arch Directors recused themselves from further discussions regarding strategic alternatives potentially available to Watford, recognizing that in any potential transaction that might result from those discussions, the interests of Arch could diverge from the interests of the Company and its other shareholders. Accordingly, the Arch Directors did not participate in the Board’s deliberations regarding acquisition proposals submitted by Arch or by other parties or in the Board’s deliberations relating to the Merger Agreement, and did not participate in the vote to approve the Merger Agreement or recommend that the shareholders approve the Merger Proposal.
In addition, Mr. Levy did not participate in the deliberations or voting of the Board with respect to the compensation arrangements relating to the Compensation Advisory Proposal.
Interests of executive officers and directors that may be different from or in addition to the interests of the Company’s shareholders include the facts that:
the Company’s executive officers hold unvested RSUs that will become fully vested (with vesting of any performance-based RSUs vesting as if performance goals had been achieved at target level) and canceled in exchange for the right to receive the Merger Consideration;
the Company’s executive officers have entered into amended and restated employment agreements that provide:
for a cash payment ($325,000 to Mr. Levy, $250,000 to each of Messrs. Hawley and Richardson, and $125,000 to each of Ms. Cunningham and Mr. Scherer) to such executive officer on the six-month anniversary of the closing date of the merger if he or she remains employed by the Company or one of its affiliates at such time, unless he or she is terminated without Cause prior thereto, in which case the amount will be paid within five days of termination;
if the closing date of the merger occurs in 2021, a cash payment to the executive officer on the closing date of the merger equal to such executive officer’s pro rata 2021 target annual bonus based on the number of days elapsed in 2021 through the closing date (with the equity component of such target annual bonus being paid in cash in lieu of units or shares), which shall be no less than such executive officer’s 2020 target annual bonus levels;
that the change of control severance payments payable under the applicable employment agreement will also be due if we give notice of any non-extension at the end of the original or any extended employment period;
for the duration of the non-competition covenant under the applicable employment agreement to be reduced to three months following termination of employment (previously twelve months following termination of employment);
if the employment of such executive officer is terminated by the Company without “Cause” or by the executive officer for “Good Reason” (each as defined in the employment agreements and summarized below) or if the Company provides notice of non-extension at the end of the original or extended employment period, in each case at any time following a “Change in Control” (as defined in the employment agreements and which would include the merger), and if he or she signs a general release of claims and complies with the covenants described below, that (A) such executive officer will be entitled to: (i) continue to receive his or her base salary for a period of twenty-four months (such period, thirty-six months for Mr. Levy); (ii) an amount equal to two times the executive officer’s target
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annual bonus then in effect, payable in a lump sum (such amount, three times for Mr. Levy); (iii) for a period of twenty-four months following the date of termination, continue to receive his or her major medical insurance coverage under the Company’s plans in effect on the date of termination (such period, thirty-six months for Mr. Levy); and (iv) other than with respect to Mr. Scherer, continue to receive a housing allowance for the lesser of twenty-four months following the date of termination and the period during which the executive officer remains a resident of Bermuda, including reimbursement for taxes incurred by such executive officer as a result of such benefits (including any taxes imposed on the reimbursement payment itself) (such period, thirty-six months for Mr. Levy); and (B) (i) the unvested portion of such Executive Officer’s equity grant in connection with the Company’s direct listing on the Nasdaq Global Select Market will thereupon vest; (ii) the unvested portion of any time-based RSUs held by such executive officer will thereupon vest; and (iii) the unvested portion of any performance-based RSUs held by such executive officer will thereupon vest as if performance goals with respect to such performance-based RSUs had been achieved at target level;
the Company’s executive officers may receive annual bonuses in respect of calendar year 2020 (including both cash and equity components), which shall (i) be based on the greater of target and actual performance (provided that the Company may exclude from the determination of actual performance the impact of any costs and expenses associated with the transactions contemplated by the Merger Agreement or any non-recurring events that would not reasonably be expected to have affected the Company or any its subsidiaries had the transactions contemplated by the Merger Agreement not arisen in a manner intended to neutralize such impact), (ii) if the closing date of the merger occurs in calendar year 2020, not be prorated based on the number of days elapsed during the period commencing on January 1, 2020 and ending on the closing date of the merger, and (iii) be payable solely in cash;
the Company’s executive officers may enter into arrangements with Holdco or Arch prior to or following the closing; and
the Company’s directors and executive officers are entitled to continued indemnification and insurance coverage under the Merger Agreement, and the Company’s directors and certain executive officers are entitled to continued indemnification and insurance coverage under indemnification agreements.
Treatment of Company Equity Awards
All of the Company’s executive officers hold RSUs. The Merger Agreement provides that effective as of immediately prior to the effective time of the merger, each outstanding performance-based RSU and time-based RSU granted under the Company’s 2018 Stock Incentive Plan (the “2018 Incentive Plan”) will become fully vested, with vesting of any performance-based RSUs vesting as if performance goals had been achieved at target level, and be canceled in exchange for the right to receive a single lump sum cash payment, without interest, equal to (i) the Merger Consideration, less (ii) any applicable taxes required to be withheld.
All such payments are required to be made by the surviving company, without interest, on or as soon as practicable following the effective time of the merger, and in no event later than five business days following the effective time of the merger.
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The table below sets forth the estimated value of unvested performance-based RSUs and time-based RSUs held as of December 31, 2020, the last practicable date prior to the date of this proxy statement, by the Company’s executive officers, based on the Merger Consideration. None of the Company’s non-employee directors holds any RSUs. Depending on when the merger is completed, certain outstanding equity awards shown in the table below may become vested in accordance with their terms without regard to the merger.
Name
Aggregate
Number of
Unvested
Performance-
Based
RSUs
(#)(1)
Aggregate
Value of
Unvested
Performance-
Based
RSUs
($)
Aggregate
Number of
Unvested
Time-
Based
RSUs
(#)
Aggregate
Value of
Unvested
Time-
Based
RSUs
($)
Total
Value of
Unvested
RSUs
($)
Executive Officers
 
 
 
 
 
Jonathan D. Levy
8,696
304,360
31,312
1,095,920
1,400,280
Robert L. Hawley
4,892
171,220
18,083
632,905
804,125
Elizabeth A. Cunningham
3,261
114,135
3,261
114,135
228,270
Laurence B. Richardson, II
3,804
133,140
3,805
133,175
266,315
Alexandre J.M. Scherer
2,717
95,095
12,141
424,935
520,030
(1)
Reflects the number of shares underlying unvested performance-based RSUs held by the Company’s executive officers with vesting of any performance-based RSUs vesting as if performance goals had been achieved at target level.
Employment Agreements with Executive Officers
The Company has entered into amended and restated employment agreements (the “Employment Agreements”) with each of its executive officers. Under the Employment Agreements:
if the employment of such executive officer is terminated by the Company without “Cause” or by the executive officer for “Good Reason” (each as defined in the Employment Agreements and summarized below) or if the Company provides notice of non-extension at the end of the original or extended employment period, in each case at any time following a “Change in Control” (as defined in the Employment Agreement and which would include the merger), and if he or she signs a general release of claims and complies with the covenants described below, then (A) such executive officer will be entitled to: (i) continue to receive his or her base salary for a period of twenty-four months (such period, thirty-six months for Mr. Levy); (ii) an amount equal to two times the executive officer’s target annual bonus then in effect, payable in a lump sum (such amount, three times for Mr. Levy); (iii) for a period of twenty-four months following the date of termination, continue to receive his or her major medical insurance coverage under the Company’s plans in effect on the date of termination (such period, thirty-six months for Mr. Levy); and (iv) other than with respect to Mr. Scherer, continue to receive a housing allowance for the lesser of twenty-four months following the date of termination and the period during which the executive officer remains a resident of Bermuda, including reimbursement for taxes incurred by such executive officer as a result of such benefits (including any taxes imposed on the reimbursement payment itself) (such period, thirty-six months for Mr. Levy); and (B) (i) the unvested portion of such Executive Officer’s equity grant in connection with the Company’s direct listing on the Nasdaq Global Select Market will thereupon vest; (ii) the unvested portion of any time-based RSUs held by such executive officer will thereupon vest; and (iii) the unvested portion of any performance-based RSUs held by such executive officer will thereupon vest as if performance goals with respect to such performance-based RSUs had been achieved at target level;
if the executive officer remains employed by us or an affiliate of ours on the six-month anniversary of the merger, such executive officer will receive a cash payment ($325,000 to Mr. Levy, $250,000 to each of Messrs. Hawley and Richardson, and $125,000 to each of Ms. Cunningham and Mr. Scherer) on the six-month anniversary of the merger, unless he or she is terminated without Cause prior thereto, in which case the amount will be paid within five days of termination (such payments, the “Retention Payments”),
if the closing date of the merger occurs in 2021, a cash payment to the executive officer on the closing date of the merger equal to such executive officer’s pro rata 2021 target annual bonus based on the number of
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days elapsed in 2021 through the closing (with the equity component of such annual bonus being paid in cash in lieu of units or shares), which shall be no less than such executive officer’s 2020 target annual bonus levels (such payment, the “2021 Pro Rata Annual Bonus Payment”);
if any amounts to be paid to such executive officer would constitute an “excise parachute payment” (within the meaning of Section 280G of the Code), the amount of payments or other benefits payable to the executive officer will be reduced to the extent necessary until no amount payable to such executive officer constitutes an excess parachute payment, but only if such reduction results in a higher after-tax payment to him or her; and
each executive officer covenants not to (a) own, manage, control, participate in, consult with, render services for or in any manner engage in any business competing with the business of the Company as such businesses exist or are in process as of the date of termination, within any geographical area in which the Company engages or plans to engage in such businesses (i) for three months following termination by the executive officer for Good Reason or by the Company not for Cause or (ii) for three months following termination by the executive officer other than for Good Reason or by the Company for Cause if the Company (A) provides written notice of its intention to enforce such restrictions within ten business days following such termination pursuant to this clause (ii), (B) continues to pay the executive officer’s base salary for such three-month period, (C) makes a lump sum payment equal to 25% of the executive officer’s target annual bonus, (D) continues to provide major medical insurance coverage for such three-month period, and (E) except with respect to Mr. Scherer, continues to provide the executive officer’s housing allowance for such three-month period, including reimbursement for taxes incurred by such executive officer as a result of such benefits (including any taxes imposed on the reimbursement payment itself), or (b) induce or attempt to induce any employee of the Company to leave the employ of the Company or in any way interfere with the relationship between the Company and any employee thereof or induce or attempt to induce any customer, supplier, client, insured, reinsured, reinsurer or other business relation of the Company to cease doing business with the Company at any time during the twelve months following termination of the executive officer’s employment for any reason.
For purposes of the Employment Agreements:
“Good Reason” means, in summary: (i) the assignment to the executive officer of any duties materially inconsistent with such executive officer’s then status as an executive officer of the Company or a substantial adverse alteration in the nature of the executive officer’s responsibilities; (ii) a material reduction by the Company in the executive officer’s base salary, target bonus or annual RSU award; (iii) the relocation of the executive officer’s principal place of employment outside of his or her current location; or (iv) any material breach by the Company of the provisions contained in the executive officer’s Employment Agreement; and
“Cause” means, in summary: (i) theft or embezzlement by the executive officer with respect to the Company; (ii) willful disregard or gross negligence in the performance of the executive officer’s duties; (iii) the executive officer’s conviction of any felony or any crime involving moral turpitude; (iv) willful or prolonged absence from work by the executive officer or failure, neglect or refusal by the executive officer to perform his or her duties and responsibilities; (v) continued and habitual use of alcohol by the executive officer to an extent which materially impairs the executive officer’s performance of his or her duties or the executive officer’s use of illegal drugs; (vi) other than in the case of Mr. Scherer, the executive officer’s failure to use his or her best efforts to obtain, maintain or renew a work permit by the Bermuda government as applicable; or (vii) the material breach by the executive officer of any of the covenants contained in his or her Employment Agreement.
Annual Bonus Payments
Under the Merger Agreement, the Company must pay, no later than the closing date of the merger, annual bonuses in respect of calendar year 2020 (including both cash and equity components), which shall (i) be based on the greater of target and actual performance (provided that the Company may exclude from the determination of actual performance the impact of any costs and expenses associated with the transactions contemplated by the Merger Agreement or any non-recurring events that would not reasonably be expected to have affected the Company or any
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its subsidiaries had the transactions contemplated by the Merger Agreement not arisen in a manner intended to neutralize such impact), (ii) if the closing date of the merger occurs in calendar year 2020, not be prorated based on the number of days elapsed during the period commencing on January 1, 2020 and ending on the closing date of the merger, and (iii) be payable solely in cash.
The table below sets forth the amount of the 2020 annual bonus payment that would be payable to each of the Company’s executive officers assuming that the consummation of the merger occurred on December 31, 2020, the last practicable date prior to the date of this proxy statement.
Name
2020 Annual Bonus
Payment Pursuant
to the Merger
Agreement
($)(1)
Jonathan D. Levy
632,500
Robert L. Hawley
342,500
Elizabeth A. Cunningham
305,000
Laurence B. Richardson, II
321,500
Alexandre J.M. Scherer
251,250
(1)
Reflects for each executive officer his or her target annual bonus for 2020.
If the merger is completed in 2021, the Company will make a cash payment to each executive officer of his or her 2021 Pro Rata Annual Bonus Payment.
Retention Payments
The Company will make a cash payment of the Retention Payments, in each case, on the six-month anniversary of the effective date of the merger if the executive officer remains employed by the Company or an affiliate thereof on such anniversary, unless the executive officer is terminated without Cause prior thereto, in which case the amount will be paid within five days of such termination.
The table below sets forth the amounts that would be payable to each of the Company’s executive officers pursuant to the Employment Agreements with each executive officer described above assuming that the consummation of the merger occurred on December 31, 2020, the last practicable date prior to the date of this proxy statement, and each of the Company’s executive officers remained employed by the Company on the six-month anniversary of the effective date of the merger.
