On August 30, 2012, Flagstone Reinsurance Holdings, S.A. ( “Flagstone”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Validus Holdings, Ltd. (“Validus”), Validus UPS, Ltd., a wholly-owned subsidiary of Validus (“Merger Sub”), and Flagstone Reinsurance Holdings (Bermuda) Limited, a wholly-owned subsidiary of Flagstone (“Flagstone Bermuda”).
The Merger Agreement provides for (a) the merger of Flagstone with and into its wholly-owned subsidiary Flagstone Bermuda pursuant to which Flagstone Bermuda will survive as the intermediate company (the “First-Step Merger”), and (b) immediately following the First-Step Merger, the merger of Flagstone Bermuda with and into Merger Sub pursuant to which Merger Sub will be the surviving company (the “Second-Step Merger” and together with the First-Step Merger, the “Mergers”) such that, immediately following the Mergers, the successor-in-interest to Flagstone will be a wholly-owned subsidiary of Validus.
Pursuant to the Merger Agreement, at the closing, (a) each outstanding share of Flagstone will be automatically converted pursuant to the First-Step Merger into one common share of Flagstone Bermuda and (b) each outstanding common share of Flagstone Bermuda will then be automatically converted pursuant to the Second-Step Merger into the right to receive 0.1935 Validus voting common shares and $2.00 in cash, without interest and less any applicable withholding tax (collectively, the “Merger Consideration”).
All Flagstone restricted share unit awards and performance share unit awards outstanding immediately prior to the Mergers generally will be cancelled and converted into the right to receive a number of fully vested Validus voting common shares and cash for each Flagstone share underlying such awards based on the Merger Consideration and cash equal to any accumulated dividends declared with respect to the applicable award, with the consideration payable in respect of performance share units to be determined assuming the achievement of all performance goals at maximum. In addition, the outstanding warrant to purchase Flagstone shares held by Leyton Limited will be amended such that following the Mergers it will represent a warrant to acquire Validus voting common shares and cash for each Flagstone share underlying such warrant based on the Merger Consideration.
The Merger Agreement is governed by New York law except to the extent Luxembourg law or Bermuda law is mandatorily applicable, and is subject to the jurisdiction of New York courts except to the extent any such proceeding manditorily must be brought in Luxembourg or Bermuda. For United States Federal income tax purposes, each of the First-Step Merger and Second-Step Merger are intended to qualify as a “reorganization” under the provisions of Section 368(a) of the United States Internal Revenue Code of 1986, as amended.
The Merger Agreement contains customary representations, warranties and covenants of Validus and Flagstone, including covenants to conduct their respective businesses in the ordinary course during the interim period between the execution of the Merger Agreement and consummation of the Mergers, not to engage in certain types of transactions during this interim period, to use their respective reasonable best efforts to take all actions necessary to cause the conditions to closing to be satisfied as promptly as reasonably practicable and to use their respective reasonable best efforts to obtain all necessary governmental and regulatory approvals.
Flagstone has agreed that neither it nor any of its subsidiaries nor any of the officers and directors of it or its subsidiaries shall solicit, initiate or knowingly facilitate or encourage (including by providing non-public information) any effort or attempt to make or implement any competing proposal or offer, as further described in the Merger Agreement. Flagstone has also agreed to take reasonable best efforts to ensure that its and its subsidiaries’ representatives and affiliates do not take any such actions. These restrictions are subject to a “fiduciary out” provision that permits Flagstone to provide non-public information and participate in discussions or negotiations with respect to a competing proposal that Flagstone’s board of directors determines in good faith, after consultation with its financial advisors and outside legal counsel, that the failure to do so would violate or result in a breach of the directors’ fiduciary duties under the laws of Luxembourg. Flagstone’s board of directors does not have the right to terminate the Merger Agreement (a) to accept a competing proposal or (b) if Flagstone’s board of directors withholds, withdraws modifies or qualifies its recommendation to Flagstone shareholders to approve the transactions contemplated by the Merger Agreement. However, Flagstone’s board of directors may, subject to certain procedural requirements set forth in the Merger Agreement, withhold, withdraw modify or qualify its recommendation to Flagstone shareholders to approve the transactions contemplated by the Merger Agreement in the event that the board of directors of Flagstone determines in good faith, after consultation with its financial advisors and outside legal counsel, that failure to do so would violate or result in a breach of the directors’ fiduciary duties under the laws of Luxembourg. Therefore, unless Validus terminates the Merger Agreement following a change in recommendation by Flagstone’s board of directors, the transactions contemplated by the Merger Agreement will be submitted to a vote of Flagstone’s shareholders even if Flagstone’s board of directors has changed its recommendation.
