UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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SCHEDULE 14D-9
Solicitation/Recommendation Statement Under Section 14(d)(4)
of the Securities Exchange Act of 1934
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State Auto Financial Corporation
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(Name of Subject Company)
State Auto Financial Corporation
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(Name of Person(s) Filing Statement)
Common Shares, without par value
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(Title of Class of Securities)
855-707105
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(CUSIP Number of Class of Securities)
John R. Lowther, Esq.
Senior Vice President, General Counsel and Secretary
State Auto Financial Corporation
518 East Broad Street
Columbus, Ohio 43215-3976
(614) 464-5000
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(Name, Address and Telephone Number of Person Authorized
to Receive Notice and Communications on
Behalf of the Person(s) Filing Statement)
with copies to:
John P. Beavers, Esq.
Bricker & Eckler LLP
100 South Third Street
Columbus, Ohio 43215
(614) 227-2361
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[X] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.(1)
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(1) See Item 2 herein.
TABLE OF CONTENTS
Page
----
Item 1. Subject Company Information................................... 1
Item 2. Identity and Background of Filing Person...................... 1
Item 3. Past Contracts, Transactions, Negotiations and Agreements..... 3
Item 4. The Solicitation or Recommendation............................ 12
Item 5. Persons/Assets Retained, Employed, Compensated or Used........ 19
Item 6. Interest in Securities of the Subject Company................. 19
Item 7. Purposes of the Transaction and Plans or Proposals............ 19
Item 8. Additional Information to be Furnished........................ 20
Item 9. Exhibits...................................................... 34
Item 1. Subject Company Information.
(a) The subject company is State Auto Financial Corporation, an Ohio
corporation (the "Company" or "STFC"). The address and telephone
number of the Company's principal executive offices are 518 East
Broad Street, Columbus, Ohio 43215, and (614) 464-5000.
(b) This Solicitation/Recommendation Statement on Schedule 14D-9 (this
"Statement") relates to the Company's Common Shares, without par
value (the "Shares"). As of August 22, 2003, there were 39,288,510
Shares outstanding and approximately 12 million Shares reserved for
issuance under the Company's equity compensation plans, of which
6,789,959 Shares are issuable upon or otherwise deliverable in
connection with the exercise of outstanding vested and unvested
options issued pursuant to such plans. The Company's equity
compensation plans consist of the 1991 and 2000 Stock Option Plans
and the 1991 and 2000 Directors Stock Option Plan, the 1998 State
Auto Agent's Stock Option Plan, and the Employee Stock Purchase
Plan.
Unless the context otherwise requires, any reference in this
Statement to an "Item" refers to a numbered Item of this Statement.
Item 2. Identity and Background of Filing Person.
(a) Name and Address of Person Filing this Statement.
The Company is the person filing this Statement. The information
about the Company's address and business telephone number in Item
1(a) above is incorporated herein by reference. The Company's
website address is www.stfc.com. The information on the Company's
website should not be considered a part of this Statement.
THIS SCHEDULE 14D-9 DOES NOT CONSTITUTE A SOLICITATION OF PROXIES IN
CONNECTION WITH ANY SPECIAL MEETING OF SHAREHOLDERS UNDER THE OHIO
CONTROL SHARE ACQUISITION STATUTE (AS DEFINED IN ITEM 4). IF SUCH
MEETING IS CALLED, ANY SUCH SOLICITATION WILL BE MADE ONLY BY MEANS
OF SEPARATE PROXY SOLICITATION MATERIALS COMPLYING WITH THE
REQUIREMENTS OF SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED, AND THE RULES AND REGULATIONS PROMULGATED
THEREUNDER.
(b) Proposed Tender Offer of the Purchaser.
This Statement relates to a proposed tender offer announced by a
filing of a Tender Offer Statement on Schedule TO with the
Securities and Exchange Commission (the "SEC") made on August 20,
2003 by State Auto Financial
Acquisition Corporation ("Offeror"), which is an Illinois
corporation wholly owned by Gregory M. Shepard ("Shepard"),
unaffiliated with STFC, to purchase 8,000,000 of the outstanding
Shares at a price of $32.00 per Share, net to the seller in cash,
without interest (the "Tender Offer"). The Company's position is
that a valid tender offer has not commenced as stated under the
heading "Position that a Valid Tender Offer Has Not Commenced" of
this Item. The Tender Offer is being proposed on the terms and
subject to the conditions described in the Tender Offer Statement on
Schedule TO (together with the exhibits thereto, as may be amended
from time to time, the "Schedule TO"), filed by Shepard and Offeror
with the SEC on August 20, 2003. The Schedule TO states that,
subject to the satisfaction or waiver of certain conditions,
following completion of the proposed Tender Offer, Shepard intends
to cause the merger of Offeror with and into State Automobile Mutual
Insurance Company ("State Auto Mutual"), which owns approximately
66.9% of the outstanding Shares as of the date of this Statement
(the "Proposed Merger," and together with the proposed Tender Offer
and any associated financing or other transactions, the "Proposed
Transaction").
The Schedule TO states that both Offeror's and Shepard's business
address is 980 North Michigan Avenue, Suite 1400, Chicago, Illinois
60611, and their business telephone number is (312) 214-3566.
Conditions to the Offer
The proposed Tender Offer contains a number of conditions requiring
State Auto Mutual or it board of directors to, among other
conditions:
- Transfer control of State Auto Mutual and the Company to
Shepard and Offeror, including entitling Shepard and Offeror
to designate such number of directors of the board and each
committee of State Auto Mutual and its subsidiaries as will
give Shepard and Offeror a majority of each such board and
committee upon terms and conditions determined by Shepard and
Offeror in their sole discretion (the "Change of Control
Condition");
- Finance the proposed Tender Offer by issuing surplus notes in
the amounts and upon terms and conditions determined by
Shepard and Offeror in their sole discretion (the "Financing
Condition"); and
- Give all other approvals and consents required to consummate
the Proposed Transaction upon terms and conditions determined
by Shepard and Offeror in their sole discretion (the "State
Auto Mutual Approval Condition").
In addition, the proposed Tender Offer contains a number of
conditions for obtaining all necessary approvals, including all
regulatory approvals necessary for their acquisition of control of
STFC and State Auto Mutual upon terms and conditions determined by
Shepard and Offeror in their sole discretion.
2
Because of these conditions and for the reasons stated in Item 4
below, the Company believes that the proposed Tender Offer, the
Proposed Merger and the Proposed Transaction are impossible to
complete and the proposed Tender Offer is illusory.
Position that a Valid Tender Offer Has Not Commenced
While Shepard and Offeror announced the proposed Tender Offer by
filing the Schedule TO with the SEC on August 20, 2003, the Company,
upon advice of counsel, believes that a valid tender offer has not
commenced under applicable SEC rules and regulations.
Item 3. Past Contracts, Transactions, Negotiations and Agreements.
STFC's Proxy Statement, dated April 14, 2003 (the "2003 Proxy
Statement") and sent by STFC to its shareholders in connection with
its 2003 annual meeting of shareholders held on May 23, 2003 (the
"2003 Annual Meeting of Shareholders"), attached hereto as Exhibit
e(1) and also available from the Securities and Exchange Commission
and its Edgar Database at http://www.sec.gov, is incorporated herein
by reference. Except as described (i) in this Statement and (ii) on
pages 8 through 21, pages 25 through 29, and pages 30 through 33 of
the Proxy Statement, to the knowledge of the Company, as of the date
of this Statement, there are no material agreements, arrangements,
or understandings, nor any actual or potential conflicts of
interest, between STFC or its affiliates and (a) STFC's executive
officers, directors or affiliates or (b) Offeror or any of its
executive officers, directors or affiliates.
(a) Agreements between STFC and affiliates and STFC's executive officers
and directors
Tendering by Executive Officers and Directors
A condition of the proposed Tender Offer is that directors and
executive officers of STFC not tender any of their Shares or
exercise any of their options into the proposed Tender Offer. If,
despite this condition, any of STFC's directors and executive
officers were to tender any of their Shares pursuant to the proposed
Tender Offer and such Shares were accepted by Offeror, they would
receive the proposed Tender Offer consideration for their Shares on
the same terms and conditions as the other shareholders of the
Company. If they were to so tender all of the Shares beneficially
owned by them as of August 22, 2003, 574,882 Shares (excluding
Shares subject to unexercised options) would be tendered, and if all
were so accepted and purchased (despite the condition that directors
and executive officers of STFC not tender any of their Shares or
exercise any of their options into the proposed Tender Offer), they
would be entitled to receive $18,396,224 in exchange for their
Shares.
3
As discussed below in Item 4(c) of this Statement, to the knowledge
of the Company, none of the Company's executive officers or
directors currently intends to tender Shares held of record or
beneficially owned by such person for purchase pursuant to the
proposed Tender Offer.
Executive Officers and Agents Compensation
Cash and certain other compensation of the CEO and the four most
highly compensated executives (other than the CEO) of STFC as of
December 31, 2002 (the "Named Executive Officers") is summarized
under the headings "Summary of Cash and Certain Other Compensation"
and "Employees' Retirement Plan" on pages 9 through 13 of the 2003
Proxy Statement, a copy of which is attached hereto as Exhibit e(1).
Employment Agreement with the Chief Executive Officer
Robert H. Moone, the Company's Chairman of the Board, President and
Chief Executive Officer, has entered into an Employment Agreement
with the Company dated May 22, 2003 (the "Moone Employment
Agreement"), with the current term continuing through December 31,
2005, or until his earlier death or disability, or upon earlier
termination by either Mr. Moone or the Company as permitted by the
Agreement. The Moone Employment Agreement may be renewed at the end
of the current term for one additional two-year term with the mutual
consent of both Mr. Moone and the Company. If Mr. Moone wants to
renew and the Company does not, the Employment Agreement will be
terminated and Mr. Moone will be compensated as if terminated
without cause. If the Company wants to renew and Mr. Moone does not,
the Moone Employment Agreement will be terminated and Mr. Moone will
be compensated as if voluntarily terminated. The Moone Employment
Agreement provides that Mr. Moone's annual rate of compensation will
not be less than his base salary at the time the Agreement was
entered into by the parties, plus such increases in base
compensation as may be authorized by the Compensation Committee of
the Company's Board of Directors. The Moone Employment Agreement
also provides for Mr. Moone's continued participation in the
Company's Quality Performance Bonus Plan and his incentive bonus
arrangement (collectively, "Incentive Compensation Plans").
In the event Mr. Moone is terminated for cause, he will be entitled
to receive salary payments for twelve bi-weekly pay periods
following the date of termination plus any compensation to which he
is entitled under the Incentive Compensation Plans. In the event Mr.