Name
Retention
Payments
Pursuant to the
Merger
Agreement
($)(1)
Jonathan D. Levy
325,000
Robert L. Hawley
250,000
Elizabeth A. Cunningham
125,000
Laurence B. Richardson, II
250,000
Alexandre J.M. Scherer
125,000
(1)
Reflects a cash payment to be made to each executive officer on the six month anniversary of the effective date of the merger if such executive officer remains employed by the Company or an affiliate thereof on such anniversary, unless the executive officer is terminated without Cause prior thereto, in which case the amount will be paid within five days of such termination.
No Golden Parachute Excise Tax Gross-Up
In connection with the merger, no executive officer or director will be entitled to a gross-up payment related to excise taxes imposed on any executive officer or director in the event that any payments or benefits result in an “excess parachute payment” within the meaning of Section 280G of the Code.
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Benefits Continuation Pursuant to the Merger Agreement
For the one-year period beginning at the effective time of the merger, Holdco has agreed to provide each employee who is employed by the Company or any subsidiary of the Company at the closing date of the merger (including each of the Company’s executive officers employed at the closing date), during such employee’s employment within such one-year period, with (i) a base salary or hourly wage rate that is at least equal to the base salary or hourly wage rate provided to such employee immediately prior to the effective time; (ii) short- and long-term cash incentive compensation opportunities that are no less favorable than the short- and long-term incentive compensation opportunities in effect for such employee immediately prior to the effective time; (iii) employee benefits that are no less favorable in the aggregate than the employee benefits provided to such employee immediately prior to the effective time; and (iv) a position with substantially comparable duties and responsibilities and the same work location as the position such employee had immediately prior to the effective time.
In addition, Holdco has agreed to provide each employee of the Company or any subsidiary of the Company who remains employed following the effective time (including each of the Company’s executive officers who remains employed following the effective time) and who incurs a termination of employment by the surviving company without cause during the one-year period immediately following the effective time of the merger with severance benefits of (i) a lump sum payment equal to twelve months of such employee’s base salary and (ii) a lump sum payment equal to the target value of such employee’s annual incentive compensation (including both cash and equity incentive compensation) for the calendar year in which such termination occurs, which target value will be no less than such target value for calendar year 2020 (including both cash and equity incentive compensation); provided that in all events, (x) if such employee is subject to an employment agreement that provides for greater severance benefits than the severance benefits described in this paragraph, the severance provisions of such employment agreement will govern in lieu of the severance benefits described in this paragraph, (y) such severance benefits will be no less than the severance allowance required to be provided to such employee under applicable law and (z) Holdco will, or will cause the surviving company to, comply with all notice requirements under applicable law.
Indemnification and Insurance
Pursuant to the terms of the Merger Agreement, following the effective time of the merger, the Company’s current and former directors and officers will be entitled to certain ongoing rights of indemnification and to coverage under directors’ and officers’ liability insurance policies. For a description of such ongoing indemnification and insurance obligations, refer to the section entitled “The Merger Agreement—Other Covenants and Agreements—Directors’ and Officers’ Indemnification” beginning on page [75].
Merger Related Compensation
This section sets forth the information required by Item 402(t) of Regulation S-K regarding the compensation for each named executive officer of the Company that is based on or otherwise relates to the merger. This compensation is referred to as “golden parachute” compensation by the applicable SEC disclosure rules, and in this section we use such term to describe the merger related compensation payable to the Company’s named executive officers. The “golden parachute” compensation payable to these individuals is subject to an advisory (non-binding) vote of the Company’s shareholders.
The following table sets forth the amount of payments and benefits that each named executive officer would receive in connection with the merger. For purposes of quantifying these potential payments and benefits for the table below, the following assumptions were used:
the consummation of the merger occurred on December 31, 2020;
the employment of each named executive officer was terminated by the Company without Cause or the named executive officer for Good Reason, in each case immediately following the effective time of the merger; and
the value of a Company common share of $35.00, which is equal to the Merger Consideration.
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Golden Parachute Compensation
Name
Cash
Equity
Perquisites/
Benefits
Tax
Reimbursement
Total
 
($)(1)
($)(2)
($)(3)
($)(4)
($)
Jonathan D. Levy
2,422,500
1,400,280
921,223
270,000
5,014,003
Robert L. Hawley
1,005,000
804,125
461,431
2,270,556
Elizabeth A. Cunningham
930,000
228,270
436,849
1,595,119
Laurence B. Richardson, II
1,029,000
266,315
176,000
80,000
1,551,315
Alexandre J.M. Scherer
757,500
520,030
68,000
1,345,530
(1)
Amounts reported represent, for each named executive officer (i) (A) other than in the case of Mr. Levy, the value of the sum of his or her base salary for twenty-four months and two times his or her target annual bonus for the year of termination and (B) in the case of Mr. Levy, the value of the sum of his base salary for thirty-six months and three times his target annual bonus for the year of termination and (ii) the value of a target 2020 annual bonus. Set forth below are the values of the cash payments that the Company’s named executive officers are expected to receive in connection with the merger:
Name
Cash
Severance
Pro-Rated
Annual Bonus
Pursuant to
the Merger
Agreement
Total
 
 
($)
 
Jonathan D. Levy
1,425,000
997,500
2,422,500
Robert L. Hawley
670,000
335,000
1,005,000
Elizabeth A. Cunningham
620,000
310,000
930,000
Laurence B. Richardson, II
686,000
343,000
1,029,000
Alexandre J.M. Scherer
505,000
252,500
757,500
(2)
Amounts reported represent the aggregate value of the cash payments expected to be received in connection with cancellation of outstanding RSUs held by each of the Company’s named executive officers upon completion of the merger, assuming, in the case unvested performance-based RSUs held by the Company’s executive officers, the achievement of the performance metrics at the target level of performance. Set forth below are the values of the cash payments in respect of the vesting and cancellation of each type of outstanding equity-based award that the Company’s named executive officers are expected to receive in connection with the merger:
Name
Aggregate
Value of
Unvested
Performance-
Based RSUs
Aggregate
Value of
Unvested
Time-Based
RSUs
Total Value of
Unvested
Equity Awards
 
 
($)
 
Jonathan D. Levy
304,360
1,095,920
1,400,280
Robert L. Hawley
171,220
632,905
804,125
Elizabeth A. Cunningham
114,135
114,135
228,270
Laurence B. Richardson, II
133,140
133,175
266,315
Alexandre J.M. Scherer
95,095
424,935
520,030
Details regarding the treatment of the equity awards held by the Company’s named executive officers upon completion of the merger are set forth in “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger—Treatment of Company Equity Awards” beginning on page [47].
(3)
The amounts in this column consist of: (a) for Mr. Levy, the amount represents estimated medical and housing expense equal to thirty-six months, and the employee payroll tax paid for by the Company; (b) for Messrs. Hawley and Richardson and Ms. Cunningham, the amount represents estimated medical and housing expense payment equal to twenty-four months, and the employee payroll tax paid for by the Company; and (c) for Mr. Scherer, the amount represents estimated medical expense payment equal to twenty-four months.. Details regarding these benefits and perquisites are set forth in “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger—Employment Agreements with Executive Officers” beginning on page [47].
(4)
For Messrs. Levy and Richardson, the amounts in this column represent tax reimbursement on the estimated housing expense included in the perquisites/benefits column. Details regarding these benefits and perquisites are set forth in “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger—Employment Agreements with Executive Officers” beginning on page [47].
Financing
Arch has assigned its rights and obligations under the Merger Agreement to Holdco. Holdco has obtained equity commitments as follows: (i) funds managed by Kelso have committed to make an aggregate cash contribution of up
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to $210,000,000, (ii) funds managed by Warburg Pincus have committed to make an aggregate cash contribution of up to $210,000,000, and (iii) ARL has committed to make a cash contribution of up to $192,500,000 and to contribute the 2,500,000 shares of common stock of Watford already owned by ARL (the foregoing, collectively, being referred to herein as the “Equity Financing”). Upon consummation of the Equity Financing, ARL will own 40% of Holdco, funds managed by Kelso will own 30% of Holdco, and funds managed by Warburg Pincus will own 30% of Holdco. Arch’s obligation to pay the Merger Consideration as and when required under the Merger Agreement is not conditioned upon obtaining any financing, including the Equity Financing.
Watford and Arch estimate that the total amount of funds required to complete the merger and pay related fees and expenses will be approximately $[•] million. Arch expects that Holdco will fund such amount with cash proceeds from the Equity Financing immediately prior to the effective time of the merger and cash on hand at Watford.
Pursuant to the Merger Agreement, Arch has represented that it has or will have, and will cause Merger Sub to have, prior to the effective time of the merger, cash sufficient to enable Arch and Merger Sub to consummate the merger on the terms contemplated by the Merger Agreement, and to make all payments contemplated by the Merger Agreement, including payment of the Merger Consideration and all fees and expenses in connection with the merger and the other transactions contemplated by the Merger Agreement.
See “Special Factors—Financing” beginning on page [53].
Voting and Support Agreements
As a condition to the Company’s willingness to enter into the Initial Merger Agreement and to proceed with the transactions contemplated thereby, including the merger, the Arch Parties entered into the Arch Voting and Support Agreement with the Company on October 9, 2020. In the Arch Voting and Support Agreement, the Arch Parties agreed (among other things) to vote their common shares and preference shares in favor of the Merger Proposal. Based on the Company’s representation in the Merger Agreement that, as of October 9, 2020, there were 19,886,979 issued and outstanding common shares and 2,145,202 issued and outstanding preference shares, the Arch Parties party to the Arch Voting and Support Agreement beneficially owned in the aggregate 2,500,000 common shares, representing approximately 12.6% of the issued and outstanding common shares, and 141,985 preference shares, representing approximately 6.6% of the issued and outstanding preference shares. However, the Company’s bye-laws contain provisions that limit the voting power of “controlled shares” to 9.9% of the combined voting power of all shares eligible to vote and all common and preference shares eligible to be voted at the special general meeting by Arch or its subsidiaries are “controlled shares” for this purpose. The Company’s Board has determined that after giving effect to these bye-law provisions, Arch and its subsidiaries will be entitled to cast an aggregate of [  ] votes on the Merger Proposal and the Adjournment Proposal, and they will be entitled to cast an aggregate of [  ] votes on the Compensation Advisory Proposal.
Under the Arch Voting and Support Agreement, the same voting obligations will apply to any additional common shares or preference shares acquired by the Arch Parties between October 9, 2020 and the termination of the Arch Voting and Support Agreement.
As a condition to Arch’s willingness to execute Amendment No. 1 (and thereby agree to an increase in the Merger Consideration from $31.10 per common share to $35.00 per common share), Enstar and its wholly-owned subsidiary Cavello entered into the Enstar Voting and Support Agreement with Arch and the Company on November 2, 2020. In the Enstar Voting and Support Agreement, Enstar and Cavello agreed (among other things) that Cavello will vote in favor of the Merger Proposal. As of the date of this proxy statement, Cavello beneficially owns 1,815,858 common shares, representing approximately 9.1% of the issued and outstanding common shares. Under the Enstar Voting and Support Agreement the same voting obligations will apply to any additional common shares or preference shares acquired by Cavello or Enstar between November 2, 2020 and the termination of the Enstar Voting and Support Agreement. Under the Enstar Voting and Support Agreement, Enstar has agreed not to pursue any other proposal to acquire the Company.
Appraisal Rights
Any dissenting shareholder will, in the event that the fair value of a dissenting share as appraised by the Bermuda Court under the Bermuda Companies Act is greater than the Merger Consideration, be entitled to receive such difference from the Company as the surviving company by payment made within one month after the final determination by the Bermuda Court of the “fair value” of such shares. If a dissenting shareholder fails to exercise,
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effectively withdraws or otherwise waives any right to appraisal, in the case of common shares, such dissenting shareholder’s common shares will be canceled and converted into the right to receive the Merger Consideration and in the case of preference shares, such shareholder’s preference shares will continue as a preference share of the surviving company and will be entitled to the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares. For a more complete description of the available appraisal rights, see the section of this proxy statement titled “Appraisal Rights” beginning on page [54].
Under the Merger Agreement, the Company has agreed to give Holdco (i) prompt written notice of (A) any demands for appraisal of dissenting shares or appraisal withdrawals and any other written instruments, notices, petitions or other communication received by the Company in connection with the foregoing and (B) to the extent that the Company has knowledge thereof, any applications to the Bermuda Court for appraisal of the fair value of the dissenting shares and (ii) to the extent permitted by applicable Law, the opportunity to participate with the Company in any settlement negotiations and proceedings with respect to any demands for appraisal under the Bermuda Companies Act. The Company shall not, without the prior written consent of Holdco or as otherwise required by an order of a governmental entity of competent jurisdiction, voluntarily make any payment with respect to, negotiate with respect to, offer to settle or settle any such demands or applications, or waive any failure to timely deliver a written demand for appraisal or to timely take any other action to exercise appraisal rights in accordance with the Bermuda Companies Act. Payment of any amount payable to holders of dissenting shares shall be the obligation of the surviving company.
Certain U.S. Federal Income Tax Consequences of the Merger
The following is a general discussion of certain U.S. federal income tax consequences of the merger to U.S. holders, as defined below, whose common shares are exchanged for cash pursuant to the merger, as well as U.S. holders who hold preference shares. This discussion is based on the provisions of the Code, applicable U.S. Treasury regulations, judicial opinions, and administrative rulings and other published positions of the Internal Revenue Service (the “IRS”), each as in effect as of the date hereof. These authorities are subject to change or differing interpretations, possibly on a retroactive basis, and any such change or different interpretation could affect the accuracy of the statements and conclusions set forth in this discussion. This discussion does not address all aspects of U.S. federal income taxation (including consequences under the alternative minimum tax or Medicare tax on net investment income) and does not address any tax considerations under state, local or non-U.S. laws or U.S. federal laws other than those pertaining to U.S. federal income tax (such as estate and gift tax laws). This discussion is not binding on the IRS or the courts and therefore could be subject to challenge, which could be sustained. We do not intend to seek any ruling from the IRS with respect to the merger.