Consummation of the Mergers is subject to certain customary conditions, including approval by Flagstone’s shareholders as described below, receipt of required regulatory approvals, listing of the Validus voting common shares to be issued as Merger Consideration on the New York Stock Exchange, effectiveness of Validus’ registration statement on Form S-4 and receipt of customary opinions relating to certain tax matters from the parties’ respective legal counsels. Consummation of the Mergers is not subject to a financing condition or contingency.
In addition, a condition to closing for each of Validus and Flagstone is that (a) the other party’s book value as of a specified “measurement date” shall be equal to or greater than 50% of such other party’s book value as of December 31, 2012, and (b) on a percentage basis, the decline in the other party’s book value between December 31, 2012 and the measurement date shall not be more than 20 percentage points greater than the decline (if any) on a percentage basis during such period of the book value of the party (for the avoidance of doubt disregarding any increase) asserting the condition. In the event that such condition is asserted and not satisfied, the party asserting such condition may terminate the Merger Agreement. The “measurement date” under the Merger Agreement will be the first business day following the satisfaction or (to the extent permitted by applicable law) waiver by the party entitled to the benefits thereof of the conditions set forth in the Merger Agreement, other than the conditions relating to book value described above and those conditions that by their nature are to be satisfied at the closing.
Flagstone must obtain the approval of at least 75% of the Flagstone shares present or represented at a special general meeting of Flagstone’s shareholders to approve the Merger Agreement, the First-Step Merger and the statutory merger agreement required to be entered into in connection with the First-Step Merger (the “First-Step Merger Agreement”). Flagstone, in its capacity as sole shareholder of Flagstone Bermuda, has (a) with respect to the First-Step Merger, approved the Merger Agreement, the First-Step Merger and the First-Step Merger Agreement and (b) with respect to the Second-Step Merger, approved the Merger Agreement, the Second-Step Merger and the statutory merger agreement required to be entered into in connection with the Second-Step Merger. The Mergers do not require the vote or approval of Validus’ shareholders.
In addition to the termination rights related to specified declines in the book value of either Flagstone or Validus that are described above, the Merger Agreement contains certain other customary termination rights for both Validus and Flagstone, including (a) if the Mergers are not consummated on or before March 31, 2013 and (b) if the approval of Flagstone shareholders is not obtained.
The Merger Agreement provides that Validus will be entitled to receive a termination fee of $24.16 million (the “Termination Fee”) from Flagstone if Validus terminates the Merger Agreement due to a change or withdrawal by Flagstone’s board of directors of its recommendation of the transaction or if Flagstone willfully and materially breaches its covenants relating to non-solicitation or the convening of Flagstone’s shareholder meeting to approve the transactions contemplated by the Mergers. The Termination Fee is also payable to Validus if either Validus or Flagstone terminates the Merger Agreement either because the required approval of Flagstone’s shareholders is not obtained or the Mergers have not been consummated on or prior to March 31, 2013 and, among other things, Flagstone enters into a definitive agreement with respect to or consummates a competing proposal within twelve months of the termination of the Merger Agreement. In addition, in the event that the approval of Flagstone’s shareholders is not obtained, Flagstone will under certain circumstances be required to pay to Validus an amount equal to $6 million (which would be netted against any subsequent termination fee payable by Flagstone).
The Mergers are expected to close in the fourth quarter of 2012, subject to the conditions described above.
The representations, warranties and covenants of Validus, Merger Sub, Flagstone and Flagstone Bermuda contained in the Merger Agreement have been made solely for the benefit of the parties thereto. In addition, such representations, warranties and covenants (a) have been made only for purposes of the Merger Agreement, (b) have been qualified by (i) matters specifically disclosed in Validus’ and Flagstone’s filings with the United States Securities and Exchange Commission and (ii) confidential disclosures made in the disclosure letters delivered in connection with the Merger Agreement, (c) are subject to materiality qualifications contained in the Merger Agreement which may differ from what may be viewed as material by investors, (d) were made only as of the date of the Merger Agreement or such other date as is specified in the Merger Agreement and (e) have been included in the Merger Agreement for the purpose of allocating risk between the contracting parties rather than establishing matters as fact. Accordingly, the Merger Agreement is included with this filing only to provide investors with information regarding the terms of the Merger Agreement, and not to provide investors with any other factual information regarding Validus, Flagstone or their respective businesses. Investors should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of Validus, Flagstone or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in Validus’ or Flagstone’s public disclosures.
The foregoing description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to and qualified in its entirety by reference to the Merger Agreement, a copy of which is filed as Exhibit 2.1 to this Form 8-K and is incorporated herein by reference.