Moone is terminated without cause (other than for death, disability,
or retirement), he will be entitled to the following: payment of his
base salary and receipt of benefits under the Moone Employment
Agreement, both for a 24-month period; payment of the average of the
prior two years' aggregate payments under the Company's Quality
Performance Bonus Plan; and payment of the average of the prior two
years' incentive bonus. In
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addition, if Mr. Moone is terminated without cause, Mr. Moone and
his spouse shall also be entitled to participate in the Company's
health insurance plan until he and his spouse first become eligible
for Medicare. In the event Mr. Moone becomes disabled, which
disability continues for more than six consecutive months during a
twelve-month period, the Company may terminate Mr. Moone's
Employment Agreement, and he will be entitled to receive his base
salary and payments under the Incentive Compensation Plans to the
date of termination. Thereafter, Mr. Moone will be entitled to
receive 20% of his base salary, in addition to disability benefits
received from any of the Company's long-term disability plans,
throughout the period of his disability or until he attains age 65,
whichever first occurs. In the event of Mr. Moone's death, his
beneficiaries will receive payment of his base annual salary for
twelve months plus a pro rata share of payments "earned" as of the
date of death under the Incentive Compensation Plans.
Executive Agreements (Change-in-Control Arrangements)
The change-in-control arrangements of the executive agreements of
Mr. Moone and three other executive officers of the Company are
summarized under the heading "Executive Agreements
(Change-in-Control Arrangements)" on pages 14 through 16 of the 2003
Proxy Statement, a copy of which is attached hereto as Exhibit e(1).
Stock Option Plans and Directors Stock Option Plans
Directors of the Company hold outstanding, unexercised options to
purchase Shares granted pursuant to the Company's 1991 and 2000
Directors Stock Option Plans referenced in the 2003 Proxy Statement,
a copy of which is attached hereto as Exhibit e(1). Officers and
employees of the Company hold outstanding, unexercised options to
purchase Shares granted pursuant to the Company's 1991 and 2000
Stock Option Plans referenced in the Proxy Statement, a copy of
which is attached hereto as Exhibit e(1).
As described on pages 5, 6 and 25 of the 2003 Proxy Statement, a
copy of which is attached hereto as Exhibit e(1), as of December 31,
2002, directors, officers and employees of the Company held
unexercised options to purchase 2,671,925 Shares with a
weighted-average exercise price of $10.98 per share issued pursuant
to the 1991 and 2000 Stock Option Plans and the 1991 and 2000
Directors Stock Option Plans.
Since the issuance of the 2003 Proxy Statement, the Company has
granted the following options to the Named Executive Officers
pursuant to the 2000 Stock Option Plan. The Named Executive Officers
in the 2003 Proxy Statement received the following grants on May 22,
2003 each with an exercise price of $18.74 per share:
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Name Shares Subject to Options Shares Vested
---- ------------------------- -------------
Robert H. Moone 48,000 0
Mark A. Blackburn 14,500 0
Steven J. Johnston 14,500 0
John R. Lowther 14,500 0
Steven R. Hazelbaker 4,500 0
The option agreement between the Company and each of these executive
officers permit the executive officer to exercise his options within
90 days if his employment is terminated, unless employment is
terminated due to death, disability or retirement. In the event of
termination due to death, disability or retirement, non-qualified
stock options may be exercised within the term of the option
agreement. Incentive stock options must be exercised within the time
frame imposed by statute following termination of employment for any
reason. The options granted on May 22, 2003 to the above named
officers and all other options granted on that day under the 2000
Stock Option Plan vest in one-third increments over a three year
period.
Change in Control Provisions
The 1991 and 2000 Stock Option Plans and the 1991 and 2000 Directors
Stock Option Plans have similar provisions in the event of a "change
in control" or "potential change in control" of the Company
(generally defined by reference to the acquisition of a specified
percentage of voting power, or a change in the composition of the
Board of Directors, or an acquisition of the Company that requires
shareholder approval, or a transaction involving the Company or its
affiliates that requires shareholder approval and has the effect of
causing the Company to cease to be a public company). In the event
of a change in control or potential change in control, all
outstanding options may be terminated by the Company upon the
payment of cash in an amount equal to the difference between the
exercise price of the option and the "change in control price"
(generally defined to mean the highest fair market value of the
Shares underlying the options at any time during the sixty-day
period preceding the event that triggered the change in control or
potential change in control). If the change in control price is less
than the exercise price, the option may be terminated without any
payment.
If the proposed Tender Offer were consummated in accordance with its
terms, the proposed Tender Offer would result in a change in control
as defined in the 1991 and 2000 Stock Option Plans and the 1991 and
2000 Directors Stock Option Plans.
As of August 22, 2003, the directors, executive officers and other
employees of the Company held unexercised options to purchase
2,752,059 Shares with a weighted-average exercise price of $12.54
per share. If the proposed Tender Offer were consummated at a change
in control price of $32.00 per share, option-holders would be
entitled to receive in the aggregate of approximately $53,747,712.
6
Compensation of Directors; Adoption of Fourth Amendment to
2000 Directors Stock Option Plan
Compensation of directors who are not officers or employees of STFC
or its affiliates, including that obtained from the directors'
deferred compensation plan and the 1991 and 2000 Directors Stock
Option Plans is described under the headings "Compensation of
Directors" and "Equity Compensation Plan Information" on pages 8 and
25, respectively, of the 2003 Proxy Statement, a copy of which is
attached hereto as Exhibit e(1).
Since the issuance of the 2003 Proxy Statement, the shareholders of
the Company at the 2003 Annual Meeting of Shareholders approved
Amendment 4 to the 2000 Directors Stock Option Plan, as described on
pages 30 through 33 of the 2003 Proxy Statement, a copy of which is
attached hereto as Exhibit e(1), increasing the number of Shares
subject to options granted annually to directors from 1,500 Shares
to 4,200 Shares.
Agents
Independent insurance agents of the Company hold outstanding,
unexercised options to purchase Shares granted pursuant to the 1998
State Auto Agent's Stock Option Plan referenced as the "Agent's
Option Plan" in the 2003 Proxy Statement (the "Agent's Option
Plan").
As described on page 25 of the 2003 Proxy Statement, a copy of which
is attached hereto as Exhibit e(1), as of December 31, 2002,
independent insurance agents of the Company held unexercised options
to purchase 104,325 Shares with a weighted-average exercise price of
$13.51 per share issued pursuant to the Agent's Option Plan.
Catastrophic Loss Reinsurance
STFC has entered into the Amended and Restated Put Agreement, dated
as of November 16, 2001 (the "Put Agreement"), with State Auto
Mutual and Bank One, NA ("Bank One"), in order to induce the
execution and performance of the Amended and Restated Credit
Agreement, dated as of the same date (the "Credit Agreement"), among
SAF Funding Corporation ("SAF Funding"), Bank One, and several banks
signatory thereto (the "Lenders"). Generally, the Credit Agreement
provides for, among other things, an extension of credit to be made
by the Lenders to SAF Funding in an aggregate principal amount not
to exceed $100,000,000 with respect to a single catastrophe loss
event. Pursuant to the Amended and Restated Standby Purchase
Agreement, dated as of November 16, 2001 (the "Standby Purchase
Agreement") between SAF Funding and STFC, SAF Funding will purchase
up to $100,000,000 worth of STFC's Class A Preferred Stock, funded
by the credit facility under the Credit Agreement. STFC
7
would, in turn, contribute the proceeds of the sale of its Class A
Preferred Stock to State Auto Property and Casualty Insurance
Company, a South Carolina domiciled, wholly owned insurance
subsidiary of STFC ("State Auto P&C"), for it to pay losses and/or
loss adjustment expenses resulting from a catastrophe loss,
affecting State Auto Mutual or any of its insurance company
affiliates, in the aggregate, above $120,000,000. However, if State
Auto Mutual consummates a statutory merger such as the Proposed
Merger or if STFC or State Auto Mutual undergoes a change of control
in its board of directors, such an event would constitute a "Put
Event" under the Put Agreement. A Put Event constitutes an event of
default under the Credit Agreement. A default under the Credit
Agreement could cause the Lenders to terminate or suspend any
obligations to provide credit, or to declare any money loaned
immediately due and payable, under the Credit Agreement. Thus, SAF
Funding, and therefore STFC, would no longer have access to the
$100,000,000 credit facility in the event of a catastrophe. Not
having access to such credit facility would cause STFC and its
subsidiaries to rely on other reinsurance and potentially the
surplus of each of the operating insurers affiliated with STFC to
pay catastrophic loss claims and/or loss adjustment expenses
resulting from a catastrophic event. To protect the policyholders
surplus of its affiliates, in the event of such a default, STFC
would likely have to replace the above described credit facility
with other catastrophe reinsurance, which may not be available on
terms and conditions as favorable as those provided under the Credit
Agreement. The Company believes that the Proposed Merger, if
consummated, and any resulting change of control in the board of the
Company would each constitute a "Put Event" under the Put Agreement
and thereby an event of default under the Credit Agreement,
permitting the Lenders to terminate the $100,000,000 credit
facility. The foregoing description is qualified in its entirety by
reference to the Put Agreement, the Credit Agreement and the Standby
Purchase Agreement, copies of which are attached to this Statement
as Exhibits e(2), e(3) and e(4), respectively.
Director Indemnification Agreements
In addition to indemnification that may be available pursuant to
STFC's Amended and Restated Code of Regulations (the "Code of
Regulations"), a copy of which is attached as Exhibit e(5) to this
Statement, STFC has executed an Indemnification Agreement with each
STFC director pursuant to which STFC will indemnify the director for
all expenses (including legal fees), judgments, fines and amounts
paid in settlement incurred by the director in connection with any
threatened, pending or completed action, suit or proceeding (whether
civil, criminal, administrative, arbitrative, or investigative and
including, without limitation, appeals and any action by or in the
right of STFC) to which the director is, was, or at any time becomes
a party, or is threatened to be made a party as a result, directly
or indirectly, of serving at any time as a director or officer of
the Company, or at the request or with the consent of STFC as a
trustee, director, officer, employee or agent of another
corporation, domestic or foreign, profit or not-for-profit,
partnership, trust, joint venture, committee, or other
8
organization or enterprise. Each Indemnification Agreement also
provides that STFC will indemnify a director to the fullest extent
the director may be indemnified under Ohio law. In addition, each
Indemnification Agreement requires that STFC pay all indemnifiable
expenses to the director in advance of the final disposition of the
action, suit or proceeding. STFC will not indemnify directors, and
directors receiving an advancement of expenses will repay all such
advances, if, among certain other triggers, the director's conduct
is adjudged by a court of competent jurisdiction to have been
knowingly fraudulent, deliberately dishonest or willfully wrongful,
and also to have been such that indemnification is unlawful under
Ohio law. The foregoing description is qualified in its entirety by
reference to the Indemnification Agreement, a copy of which is
attached hereto as Exhibit e(6) to this Statement.