This discussion applies only to U.S. holders of common shares who hold such shares as capital assets (generally, property held for investment). Further, this discussion does not cover all aspects of U.S. federal income taxation that may be relevant to U.S. holders in light of their particular circumstances, nor does it apply to U.S. holders subject to special treatment under U.S. federal income tax laws, such as: banks and other financial institutions; pension plans; regulated investment companies; real estate investment trusts; partnerships or other pass-through entities (or investors therein); cooperatives; tax-exempt entities; insurance companies; persons holding common shares as part of a hedging, integrated, conversion or constructive sale transaction or a straddle; persons who use a mark-to-market method for reporting income or loss with respect to their common shares; persons subject to special tax accounting rules as a result of their use of “applicable financial statements” (within the meaning of Section 451(b)(3) of the Code); U.S. expatriates; persons who at any time have held (actually or constructively) 10% or more of any class of our shares (by vote or value); and persons whose “functional currency” is not the U.S. dollar.
For purposes of this discussion, a “U.S. holder” means a beneficial owner of common shares that is, for U.S. federal income tax purposes, one of the following:
an individual who is a citizen or resident of the United States;
a corporation created or organized under the laws of the United States, any state thereof or the District of Columbia;
an estate the income of which is subject to U.S. federal income taxation regardless of its source; or
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a trust if (1) a court within the United States is able to exercise primary supervision over the trust’s administration and one or more U.S. persons are authorized to control all substantial decisions of the trust, or (2) the trust has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
The tax treatment of a partner in any entity or arrangement treated as a partnership for U.S. federal income tax purposes will generally depend on the status of the partners and the activities of the partnership. If you are a partner of a partnership holding common shares, you should consult your tax advisor.
U.S. holders should consult their tax advisors concerning the particular U.S. federal income tax consequences of the merger to them, as well as any consequences to you arising under any state, local, non-U.S. and other U.S. federal tax laws.
Consequences of the Merger Generally
The receipt of cash by a U.S. holder in exchange for common shares pursuant to the merger will be a taxable transaction for U.S. federal income tax purposes. In general, subject to the possible application of Section 1248 and the “passive foreign investment company,” or “PFIC,” rules (each as discussed below), a U.S. holder who receives cash in exchange for common shares pursuant to the merger will recognize gain or loss in an amount equal to the difference, if any, between (1) the amount of cash received and (2) the U.S. holder’s adjusted tax basis in those shares. If a U.S. holder acquired different blocks of common shares at different times or at different prices, that holder generally must determine its gain or loss and holding period separately with respect to each block of common shares. The deductibility of capital losses is subject to limitations. Subject to the PFIC and other rules discussed below, any capital gain recognized by a non-corporate U.S. holder is generally eligible for the preferential long-term capital gains rate if such U.S. holder’s holding period in its common shares exchanged in the merger is greater than one year as of the effective date of the merger.
Holders of preference shares should not be treated as disposing of or exchanging their preference shares in the merger. Instead, the preference shares should be treated as remaining outstanding for U.S. federal income tax purposes. As a result, holders of the preference shares should not recognize gain or loss with respect to such shares in the merger.
Potential Application of the Controlled Foreign Corporation and Related Party Insurance Rules
Under Section 1248 of the Code, any gain from the sale or exchange by a U.S. holder that owns, or is attributed under certain attribution rules, 10% or more of the Company’s shares by vote or value (a “U.S. 10% Shareholder”) of stock in a non-U.S. corporation treated as a “controlled foreign corporation” within the meaning of Section 957(a) of the Code (a “CFC”) may be recharacterized as a dividend to the extent of the CFC’s earnings and profits during the period that the U.S. 10% Shareholder owned the stock, subject to certain adjustments. Section 953(c)(7) of the Code generally provides that, if any portion of a CFC’s profits related to related party insurance income (“RPII”), Section 1248 may apply more broadly to a sale of stock by any shareholder that is a U.S. holder (regardless of whether it is a U.S. 10% Shareholder). The dividend treatment applies to a U.S. holder subject to the RPII rules regardless of whether the U.S. Holder meets either one of the two RPII 20% exceptions to the inclusion of income for purposes of subpart F (i.e., the 20% ownership exception and the 20% gross income exception). Proposed regulations implementing Section 953 of the Code do not specifically address whether Section 1248 of the Code applies when a non-U.S. corporation is not an insurance company, but the non-U.S. corporation has an insurance company subsidiary that is a CFC for purposes of requiring U.S. holders to take into account RPII.
The Company believes that a strong argument exists that Section 1248 of the Code should not apply to dispositions of the Company’s shares by persons who are not U.S. 10% Shareholders because the Company will not be directly engaged in the insurance business. However, because (i) the applicable Treasury regulations under Section 953 of the Code remain proposed and taxpayers cannot affirmatively rely on regulations in proposed form; (ii) authority as to how Section 953 of the Code and the proposed regulations should be interpreted is lacking; and (iii) the proposed regulations are subject to amendment, the Company cannot assure prospective investors that the IRS will interpret the proposed regulations under Section 953 of the Code in this manner or that the Treasury will not amend such regulations, or issue other regulations, that would have the effect of causing Section 1248 of the Code to apply to dispositions of the Company’s shares. If Section 1248 of the Code were to apply to a U.S. holders, any
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gain from the sale or exchange of the Company’s stock pursuant to the merger would be treated as a dividend to the extent of the Company’s earnings and profits accumulated during such holder’s holding period, subject to certain adjustments. U.S. holders should consult their tax advisors regarding the potential application of Section 1248 of the Code to the merger.
Passive Foreign Investment Company Considerations
A non-United States corporation, such as the Company, will be a PFIC for U.S. federal income tax purposes for any taxable year if either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more of the value of its assets (determined on the basis of a quarterly average) during such year produce or are held for the production of passive income. For this purpose, (i) passive income generally includes, among other things, rents, dividends, interest, royalties, gains from the disposition of passive assets and gains from commodities and securities transactions and (ii) cash is generally treated as an asset held for the production of passive income. For purposes of this test, a corporation will be treated as owning a proportionate share of the assets and earning a proportionate share of the income of any other corporation in which it owns, directly or indirectly, more than 25% (by value) of the stock.
As discussed above, although not free from doubt due to a lack of directly governing authority, we currently believe that the Company should not be treated as a PFIC because we believe that Watford Re’s income should qualify for an exception to the PFIC rules for income that is derived in the active conduct of an insurance business by a corporation satisfying certain requirements, which we refer to as the Insurance Company Exception. However, the ability of the Company to qualify for the Insurance Company Exception will depend on the Company’s continuing operations and operating results. Furthermore, because of a lack of clarity regarding certain aspects of the Insurance Company Exception, there is significant uncertainty as to whether the Insurance Company Exception has applied to the Company to date.
The United States Tax Cuts and Jobs Act, or the “TCJA,” modified the Insurance Company Exception so that, with respect to taxable years beginning after December 31, 2017, only a “qualifying insurance corporation” is eligible for the exception. The TCJA generally defines a qualifying insurance corporation as a foreign corporation that would be subject to U.S. federal income tax as an insurance company if it were a domestic corporation and whose “applicable insurance liabilities” constitute more than 25% of the company’s total assets, determined on the basis of a financial statement of the company that meets certain requirements (the “Insurance Liabilities Test”). Although the Company believes that it has satisfied the Insurance Liabilities Test in prior years, there has been considerable uncertainty regarding the application of this test, and no assurance can be provided that the IRS would not interpret certain aspects of the Insurance Liabilities Test in a manner different from the Company. The 2020 Final Regulations, released by the Treasury on December 4, 2020, included certain rules clarifying the application of the Insurance Liabilities Test and certain other aspects of the Insurance Company Exception for future years. Although the Company expects to satisfy the Insurance Liabilities Test in the period during which the merger closes, the Company’s ability to satisfy the test will depend on the Company’s actual operating results, and as a result no assurance can be provided that the Company will satisfy the test under all circumstances.
In order for an insurance company to satisfy the Insurance Company Exception, the company must be engaged in the active conduct of an insurance business. There is little currently applicable guidance regarding what causes an insurance business to be actively conducted, and as a result there has been considerable uncertainty in the law regarding what constitutes the active conduct of an insurance business. In recent years, the Treasury has proposed regulations that would impose specific requirements for an insurance business to be treated as actively conducted. Most recently, on December 4, 2020, the Treasury withdrew prior proposed regulations and issued the 2020 Proposed Regulations, which included proposed requirements for an insurance company to be treated as actively conducted. Although the 2020 Proposed Regulations could adversely impact the Company’s ability to satisfy the Insurance Company Exception if finalized in their current form, the 2020 Proposed Regulations are proposed to apply on a prospective basis after they are finalized, and as a result are not expected to apply to periods prior to the merger. As a result, we do not believe that these regulations should adversely impact the Company’s ability to satisfy the Insurance Company Exception at all times prior to the closing of the merger. However, given the lack of currently applicable authority regarding the Insurance Company Exception, no assurance can be provided that that taxing authorities may not seek to apply principles similar to the 2020 Proposed Regulations in interpreting the Insurance Company Exception for prior periods, notwithstanding the prospective application of those regulations, or may not otherwise interpret the Insurance Company Exception in a manner that causes the Company to be treated as a PFIC. In addition, no assurance can be provided that future guidance or legislation regarding the Insurance Company
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Exception will not apply retroactively in a manner that could cause the Company to fail to satisfy the Insurance Company Exception with respect to periods prior to the merger.
As a result of the foregoing, although we believe that the Company should be treated as having satisfied the requirements to be treated as a qualifying insurance corporation under current law with respect to all periods prior to the merger, no assurance can be provided that the IRS will not successfully challenge this qualification, or that future legal developments would prevent the Company from qualifying for the Insurance Company Exception, in which case the Company would be treated as a PFIC. If the Company were treated as a PFIC at any time during a U.S. holder’s holding period, such U.S. holder would also be subject to the PFIC regime with respect to any non-U.S. subsidiary of the Company that is treated as a PFIC.
In addition, it is possible that the 2020 Proposed Regulations, if finalized in their current form, could adversely impact the ability of the Company to satisfy the Insurance Company Exception in future years, and as a result could impact the tax consequences of U.S. holders holding shares of the Company in the event that the merger closes later than planned.
Consequences for U.S. Holders Who Make Timely QEF Elections if the Company is Treated as a PFIC
If the Company were treated as a PFIC at any time during a U.S. holder’s holding period, such U.S. holder would still recognize gain or loss on the exchange of common shares for cash pursuant to the merger in the manner described above under the heading “Special Factors—Certain U.S. Federal Income Tax Consequences for the Merger—Consequences of the Merger Generally” if such U.S. Holder made a timely qualified electing fund (“QEF”) election with respect to the Company and any entity in which the Company holds a direct or indirect interest that is treated as a PFIC for U.S. federal income tax purposes (a “PFIC subsidiary”). A QEF election will generally be considered timely filed if the U.S. holder makes such election on an IRS Form 8621 filed with its U.S. federal income tax return for the first year in which it held shares of the Company and the Company is treated as a PFIC. Under certain circumstances, shareholders meeting certain requirements may be entitled to make a retroactive QEF election with respect to a company that is believed not to be a PFIC but is later asserted to be a PFIC. U.S. holders who make timely QEF elections will be required to report and include in income for U.S. federal income tax purposes their pro rata share of the Company’s and each of its PFIC subsidiary’s ordinary earnings and net capital gain, if any, for each taxable year for which the Company and each such subsidiary is a PFIC ending with the taxable year that includes the merger. A U.S. holder’s adjusted tax basis in its common shares will be increased to reflect any taxed but undistributed ordinary earnings and net capital gain included in income as a result of the QEF election, thus reducing the amount of capital gain (or increasing the amount of capital loss) recognized by such U.S. holder with respect to its common shares exchanged for cash in the merger.
Consequences for U.S. Holders Who Do Not Make Timely QEF Elections if the Company is a PFIC
If the Company is treated as a PFIC, U.S. holders who do not make timely QEF elections with respect to the Company and each of the Company’s PFIC subsidiaries will generally be subject to special adverse U.S. federal income tax rules with respect to any gain recognized (or in the case of any PFIC subsidiary, deemed to be recognized, as discussed below) as a result of the merger. Under these special rules:
the gain recognized would be allocated ratably over the U.S. holder’s holding period for its common shares;
the amount of gain allocated to the taxable year that includes the merger would be subject to tax as ordinary income; and
the amount of gain allocated to each of the other taxable years would be subject to tax at the highest rate in effect for the applicable class of taxpayer for such taxable year and, if the relevant company was a PFIC in such taxable year or any prior taxable year, would be increased by an additional tax equal to the interest on the resulting tax deemed deferred with respect to each such other taxable year.
A U.S. holder who does not make a timely QEF election with respect to each PFIC subsidiary will be deemed to recognize an amount of gain (subject to tax under the special rules discussed above) as a result of an indirect disposition of such PFIC subsidiary pursuant to the merger. The amount of gain deemed to be recognized by such U.S. holder will equal such U.S. holder’s proportionate share (based on the value of such U.S. holder’s common shares relative to the total value of all of the Company’s common shares) of any gain that would be recognized by the Company if the Company disposed of such PFIC subsidiary on the effective date of the merger for cash equal to the then fair market value of such PFIC subsidiary. A U.S. holder’s tax basis in its Company common shares will
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be increased by the amount of any gain deemed to be recognized as a result of an indirect disposition of such PFIC subsidiary for which no timely QEF election is made, thus reducing the amount of gain (or increasing the amount of loss) recognized by such U.S. holder with respect to its common shares exchanged for cash in the merger.
The application of these rules to the merger is complex. U.S. holders should consult their tax advisors regarding the application of the PFIC rules, including the indirect disposition rule, to them in light of their particular circumstances.
Consequences for U.S. Holders Who Have Made a Mark-to-Market Election
In general, if a U.S. holder has made a timely mark-to-market election pursuant to Section 1296 of the Code with respect to the Company (a “mark-to-market election”), the PFIC rules described above generally would not apply. Instead, each year, a U.S. holder would be required to report any gain as ordinary income and any loss as ordinary loss, provided that such loss will be limited to the amount of ordinary income previously recognized by such U.S. holder with respect to such shares. While the mark-to-market election may be beneficial in certain situations, because such election does not apply to subsidiaries of a PFIC that are not themselves publicly traded, the benefits of a mark-to-market election with respect to the Company (the insurance operations of which are conducted entirely through subsidiaries) may be limited. U.S. holders considering making a mark-to-market election should consult their tax advisors.
Tax Return Disclosure Requirements
U.S. holders that own shares in a PFIC are subject to various disclosure obligations in connection with their tax returns. U.S. holders should consult their tax advisors regarding these reporting requirements.
Information Reporting and Backup Withholding
Payments of cash made in exchange for common shares pursuant to the merger may be subject, under certain circumstances, to information reporting and backup withholding. To avoid backup withholding, a U.S. holder that does not otherwise establish an exemption should timely complete and return an IRS Form W-9. Certain holders (such as corporations) are exempt from backup withholding. U.S. holders exempt from backup withholding may be required to timely comply with certification requirements and identification procedures in order to establish an exemption from information reporting and backup withholding. Backup withholding is not an additional tax. The amount of any backup withholding imposed on a payment will be allowed as a credit against any U.S. federal income tax liability of a U.S. holder and may entitle the U.S. holder to a refund, provided the required information is timely furnished to the IRS.
The preceding discussion is intended only as a summary of certain U.S. federal income tax consequences of the offer and the merger. It is not a complete analysis or discussion of all potential tax effects that may be important to a particular holder. All holders of common shares should consult their own tax advisors as to the specific tax consequences of the offer and the merger to them, including tax-reporting requirements, and the applicability and effect of any U.S. federal, state, local and non-U.S. tax laws.
Regulatory Approvals
Under the terms of the Merger Agreement, the merger cannot be consummated unless certain required regulatory approvals have been obtained and remain in full force and effect.
Under the HSR Act, the merger cannot be consummated until Watford and Arch have notified the Department of Justice’s Antitrust Division and the Federal Trade Commission of the merger and furnished them with certain information and materials relating to the merger and the applicable waiting period has terminated or expired. On November 18, 2020, the FTC granted early termination of the waiting period under the HSR Act. In addition, the merger cannot be consummated until each of (i) the European Commission and (ii) the Turkish Competition Authority has issued its clearance decision or the relevant waiting periods have expired without the issuance of a decision.
Insurance laws and regulations generally require that, prior to the acquisition of control of an insurance company, either through the acquisition of or merger with the insurance company or a holding company of that insurance company, the acquiring company must obtain approval from the insurance commissioner of the insurance company’s state of domicile. In addition, under the laws of certain states, an acquirer must obtain the approval of the
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state’s insurance regulator to acquire control of an insurance company that is commercially domiciled in that state. Accordingly, consummation of the merger requires obtaining approvals from the Bermuda Monetary Authority, the New Jersey Department of Banking and Insurance, the California Department of Insurance and the Financial Services Commission of Gibraltar. The relevant parties have made or will make the requisite filings to obtain such approvals in November and December 2020.
Other than the approvals and notifications described above, neither Watford nor Arch is aware of any material regulatory approvals required to be obtained, or waiting periods required to expire, after the making of a filing. If the parties discover that other approvals or filings and waiting periods are necessary, they will seek to obtain or comply with them, although, as is the case with the regulatory approvals described above, there can be no assurance that they will be obtained on a timely basis, if at all.
Fees and Expenses
Except as described under “The Merger Agreement—Termination Fee” beginning on page [83], whether or not the merger is completed, all fees and expenses incurred in connection with the merger will be paid by the party incurring those fees and expenses. The Company will pay the costs of proxy solicitation and printing and mailing this proxy statement and the Schedule 13E-3 and all SEC filing fees with respect to the transaction. The Company has agreed to pay D.F. King & Co., Inc. a fee of $9,000, plus potential fees for additional specified services and reimbursement of out-of-pocket expenses in respect of these services. Total fees and expenses incurred or to be incurred by the Company in connection with the merger are estimated at this time to be as follows:
Description
Amount
Financial advisory fees and expenses
$[•]
Legal fees and expenses
$[•]
Proxy solicitation fees
$[•]
SEC filing fees
$66,803.15
Printing and mailing costs
$[•]
Accounting fees
$[•]
Paying agent fees and expenses
$[]
Total
$[]
It is also expected that Merger Sub and/or Holdco will incur approximately $[•] of financing costs, legal fees and other advisory fees.
Litigation Relating to the Merger
As of the date hereof, there are no pending lawsuits challenging the merger. However, potential plaintiffs may file lawsuits challenging the merger. The outcome of any future litigation is uncertain. Such litigation could prevent or delay completion of the merger and result in substantial costs to the Company, including any costs associated with the indemnification of directors and officers.
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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This proxy statement, and the documents incorporated by reference in this proxy statement, include “forward-looking statements” that reflect the Company’s current views as to future events and financial performance with respect to its operations, the expected completion and timing of the merger and other information relating to the merger. These statements can be identified by the fact that they do not relate strictly to historical or current facts. There are forward-looking statements throughout this proxy statement, including under the headings, among others, “Summary Term Sheet”, “Questions and Answers About the Special General Meeting and the Merger”, “The Special General Meeting”, “Special Factors”, and “Important Information Regarding the Company”, and in statements containing the words “aim,” “anticipate,” “are confident,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will” and other words and terms of similar meaning in conjunction with a discussion of future operating or financial performance or other future events or trends.
You should be aware that forward-looking statements involve known and unknown risks, uncertainties, assumptions and contingencies. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that the actual results or developments we anticipate will be realized, or, even if realized, that they will have the expected effects on the business or operations of the Company. These forward-looking statements speak only as of the date on which the statements were made and we undertake no obligation to update or revise any forward-looking statements made in this proxy statement or elsewhere as a result of new information, future events or otherwise, except as required by law. In addition to other factors and matters referred to or incorporated by reference in this document, we believe the following factors could cause actual results to differ materially from those discussed in the forward-looking statements:
the occurrence of any event, change or other circumstance that could give rise to the termination of the Merger Agreement;
the outcome of any legal proceedings that have been or may be instituted against the Company or others relating to the Merger Agreement;
the inability to complete the merger because of the failure to receive, on a timely basis or otherwise, the required approvals by Company shareholders or governmental or regulatory agencies in connection with the proposed merger;
the risk that a condition to closing of the merger may not be satisfied;
the failure of the merger to close for any other reason;
the risk that the pendency of the merger disrupts current plans and operations and potential difficulties in employee retention as a result of the pendency of the merger;
the effect of the announcement of the merger on our business relationships, operating results and business generally;
the amount of the costs, fees, expenses and charges related to the merger;
and other risks detailed in our filings with the SEC, including our 2019 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2020. See “Where You Can Find Additional Information” beginning on page [111]. Many of the factors that will determine our future results are beyond our ability to control or predict. In light of the significant uncertainties inherent in the forward-looking statements contained herein, readers should not place undue reliance on forward-looking statements, which reflect management’s views only as of the date hereof. We cannot guarantee any future results, levels of activity, performance or achievements.
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THE PARTIES TO THE MERGER AND THEIR PRINCIPAL AFFILIATES
Watford Holdings Ltd.
Watford Holdings Ltd. is a Bermuda exempted company that was formed in 2013. Watford is a global property and casualty (“P&C”) insurance and reinsurance company with approximately $1.1 billion in capital as of September 30, 2020 and with operations in Bermuda, the United States and Europe. For information about the Company, see “Important Information Regarding the Company—Company Background” beginning on page [88] and “Where You Can Find Additional Information” beginning on page [111].
Arch Capital Group Ltd. and Certain Affiliates
Arch Capital Group Ltd., a Bermuda exempted company limited by shares (“ACGL” or “Arch”), with approximately $15.2 billion in capital at September 30, 2020, provides insurance, reinsurance and mortgage insurance on a worldwide basis through its wholly-owned subsidiaries. Certain of Arch’s subsidiaries manage Watford’s insurance and reinsurance underwriting operations and part of Watford’s investment grade portfolio. Arch Reinsurance Ltd., a Bermuda exempted company limited by shares (“ARL” or “Arch Re Bermuda”), is a wholly owned direct subsidiary of ACGL. ARL owns 2,500,000 shares (or approximately 12.6%) of Watford’s outstanding common shares. Gulf Reinsurance Limited, a company limited by shares incorporated in the United Arab Emirates (“Gulf Re”), is a wholly owned indirect subsidiary of ACGL. Gulf Re owns 141,985 shares (or approximately 6.6%) of Watford’s outstanding preference shares. The registered offices of ACGL and ARL are located at Clarendon House, 2 Church Street, Hamilton HM 11, Bermuda. The registered offices of Gulf Re are located at Unit 304, Level 3, Park Towers, Dubai International Financial Centre, Dubai, 506766, United Arab Emirates.
For more information, see “Important Information Regarding the Arch Filing Persons” beginning on page [95].
Greysbridge Ltd.
Greysbridge Ltd. (“Merger Sub”), a newly formed Bermuda exempted company limited by shares and a wholly-owned direct subsidiary of ACGL, has been organized by ACGL for the sole purpose of facilitating the merger. Merger Sub has not engaged in any business other than in connection with the merger. Merger Sub’s corporate existence will terminate upon consummation of the merger. The registered office of Merger Sub is c/o Carey Olsen Services Bermuda Limited, 2nd Floor, Atlantic House, 11 Par-la-Ville Road, Hamilton HM 11, Bermuda.
For more information, see “Important Information Regarding the Arch Filing Persons” beginning on page [95].
Greysbridge Holdings Ltd.
Greysbridge Holdings Ltd. (“Holdco”), a newly formed Bermuda exempted company limited by shares and a wholly-owned indirect subsidiary of ACGL, has been organized by ACGL for the purpose of facilitating the merger and other related transactions. Arch has assigned its rights under the Merger Agreement to Holdco, however, as provided in the Merger Agreement, Arch remains contractually responsible for the performance of its obligations under the Merger Agreement. Holdco has not engaged in any business other than in connection with the merger and related transactions. The registered office of Holdco is c/o Carey Olsen Services Bermuda Limited, 2nd Floor, Atlantic House, 11 Par-la-Ville Road, Hamilton HM 11, Bermuda.
For more information, see “Important Information Regarding the Arch Filing Persons” beginning on page [95].
Kelso & Company LLC
Kelso is a leading private equity firm focused on the North American middle market. Since 1980, Kelso has invested approximately $14 billion of equity capital in over 125 transactions. Kelso’s principal executive offices are located at 320 Park Avenue, New York, NY 10022.
For more information, see “Important Information Regarding the Kelso Filing Persons” beginning on page [101].
Warburg Pincus LLC
Warburg Pincus is a leading global private equity firm focused on growth investing. The firm has more than $56 billion in private equity assets under management. Warburg Pincus’ principal executive offices are located at 450 Lexington Avenue, New York, NY 10017.
For more information, see “Important Information Regarding the Warburg Pincus Filing Persons” beginning on page [104].
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THE SPECIAL GENERAL MEETING
Date, Time and Place
This proxy statement is being furnished to the Company’s shareholders as part of the solicitation of proxies by the Board of Directors for use at the special general meeting, which will be held at Watford’s offices located at 100 Pitts Bay Road, 1st Floor, Pembroke HM 08, Bermuda, on [•], 2021, starting at [•] Atlantic time, or at any adjournments or postponements thereof.
The purpose of the special general meeting is for the Company’s holders of common shares and preference shares to consider and vote upon the adoption of the Merger Agreement and the Statutory Merger Agreement and approval of the merger and other related transactions contemplated thereby. Copies of the Initial Merger Agreement, Amendment No. 1 and the Statutory Merger Agreement are attached to this proxy statement as Annex A. This proxy statement and the enclosed form of proxy are first being mailed to the Company’s shareholders on or about [•], 2021.
In addition, in accordance with Section 14A of the Exchange Act, the Company is providing its holders of common shares with the opportunity to cast an advisory (non-binding) vote on the compensation that may be payable to its named executive officers in connection with the merger, the value of which is disclosed in the table in the section of the proxy statement entitled “Special Factors—Interests of the Company’s Directors and Executive Officers in the Merger—Merger Related Compensation” beginning on page [47]. The advisory (non-binding) vote on executive compensation payable in connection with the merger is a vote separate and apart from the vote to approve the merger. Accordingly, a holder of common shares may vote to approve the Compensation Advisory Proposal and vote not to approve the Merger Proposal, or vice versa. Because the Compensation Advisory Proposal is advisory in nature only, it will not be binding on any of the Company, Holdco or the surviving company. Accordingly, because the Company is contractually obligated to pay the compensation even if shareholders do not approve the Compensation Advisory Proposal, the compensation will become payable by the surviving company if the merger closes, subject only to the conditions applicable thereto, regardless of the outcome of the vote on the Compensation Advisory Proposal.
Record Date and Quorum
The holders of record of common shares and preference shares as of the close of business on [•], 2021 (the record date for the determination of shareholders entitled to notice of and to vote at the special general meeting) are entitled to receive notice of and to vote at the special general meeting. As of the record date, there were [19,886,979] common shares issued and outstanding and [2,145,202] preference shares issued and outstanding.
The presence of two or more persons at the start of the special general meeting and representing, in the aggregate, in person or by proxy, in excess of 50% of the total voting rights of all issued and outstanding common and preference shares in the Company will form a quorum for the transaction of business. If a quorum is not present, the special general meeting may be adjourned from time to time until a quorum is obtained. Abstentions and broker non-votes are counted as present for determining whether a quorum exists. A broker non-vote occurs when a bank, broker or other intermediary holding shares for a beneficial owner (a “custodian”) does not vote on a particular proposal because the custodian does not have discretionary voting power for that particular proposal and has not received instructions from the beneficial owner as to how the shares should be voted. The Company has been advised that the New York Stock Exchange’s rules, which apply to banks, brokers and other member organizations, do not permit custodians that are subject to those rules to exercise discretionary voting authority with respect to any of the proposals to be voted on at the special general meeting. Accordingly, if any beneficial owner of common shares or preference shares fails to instruct the custodian of those shares as to how the shares should be voted, those shares may not be voted at the special general meeting.