Ohio Revised Code Section 1701.13(E) allows a corporation to
indemnify any person, including a STFC director, subject to certain
requirements. The Indemnification Agreements executed by directors
expand the indemnification generally available under Ohio Revised
Code Section 1701.13(E). The Ohio Revised Code provides that STFC
may indemnify a person, whereas the language in the Indemnification
Agreements requires that STFC will indemnify a director.
Accordingly, in addition to the litigation described in Item 8(a) in
which certain STFC directors are named as defendants, if any other
litigation arises as a result of the proposed Tender Offer, and if
one or more current or former STFC directors are parties to those
suits, STFC will be required to indemnify each such person for the
expenses related to such litigation, so long as such indemnification
is not adjudged to be unlawful.
Indemnification for Directors, Officers, Employees and Agents
Certain persons, who are directors, officers, employees and agents
of the Company and are not party to an Indemnification Agreement,
have certain indemnification rights pursuant to Article 6 of the
Code of Regulations. The indemnification rights granted under the
Code of Regulations are similar to those granted under the
Indemnification Agreements described above; however, the Code of
Regulations provides indemnification for any person who is a party
or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (whether civil, criminal,
administrative, or investigative) by reason of the fact that the
person is or was a director, officer, employee or agent of STFC. The
Code of Regulations allows for permissive, rather than mandatory,
advancement of expenses by STFC. The indemnification provided by the
Code of Regulations continues to cover any person after he or she
ceases being a director, trustee, officer, employee or agent of
STFC. The foregoing description is qualified in its entirety by
reference to the Code of Regulations, a copy of which is attached as
Exhibit e(5) to this Statement.
The indemnification provided pursuant to the Code of Regulations,
unlike the permissive indemnification provisions of the Ohio Revised
Code, is mandatory
9
that STFC indemnify persons who meet the criteria under the Code of
Regulations. Accordingly, in addition to the litigation described in
Item 8(a) in which certain STFC directors are named as defendants,
if any other litigation arises as a result of the proposed Tender
Offer, and if one or more current or former STFC directors,
trustees, officers, employees or agents are parties to those suits,
STFC will be required to indemnify each such person for the expenses
related to such litigation, so long as such indemnification is
within the scope of the Code of Regulations.
Affiliates
The Management and Operations Agreement effective January 1, 2000,
as amended (the "2000 Management Agreement"), the Reinsurance
Pooling Agreement Amended and Restated as of January 1, 2000, as
amended (the "2000 Pooling Agreement"), the Management and
Operations Agreement dated January 1, 2000, as amended (the "2000
Midwest Management Agreement"), that relates to management of State
Auto Insurance Company of Wisconsin formerly known as Midwest
Security Insurance Company ("SAWI"), the Management and Operations
Agreement dated January 1, 2000 (the "2000 Farmers Casualty
Management Agreement") that relates to management of Farmers
Casualty Insurance Company ("Farmers Casualty") and Mid-Plains
Insurance Company ("Mid-Plains"), the Management and Operations
Agreement dated January 1, 2002 (the "MIGI Management Agreement")
that relates to management of Meridian Security Insurance Company
("Meridian Security"), Meridian Citizens Security Insurance Company
("Meridian Citizens Security") and Meridian Citizens Mutual
Insurance Company ("Meridian Citizens Mutual"), and certain other
arrangements (including investment management arrangements) among
STFC and certain affiliates, including State Auto Mutual, State Auto
P&C and other affiliated companies, are described under the
following headings in the 2003 Proxy Statement: "Compensation of
Executive Officers" on page 8 and "Certain Transactions" on pages 26
through 29, a copy of which is attached hereto as Exhibit e(1).
During the first six months of 2003, the following companies
incurred the following management fees to State Auto P&C under the
2000 Midwest Management Agreement, the 2000 Farmers Casualty
Management Agreement and the MIGI Management Agreement: SAWI -
$107,000; Farmers Casualty - $102,000; Mid-Plains - $8,600; Meridian
Security - $327,000; Meridian Citizens Security - $41,000; and
Meridian Citizens Mutual - $41,000.
During the first six months of 2003, the following companies
incurred the following fees to Stateco Financial Services, Inc.
("Stateco") for investment management services pursuant to the
investment management agreements between Stateco and such companies:
State Auto Mutual - $807,425; State Auto P&C - $2,019,245; Milbank
Insurance Company - $574,251; State Auto National Insurance Company
- $107,159; SAWI - $40,114; Farmers Casualty - $88,513;
10
Mid-Plains - $18,761; SAOH - $36,732; Meridian Security - $141,240;
Meridian Citizens Security - $36,841; and Meridian Citizens Mutual -
$32,906. STFC continues to believe that the fees charged by Stateco
are comparable to those charged by independent investment managers
under similar circumstances.
Both the 2000 Management Agreement and the 2000 Midwest Management
Agreement contain termination provisions which permit SAWI, in the
case of the 2000 Midwest Management Agreement, and any of the
"Managed Companies" as that term is defined in the 2000 Management
Agreement (which term includes State Auto Mutual, STFC and certain
affiliates) to terminate the management agreement upon the
occurrence of either a "Change in Control" or a "Potential Change of
Control," each as identically defined in each agreement. In both the
2000 Management Agreement and the 2000 Midwest Management Agreement
the term "Change of Control" includes (i) any person or group (as
defined in Section 13(d) of the Exchange Act) other than State Auto
Mutual or another STFC affiliate becoming the "beneficial owner" (as
defined in Section 13(d) of the Exchange Act) of STFC securities
representing 20% or more of the combined voting power of the then
outstanding STFC securities, (ii) certain changes in the majority of
the Board of Directors of STFC during a 24-month period, and (iii)
occurrence of any transaction requiring shareholder approval for the
acquisition of STFC by an entity, other than State Auto Mutual or an
STFC subsidiary, by merger, purchase of assets or otherwise. The
Company believes that the Proposed Transaction, if consummated,
would constitute a "Change of Control" under the 2000 Management
Agreement and the 2000 Midwest Management Agreement, permitting SAWI
to terminate the 2000 Midwest Management Agreement and permitting
any of the Managed Companies (as defined therein) to terminate the
2000 Management Agreement. Under both agreements, a "Potential
Change of Control" includes (a) the approval by the STFC
shareholders of an agreement the consummation of which would result
in a Change of Control as defined above, and (b) the acquisition of
beneficial ownership by any person or group, other than STFC, its
subsidiaries and their benefit plans, of STFC securities
representing 5% or more of the combined voting power of outstanding
STFC securities and the adoption of a resolution by the STFC Board
of Directors to the effect that a Potential Change of Control has
occurred for purposes of the agreement. The Schedule 13D, filed by
Shepard with the Securities and Exchange Commission, as amended,
reports beneficial ownership of STFC securities representing 5% or
more of the combined voting power of outstanding STFC securities,
but no resolution has been adopted by the STFC Board of Directors
declaring a "Potential Change of Control" to have occurred for
purposes of the agreements. Until adoption of such a resolution by
the STFC Board, no "Potential Change of Control" can occur
permitting termination of the management agreements. Such a
resolution, if adopted by the STFC Board of Directors, would allow
SAWI to terminate the 2000 Midwest Management Agreement, and any of
the Managed Companies (as defined in the 2000 Management Agreement)
to terminate the 2000 Management Agreement, at any time following
adoption of such a resolution by the STFC Board. A tender of STFC
securities by the STFC
11
shareholders in response to the Proposed Transaction which resulted
in Shepard and/or Offeror owning 20% or more of the then outstanding
STFC securities will constitute a "Change of Control" and will also
allow the termination of the agreements.
Any termination of the 2000 Management Agreement by any "Managed
Companies" (as defined therein), or the termination of the 2000
Midwest Management Agreement by SAWI, would require the terminating
company or companies to obtain from another source all of the
various management, support and related services currently provided
by State Auto P&C under the management agreements. Those services
may not be available from other sources on terms and conditions as
favorable as those currently provided under the agreements prior to
termination.
In addition to the agreements referred to above, STFC and its
affiliates (including State Auto P&C and State Auto Mutual) are
parties to certain other incidental intercompany support agreements
not specifically discussed in the 2003 Proxy Statement, such as cost
allocation agreements and other similar operational support
agreements, all of which were entered into in the ordinary course of
business and none of which contain termination or other provisions
that are triggered by the Proposed Transaction. The MIGI Management
Agreement, the 2000 Farmers Casualty Management Agreement and the
2000 Pooling Agreement do not contain termination or other
provisions that are triggered by the Proposed Transaction.
(b) Agreements with Offeror and Its Affiliates
Except as described in this Statement, to the best of the Company's
knowledge, no material agreement exists between the Company and
Offeror or Offeror's affiliate, Shepard. On August 25, 2003, the
Company notified Offeror that the Company has elected under
applicable federal securities laws to mail Offeror's proposed Tender
Offer materials to the Company's shareholders rather than to deliver
to Offeror the Company's shareholder list and security position
listings. As of September 1, 2003, neither Offeror nor Shepard had
delivered any materials for mailing.
Item 4. The Solicitation or Recommendation.
(a) Solicitation/Recommendation.
STFC's Board of Directors, at a special meeting held on August 22,
2003, formed a special committee of independent directors (the
"Special Committee"), comprised of David J. D'Antoni, William J.
Lhota, S. Elaine Roberts, Richard K. Smith and Paul S. Williams. The
Board of Directors charged the Special Committee with, among other
things, evaluating and assessing the terms of the proposed Tender
Offer, recommending to the Board of Directors the position which the
12
Company should take in respect of the proposed Tender Offer and
communicating the Board of Directors' response to the shareholders
of the Company.
The Special Committee, in consultation with the Special Committee's
independent legal advisors, Vorys, Sater, Seymour and Pease LLP, and
the Board of Director, in consultation with the Company's legal
advisors, Bricker & Eckler LLP, each unanimously determined at a
meeting held on September 1, 2003 that, the proposed Tender Offer is
not bona fide, but an illusory offer, because certain of the
essential conditions to the proposed Tender Offer could not be met.
Therefore, the Special Committee unanimously recommended to the
Board of Directors that the full Board of Directors, in turn,
recommend that the Company's shareholders reject the proposed Tender
Offer, if commenced, and not tender their Shares to Offeror pursuant
to the proposed Tender Offer.
ACCORDINGLY, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
COMPANY SHAREHOLDERS REJECT THE PROPOSED TENDER OFFER, IF COMMENCED,
AND NOT TENDER THEIR SHARES TO OFFEROR PURSUANT TO THE PROPOSED
TENDER OFFER.
A press release communicating the recommendation of the Board of
Directors is filed as Exhibit a(1) and is incorporated herein by
this reference.
(b) Reasons for the Recommendation.