Required Shareholder Votes for the Merger
The approval of the Merger Proposal requires the affirmative votes of not less than 50% of the total voting rights of all issued and outstanding common shares and preference shares, voting as a single class, in accordance with the Company’s bye-laws. The approval of the Merger Proposal is a condition to the parties’ obligations to consummate the merger.
The approval of the Compensation Advisory Proposal requires the affirmative vote of a majority of the votes cast by holders of common shares present in person or represented by proxy and entitled to vote at the special general meeting in accordance with Company’s bye-laws.
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The approval of the Adjournment Proposal requires the affirmative vote of a majority of the votes cast by holders of common shares and preference shares, voting as a single class, present in person or represented by proxy and entitled to vote at the special general meeting in accordance with Company’s bye-laws.
Common shares carry one vote per share and preference shares carry one vote per share.
Pursuant to the Arch Voting and Support Agreement, the Arch Parties agreed, subject to certain conditions, to vote all common shares and preference shares beneficially owned by them in favor of the Merger Proposal. Pursuant to the Enstar Voting and Support Agreement, Enstar and Cavello agreed (among other things) that Cavello will vote its common shares in favor of the Merger Proposal. For more information, see “Voting and Support Agreements” beginning on page [85].
Abstentions and Broker Non-Votes
If a shareholder holds shares through a broker, bank or other nominee, generally that holder may vote its shares in accordance with instructions received. If a shareholder does not give instructions to the holder, the holder can vote its shares with respect to “discretionary” or routine proposals. Such a holder cannot vote shares with respect to “non-discretionary” proposals for which a shareholder has not given instruction. It is expected that all proposals to be voted on at the special general meeting are considered “non-discretionary” proposals which your broker, bank or other nominee cannot vote on your behalf, resulting in a “broker non-vote.”
Abstentions and “broker non-votes” will be counted toward the presence of a quorum at the special general meeting. Abstentions and “broker non-votes” will not be considered votes cast on any proposal brought before the special general meeting. Because the vote required to approve the Merger Proposal at the special general meeting is the affirmative vote of shares carrying not less than 50% of the total voting rights of all issued and outstanding common shares and preference shares, voting together as a single class assuming a quorum is present, an abstention or a “broker non-vote” with respect to the Merger Proposal at the special general meeting will have the effect of a vote against the Merger Proposal. Because (i) the vote required to approve the Compensation Advisory Proposal at the special general meeting is the affirmative vote of a majority of the votes cast by holders of outstanding common shares present in person or represented by proxy and entitled to vote at the special general meeting or any adjournment thereof assuming a quorum is present and (ii) the vote required to approve the Adjournment Proposal at the special general meeting is the affirmative vote of a majority of the votes cast by holders of outstanding common shares and preference shares, voting as a single class, present in person or represented by proxy and entitled to vote at the special general meeting or any adjournment thereof assuming a quorum is present, an abstention or a “broker non-vote” with respect to either of those proposals at the special general meeting will not have the effect of a vote for or against the applicable proposal, but will reduce the number of votes cast and therefore increase the relative influence of those shareholders who do vote.
Voting; Proxies; Revocation
You may submit your proxy with voting instructions by any one of the following means:
Submit a Proxy by Internet or Telephone
To submit your proxy on the Internet, go to the website listed on your applicable proxy card or voting instruction card and follow the instructions there. You will need the control number included on your proxy card or voting instruction form.
To submit your proxy by telephone, you should dial the number listed on your applicable proxy card or your voting instruction form. You will need the control number included on your proxy card or voting instruction form.
Telephone and Internet voting facilities for shareholders of record will be available 24 hours a day, and will close at 5:00 p.m., Atlantic time, on [•], 2021. The availability of telephone and Internet voting for beneficial owners will depend on the voting processes of your broker, bank or other holder of record. Therefore, we recommend that you follow the voting instructions in the materials you receive. If you submit your proxy by telephone or on the Internet, you do not have to return your proxy card, voter instruction form or Notice of Internet Availability of Proxy Materials.
By Mail
Complete and sign your applicable proxy card or voting instruction card and mail it using the enclosed, prepaid envelope.
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In Person, at the Special General Meeting
The Company intends to hold the special general meeting in person. Shares held directly in your name as the shareholder of record may be voted in person at the special general meeting. If you choose to vote your shares in person at the special general meeting, please bring proof of identification, such as a driver’s license or passport. Even if you plan to attend the special general meeting, the Company recommends that you vote your shares in advance as described above so that your vote will be counted if you later decide not to attend the special general meeting. Although you will be entitled to attend the special general meeting and vote in person, in light of the rapidly changing COVID-19 pandemic, attendance in person may be discouraged or prohibited by government regulations or action or based on general health and safety considerations. Your vote is important and the Company encourages you to vote your shares by proxy as soon as possible prior to the special general meeting. See “—Submit a Proxy by Internet or Telephone” and “—By Mail” above for more information.
Revocation of Proxies
Any shareholder returning a proxy may revoke it at any time before the proxy is exercised by filing with the Secretary of the Company either a notice of revocation or a duly executed proxy bearing a later date. The powers of the proxy holders will be suspended if you attend the special general meeting in person and so request, although attendance at the special general meeting will not by itself revoke a previously granted proxy. Any proxy not revoked will be voted as specified by the shareholder. If no choice is indicated, a proxy will be voted in accordance with the Board of Directors’ recommendations.
Adjournments and Postponements
The special general meeting may be adjourned or postponed for the purpose of soliciting additional proxies if there are insufficient votes at the time of the special general meeting to approve the Merger Proposal. Under the Merger Agreement, the special general meeting may not be postponed or adjourned without the consent of Holdco, such consent not to be unreasonably withheld, except that no such consent is required if the Company reasonably believes that (x) such postponement is necessary to ensure that any required supplement to this proxy statement or the Schedule 13E-3 is provided to the holders of common shares and preference shares within a reasonable amount of time in advance of the special general meeting or (y) there will be an insufficient number of common shares and preference shares present (either in person or by proxy) to constitute a quorum necessary to conduct the business of the special general meeting or (z) there will be an insufficient number of proxies to obtain shareholder approval of the Merger Proposal; provided that the postponed or adjourned special general meeting cannot be scheduled after the date that is five business days before the end date under the Merger Agreement. If there is present, in person or by proxy, sufficient favorable voting power to secure the vote of the shareholders of the Company necessary to approve the Merger Proposal, the Company does not anticipate that it will adjourn or postpone the special general meeting. Any signed proxies received by the Company in which no voting instructions are provided on the Adjournment Proposal will be voted in favor of adjournment, if such proposal is introduced at the special general meeting.
Solicitation of Proxies
This proxy statement is sent on behalf of, and the proxies are being solicited by, the Board of Directors. We will bear all costs of this solicitation of proxies. In addition to solicitations by mail, the Company’s directors, officers and regular employees, without additional remuneration, may solicit proxies by telephone, telecopy, email and personal interviews. We will request brokers, custodians and other fiduciaries to forward proxy-soliciting materials to the beneficial owners of common shares they hold of record. We will reimburse them for their reasonable out-of-pocket expenses incurred in connection with the distribution of the proxy materials. We have also engaged D.F. King & Co., Inc. to assist the Company in the solicitation of proxies for an anticipated fee of $9,000, and have agreed to reimburse D.F. King & Co., Inc. for reasonable out-of-pocket expenses incurred in connection with the proxy solicitation and to indemnify D.F. King & Co., Inc. against certain losses, costs and expenses.
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THE MERGER AGREEMENT
The following is a summary of the material provisions of the Merger Agreement. A copy of the Merger Agreement is attached to this proxy statement as Annex A and is incorporated by reference into this proxy statement. We encourage you to read carefully the Merger Agreement in its entirety, as the rights and obligations of the parties to the Merger Agreement are governed by the express terms of the Merger Agreement and not by this summary or any other information contained in this proxy statement. In addition, you should read “Voting and Support Agreements” beginning on page [85], which summarizes the Arch Voting and Support Agreement and the Enstar Voting and Support Agreement, as certain provisions of these agreements relate to certain provisions of the Merger Agreement. Copies of the Arch Voting and Support Agreement and the Enstar Voting and Support Agreement are attached to this proxy statement as Annex B and Annex C, respectively, and are incorporated by reference into this proxy statement.
Explanatory Note Regarding the Merger Agreement
The following summary of the Merger Agreement and the copies of the Initial Merger Agreement and Amendment No. 1 to the Merger Agreement that are attached as Annex A to this proxy statement are intended to provide information regarding the terms of the Merger Agreement. The Merger Agreement contains representations and warranties by the Company, Arch and Merger Sub, which were made for purposes of that agreement and as of specified dates. The representations, warranties and covenants of the Company, Arch and Merger Sub contained in the Merger Agreement:
have been qualified by matters specifically disclosed in the Company’s filings with the SEC after January 1, 2018 and prior to the date of the Merger Agreement, in each case excluding any disclosures contained in any “risk factor” or “forward looking statements” sections of the Company’s filings with the SEC or that otherwise comprise forward-looking statements, statements of risk, or are cautionary or predictive in nature;
are subject to materiality qualifications contained in the Merger Agreement which may differ from what may be viewed as material by investors;
were made only as of the date of the Merger Agreement or, with respect to certain representations, in the event the closing occurs, as of the date of the closing, or such other date as is specified in the Merger Agreement;
may be subject to important qualifications, limitations and supplemental information agreed to by the Company, Arch and Merger Sub in connection with negotiating the terms of the Merger Agreement, including certain qualifications, limitations and supplemental information disclosed in the confidential disclosure letters to the Merger Agreement; and
have been included in the Merger Agreement for the purpose of allocating risk between the contracting parties.
In reviewing the representations, warranties and covenants contained in the Merger Agreement or any description thereof in this summary, it is important to bear in mind that such representations, warranties, covenants and agreements or any descriptions were not intended by the parties to the Merger Agreement to be characterizations of the actual state of facts or condition of the Company, Arch and Merger Sub or any of their respective subsidiaries, affiliates or businesses except as expressly stated in the Merger Agreement. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures. The Merger Agreement and the description of the Merger Agreement in this proxy statement should not be read alone, but should instead be read in conjunction with the other information contained in this proxy statement and other information regarding the Company that is or will be contained in, or incorporated by reference into, the Company’s filings with the SEC.
The description of the Merger Agreement below does not purport to describe all of the terms of that agreement, and is qualified in its entirety by reference to the full text of the Initial Merger Agreement and Amendment No. 1, copies of which are attached as Annex A and are incorporated in this proxy statement by reference.
Additional information about the Company may be found elsewhere in this proxy statement and in the Company’s other public filings. See “Where You Can Find Additional Information” beginning on page [111].
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Parties to the Merger
The parties to the Merger Agreement are the Company, Arch and Merger Sub. Arch has assigned its rights under the Merger Agreement to Holdco; however, as provided in the Merger Agreement, Arch remains contractually responsible for the performance of its obligations under the Merger Agreement.
Structure of the Merger
At the effective time of the merger, Merger Sub will be merged with and into the Company, and the separate corporate existence of Merger Sub will cease. The Company will continue as the surviving company in the merger.
At the effective time of the merger, the memorandum of association and bye-laws of the surviving company shall, by virtue of the merger and without any further action, be in the form of the memorandum of association and bye-laws of the Company until thereafter changed or amended as provided therein or by applicable law.
Completion of the Merger
The closing of the merger will take place on a date to be specified by the Company and Holdco, which will be within three business days following the satisfaction or (to the extent permitted by law) waiver by the party or parties entitled to the benefits thereof of the conditions set forth in the Merger Agreement (other than those conditions that by their nature are to be satisfied at the closing of the merger, but subject to the satisfaction or (to the extent permitted by law) waiver of those conditions), or at such other time and date as may be agreed in writing between the Company and Holdco; provided that if all of the conditions to closing have been satisfied or waived (other than those conditions that by their nature are to be satisfied at the closing) except for the Non-Investment Grade Portfolio Loss Condition, the Company may elect at any time, or from time to time, during the three months following the Extended Condition Date, deliver another certificate setting forth the Non-Investment Grade Portfolio Loss with a view to satisfying the Non-Investment Grade Portfolio Loss Condition before the expiration of the Extended Condition Date. The merger will become effective on the date shown in the certificate of merger with respect to the merger issued by the Registrar of Companies in Bermuda.
Conditions to the Merger
The respective obligation of each party to effect the merger is subject to the satisfaction or, to the extent permitted by law, waiver at or prior to the closing of the following conditions:
approval and adoption of the Merger Proposal by the affirmative votes of shares carrying not less than 50% of the total voting rights of all issued and outstanding common shares and preference shares, voting together as a single class at the special general meeting at which a quorum is present (the “Company Shareholder Approval”);
the expiration or termination of any waiting period under the HSR Act, the receipt of pre-clearance or similar approvals under the antitrust or competition laws of certain other jurisdictions, the receipt of regulatory clearances required under other applicable laws including laws regulating insurance companies, without the imposition of “Burdensome Conditions” (as defined in the Merger Agreement) and all such required regulatory approvals being in full force and effect (the “Required Regulatory Approvals Condition”); and
no applicable law and no order, writ, assessment, decision, injunction, decree, ruling, or judgment of a governmental entity or arbitrator, whether temporary, preliminary, or permanent, will be in effect that prevents, makes illegal or prohibits the consummation of the merger and the other transactions contemplated by the Merger Agreement (the “Absence of Legal Restraints Condition”).
The obligations of the Company to consummate the merger are further subject to the satisfaction or, to the extent permitted by law, waiver at or prior to the closing of the following conditions:
the representations and warranties of Arch and Merger Sub related to Arch’s and Merger Sub’s organization, standing and power; and authority, execution, delivery and enforceability shall be true and correct in all respects as of the closing as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such earlier date);
the other representations and warranties of Arch and Merger Sub shall be true and correct in all respects (without giving effect to any limitation as to “material,” “materiality,” “in all material respects,” “in any
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material respect,” “material adverse effect” or “Parent Material Adverse Effect” set forth therein) as of the closing as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such earlier date), except where the failure of such representations and warranties to be true and correct, individually or in the aggregate, has not had and would not reasonably be expected to have a Parent Material Adverse Effect; (together with the first bullet this paragraph, the “Arch Representation Condition”);
Arch and Merger Sub shall have performed in all material respects all obligations, and complied in all material respects with the agreements and covenants, required to be performed by or complied with by them under the Merger Agreement at or prior to the closing of the merger (the “Arch Covenant Condition”); and
Arch shall have delivered to the Company a certificate, dated as of the closing date of the merger and signed by an authorized officer of Arch, certifying to Arch’s compliance with the above described conditions.