Background
Since at least December 9, 2002, Shepard has been the beneficial
owner of more than 5 percent of the outstanding Shares. On or about
December 12, 2002, Shepard filed a Schedule 13D with the SEC.
In the Schedule 13D, Shepard reported that he had submitted a
proposal (the "Proposal") to the Company to be presented and voted
on at the Company's 2003 Annual Meeting of Shareholders. The
Proposal requested that the Board of Directors of the Company
appoint a special committee, with the assistance of an investment
banker retained by it, to initiate a process for soliciting and
evaluating merger proposals for State Auto Mutual and to undertake a
general exploration of strategic alternatives available to the
Company to maximize shareholder value.
Upon receipt of the Proposal, the Board formed a special committee
of five independent directors, which retained independent legal
counsel and unanimously recommended that the Board include the
Proposal in the proxy statement for the 2003 Annual Meeting of
Shareholders and oppose the Proposal. State Auto Mutual, acting
through a committee of independent directors, informed the Company
that the Company and its directors were not authorized to initiate
13
and/or conduct any process for soliciting or evaluating merger
proposals involving State Auto Mutual. State Auto Mutual also
informed the Company that it would vote against the Proposal if it
were submitted to a vote of the Company's shareholders, thereby
making adoption of the Proposal impossible.
The Board of Directors of the Company included the Proposal in the
2003 Proxy Statement and opposed the Proposal on the grounds that
(i) the Company did not have the power or authority to solicit
merger proposals for its shareholder, State Auto Mutual, and (ii)
the Board believed that the interests of shareholders were best
served by maintaining the Company's current business strategies
which are designed to maximize shareholder value over the long term.
Shepard did not attend the 2003 Annual Meeting, and accordingly, the
Proposal was not introduced or voted on at the meeting.
On May 29, 2003, Shepard filed Amendment No. 1 to his Schedule 13D,
proposing that State Auto Mutual merge with an unlicensed Ohio
mutual property and casualty insurance company to be formed by
Shepard and then finance a tender offer for 10,896,332 STFC
publicly-held Shares for $27.50 per share. The proposal was to be
entirely financed with State Auto Mutual's own credit or assets. The
May 29, 2003 proposal neither provided for Shepard to personally
purchase Shares at $27.50 per share, nor committed Shepard to use
any of his own funds to finance the purchase of Shares.
State Auto Mutual has made publicly available a letter dated June 4,
2003 advising Mr. Shepard that on that date the Board of Directors
of State Auto Mutual met and established a special committee to
review communications from Shepard and to review and recommend
actions to be taken based upon what is in the best interests of
State Auto Mutual's policyholders. The June 4, 2003 letter also
advised that State Auto Mutual takes great pride in its record as an
independent company that has outperformed its industry over the last
decade and that Shepard's proposal raised concerns because Shepard's
proposal: (a) would be financed entirely with State Auto Mutual's
own assets; (b) would not bring any additional resources or
financial strength to State Auto Mutual; and (c) does not expand
State Auto Mutual's insurance markets or business opportunities. A
copy of the June 4, 2003 letter is attached as Exhibit a(2).
State Auto Mutual has informed STFC that the State Auto Mutual Board
appointed to the State Auto Mutual special committee the following
directors, none of whom is or has been within the past five years,
an officer, employee, agent or consultant of or to STFC or any of
its affiliates: Paul J. Otte, Marsha P. Ryan, Dennis R. Blank and
James E. Kunk.
On June 6, 2003, STFC's Board of Directors considered Shepard's
proposals. STFC, in a letter dated June 6, 2003, advised him that
his "proposal, by its terms, depends on actions by other parties
which have not been taken and which are beyond [STFC]'s legal
authority" and that, based on this and other factors, the
14
Board had decided it would not be necessary or appropriate to take
action at this time.
On June 13, 2003, Shepard filed Amendment No. 4 to his Schedule 13D,
stating that although he preferred financing the tender offer of
Shares with surplus notes issued by State Auto Mutual, he would be
willing to consider "injecting equity into STFC through the purchase
of STFC Class A Preferred Stock." Shepard did not specify the amount
of equity he would consider providing or make any commitment to
provide it. Shepard nonetheless proposed that STFC make a tender
offer for 10,896,332 of its publicly-held Shares for $29.00 per
share, conditioning the transaction on Shepard and his nominees
taking over control of State Auto Mutual, STFC, and their
affiliates.
The June 13, 2003 proposal neither provided for Shepard to
personally purchase Shares at $29.00 per share, nor committed
Shepard to use any of his own funds to finance the purchase of
Shares.
State Auto Mutual has made publicly available a letter dated June
13, 2003, responding to Shepard's June 13, 2003 proposal by advising
him that his most current proposal had been referred to the State
Auto Mutual special committee and noting that Shepard's most recent
proposal would be entirely financed by State Auto Mutual's own
assets even though Shepard had conditioned the transaction on his
taking control of State Auto Mutual and STFC. The June 13, 2003
letter also pointed out that Shepard's proposal continued to suffer
from substantially the same defects identified in State Auto
Mutual's June 4, 2003 letter. A copy of State Auto Mutual's June 13,
2003 letter is attached as Exhibit a(3).
On June 23, 2003, Shepard filed Amendment No. 5 to his Schedule 13D
"proposing to negotiate a transaction whereby . . . [Shepard] would
commence a tender offer for 8,000,000 of STFC's 10,896,332
publicly-held Shares . . . for $30.00 per share." Shepard further
stated that "[Shepard's] financing" of the proposed tender offer
"would not involve the incurrence of any debt by State Auto, STFC or
their subsidiaries or affiliates" but Shepard offered no explanation
of, or commitment for, financing the purchase other than the use of
surplus notes sold by State Auto Mutual. Such surplus notes,
however, are believed to constitute debt that would have to be
repaid by State Auto Mutual and that would accrue above-market
interest expense. Again, Shepard's June 23, 2003 proposal did not
commit any of his own funds to finance the proposed purchase of
STFC's publicly-held Shares.
State Auto Mutual issued a press release on June 29, 2003, reporting
that its board of directors considered a report of the State Auto
Mutual special committee of independent directors and endorsed the
special committee's determination not to enter into discussions with
Shepard. State Auto Mutual has made publicly available a letter
dated June 30, 2003, advising Shepard of the State Auto Mutual
15
Board's decision and the State Auto Mutual Board's endorsement of
its special committee's determination that:
- Shepard's proposals appear to follow a pattern of making
impractical proposals with wide publication, aimed at
pressuring pursuit of a transaction for short-term gain;
- Shepard's proposals provide no additional resources or
insurance business opportunities to the Company; and
- There appears to be no benefit for the Company or its
constituencies from engaging in discussions.
A copy of State Auto Mutual's June 30, 2003 letter is attached as
Exhibit a(4).
On August 20, 2003, Shepard filed Amendment No. 7 to his Schedule
13D disclosing the filing of a Schedule TO by Shepard's wholly owned
company and that the purpose of the proposed Tender Offer is to
enable Shepard to acquire control of STFC, State Auto Mutual and
each of their subsidiaries.
On August 21, 2003, in addition to receiving a copy of the amendment
to Shepard's Schedule 13D and Offeror's Schedule TO filed on August
20, 2003, the Company received a demand that STFC elect either to
mail Offeror's tender offer materials to STFC shareholders or to
deliver to Offeror for this purpose STFC's shareholder list and
security position listings under the SEC's tender offer rules. On
this day STFC also received certain filings with the Ohio Department
of Insurance, which was later directed to the Ohio Division, and a
related statement to STFC under Section 1701.831 of the Ohio Revised
Code (the "Ohio Control Share Acquisition Statute").
On August 25, 2003, the Company notified Shepard on behalf of
Offeror of the Company's election to mail Offeror's tender offer
materials.
Formation and Considerations of the STFC Special Committee
Following STFC's receipt on August 21, 2003 of a copy of the
amendment to Shepard's Schedule 13D and Offeror's Schedule TO,
STFC's Board of Directors at a special meeting held on August 22,
2003 established a Special Committee as discussed above.
The Special Committee held meetings on August 22, August 27, August
29 and September 1, 2003, in accordance with the responsibilities
assigned to it by the resolutions of the Board of Directors adopted
on August 22, 2003.
16
Reasons for the Recommendation of the Board of Directors
On September 1, 2003, the Company's Board of Directors and its
Special Committee were informed that State Auto Mutual's board of
directors, based on the unanimous recommendation of its special
committee of independent directors, has unanimously determined:
- To oppose and reject the proposed Tender Offer because it is
not in the best interests of State Auto Mutual, its
policyholders and other constituencies;
- To decline and refuse to turn over control of State Auto
Mutual and its affiliates, including the Company, to Shepard
because such transfer of control would not be in the best
interests of State Auto Mutual, its policyholders and other
constituencies;
- To decline and refuse to issue the surplus notes or to provide
other financing to Shepard or Offeror to finance the proposed
Tender Offer, and
- To vote State Auto Mutual's shares of the Company (66.9% of
the Company's outstanding Shares) against approval of the
proposed Tender Offer at any shareholder meeting that may be
called to consider the same.
The Company's Board of Directors and Special Committee unanimously
believe that the unanimous decisions of the board of directors of
State Auto Mutual, based on the unanimous recommendation of its
special committee of independent directors, to oppose and reject the
proposed Tender Offer and to decline and refuse to turn over control
of State Auto Mutual and its affiliates, including the Company, mean
that the proposed Tender Offer's Change of Control Condition (as
described in Item 2 above) cannot be met and that, therefore, it is
impossible for Shepard and Offeror to complete the proposed Tender
Offer, and the proposed Tender Offer is illusory.
The Company's Board of Directors and Special Committee unanimously
believe that the unanimous decisions of the board of directors of
State Auto Mutual, based on the unanimous recommendation of its
special committee of independent directors, not to issue $300
million of surplus notes of State Auto Mutual - the only source of
financing identified in the Schedule TO - or to provide any other
form of financing to Shepard or Offeror mean that the proposed
Tender Offer's Financing Condition (as described in Item 2 above)
cannot be met and that, therefore, it is impossible for Shepard and
Offeror to complete the proposed Tender Offer, and the proposed
Tender Offer is illusory.
The Company's Board of Directors and Special Committee unanimously
believe that: the unanimous decisions of the board of directors of
State Auto Mutual, based on the unanimous recommendation of its
special committee of independent directors, to vote its shares of
the Company (66.9% of the Company's outstanding
17
common shares) against approval of the proposed Tender Offer if
submitted to a vote of the Company's shareholders pursuant to the
Control Share Acquisition Statute means that the proposed Tender
Offer's State Auto Mutual Approval Condition (as described in Item 2
above) cannot be met; therefore, (i) the proposed Tender Offer would
not receive the required affirmative vote for approval if submitted
to such a vote and could not be completed under Ohio law, (ii) it is
impossible for Shepard and Offeror to complete the proposed Tender
Offer, and (iii) the proposed Tender Offer is illusory.