The obligations of Arch and Merger Sub to consummate the merger are further subject to the satisfaction or, to the extent permitted by law, waiver at or prior to the closing of the following conditions:
the representations and warranties of the Company related to the Company’s organization, standing and power; authorized and outstanding share capital; authority, execution, delivery and enforceability; anti-takeover provisions; and brokers’ fees and expenses shall be true and correct in all respects when made and as of the closing as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such earlier date and, with respect to the representations and warranties related to outstanding share capital, except for any de minimis inaccuracies in the numbers of outstanding shares referred to therein);
the other representations and warranties of the Company contained in the Merger Agreement shall be true and correct (without giving effect to any limitation as to “material,” “materiality,” “in all material respects,” “in any material respect,” “material adverse effect” or “Company Material Adverse Effect” set forth therein) as of the closing as if made at and as of such time (except to the extent expressly made as of an earlier date, in which case as of such earlier date), except where the failure of such representations and warranties to be true and correct, individually or in the aggregate, has not had and would not reasonably be expected to have a Company Material Adverse Effect; (together with the first and second bullets of this paragraph, the “Company Representation Condition”);
the Company shall have performed in all material respects all obligations, and complied in all material respects with the agreements and covenants, required to be performed by or complied with by it under the Merger Agreement at or prior to the closing of the merger (the “Company Covenant Condition”);
the Company shall have delivered to Holdco a certificate, dated as of the closing date of the merger and signed by its Chief Executive Officer or Chief Financial Officer, certifying to the Company’s compliance with the above described conditions;
since the date of the Merger Agreement, there shall not have occurred any circumstance, occurrence, effect, change, event or development that has had or would reasonably be expected to have a Company Material Adverse Effect; and
the net investment loss (defined as net interest income plus realized and unrealized losses (if any) and net of realized and unrealized gains (if any)) on the Company’s non-investment grade portfolio between September 30, 2020 and the date that is two business days prior to the closing date must be less than $208 million.
Effect of the Merger on the Shares of the Company and Merger Sub
Subject to the provisions of the Merger Agreement, at the effective time of the merger, (i) each of the common shares then issued and outstanding immediately prior to the effective time of the merger (other than (x) shares to be canceled pursuant to the Merger Agreement and (y) restricted share units to be canceled and exchanged pursuant to the Merger Agreement) will be converted into the right to receive the Merger Consideration and (ii) each of the preference shares then issued and outstanding immediately prior to the effective time of the merger will continue as a preference share of the surviving company and will be entitled to the same dividend and other relative rights, preferences, limitations and restrictions as are now provided to the preference shares. All such common shares, when
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so converted, will no longer be issued and outstanding and will automatically be canceled and will cease to exist, and each holder of a share certificate (or evidence of shares in book-entry form) that immediately prior to the effective time of the merger represented any such common shares will cease to have any rights with respect thereto, except the right to receive the Merger Consideration.
Each of Holdco, the Company, the surviving company and the paying agent (without duplication) will be entitled to deduct and withhold from any amounts payable to any person pursuant to the Merger Agreement such amounts as are required to be deducted and withheld with respect to the making of such payment under applicable law. Amounts so withheld and paid over to the appropriate taxing authority will be treated for all purposes of the Merger Agreement as having been paid to the person in respect of which such deduction or withholding was made.
Dissenters’ Rights of Appraisal
At the effective time of the merger, all common shares and preference shares of the Company held by a holder who, as of the effective time, (i) did not vote in favor of the merger, (ii) complied with all of the provisions of the Bermuda Companies Act concerning the right of holders of common shares or preference shares, as the case may be, to require appraisal of their common shares or preference shares, as the case may be, pursuant to the Bermuda Companies Act and (iii) did not fail to exercise such right or did not deliver an appraisal withdrawal (the “dissenting shares”), will (x) in the case of dissenting shares that are common shares, automatically be canceled and, unless otherwise required by applicable law, converted into the right to receive the Merger Consideration, or (y) in the case of dissenting shares that are preference shares, continue as preference shares of the surviving company, in each case pursuant to the Merger Agreement. Any holder of dissenting shares will, in the event that the fair value of a dissenting share as appraised by the Supreme Court of Bermuda under Section 106(6) of the Bermuda Companies Act (the “appraised fair value”) is greater than, in the case of common shares, the Merger Consideration or, in the case of preference shares, the value of their preference shares in the surviving company, be entitled to receive such difference from the surviving company by payment made within one month after such appraised fair value is finally determined pursuant to such appraisal procedure. In the event that a holder fails to exercise any right to appraisal within one month of the date the notice convening the Company Shareholders Meeting has been given, effectively withdraws or otherwise waives any right to appraisal, such holder will have no other rights with respect to such dissenting shares other than the right to receive, in the case of common shares, the Merger Consideration or, in the case of preference shares, preference shares in the surviving company, in each case pursuant to the Merger Agreement.
Treatment of Company Equity Awards
Effective immediately prior to the effective time of the merger:
each then outstanding performance-based RSU will become fully vested with vesting of any performance-based RSUs vesting as if performance goals had been achieved at target level and be canceled in exchange for the right of the holder thereof to receive a single lump sum cash payment, without interest, equal to (A) the Merger Consideration, less (B) any applicable withholding for taxes; and
each then outstanding time-based RSU will become fully vested and be canceled in exchange for the right of the holder thereof to receive a single lump sum cash payment, without interest, equal to (A) the Merger Consideration, less (B) any applicable withholding for taxes.
Such payments will be paid through the payroll of the surviving company or its affiliates on or as soon as practicable after the closing date and in no event later than five business days following the closing date.
Exchange and Payment Procedures for the Common Shares in the Merger
As promptly as reasonably practicable after the effective time of the merger and in any event within three business days after the effective time of the merger, Holdco will cause the paying agent to mail, or otherwise provide in the case of book-entry shares, to each holder of record of common shares whose common shares were converted into the right to receive the Merger Consideration (i) a form of letter of transmittal and (ii) instructions for effecting the surrender of book-entry shares or share certificates in exchange for the Merger Consideration.
You will not be entitled to receive the Merger Consideration until you surrender your certificates (or effective affidavit of loss in lieu thereof) or evidence of book-entry shares to the paying agent, together with a properly completed and duly executed letter of transmittal and any other documents as reasonably may be required by the paying agent. If a transfer of ownership of shares is not registered in the transfer records of the Company, the Merger
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Consideration may be paid to the transferee if the stock certificate formerly representing the shares is presented to the paying agent accompanied by all documents required to evidence and effect the transfer and to evidence that any applicable stock transfer taxes have been paid. No interest will be paid or accrued on the cash payable upon surrender of the certificates or evidence of book-entry shares.
Any portion of the Merger Consideration deposited with the paying agent that remains undistributed to holders of common shares one year after the effective time of the merger will be delivered to Holdco. Former holders of common shares who have not complied with the above-described exchange and payment procedures may thereafter only look to Holdco for payment of its claim for the Merger Consideration. None of the Company, Holdco, Merger Sub or the paying agent will be liable to any person for any portion of the payment fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar law.
If any certificate formerly representing common shares is lost, stolen or destroyed, the paying agent will issue the Merger Consideration deliverable in respect of, and in exchange for, such lost, stolen or destroyed certificate only upon the making of an affidavit of such loss, theft or destruction by the person claiming such certificate to be lost, stolen or destroyed.
These procedures will be described in the letter of transmittal that you will receive, which you should read carefully in its entirety.
Representations and Warranties
Company Representations and Warranties
In the Merger Agreement, the Company makes certain representations to Holdco and Merger Sub with respect to itself and its subsidiaries that are subject, in some cases, to specified exceptions and qualifications contained in the Merger Agreement or in the Company disclosure letter delivered in connection therewith. These include representations and warranties relating to, among other things:
corporate organization, existence and good standing, including with respect to the Company’s subsidiaries;
ownership of the Company’s subsidiaries;
the capitalization of the Company, including in particular the number of common shares, preference shares, common shares reserved and available for the grant of future awards pursuant to the 2018 Incentive Plan, common shares issuable upon the vesting or settlement of outstanding performance-based RSUs (assuming achievement of the applicable performance metrics at the maximum level of performance) and common shares issuable upon the vesting or settlement of outstanding time-based RSUs;
corporate power and authority to enter into the Merger Agreement and the Statutory Merger Agreement and to consummate the transactions contemplated by such agreements;
subject to the ability to make an adverse recommendation change, the approval of, and recommendation by, the Board of Directors in favor of the Merger Proposal;
required regulatory filings and authorizations, consents or approvals of government entities and consents or approvals required of other third parties;
the accuracy of the Company’s filings with the SEC and of the financial statements included in the SEC filings and the absence of certain undisclosed liabilities of the Company and its subsidiaries;
matters relating to information to be included in required filings with the SEC in connection with the merger;
the operation of the business of the Company and its subsidiaries in all material respects in the ordinary course consistent with past practice and the absence of any Company Material Adverse Effect with respect to the Company since June 30, 2020 to the date of the Merger Agreement;
the filing of tax returns, the payment of taxes and other tax matters related to the Company and its subsidiaries;
the Company’s employee benefit plans;
the absence of suits, actions or other proceedings by or before any governmental entity with respect to the Company and its subsidiaries;
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compliance with anti-bribery laws, sanctions laws and anti-money laundering laws, by the Company and its subsidiaries since January 1, 2016;
compliance with laws by the Company and its subsidiaries since January 1, 2018 and there having been no violation of any of the necessary permits and authorizations since January 1, 2018;
based on reliance on the information technology, data privacy and cyber security services provided to the Company by Arch, compliance with data privacy laws, compliance with contractual privacy and security standards and obligations, and the absence of data breaches by the Company and its subsidiaries since January 1, 2018;
environmental matters and compliance with environmental laws by the Company and its subsidiaries;
material contracts of the Company and its subsidiaries and the absence of certain defaults under material contracts;
real property that is leased by the Company and its subsidiaries;
intellectual property owned, licensed or used by the Company and its subsidiaries;
certain labor matters;
the inapplicability of anti-takeover provisions of applicable law with respect to the merger;
the absence of any broker’s, finder’s, financial advisor’s or other similar fee or commission owed to any broker, investment banker, financial advisor or other person in connection with the merger based upon arrangements made by or on behalf of the Company, other than the fees and expenses to be paid to Morgan Stanley;
the receipt by the Board of Directors of an opinion of the Company’s financial advisor;
certain insurance matters;
the insurance reserves for claims, losses (including incurred, but not reported losses), loss adjustment expenses (whether allocated or unallocated) and earned premiums of each subsidiary of the Company;
neither the Company nor any subsidiary of the Company being an “investment company,” as such term is defined in the U.S. Investment Company Act of 1940;
excluding Arch and its affiliates, the absence, since January 1, 2018, of any contracts, transactions, arrangements or understandings between the Company and any affiliate (including any director, officer, or employee or any of their respective family members) of the Company or any holder of 5% or more of the Company’s common shares (or any of their respective family members), but not including any wholly-owned subsidiary of the Company or either Arch Shareholder, that would be required to be disclosed pursuant to Item 404 of Regulation S-K promulgated by the SEC in the Company’s Form 10-K or proxy statement pertaining to an annual meeting of shareholders;
the conduct of the business of insurance or reinsurance by the Company’s subsidiaries; and
since January 1, 2019, the accuracy, and timely filing or submission with the applicable insurance regulator, of annual and quarterly statutory financial statements by each subsidiary of the Company licensed to conduct the business of insurance or reinsurance.
Many of the representations and warranties in the Merger Agreement are qualified by knowledge or materiality qualifications or a “Company material adverse effect” qualification standard.
For purposes of the Merger Agreement, a “Company Material Adverse Effect” means any circumstance, occurrence, effect, change, event or development that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on (a) the business, financial condition or results of operations or assets of the Company and its subsidiaries, taken as a whole, or (b) the ability of the Company to consummate the transactions contemplated by the Merger Agreement prior to the end date. However, for purposes of clause (a) only, any circumstance, occurrence, effect, change, event or development arising from or related to the following will not be taken into account in determining whether a Company Material Adverse Effect has occurred or would be
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reasonably expected to occur (except, in the case of the first, second, third, fifth, sixth and seventh bullets below, to the extent materially disproportionately affecting the Company and its subsidiaries, taken as a whole, relative to other participants in the industries in which the Company and its subsidiaries conduct their business):
conditions generally affecting the economy in any of the countries, markets or geographical areas in which the Company and its subsidiaries operate, or any other national or regional economy or the global economy generally;
conditions generally affecting political conditions (or changes in such conditions) in any country or region of the world;
declared or undeclared acts of war, cyber-attacks, sabotage or terrorism (including any escalation thereof);
natural disasters, epidemics or pandemics as declared by the World Health Organization or the Health and Human Services Secretary of the United States), including the COVID-19 pandemic;
changes in the financial, credit, banking or securities markets in any country or region in the world and including changes or developments in or relating to currency exchange or interest rates;
changes required by U.S. generally accepted accounting principles or other accounting standards (or interpretations thereof);
changes in any applicable laws or other binding directives issued by any governmental entity (or interpretations thereof), including, to the extent relevant to the business of the Company and its subsidiaries, in any legal or regulatory requirement or condition or the regulatory enforcement environment;
changes that are generally applicable to the industries in which the Company and its subsidiaries operate;
any failure by the Company to meet any internal or published projections, forecasts or revenue or earnings predictions for any period ending on or after the date of the Merger Agreement or any decline in the market price or trading volume of the common shares of the Company or change in its credit ratings (provided that the underlying causes of any such failure, decline or change may be considered in determining whether a Company Material Adverse Effect has occurred to the extent not otherwise excluded by another exception in the Company Material Adverse Effect definition);
the announcement or pendency of the transactions contemplated by the Merger Agreement (including as to the identity of the parties thereto);
shareholder litigation arising from or relating to the Merger Agreement or the merger;
any action required by the terms of the Merger Agreement, or with the prior written consent or at the direction of Holdco;
any liability arising from any pending or threatened claim, suit, action, proceeding, investigation or arbitration disclosed to Holdco in the Merger Agreement or in the Company disclosure letter (but only to the extent such liability reasonably could be anticipated based on the substance and content of such disclosure);
any decrease in the value of the Non-Investment Grade Portfolio; or
any circumstance, occurrence, effect, change, event or development to the extent caused by the provision of any service provided by Arch or its affiliates to the Company and its subsidiaries.
Arch’s and Merger Sub’s Representations and Warranties
In the Merger Agreement, Arch and Merger Sub make certain representations and warranties that are subject, in some cases, to specified exceptions and qualifications contained in the Merger Agreement. The representations and warranties relate to, among other things:
corporate organization, existence and good standing;
corporate power and authority to enter into the Merger Agreement and the Statutory Merger Agreement and to consummate the transactions contemplated by such agreements;
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required regulatory filings and authorizations, consents or approvals of government entities and consents or approvals required of other third parties;
matters relating to information to be included in required filings with the SEC in connection with the merger;
compliance with laws by Arch and its subsidiaries since the date of incorporation of Arch and there having been no violation of any of the necessary permits and authorizations since the date of formation of Arch;
the absence of suits, actions or other proceedings by or before any governmental entity with respect to Arch, Merger Sub and their affiliates;
the absence of any broker’s, finder’s, financial advisor’s or other similar fee or commission owed to any broker, investment banker, financial advisor or other person in connection with the merger based upon arrangements made by or on behalf of Arch or Merger Sub, other than the fees to be paid to Goldman Sachs;
the ownership of Merger Sub and the absence of any business or operations conducted by Merger Sub, other than matters related to the merger;
ownership of common shares and preference shares of the Company;
sufficiency of cash to pay the aggregate Merger Consideration and all other payments, fees and expenses payable by Arch and Merger Sub pursuant to the Merger Agreement;
the solvency of the surviving company following the merger; and
acknowledgment by Arch and Merger Sub of the absence of any other representations and warranties of the Company, other than as set forth in the Merger Agreement.
For purposes of the Merger Agreement, a “Parent Material Adverse Effect” means, with respect to Arch or Merger Sub, any circumstance, occurrence, effect, change, event or development that, individually or in the aggregate, is or would be reasonably expected to have a material adverse effect on the ability of Arch or Merger Sub to consummate the transactions contemplated by the Merger Agreement, including by preventing or materially impairing, interfering with, hindering or delaying the consummation thereof.
None of the representations and warranties contained in the Merger Agreement will survive the consummation of the merger.
Conduct of Business Pending the Merger
The Merger Agreement provides that, subject to certain exceptions or unless Holdco provides its prior written consent (which will not be unreasonably withheld, conditioned or delayed), from the date of the Merger Agreement to the effective time of the merger, the Company will, and will cause each of its subsidiaries to, conduct the business of the Company and its subsidiaries in the ordinary course of business consistent with past practice in all material respects.
In addition, the Merger Agreement provides that, subject to certain exceptions or unless Holdco provides its prior written consent (which will not be unreasonably withheld, conditioned or delayed), from the date of the Merger Agreement to the effective time of the merger, the Company will use commercially reasonable efforts to not, and will use commercially reasonable efforts to not cause or permit any of its subsidiaries to:
Amend or propose to amend its charter documents, except as may be required by law or the rules and regulations of the SEC or the Nasdaq National Market;
other than with respect to regular quarterly dividends required to be paid on the preference shares, declare, set aside or pay any dividends on, or make any other distributions in respect of, any of its share capital, other equity interests or voting securities;
split, combine, subdivide or reclassify any of its share capital, other equity interests or voting securities or securities convertible into or exchangeable or exercisable for share capital or other equity interests or voting securities, or issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for its share capital, other equity interests or voting securities;
repurchase, redeem or otherwise acquire, or offer to repurchase, redeem or otherwise acquire, any share capital or voting securities of, or equity interests in, the Company or any of its subsidiaries or any securities
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of the Company or any of its subsidiaries convertible into or exchangeable or exercisable for share capital or voting securities of, or equity interests in, the Company or any of its subsidiaries, or any warrants, calls, options or other rights to acquire any such share capital, securities or interests;
issue, deliver, sell, grant, pledge or otherwise encumber or subject to any lien (other than liens imposed by applicable securities laws) (i) any share capital of the Company or any of its subsidiaries; (ii) any other equity interests or voting securities of the Company or any of its subsidiaries; (iii) any securities convertible into or exchangeable or exercisable for share capital or voting securities of, or other equity interests in, the Company or any of its subsidiaries; (iv) any warrants, calls, options or other rights to acquire any share capital or voting securities of, or other equity interests in, the Company or any of its subsidiaries; (v) any rights issued by the Company or any of its subsidiaries that are linked in any way to the price of any class of share capital of the Company or any share capital of any subsidiary of the Company, the value of the Company, any of the Company’s subsidiaries or any part of the Company or any of its subsidiaries; or (vi) any Company voting debt;
make, depart from or adopt any change in any accounting methods, principles or practices of the Company or any of its subsidiaries, other than in the ordinary course of business consistent with past practice and except as may be required by a change in U.S. generally accepted accounting principles, applicable statutory accounting principles prescribed or permitted by the applicable insurance regulator of any Company subsidiary or law (or authoritative interpretations thereof);
knowingly take any action, directly or indirectly, that would, or would reasonably be expected to, expose the Company or its subsidiaries to material liability under any applicable anti-corruption law or anti–money laundering law;
directly or indirectly (i) acquire or agree to acquire, by merger, consolidation, acquisition of stock or assets, or otherwise, any equity interest in or material business of any person or division thereof or (ii) make any loans, advances or capital contributions to or investments in any person in excess of $500,000;
sell, transfer, lease, license, or otherwise dispose of (whether by way of merger, consolidation, sale of stock or assets, or otherwise) or pledge, mortgage, sell and leaseback, encumber or otherwise subject to any lien (other than permitted liens) any material properties or material assets, including the capital stock or other equity interests in any subsidiary of the Company, or any material interests therein;
repurchase, prepay or incur indebtedness (including, for the avoidance of doubt, the issuance of any letters of credit) or guarantee any indebtedness of another person, issue or sell any debt securities or options, warrants, calls, or other rights to acquire any debt securities of the Company or any subsidiary of the Company, guarantee any debt securities of another person, enter into any “keep well” or other contract to maintain any financial statement condition of any other person (other than a wholly-owned subsidiary of the Company) or enter into any arrangement having the economic effect of any of the foregoing, except for (i) indebtedness under the Company’s or any subsidiary’s existing credit facilities; or (ii) indebtedness between the Company, on the one hand, and any of its subsidiaries, on the other hand, or between subsidiaries of the Company;
institute, settle or compromise any litigation or proceeding involving the payment of monetary damages by the Company or any of its subsidiaries of any amount exceeding $1,000,000 in the aggregate;
abandon, allow to lapse, sell, assign, transfer, exclusively license, grant any material security interest in or otherwise encumber or dispose of any intellectual property rights owned by the Company or any of its subsidiaries, or grant any material right or license to any intellectual property rights, other than pursuant to non-exclusive licenses entered into in the ordinary course of business consistent with past practice;
make, change or revoke any material tax election, file any amended material tax return, make, change or revoke any tax accounting method, enter into any closing or similar agreement regarding any material tax liability or assessment, enter into, change or revoke any tax sharing obligation, settle or resolve any controversy that relates to a material amount of taxes, consent to any extension or waiver of the limitation period applicable to any material tax audit, assessment or other tax matter, or surrender any right to claim a material tax refund;
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except as expressly contemplated by the Merger Agreement, materially increase the compensation or benefits payable to any current or former director, officer or employee of the Company or any of its subsidiaries, other than routine increases in the ordinary course of business consistent with past practice; hire, terminate or promote any officers or employees with an annual base salary over $50,000, other than hires or promotions to fill a vacancy in the ordinary course of business consistent with past practice; fund or secure the payment in any way, or accelerate the time of payment, vesting or funding of any compensation or benefits payable to any current or former director, officer or employee of the Company or any of its subsidiaries, other than in the ordinary course of business consistent with past practice, or amend any Company benefit plan or collective bargaining agreement or adopt or enter into any plan, agreement or arrangement that would be a Company benefit plan or collective bargaining agreement if in effect on the date of the Merger Agreement;
enter into any material agreement, agreement in principle, letter of intent, memorandum of understanding, or similar contract with respect to any joint venture, strategic partnership, or alliance;
terminate or modify in any material respect, or fail to exercise or waive any renewal or other rights with respect to, any material insurance policy or material contract, other than any Company insurance policy or Company reinsurance contract;
make or authorize capital expenditures except in the ordinary course of business consistent with past practice, in excess, individually, or in the aggregate, of $1,000,000;
adopt any plan of complete or partial liquidation or dissolution, restructuring, recapitalization or reorganization for the Company or any of its subsidiaries;
enter into any material new line of business, any class or any market in which the Company and the Company’s subsidiaries do not operate as of the date of the Merger Agreement;
modify in any material respect the business plan of any subsidiary of the Company licensed to conduct the business of insurance or reinsurance filed with the applicable insurance regulator as of the date of the Merger Agreement;
enter into any agreement or commitment with any applicable insurance regulator other than in the ordinary course of business consistent with past practice;
abandon, modify, waive or terminate any material permit; or
agree or commit to take any of the foregoing actions described in the bullets above.
Other Covenants and Agreements
Shareholders Meeting
The Merger Agreement requires the Company to take all action necessary to duly call, give notice of, convene and hold a meeting of the Company’s shareholders for the purpose of:
seeking the approval of the Merger Proposal by the shareholders of the Company (the “Company Shareholder Approval”); and
in accordance with Section 14A of the Exchange Act and the applicable SEC rules issued thereunder, seeking advisory (non-binding) approval of the Compensation Advisory Proposal (such meeting, the “Company Shareholders Meeting”)
as promptly as reasonably practicable after the SEC confirms it has no further comments on this proxy statement and the Schedule 13E-3 and, in connection therewith, the Company will mail the Proxy Statement to the holders of common shares and preference shares in advance of such Company Shareholders Meeting.
The Company agreed to use its reasonable best efforts to (i) cause the Proxy Statement to be mailed to the Company’s shareholders; and (ii) subject to certain limitations described in “The Merger Agreement—Other Covenants and Agreements—No Solicitation; No Adverse Recommendation Change” beginning on page [9], solicit the Company Shareholder Approval and take all other actions reasonably necessary to obtain the Company Shareholder Approval.
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No Solicitation; No Adverse Recommendation Change
Except as set forth in certain sections of the Merger Agreement described below, the Merger Agreement provides that the Company will, and will cause each of its subsidiaries, and its and their officers, directors, managers or employees, and will instruct its accountants, consultants, legal counsel, financial advisors and agents and other representatives (with respect to any person, the foregoing persons are referred to as such person’s “representatives”) of the Company or its subsidiaries, to:
immediately cease any existing solicitations, discussions or negotiations with any persons that may be ongoing with respect to any alternative proposal or any proposal that could be reasonably expected to result in an “alternative proposal” (as defined below); and
from the date of the Merger Agreement until the earlier of the effective time of the merger or the date (if any) on which the Merger Agreement is terminated, not, and not to publicly announce any intention to, directly or indirectly:
solicit, initiate, knowingly encourage or facilitate any inquiry, discussion, offer or request that constitutes, or would reasonably be expected to lead to, an alternative proposal (an “inquiry”)
(it being understood and agreed that ministerial acts that are not otherwise prohibited by the Merger Agreement (such as answering unsolicited phone calls) will not be deemed to “facilitate” for purposes of, or otherwise constitute a violation of, the Merger Agreement),
furnish non-public information regarding the Company or its subsidiaries to any person in connection with an inquiry or an alternative proposal,
enter into, continue or maintain discussions or negotiations with any person with respect to an inquiry or an alternative proposal,
otherwise cooperate with or assist or participate in or facilitate any discussions or negotiations regarding, or furnish or cause to be furnished to any person or group any non-public information with respect to, or take any other action to facilitate any inquiries or the making of any proposal that constitutes, or could be reasonably expected to result in, an alternative proposal,
approve, agree to, accept, endorse or recommend any alternative proposal,
submit to a vote of its shareholders, approve, endorse or recommend any alternative proposal,
effect any adverse recommendation change or
enter into letter of intent, agreement in principle, term sheet, acquisition agreement, merger agreement, option agreement, joint venture agreement, partnership agreement or other Contract (as such term is defined in the Merger Agreement) or agreement (a “Company acquisition agreement”) relating to any alternative proposal.
Permitted Negotiations
Notwithstanding anything to the contrary in the paragraph immediately above, if the Company or any of its subsidiaries or any of its or their respective representatives receives an unsolicited bona fide written alternative proposal by any person or group at any time before the Company Shareholders Meeting, there has been no material breach of the obligations described in the paragraph immediately above that resulted in such alternative proposal and the Board of Directors (or any committee thereof) has determined, in its good faith judgment (after consultation with the Company’s financial advisors and outside legal counsel), that such alternative proposal constitutes or could reasonably be expected to lead to a “superior proposal” (as defined below) and that the failure to take such action would be inconsistent with the directors’ exercise of their fiduciary duties under applicable law, the Company and its representatives may, prior to the Company Shareholders Meeting:
furnish non-public information to and afford access to the business, employees, officers, contracts, properties, assets, books and records of the Company and its subsidiaries to any person in response to such alternative proposal, pursuant to the prior execution of (and the Company and/or its subsidiaries may enter into) an acceptable confidentiality agreement; and
enter into and engage in discussions or negotiations with any person with respect to such alternative proposal.
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In the event the Company receives any alternative proposal or any inquiry, it will be subject to certain notice requirements, including keeping Holdco reasonably informed on a prompt basis of any material developments regarding the alternative proposal and providing a copy or summary of the material terms thereof.