The Company's Board of Directors and Special Committee also
considered the following to be further indications of the illusory
nature of the proposed Tender Offer, as of September 1, 2003:
- While Shepard and Offeror announced the purported commencement
of the Tender Offer on August 20, 2003, the members of the
Special Committee have been advised by their independent legal
counsel, and the Board of Directors has been advised by its
legal counsel, that a valid tender offer has not "commenced"
under applicable SEC rules and regulations;
- While the Company on August 25, 2003, agreed to mail the
proposed Tender Offer materials on Shepard's and Offeror's
behalf to shareholders of the Company, Shepard and Offeror
have not as yet delivered such materials to the Company under
applicable SEC rules and regulations; and
- Based upon the review of public records of the Ohio Division,
on August 27, 2003, Shepard and Offeror undertook to file an
amendment to their Schedule TO reflecting changes in the
structure of certain transactions contemplated by the proposed
Tender Offer and revised and supplemental disclosures,
required or requested by the Ohio Division in connection with
its review of the filing made by Shepard and Offeror under
Section 1707.041 of the Ohio Revised Code, but to date they
have not done so.
The members of the Board of Directors and the Special Committee did
not find it practicable to assign relative weights to the foregoing
factors. The recommendation of the Board of Directors and the
Special Committee was made after considering the totality of the
information and factors involved. In addition, individual members of
the Board of Directors or the Special Committee may have given
different weight to different factors.
Recommendation of the Board
In light of the factors described above, the Board of Directors and
the Special Committee each has separately and unanimously determined
to recommend that the shareholders reject the proposed Tender Offer,
if commenced, and not tender their Shares to Offeror pursuant to the
proposed Tender Offer. THEREFORE, THE BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT
18
THE SHAREHOLDERS REJECT THE PROPOSED TENDER OFFER, IF COMMENCED, AND
NOT TENDER THEIR SHARES TO OFFEROR PURSUANT TO THE PROPOSED TENDER
OFFER.
(c) Intent to Tender.
To the best knowledge of the Company, none of the Company's
executive officers, directors, affiliates or subsidiaries currently
intends to tender Shares held of record or beneficially by such
person for purchase pursuant to the proposed Tender Offer.
Item 5. Persons/Assets Retained, Employed, Compensated or Used.
Neither the Company nor any person acting on its behalf has directly
or indirectly employed, retained or compensated, or currently
intends to employ, retain or compensate, any person to make
solicitations or recommendations to the shareholders of the Company
on its behalf with respect to the proposed Tender Offer or Proposed
Merger except that the Company has retained:
- Cochran Public Relations Inc. to assist in connection with
media and public relations; and
- Georgeson Shareholder Communications Inc. to assist in
connection with shareholder communications.
Item 6. Interest in Securities of the Subject Company.
Except as set forth in this Statement, no transactions in the Shares
have been effected during the past 60 days by the Company or, to the
Company's knowledge, by any of the Company's directors, executive
officers, or affiliates.
Item 7. Purposes of the Transaction and Plans or Proposals.
Except as set forth in this Statement, the Company is not currently
undertaking or engaged in any negotiation in response to the
proposed Tender Offer that relates to (i) a tender offer for or
other acquisition of securities by or of the Company, any subsidiary
of the Company or any other person; (ii) an extraordinary
transaction, such as a merger, reorganization or liquidation,
involving the Company or any of its subsidiaries; (iii) a purchase,
sale or transfer of a material amount of assets by the Company or
any of its subsidiaries; or (iv) any material change in the
indebtedness, present capitalization or dividend policy of the
Company.
Except as set forth in this Statement, there are no transactions,
Board of Directors' resolutions, agreements in principle or signed
agreements in response to the
19
proposed Tender Offer that relate to or would result in one or more
of the events referred to in the first paragraph of this item.
Unrelated to the Tender Offer, the Company has been considering
since the first quarter of 2003 capital raising alternatives which
include a section 144(a) ten-year debenture offering in the
principal amount of $150 million. The proceeds from the offering
would be used to retire existing indebtedness and to make
contributions to the capital of certain of the Company's operating
subsidiaries. Although the Company's Board of Directors has
authorized the offering, the Company has not yet committed to
consummation of the offering.
Item 8. Additional Information to be Furnished.
(a) Legal Matters.
Litigation
Indiana Action Filed by Shepard. On July 27, 2001, Shepard and
American Union Insurance Company ("AUIC"), an Illinois insurance
company owned by Shepard and his brother, Tracey Shepard, filed a
complaint in the United States District Court for the Southern
District of Indiana against STFC, State Auto Mutual, Meridian
Insurance Group, Inc. ("MIGI"), a wholly owned subsidiary of State
Auto Mutual, and the former members of MIGI's board of directors, in
the case styled Shepard, et al. v. Ramon L. Humke, et al., Case No.
IP01-1103C-T/G (the "Indiana Lawsuit"). On November 13, 2001,
Shepard and AUIC filed an Amended Complaint in the Indiana Lawsuit
against the same defendants. The amended complaint arises from
circumstances surrounding the merger of MIGI with and into a wholly
owned subsidiary of State Auto Mutual (the "Merger"), which was
consummated on or about May 31, 2001. The amended complaint alleges:
(i) breach of fiduciary duty against the former MIGI directors for
entering into, and other conduct relating to, the Merger; (ii)
breach of an alleged confidentiality agreement brought against STFC
and State Auto Mutual; and (iii) a claim for tortious interference
with the confidentiality agreement brought against MIGI and one of
the individual defendants. The Indiana Lawsuit remains pending.
20
Defendants STFC, State Auto Mutual, MIGI and the former members of
MIGI's board of directors believe the claims asserted by Shepard and
AUIC are meritless and will vigorously defend the litigation.
Ohio Action Filed by Shepard. On August 21, 2003, at 8:06 a.m.,
Shepard and Offeror filed a lawsuit in the United States District
for the Southern District of Ohio, Eastern Division, Case No.
C2-03-751, against STFC, State Auto Mutual, and certain directors of
both companies. The central gravamen of Shepard's 32-page complaint
is that the defendants were, at the time of the filing of the
complaint, and will continue to "frustrate and impede" Offeror's
presentation of the proposed Tender Offer.
The complaint asserts three counts. Count I asserts that the
directors of STFC "are attempting to frustrate and impede
Purchasers' acquisition of shares by interfering with Purchasers'
presentation of the Tender Offer and the shareholders' opportunity
to decide for themselves whether they wish to sell their shares at
the premium provided for under the Tender Offer." Plaintiffs assert
that the STFC directors have breached their fiduciary duties to the
company's shareholders by, among other things, failing to give due
consideration to Shepard's prior proposals and by opposing the
proposed Tender Offer.
Count II alleges that State Auto Mutual, as a majority shareholder
of STFC, has a fiduciary duty to the minority shareholders of STFC
and that it has breached its purported fiduciary duty to those
shareholders. It further asserts that actions taken by the directors
of State Auto Mutual "constitute breaches by the State Auto Mutual
directors of State Auto Mutual's fiduciary duties" and that the
purported breaches of fiduciary duty of both State Auto Mutual and
its directors are likely to cause irreparable harm to plaintiffs.
Finally, Count III of the complaint alleges that the directors of
both State Auto Mutual and STFC conspired to participate in a scheme
with "the purpose of disparaging Shepard and lowering him in the
esteem of the company's other minority shareholders and in the eyes
of State Auto Mutual's policyholders."
Plaintiffs seek relief in the form of declaratory judgment that
State Auto Mutual and the directors of the two companies have
breached fiduciary duties and further seek to enjoin the defendants
from "impeding, thwarting, frustrating or interfering with the
Tender Offer," and judgment in an amount to be determined and costs
and expenses.
The Company and the STFC director defendants believe the claims
asserted by Shepard and Offeror are meritless and will vigorously
pursue dismissal of the action.
Ohio Action Against Shepard. On June 30, 2003, STFC and State Auto
Mutual filed a complaint in the United States District Court for the
Southern District of
21
Ohio against Shepard. The central gravamen of the complaint is that
Shepard falsely misstated or omitted material facts in press
releases which accompanied his Schedule 13D SEC filings of May 30,
June 13, and June 23, 2003. The complaint alleges that Shepard has
repeatedly misled the investing public by asserting in his press
releases that he would personally purchase STFC shares where the
Schedule 13D filing indicates otherwise. The complaint further
alleges that Shepard repeatedly failed to disclose in his press
releases that the proposed purchase of STFC shares would be funded
from the assets of State Auto Mutual.
The complaint also alleged that Shepard had omitted from his
Schedule 13D filings the material disclosure that he had been CEO of
Illinois Healthcare Insurance Company and that the company was
placed into liquidation while under his management and that he had
been the subject of a cease and desist order issued by the Indiana
Division of Securities. After the complaint was filed, Shepard filed
an amended Schedule 13D which disclosed these two facts.
Shortly after filing the complaint, Plaintiffs filed a motion for
preliminary injunction against Shepard and that motion came on for
an evidentiary hearing on August 20, 2003. At the end of the first
day of that hearing, at 5:31 p.m., Shepard filed with the SEC a
Schedule TO purporting to initiate the proposed Tender Offer. This
filing was accompanied by another press release. On the following
morning, Plaintiffs filed a motion for temporary restraining order
in which they sought to have Shepard restrained from further
disseminating his August 21 press release where (1) Plaintiffs
alleged it continued to purport to show that Shepard would be the
purchaser of the stock when that was not the case, and (2)
Plaintiffs alleged that Shepard was misrepresenting to the investing
public that his proposed transaction would not involve the
incurrence of any debt by State Auto Mutual, STFC, or any of its
subsidiaries. A hearing on Plaintiffs' motion for temporary
restraining order was held on August 21 and the preliminary
injunction hearing was adjourned pending the Court's ruling on the
motion for temporary restraining order.
On August 25, 2003, the Court issued an order overruling Plaintiffs'
motion for temporary restraining order finding that, even though
Shepard's press releases were incomplete, it did not constitute a
showing of a likelihood of proving a violation of SEC rules.
Plaintiffs subsequently withdrew their motion for a preliminary
injunction that was scheduled for reconvened hearing on Tuesday,
September 2, 2003.
On August 25, 2003, Plaintiffs filed an amended supplemental
complaint which added new claims relating to Shepard's August 21
press release. They also added a "tipster" claim which alleges that
several of Shepard's neighbors and acquaintances were tipped off to
Shepard's plans and bought shares in STFC based upon Shepard's tips.
Shepard has filed a motion to dismiss the amended supplemental
complaint.