At any time before the Company Shareholders Meeting, the Board of Directors may (if the Company has received a superior proposal (after taking into account the terms of any revised offer by Holdco), and provided there has been no material breach of the non-solicitation provisions of the Merger Agreement that resulted in such superior proposal, and if the Board of Directors has determined in good faith, after consultation with outside legal counsel, that the failure to take such action would be inconsistent with the directors’ exercise of their fiduciary duties under applicable law):
cause the Company to withdraw, qualify or modify, or propose publicly to withdraw, qualify or modify, in a manner adverse to Holdco, the Company Recommendation or take any action, or make any public statement, filing or release inconsistent with the Company Recommendation (any of the foregoing being an “adverse recommendation change”) (including recommending against the merger or approving, endorsing or recommending any alternative proposal), and
terminate the Merger Agreement to enter into a definitive written agreement providing for such superior proposal simultaneously with the termination of the Merger Agreement,
provided that the Board of Directors may not make an adverse recommendation change or, in the case of a superior proposal, terminate the Merger Agreement, unless:
the Company has provided prior written notice to Holdco of its intent to take such action at least four business days in advance (the “notice period”) of taking such action (which notice must (i) advise Holdco of the circumstances giving rise to the adverse recommendation change, that the Board of Directors has received a superior proposal, that the Board of Directors intends to effect an adverse recommendation change and/or that the Company intends to enter into a Company acquisition agreement, (ii) specify the identity of the party making the superior proposal and the material terms and conditions thereof, (iii) include an unredacted a copy of such superior proposal (or, where no such copy is available, a detailed description of the material terms and conditions of such superior proposal) and (iv) attach to such notice the most current version of any proposed agreement for such superior proposal);
during the notice period, the Company has negotiated with Holdco in good faith (to the extent Holdco desires to so negotiate) to make such adjustments in the terms and conditions of the Merger Agreement so that such superior proposal ceases to constitute (in the good faith judgment of the Board of Directors) a superior proposal; and
the Board of Directors has determined in good faith, after considering the results of such negotiations and giving effect to any proposals, amendments or modifications made or agreed to by Holdco, if any, and after consultation with the Company’s financial advisors and outside legal counsel, that such superior proposal remains a superior proposal.
If the Merger Agreement is terminated pursuant to the second bullet above, the Company would be required to pay Holdco a termination fee of $28,100,000 as described in “The Merger AgreementTermination Fee” beginning on page [83].
If during the notice period any material revisions are made to the superior proposal, the Company will deliver a new written notice to Holdco and will comply with the requirements described in the preceding bullets with respect to such new written notice, provided that for purposes of this sentence, references to the four business day period above will be deemed to be references to a three business day period.
The Merger Agreement does not prevent the Company or the Board of Directors from issuing a “stop, look and listen” communication pursuant to Rule 14d-9(f) under the Exchange Act or complying with Rule 14d-9 and Rule 14e-2 under the Exchange Act with respect to an alternative proposal or from making any disclosure to the Company’s shareholders if the Board of Directors (after consultation with outside legal counsel) concludes that its failure to do so would reasonably be expected to be inconsistent with its fiduciary duties under applicable Law.
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For purposes of the Merger Agreement:
An “alternative proposal” means any inquiry, proposal or offer (whether or not in writing) or any indication of interest in making a proposal or offer, by any person or group (other than Holdco and its subsidiaries, including Merger Sub, or any person in which Arch and its subsidiaries hold not less than 20% of the equity ownership or voting power), relating to any transaction or series of related transactions (other than transactions contemplated by the Merger Agreement), involving any:
direct or indirect acquisition (whether by merger, amalgamation, scheme of arrangement, consolidation, share exchange, other business combination, any reinsurance or retrocession transaction, or transaction that has similar risk transfer effects or otherwise) of assets of the Company of any of its subsidiaries (including any voting interests of any of the Company’s subsidiaries, but excluding sales of assets in the ordinary course of business) equal to twenty percent (20%) or more of the fair market value of the Company’s and its subsidiaries’ consolidated assets or to which twenty percent (20%) or more of the Company’s and its subsidiaries’ net revenues or net income on a consolidated basis are attributable;
direct or indirect acquisition (whether by merger, amalgamation, scheme of arrangement, consolidation, share exchange, other business combination, or otherwise) of twenty percent (20%) or more of the voting equity interests of the Company or any of its subsidiaries whose business constitutes twenty percent (20%) or more of the consolidated net revenues, net income, or assets of the Company and its subsidiaries, taken as a whole;
tender offer or exchange offer that if consummated would result in any person or group (as defined in Section 13(d) of the Exchange Act) beneficially owning (within the meaning of Section 13(d) of the Exchange Act) twenty percent (20%) or more of the voting power of the Company;
merger, amalgamation, consolidation, other business combination, or similar transaction involving the Company or any subsidiary of the Company, pursuant to which such person or group (as defined in Section 13(d) of the Exchange Act) would own twenty percent (20%) or more of the consolidated net revenues, net income, or assets of the Company and its subsidiaries, taken as a whole;
liquidation, dissolution (or the adoption of a plan of liquidation or dissolution), or recapitalization or other significant corporate reorganization of the Company or one or more of its subsidiaries which, individually or in the aggregate, generate or constitute twenty percent (20%) or more of the consolidated net revenues, net income, or assets of the Company and its subsidiaries, taken as a whole; or
any combination of the foregoing.
A “superior proposal” means any bona fide written alternative proposal (except that, for purposes of this definition, each reference in the definition of “alternative proposal” to “twenty percent (20%)” shall be “eighty percent (80%)”) that the Board of Directors determines in good faith (after consultation with outside counsel and Morgan Stanley) to be more favorable from a financial point of view to the holders of Company common shares than the merger, taking into account:
all financial considerations;
the identity of the third party making such alternative proposal;
the anticipated timing, conditions (including any financing condition or the reliability of any debt or equity funding commitments) and prospects for completion of such alternative proposal;
the other terms and conditions of such alternative proposal and the implications thereof on the Company, including relevant legal, regulatory, and other aspects of such alternative proposal deemed relevant by the Board of Directors (including conditions related to financing, shareholder approval, regulatory approvals, or other events or circumstances beyond the control of the party invoking the condition); and
any revisions to the terms of the Merger Agreement and the merger proposed by Holdco during the notice period.
Reasonable Best Efforts
Subject to the terms and conditions of the Merger Agreement, each of Holdco and the Company agreed to use their respective reasonable best efforts to promptly take, or cause to be taken, all actions and to do, or cause to be
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done, all things necessary, proper or advisable under the Merger Agreement and applicable Laws to consummate and make effective as promptly as practicable after the date of the Merger Agreement the transactions contemplated by the Merger Agreement, including:
preparing and filing with applicable governmental entities as promptly as reasonably practicable all necessary applications, notices, disclosures, petitions, filings, ruling requests, and other documents and to obtain as promptly as practicable all consents necessary or advisable to be obtained from any governmental entity in order to consummate the transactions contemplated by the Merger Agreement (collectively, the “governmental approvals”);
as promptly as reasonably practicable taking all steps as may be necessary to obtain all such governmental approvals;
obtaining any consents required from third parties (other than governmental approvals) in connection with the consummation of the transactions contemplated by the Merger Agreement; and
the execution and delivery of any additional instruments necessary to consummate the merger and to fully carry out the purposes of the Merger Agreement.
The Company and Holdco agreed, subject to applicable law, to promptly cooperate and coordinate with the other in the taking of the actions contemplated by the foregoing bullets and supply the other with any information that may be reasonable required in order to effectuate the taking of such actions
In furtherance and not in limitation of the covenants of the parties described in the foregoing paragraphs, but subject to the paragraph immediately below this paragraph, Holdco and the Company will take any and all steps not prohibited by law to:
avoid the entry of, or to have vacated, lifted, reversed or overturned any judgment or injunction, whether temporary, preliminary or permanent, that would restrain, prevent or delay the closing on or before the end date, including defending (with sufficient time for resolution in advance of the end date) through litigation on the merits any claim asserted in any court with respect to the transactions contemplated by the Merger Agreement by the Federal Trade Commission, the Department of Justice or any other applicable governmental entity or any private party; and
avoid or eliminate each and every impediment under any regulatory law, including by: divestiture or disposition of such businesses, product lines or assets of Arch, the Company and their respective subsidiaries, terminating existing relationships, litigating any administrative or judicial, including under the HSR Act, commencing and/or defending any suit, except for any suit, action or other proceeding or appeal involving any insurance regulator, and otherwise taking or committing to take action that would limit Arch’s and/or its subsidiaries’ ability to operate and/or retain, one or more of the businesses, product lines or assets of Arch, the Company and/or their respective subsidiaries.
However, in no event will Holdco or any of its affiliates be required (and in no event will the Company or any of its subsidiaries agree without the prior written consent of Holdco) to take any action (including entering into any consent decree, hold separate order or other arrangement), or to permit or suffer to exist any material restriction, condition, limitation or requirement, that (when taken together with all other such actions, restrictions, conditions, limitations and requirements), individually or in the aggregate, could result in a burdensome condition. A “burdensome condition” means any action, restriction, condition, limitation or requirement imposed by any governmental entity in connection with the governmental approvals necessary or advisable to be obtained from any governmental entity in order to consummate the merger which, individually or together with all other such actions, restrictions, conditions, limitations or requirements imposed by any governmental entity in connection with such governmental approvals would, or would reasonably be expected to result in a material adverse effect on the business, operations or financial results of the surviving company and its affiliates (including Holdco and its affiliates) measured on a scale relative to the Company and its subsidiaries taken as a whole.
Access
Subject to applicable law, during the period from the date of the Merger Agreement to the effective time of the merger, the Company will, and will cause each of its subsidiaries to, afford to Holdco and its representatives reasonable access, upon reasonable advance notice, to all their respective properties, books, contracts, commitments, records, officers, employees, accountants and agents and furnish reasonably promptly to Holdco (i) to the extent not
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publicly available, a copy of each report, schedule, registration statement and other document filed by it during such period pursuant to the requirements of federal or state securities laws or commission actions and (ii) all other information concerning its business, properties and personnel as Holdco may reasonably request (in each case, in a manner so as to not interfere in any material respect with the normal business operations of the Company or any of its subsidiaries), subject to certain exceptions.
Directors’ and Officers’ Indemnification
From and after the effective time of the merger, the surviving company will indemnify and hold harmless each individual who was prior to or is as of the date of the Merger Agreement, or who becomes prior to the effective time of the merger, a director, officer or employee of the Company or any of its subsidiaries or who was prior to or is as of the date of the Merger Agreement, or who thereafter commences prior to the effective time of the merger, serving at the request of the Company or any of its subsidiaries as a director, officer or employee of another person (the “Company indemnified parties”), against all claims, losses, liabilities, damages, judgments, inquiries, fines and fees, costs and expenses, including reasonable attorneys’ fees and disbursements, incurred in connection with any claim, action, suit or proceeding, whether civil, criminal, administrative or investigative, arising out of or pertaining to the fact that the Company indemnified party is or was a director, officer or employee of the Company or any of its subsidiaries or is or was serving at the request of the Company or any of its subsidiaries as a director, officer or employee of another person, whether asserted or claimed prior to, at or after the effective time of the merger, to the fullest extent permitted under applicable law.
The surviving company is obligated to use reasonable best efforts to work through the Marsh New York FINPRO group to obtain a tail policy of directors’ and officers’ liability insurance providing for not less than six years of coverage from each of the primary layer and excess layer carriers who insure the Company’s directors and officers as of the date of the Merger Agreement with at least the same coverage and amounts and containing terms and conditions that are not less advantageous to the Company indemnified parties, in each case with respect to claims arising out of or relating to events which occurred before or at the effective time of the merger; provided that in no event will the surviving company be required to pay with respect to such insurance policies in respect of any one policy year more than 400% of the aggregate annual premium most recently paid by the Company prior to the date of the Merger Agreement, and if the surviving company is unable to obtain such insurance at an annual premium equal to or less than such maximum amount, it will obtain as much comparable insurance as possible for each year within such six-year period for an annual premium equal to such maximum amount, using reasonable best efforts to maintain continuity of the Company’s current insurers providing the coverage in the various layers
Financing Cooperation
Until the earlier of the closing of the merger and the date the Merger Agreement is terminated, at Holdco’s sole expense, the Company will use its commercially reasonable efforts, and will cause each of its subsidiaries and its and their respective representatives to use their respective commercially reasonable efforts, to provide Holdco and Merger Sub with all cooperation reasonably requested by Holdco or Merger Sub to assist Holdco or Merger Sub as is reasonably requested by Holdco or Merger Sub (i) in connection with a potential debt financing in an amount necessary to redeem the preference shares outstanding on the closing date of the merger and (ii) in connection with any equity financing of Holdco, including using commercially reasonable efforts to provide reasonably requested diligence materials and participate in and cause the Company’s management team, with appropriate seniority and expertise, including senior officers, to participate in a reasonable and customary due diligence sessions in connection with any such equity financing on reasonable advance notice and at mutually agreeable times and places.
Shareholder Litigation
Subject to entry into a customary joint defense agreement, the Company will give Holdco the opportunity to consult with the Company and participate in the defense or settlement of any shareholder litigation against the Company, any of the Company’s subsidiaries and/or their respective directors or officers (each a “Company Party”) relating to the merger and the other transactions contemplated by the Merger Agreement. None of the Company, any of its subsidiaries or any representative of the Company will compromise, settle or come to an arrangement regarding any such shareholder litigation, in each case unless Holdco will have consented in writing, provided that the Company may compromise, settle or come to an agreement regarding shareholder litigation made or pending against a Company Party, if the resolution of such litigation requires payment from the Company or any of its subsidiaries or any of its or their representatives in an amount that together with all other such payments does not exceed a
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specified amount and/or the provision of disclosures to the shareholders of the Company relating to the merger (which disclosures shall be subject to review and comment by Holdco), and the settlement provides for no other non-monetary relief. None of Holdco, Merger Sub or any of their respective affiliates will be required to defend, contest, or resist any action, or to take any action to have vacated, lifted, reversed, or overturned any order, in connection with the merger.