22
Potential Litigation over Misuse of Trade Name and Mark
On September 2, 2003, legal counsel for State Auto Mutual sent
Shepard a letter demanding that he immediately discontinue use of
"State Auto" in the Offeror's name. State Auto Mutual has been using
the "STATE AUTO(R)" name and mark since 1963. State Auto Mutual owns
Incontestable U.S. Federal Registration No. 1,610,097 for its "STATE
AUTO(R)" mark. State Auto Mutual has used its "STATE AUTO(R)" name
and mark for 40 years and has the exclusive right to use "STATE
AUTO(R)" in connection with its business and activities. Shepard's
adoption and use of "State Auto" for the name of Offeror can only
generate confusion among the relevant public as to the origin or
sponsorship of Shepard's activities, while trading on State Auto
Mutual's goodwill and eroding the distinctive character of its
valuable mark.
Certain Other Legal Matters
Control Share Acquisition Statute. The Ohio Control Share
Acquisition Statute provides that a control share acquisition can
proceed only after shareholder review and approval. Control share
acquisitions are acquisitions, directly or indirectly, by any person
of shares of an Ohio public corporation that, when added to all
other shares of the company for which such person may exercise or
direct the voting power, would entitle such person, immediately
after such acquisition, to exercise or direct the exercise of at
least 20 percent of the voting power of the company in the election
of directors. The acquiring person may make the control share
acquisition if (a) shareholders who hold shares as of the record
date entitling them to vote in the election of directors authorize
the acquisition at a special meeting by both: (1) an affirmative
vote of a majority of the voting power represented at the meeting in
person or by proxy; and (2) an affirmative vote of a majority of the
portion of voting power, excluding the voting power of "interested
shares", represented at the meeting, and (b) the control share
acquisition is consummated no later than 360 days following
shareholder authorization of the control share acquisition. A quorum
is present if at least a majority of the voting power of the company
in the election of directors is represented at the meeting in person
or by proxy.
"Interested shares" means the shares as to which any of the
following persons may exercise or direct the exercise of the voting
power in the election of directors: (a) the acquiring person, which
in the present case is Offeror, (b) any officer elected or appointed
by directors, (c) any employee who is also a director, (d) any
person that acquires such Shares for valuable consideration during
the period beginning on the date of the first public disclosure of
the proposed Tender Offer and ending on the record date for the
meeting if either (i) consideration paid by the acquiror exceeds
$250,000 or (ii) the number of shares acquired exceeds 1/2 of 1% of
the outstanding shares of the corporation entitled to vote in
election, or (e) any person that transfers such shares for valuable
consideration after the record date for the meeting as to the shares
so transferred, if accompanied by the
23
voting power in the form of a blank proxy, an agreement to vote as
instructed by the transferee, or otherwise.
Pursuant to the Ohio Control Share Acquisition Statute, the Board of
Directors is required to call a special meeting of shareholders for
purposes of voting on the proposed control share acquisition within
ten days after receipt by the Company of the acquiring person
statement that complies with the Ohio Control Share Acquisition
Statute. The Board of Directors, after consultation with legal
counsel, believes that the acquiring person statement delivered by
Offeror does not comply with the Ohio Control Share Acquisition
Statute and as a result, has not called a shareholder meeting.
Merger Moratorium Statute. Section 1704 of the Ohio Revised Code
(the "Merger Moratorium Statute") provides for a moratorium on
certain types of acquisition transactions, including the merger
described in the proposed Tender Offer, by an interested shareholder
for a period of three years after such person became an interested
shareholder, unless prior to the interested shareholder's share
acquisition date, the directors of the corporation have approved the
transaction by the interested shareholder on the interested
shareholder's share acquisition date. The moratorium is not
applicable to certain types of transactions and situations, which
are not relevant in the present situation.
An interested shareholder is a person, other than (a) the company,
(b) its subsidiaries, (c) employee stock ownership plans or benefits
plans of the company or its subsidiaries, and (d) trustees or
fiduciaries of such plans acting in such capacity, who is the
beneficial owner of a sufficient number of shares of the company
that when added to all other shares of the company in respect of
which that person may exercise or direct the exercise of voting
power, would entitle that person, directly or indirectly, along or
with others, to exercise or direct the exercise of 10% of voting
power in election of directors after taking into account all of that
person's beneficially owned shares that are not currently
outstanding.
After three years, an interested shareholder may engage in a
previously prohibited transaction if, among other things, at least
one of the following is satisfied: (a) prior to the interested
shareholder's share acquisition date, the directors of the company
had approved the purchase of shares by the interested shareholder on
the interested shareholder's acquisition date; (b) the transaction
is approved at a meeting held for that purpose by the affirmative
vote of the holders of shares of the corporation entitling them to
exercise at least two-thirds of the voting power of the corporation
in the election of directors and further provided that the
transaction is also approved by the affirmative vote of the holders
of at least a majority of the shares owned by persons that are not
interested shareholders, or affiliates or associates thereof; or (c)
the transaction meets certain tests relating to the amount and form
of consideration to be received per share by the holders of all
outstanding shares of the corporation not beneficially owned by the
interested shareholder.
24
The Board of Directors has resolved that neither (i) the purchase of
Shares by Offeror or Shepard nor (ii) any transaction constituting a
Chapter 1704 Transaction, as defined in Section 1704.01(B) of the
Ohio Revised Code with, into or involving Offeror and/or Shepard,
directly or indirectly, will be deemed approved for purposes of the
Merger Moratorium Statute.
Control Bid Statutes. Sections 1707.041, 1707.042, 1707.043, 1707.23
and 1707.26 of the Ohio Revised Code (collectively, the "Control Bid
Statutes") regulate tender offers. The Control Bid Statutes apply to
the purchase of, or offer to purchase, any equity security of a
subject company from a resident of Ohio if, after the purchase,
Offeror would directly or indirectly be the beneficial owner of more
than 10% of any class of issued and outstanding equity securities of
the company (a "Control Bid"). A subject company includes an issuer,
such as STFC, that either has its principal place of business or
principal executive offices located in Ohio or owns or controls
assets located in Ohio that have a fair market value of at least one
million dollars, and that either (a) more than ten percent of its
beneficial or record equity security holders are resident in Ohio,
(b) more than ten percent of its equity securities are owned
beneficially or of record by residents in Ohio, or (c) more than one
thousand of its beneficial or record equity security holders are
resident in Ohio. Notwithstanding the definition of subject company
contained in the Control Bid Statutes, the Ohio Division, by rule or
an adjudicatory proceeding, may make a determination that an issuer
does not constitute a subject company if appropriate review of
Control Bids involving the issuer is to be made by any regulatory
authority of another jurisdiction. The Ohio Division has not adopted
any rules under this provision.
The Control Bid Statutes prohibit an offeror from making a Control
Bid for securities of a subject company pursuant to a tender offer
until Offeror has filed specified information with the Ohio
Division. In addition, Offeror is required to deliver a copy of such
information to the subject company not later than Offeror's filing
with the Ohio Division and to send or deliver such information and
the material terms of this proposed offer to all offerees in Ohio as
soon as practicable after Offeror's filing with the Ohio Division.
Within five calendar days of such filing, the Ohio Division may by
order summarily suspend the continuation of the Control Bid if it
determines that Offeror has not provided all of the specified
information or that the Control Bid materials provided to offerees
do not provide full disclosure of all material information
concerning the Control Bid. If the Ohio Division summarily suspends
a Control Bid, it must schedule and hold a hearing within ten
calendar days of the date on which the suspension is imposed and
must make its determination within three calendar days after the
hearing has been completed but no later than 14 calendar days after
the date on which the suspension is imposed. The Ohio Division may
maintain its suspension of the continuation of the Control Bid if,
based upon the hearing, it determines that all of the information
required to
25
be provided by the Control Bid Statutes has not been provided by
Offeror, that the Control Bid materials provided to offerees do not
provide full disclosure of all material information concerning the
Control Bid, or that the Control Bid is in material violation of any
provision of the Ohio securities laws. If, after the hearing, the
Ohio Division maintains the suspension, Offeror has the right to
correct the disclosure and other deficiencies identified by the Ohio
Division and to reinstitute the Control Bid by filing new or amended
information pursuant to the Control Bid Statutes.
STFC is a subject company pursuant to the Control Bid Statutes and
the proposed Tender Offer constitutes a Control Bid for securities
of the Company pursuant to a tender offer.
On August 22, 2003, the Ohio Division received a filing by Offeror
under the Control Bid Statutes. As noted in Item 4 above, to the
knowledge and belief of the Board of Directors, notwithstanding
their undertaking on August 27, 2003, to the Ohio Division, Shepard
and Offeror had not filed an amendment to their Schedule TO
reflecting changes in the Proposed Transaction and related
disclosures, required or requested by the Ohio Division in
connection with its review of the filing made by Shepard and Offeror
under the Control Bid Statutes.
(b) Regulatory Matters.
Ohio Insurance Company Statute. Section 3901.321 of the Ohio Revised
Code (the "Ohio Insurance Company Statute") regulates the
acquisition of direct or indirect control of an Ohio domestic
insurance company (an "OH Domestic Insurer") or its holding company.
A person who directly or indirectly possesses the power to direct or
cause the direction of the management and policies of an OH Domestic
Insurer or its holding company, whether through the ownership of
voting securities or by contract or otherwise, is presumed to
"control" that OH Domestic Insurer. Control is deemed to exist if a
person directly or indirectly holds or has the power to vote ten
percent (10%) or more of the voting stock of an OH Domestic Insurer
or its holding company. Unless the Ohio Department of Insurance (the
"OH DOI") has approved the proposed transaction, no person, such as
Offeror, shall do any of the following if, as a result, the person
would, directly or indirectly, be in control of an Ohio Domestic
Insurer: (i) make a tender offer for any voting security of an OH
Domestic Insurer or its holding company; (ii) make a request or
invitation for tenders of any voting security of an OH Domestic
Insurer or its holding company; (iii) enter into any agreement to
exchange securities of an OH Domestic Insurer or its holding
company; (iv) seek to acquire or acquire, in the open market or
otherwise, any voting security of an OH Domestic Insurer or its
holding company; or (v) enter into an agreement to merge with, or
otherwise to acquire control of, an OH Domestic Insurer or its
holding company. STFC is an insurance holding company for State Auto
Insurance Company of Ohio and State Auto National Insurance Company,
each of which is an OH Domestic Insurer. The proposed Tender Offer
as well as
26
Offeror's condition to acquire control of State Auto Mutual's Board
of Directors each accordingly requires the approval of the OH DOI
pursuant to the OH Insurance Company Statute.
Pursuant to the OH Insurance Company Statute, before a person, such
as Offeror, may acquire control of an OH Domestic Insurer, the OH
DOI and the OH Domestic Insurer must receive specified information
from that person on a "Form A". The OH DOI may deny approval of an
acquisition of control if, after a public hearing, it finds any of
the following: (i) after the change of control, the domestic insurer
would not be able to satisfy the requirements for the issuance of a
license to write the lines of insurance for which it is presently
licensed; (ii) the effect of the merger or acquisition would
substantially lessen competition in the insurance in the state or
tends to create a monopoly; (iii) the financial condition of any
acquiring party might jeopardize the financial stability of the
domestic insurer or interests of its policyholders; (iv) the plans
that the acquiring party has to liquidate the domestic insurer, sell
its assets, merge it with any person or make any material change in
its business or corporate structure, are unfair and unreasonable to
the interests of the policyholders of the domestic insurer and not
in the public interest; (v) the competence, experience and integrity
of those persons that would control the domestic insurer are such
that it would not be in the interest of the policyholders to permit
the merger or acquisition; or (vi) the acquisition is likely to be
hazardous or prejudicial to the insurance-buying public.
South Carolina Insurance Company Statute. Section 38-21-10, et. seq.
of the Code of Laws of South Carolina (the "SC Insurance Company
Statute") regulates the acquisition of direct or indirect control of
a South Carolina insurance company (a "SC Domestic Insurer") or its
holding company. As defined in the SC Insurance Company Statute,
control is presumed to exist if any person, directly or indirectly,
owns, controls, holds with the power to vote, or holds proxies
representing 10% or more of the voting securities of a SC Domestic
Insurer or its holding company. Unless the South Carolina Department
of Insurance (the "SC DOI") has approved the proposed transaction,
no person, such as Offeror, may do any of the following if, after
the consummation, the person would be in control of a SC Domestic
Insurer or its holding company: (i) make a tender offer for any
voting security of a SC Domestic Insurer or its holding company;
(ii) make a request or invitation for tenders of any voting security
of a SC Domestic Insurer or its holding company; (iii) enter into
any agreement to exchange securities of a SC Domestic Insurer or its
holding company; (iv) seek to acquire or acquire, in the open market
or otherwise, any voting security of a SC Domestic Insurer or its
holding company; or (v) enter into an agreement to merge with, or
otherwise to acquire control of, a SC Domestic Insurer or its
holding company. State Auto P&C is a SC Domestic Insurer and the
wholly owned subsidiary of STFC. Offeror's proposed Tender Offer for
shares of STFC accordingly requires the approval of the SC DOI under
the SC Insurance Company Statute.
27
Pursuant to the SC Insurance Company Statute, a person seeking
control of a SC Domestic Insurer must submit to the SC DOI
information as specified therein and in the regulations promulgated
thereunder. The SC DOI may deny approval of an acquisition of
control if, after a public hearing, it finds any of the following:
(i) after the change of control, the SC Domestic Insurer will not be
able to satisfy the requirements for the issuance of a license to
write the lines of insurance for which it is presently licensed;
(ii) the effect of the acquisition of control would substantially
lessen competition in insurance in South Carolina or tend to create
a monopoly; (iii) the financial condition of the acquiring party
might jeopardize the financial stability of the SC Domestic Insurer
or prejudice the interest of its policyholders; (iv) the plans which
the acquiring party has to liquidate the SC Domestic Insurer, sell
its assets, consolidate or merge it with a person, or make another
material change in its business or corporate structure or management
are unfair and unreasonable to policyholders of the SC Domestic
Insurer and not in the public interest; (v) the competence,
experience and integrity of those persons who would control the
operation of the SC Domestic Insurer are such that it is not in the
interest of the policyholders of the SC Domestic Insurer and of the
public to permit the acquisition of control; or (vi) the acquisition
is likely to be hazardous or prejudicial to the insurance buying
public.
South Dakota. Section 58-5A-1, et. seq., of the South Dakota
Codified Laws (the "SD Insurance Company Statute") regulates the
acquisition of control with a South Dakota domestic insurer (a "SD
Domestic Insurer") or its holding company. As defined in the SD
Insurance Company Statute, control is presumed to exist if any
person, directly or indirectly, owns, controls, holds with the power
to vote, or holds proxies representing, 10% or more of the voting
securities of that insurer. Unless the South Dakota Division of
Insurance (the "SD DOI") has approved the proposed transaction, no
person, such as Offeror, shall do any of the following if, after the
consummation, the person would be in control of a SD Domestic
Insurer or its holding company: (i) make a tender offer for any
voting security of a SD Domestic Insurer or its holding company;
(ii) make a request or invitation for tenders of any voting security
of a SD Domestic Insurer or its holding company; (iii) enter into
any agreement to exchange securities of a SD Domestic Insurer or its
holding company; (iv) seek to acquire or acquire, in the open market
or otherwise, any voting security of a SD Domestic Insurer or its
holding company; or (v) enter into an agreement to merge with, or
otherwise to acquire control of, a SD Domestic Insurer or its
holding company. Milbank Insurance Company is a SD Domestic Insurer
and the wholly owned subsidiary of STFC. Offeror's proposed Tender
Offer for shares of STFC accordingly requires the approval of the SD
DOI pursuant to the SD Insurance Company Statute.
Pursuant to the SD Insurance Company Statute, a person seeking
control of a SD Domestic Insurer or its holding company must submit
to the SD DOI and the SD Domestic Insurer information as specified
therein and in the regulations promulgated thereunder. The SD DOI
may deny approval of the acquisition of control if, after a public
hearing, it finds any of the following: (i) after the change
28
of control, the SD Domestic Insurer is not able to satisfy the
requirements for the issuance of a license to write the lines of
insurance for which it is presently licensed; (ii) the effect of the
acquisition of control would substantially lessen competition in
insurance in South Dakota or tend to create a monopoly; (iii) the
financial condition of the acquiring party might jeopardize the
financial stability of the SD Domestic Insurer or prejudice the
interest of its policyholders; (iv) the plans or proposals which the
acquiring party has to liquidate the SD Domestic Insurer, sell its
assets, consolidate or merge it with a person, or make another
material change in its business or corporate structure or management
are unfair and unreasonable to policyholders of the SD Domestic
Insurer and not in the public interest; (v) the competence,
experience and integrity of those persons who would control the
operation of the SD Domestic Insurer are such that it is not in the
interest of the policyholders of the SD Domestic Insurer and of the
public to permit the acquisition of control; or (vi) the acquisition
of control is likely to be hazardous or prejudicial to the insurance
buying public.
Iowa Insurance Company Statute. Section 521A.3 of the Iowa Code (the
"IA Insurance Company Statute") regulates the acquisition of direct
or indirect control of an Iowa domestic insurance company (an "IA
Domestic Insurer") or its holding company. Any person who, directly
or indirectly, owns, controls, holds with the power to vote, or
holds proxies representing, ten percent (10%) or more of the voting
securities of an IA Domestic Insurer or its holding company is
presumed to "control" that IA Domestic Insurer. Unless the
commissioner of the Iowa Insurance Division (the "IID") has approved
the proposed transaction, no person, such as Offeror, shall (a) make
a tender offer for or a request or invitation for tenders of, or
enter into any agreement to exchange securities for, seek to
acquire, or acquire, any voting security of an IA Domestic Insurer
or its holding company if, after the consummation thereof, such
person would, directly or indirectly, be in control of the IA
Domestic Insurer or its holding company, or (b) enter into an
agreement to merge with or acquire control of the IA Domestic
Insurer or its holding company. STFC is an insurance holding company
whose subsidiaries include Farmers Casualty and Mid-Plains, both of
which are Iowa domiciled insurance companies. Offeror's proposed
tender offer for shares of STFC accordingly requires the approval of
the IID pursuant to the IA Insurance Company Statute.
Pursuant to the IA Insurance Company Statute, a person seeking to
acquire control of an IA Domestic Insurer must provide the IID and
the domestic insurer with a "Form A" statement containing specified
information. A public hearing shall be held within thirty days after
the filing of the Form A. Following the public hearing, the IID
shall approve the acquisition of control if the acquiring party has
demonstrated to the IID all of the following: (i) after the change
of control the IA Domestic Insurer will be able to satisfy the
requirements for the issuance of a license to write the line or
lines of insurance for which it is presently licensed; (ii) the
effect of the acquisition of control will not substantially lessen
competition in insurance in Iowa; (iii) the financial condition of
any acquiring
29
party will not jeopardize the financial stability of the IA Domestic
Insurer, or prejudice the interest of its policyholders; (iv) the
plans the acquiring party has to liquidate the IA Domestic Insurer,
sell its assets or merge it with any person, or to make any other
material change in its business or corporate structure or management
are not unfair or unreasonable to policyholders of the IA Domestic
Insurer and are not contrary to the public interest; and (v) the
competence, experience, and integrity of those persons who would
control the IA Domestic Insurer are sufficient to indicate that the
interests of policyholders of the IA Domestic Insurer and of the
public will not be jeopardized by the acquisition of control.
Wisconsin Acquisition Rule. Wisconsin Administrative Code Ins. 40.02
(the "WI Acquisition Rule") regulates the acquisition of control of
a Wisconsin domestic insurer ("WI Domestic Insurer") or its holding
company. Under the WI Acquisition Rule, control means the
possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of a person, whether
through the ownership of voting securities, by contract, by common
management or otherwise. Unless the Wisconsin Office of the
Commissioner of Insurance (the "WI OCI") approves the proposed
transaction, no person, such as Offeror, shall, inter alia, enter
into an agreement to merge with or otherwise acquire or attempt to
acquire control of a WI Domestic Insurer or its holding company.
SAWI is a WI Domiciled Insurer and the wholly owned subsidiary of
State Auto Mutual. Offeror's attempt to acquire control of State
Auto Mutual's Board of Directors accordingly requires approval of
the WI OCI pursuant to the WI Acquisition Rule.
Pursuant to the WI Acquisition Rule, no agreement with respect to
the acquisition of control of any WI Domestic Insurer or its holding
company may be executed or submitted for approval by the
shareholders of the WI Domestic Insurer or its holding company
without the approval of the WI OCI. The proposed acquisition of
control will be approved if, after a hearing, the WI OCI determines
that the proposed transaction is legal and not contrary to the
interests of the insured of the WI Domestic Insurer and the
following: (i) after the change of control, the WI Domestic Insurer
would be able to satisfy the requirements for the issuance of a
license to write lines of insurance for which it is presently
licensed; (ii) the effect of the merger or other acquisition of
control would not be to create a monopoly or substantially lessen
competition in insurance in this state; (iii) the financial
condition of any acquiring party is not likely to jeopardize the
financial stability of the WI Domestic Insurer or prejudice the
interests of its Wisconsin policyholders; (iv) the plan or proposals
which the acquiring party has to liquidate the WI Domestic Insurer
or its holding company, sell its assets, merge it with any person or
make any material change in its business or corporate structure, are
fair and reasonable to policyholders of the WI Domestic Insurer or
in the public interest; and (v) the competence and integrity of
those persons who would control the operation of the WI Domestic
Insurer or its holding company are such that it
30
would be in the interest of the policyholders of the insurer and of
the public to permit the acquisition of control.
Florida Insurance Company Statute. Section 628.461 of the Florida
Statutes (the "FL Insurance Company Statute") regulates the
acquisition of control of a Florida domestic insurance company (a
"FL Domestic Insurer"). Pursuant to the FL Insurance Company
Statute, unless the Florida Department of Insurance (the "FL DOI")
has approved the transaction, no person, such as Offeror, may, inter
alia, acquire, directly or indirectly, or otherwise finally acquire
10% or more (and in some cases 5% or more) of the outstanding voting
securities of a FL Domestic Insurer or of its holding company. State
Auto Mutual owns all (100%) of the issued and outstanding voting
shares of State Auto Florida Insurance Company, a FL Domestic
Insurer. Offeror's proposal to acquire control of State Auto
Mutual's Board of Directors accordingly requires the approval of the
FL DOI pursuant to the FL Insurance Company Statute.
Pursuant to the FL Insurance Company Statute, a person, such as
Offeror, must file a complete Acquisition of Controlling Interest of
a Domestic Insurer Application Package (the "Application"),
containing information specified in the FL Insurance Company Statute
and the administrative rules promulgated thereunder, with the FL DOI
and the FL Domestic Insurer before or within five days after
acquiring control of such FL Domestic Insurer. The FL DOI shall
approve a proposed acquisition if it finds that: (i) upon the
completion of the acquisition, the FL Domestic Insurer will be able
to satisfy the requirements for the issuance of a license to write
lines of insurance for which it is presently licensed; (ii) the
financial condition of the acquiring person will not jeopardize the
financial stability of the FL Domestic Insurer or prejudice the
interests of its policyholders or the public; (iii) any plan to
liquidate the FL Domestic Insurer or any controlling company, sell
its assets, merge or consolidate it with any person, or make any
major change in its business or corporate structure, is fair and
free of prejudice to the policyholders of the FL Domestic Insurer or
to the public; (iv) the competence, experience, and integrity of
those persons who will directly or indirectly control the operation
of the FL Domestic Insurer indicate that the acquisition is in the
best interest of the policyholders of the insurer and in the public
interest; (v) the natural persons for whom background information is
required to be furnished have such backgrounds to indicate that it
is in the best interests of the policyholders and the public to
permit such person to exercise control over the FL Domestic Insurer;
(vi) the officers and directors to be employed after the acquisition
have sufficient insurance experience and ability to assure
reasonable promise of successful operation; (vii) the management of
the FL Domestic Insurer after the acquisition will be competent and
trustworthy and make the proposed operation of such insurer not
hazardous to the insurance-buying public; (viii) the management of
the insurer after the acquisition will not include any person who
has, directly or indirectly, unlawfully manipulated the assets,
accounts, finances or books of any insurer or otherwise acted in bad
faith with respect to any insurer; (ix) the acquisition is not
likely to be hazardous or
31
prejudicial to the insurer's policyholders or the public; and (x)
the effect of the acquisition would not substantially lessen
competition in insurance or tend to create a monopoly in Florida.
Conversely, the FL DOI may disapprove an acquisition if it is made
by a person who has committed certain violations of the FL Insurance
Company Statute. An acquiring party, such as the Offeror, has the
burden of proof with respect to the statutory standards for approval
of an acquisition of control.
The acquisition of direct or indirect control of a FL Domestic
Insurer or its holding company shall be deemed approved unless the
FL DOI disapproves the acquisition within 90 days after the
acquiring person has filed the Application. The FL DOI may, or if
requested to do so in writing by a substantially affected party
shall, conduct a proceeding to consider the appropriateness of the
acquisition. The 90 day review period shall be tolled during the
pendency of such proceeding.
During the pendency of the FL DOI's review of any acquisition
subject to the FL Insurance Company Statute, an acquiring person,
such as Offeror, may not make any material change in the operation
of the FL Domestic Insurer or of a controlling company thereof
unless the FL DOI has specifically approved the change, nor may the
acquiring person make any material change in the management
(including directors) of the FL Domestic Insurer unless advance
written notice of the change in management (including directors) is
furnished to the FL DOI. The FL DOI may disapprove any material
change in operation or management if it finds that the statutory
grounds for approval of the acquisition (as described above) have
not been satisfied.
Indiana Insurance Company Statute. Indiana Code Section 27-1-23-2
(the "IN Insurance Company Statute") regulates the acquisition of
direct or indirect control of an Indiana domestic insurance company
(an "IN Domestic Insurer") or its holding company. Any person who
possesses, directly or indirectly, the power to direct or cause the
direction of the management and policies of an IN Domestic Insurer
or its holding company, whether through the beneficial ownership of
voting securities, by contract, or otherwise, is presumed to
"control" the IN Domestic Insurer. Unless the proposed transaction
has been approved by the Indiana Department of Insurance ("IN DOI"),
no person, such as Offeror, shall, inter alia, enter into an
agreement to acquire control of a domestic insurer or of any
corporation controlling an IN Domestic Insurer. Meridian Security
and Meridian Citizens Security are Indiana domiciled stock insurance
companies owned by MIGI. Meridian Citizens Mutual is an Indiana
domiciled mutual insurance company, which is controlled by MIGI
through an affiliation agreement. MIGI is wholly owned by STFC.
Pursuant to the IN Insurance Company Statute, a person seeking to
acquire control of an IN Domestic Insurer must provide the IN DOI
and the IN Domestic Insurer with a "Form A" statement containing
specified information. A public
32
hearing shall be held within 60 days after the filing of the Form A
or at such later date as the IN DOI determines upon a showing of
good cause. Following the public hearing, the IN DOI shall approve
the acquisition of control only if it finds, by a preponderance of
the evidence, that: (i) the acquisition of control would not tend to
affect adversely the contractual obligations of the domestic insurer
or its ability and tendency to render service in the future to its
policyholders and the public; (ii) the effect of the acquisition of
control would not be substantially to lessen competition in any line
of insurance business in any section of Indiana or tend to create a
monopoly therein; (iii) the financial condition of any acquiring
party is not such as might jeopardize the financial stability of the
domestic insurer or of any corporation controlling such insurer, or
prejudice the interest of its policyholders; (iv) the plans any
acquiring party has to liquidate the domestic insurer or any such
controlling corporation, sell its assets or merge it with any
person, or to make any other material change in its investment
policy, business, corporate structure, or management are fair and
reasonable to policyholders of the domestic insurer and in the
public interest; and (v) the competence, experience, and integrity
of those persons who would control the domestic insurer are such
that the acquisition of control would not tend to affect adversely
the general capacity or intention of the domestic insurer to
transact the business of insurance in a safe and prudent manner.
Michigan Requalification Requirement. Pursuant to Section 500.405 of
the Michigan Compiled Laws, the certificate of authority of an
insurer licensed to do business as a foreign insurer in Michigan is
revoked unless, within 90 days of a change of control: (i) the
insurer requalifies for a certificate of authority or (ii) the
Michigan Office of Financial and Insurance Services finds that the
insurer, after the change of control, meets certain statutory
standards, including the maintenance of at least an A- A.M. Best's
rating. As defined in Section 500.115 of the Michigan Compiled Laws,
control is presumed to exist if any person, by formal or informal
arrangement, device, or understanding, directly or indirectly, owns,
controls, holds with the power to vote, or holds proxies
representing 10% or more of the voting securities of any other
person. State Auto Mutual, State Auto P&C, Meridian Security, and
Meridian Citizens Mutual are licensed in Michigan. A person seeking
to acquire control of an insurer licensed to do business as a
foreign insurer in Michigan may request the Michigan Office of
Financial and Insurance Services to determine whether or not the
insurer would requalify for a certificate of authority in advance of
the change of control.
(c) Forward-Looking Statements
Forward-Looking Statements. Statements contained in this Statement
or any other reports or documents prepared by the Company or made by
management may be "forward-looking" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to certain risks and
uncertainties that could cause the Company's actual results to
differ
33
materially from those projected. Forward-looking statements may be
identified, preceded by, followed by, or otherwise include, without
limitation, words such as "plans," "believes," "expects,"
"anticipates," "intends," "estimates," or similar expressions.
Certain statements made in this Statement indicating the Company's
or management's or its board of directors' or any board of directors
committee's intentions, beliefs, expectations or predictions for the
future are forward-looking statements. Such forward-looking
statements are not guarantees of future performance and may involve
known and unknown risks, uncertainties and other factors including
those detailed from time to time in the Company's filings with the
SEC.
Item 9. Exhibits.
Item No. Description of Exhibit
-------- ----------------------
99a(1) STFC Press Release issued September 2, 2003
99a(2) Letter from State Auto Mutual to Shepard dated June 4, 2003
99a(3) Letter from State Auto Mutual to Shepard dated June 13, 2003
99a(4) Letter from State Auto Mutual to Shepard dated June 30, 2003
99a(5) Letter from Robert H. Moone, Chairman and Chief Executive
Officer of STFC, to Shepard dated September 2, 2003
99a(6) Letter from Robert H. Moone, Chairman and Chief Executive
Officer of State Auto Mutual, to Shepard dated September 2, 2003
99e(1) STFC 2003 Proxy Statement
99e(2) Amended and Restated Put Agreement
99e(3) Amended and Restated Credit Agreement
99e(4 Amended and Restated Standby Purchase Agreement
99e(5) STFC Code of Regulations
99e(6) Indemnification Agreement
34
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
STATE AUTO FINANCIAL CORPORATION
Dated: September 2, 2003 By /s/ John R. Lowther
----------------------------------
John R. Lowther
Senior Vice President, General
Counsel and Secretary
35
EXHIBIT INDEX
Item No. Description of Exhibit
-------- ----------------------
99a(1) STFC Press Release issued September 2, 2003
99a(2) Letter from State Auto Mutual to Shepard dated June 4, 2003
99a(3) Letter from State Auto Mutual to Shepard dated June 13, 2003
99a(4) Letter from State Auto Mutual to Shepard dated June 30, 2003
99a(5) Letter from Robert H. Moone, Chairman and Chief Executive
Officer of STFC, to Shepard dated September 2, 2003
99a(6) Letter from Robert H. Moone, Chairman and Chief Executive
Officer of State Auto Mutual, to Shepard dated September 2, 2003
99e(1) STFC 2003 Proxy Statement
99e(2) Amended and Restated Put Agreement
99e(3) Amended and Restated Credit Agreement
99e(4) Amended and Restated Standby Purchase Agreement
99e(5) STFC Code of Regulations
99e(6) Indemnification Agreement
36