Old Guard Insurance completes conversion
LANCASTER, Pa.--Feb. 13, 1997--Old Guard Group, Inc. announced that on Feb. 11, 1997, Old Guard Mutual Insurance
Company, Old Guard Mutual Fire Insurance Company and Goschenhoppen- Home Mutual Insurance Company (the
"Insurance Companies") completed the mutual to stock conversion contemplated by their Joint Plan of Conversion (the
"Plan").
The Plan was adopted by the Company and the Insurance Companies on May 31, 1996, amended on July 19, 1996 and Jan.
10, 1997, and approved by the Insurance Department of the Commonwealth of Pennsylvania on Dec. 27, 1996.
At special meetings of policyholders held on Feb. 11, 1997, the Plan was approved by the Insurance Companies'
policyholders. The Company plans to make an announcement in the near future regarding the date Old Guard stock will begin
trading.
Pursuant to the Plan, among other things: (i) the Insurance Companies converted from mutual to stock form, (ii) the Company
simultaneously purchased all of the authorized capital stock of each Insurance Company, and (iii) the Company sold
approximately 3,955,000 shares of common stock at $10 per share to policyholders and an Employee Stock Ownership Plan.
The conversion of the Insurance Companies to stock form, the issuance of capital stock of the Insurance Companies to the
Company and the offer and sale of the common stock of the Company pursuant to the Plan are collectively referred to herein
as the "Conversion."
The Conversion is the first conversion of a financially sound mutual insurance company to stock form under Pennsylvania's new
Mutual to Stock Conversion Act.
Attached is a Form 8-K that was filed today with the Securities and Exchange Commission. The 8-K was filed to insure
adequate dissemination of this information prior to commencement of trading of the Company's common stock. Substantially
similar information was included in the prospectus delivered to initial purchasers of the common stock.
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or
15(d) of
The Securities Exchange Act
of 1934
Date of Report (Date of earliest event
reported) Feb. 10, 1997
OLD GUARD GROUP, INC.
(Exact name of registrant as
specified in its charter)
Pennsylvania 0-21611
23-2852984
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(State or other jurisdiction
(Commission (IRS Employer
of incorporation) File Number)
Ident. No.)
2929 Lititz Pike, Lancaster, Pennsylvania
17601
-----------------------------------------
---------------------
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including
area code 717/569-5361
N/A
(Former name or former address, if
changed since last report.)
Item 5. Other Events.
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On Feb. 11, 1997, Old Guard Group, Inc. (the "Company") and Old Guard Mutual Insurance Company, Old Guard Mutual
Insurance Company and Goschenhoppen-Home Mutual Insurance Company (the "Insurance Companies") completed the
mutual to stock conversion contemplated by their Joint Plan of Conversion (the "Plan").
The Plan was adopted by the Company and the Insurance Companies on May 31, 1996, amended on July 19, 1996 and Jan.
10, 1997, and approved by the Insurance Department of the Commonwealth of Pennsylvania on Dec. 27, 1996. At special
meetings of policyholders held on Feb. 11, 1997, the Plan was approved by the Insurance Companies' policyholders.
Pursuant to the Plan, among other things: (i) the Insurance Companies converted from mutual to stock form, (ii) the Company
simultaneously purchased all of the authorized capital stock of each Insurance Company, and (iii) the Company sold
approximately 3,955,000 shares of common stock at $10 per share to policyholders and an Employee Stock Ownership Plan.
The conversion of the Insurance Companies to stock form, the issuance of capital stock of the Insurance Companies to the
Company and the offer and sale of the common stock of the Company pursuant to the Plan are collectively referred to herein
as the "Conversion." The Conversion is the first conversion of a financially sound mutual insurance company to stock form
under Pennsylvania's new Mutual to Stock Conversion Act.
Prior to completion of the Conversion, on Nov. 22, 1996, the Company and the Insurance Companies received an unsolicited
request from Donegal Group, Inc., a holding company of property and casualty insurance companies located, like the
Company and the Insurance Companies, in Lancaster County, Pa. ("Donegal") to merge with Donegal.
Donegal is the largest local competitor of the Insurance Companies. Donegal proposed that the Company and the Insurance
Companies amend the Plan to provide for the merger of the Company into Donegal in exchange for an aggregate payment of
$27.5 million to all policyholders of the Insurance Companies, or less than $200 per policyholder, assuming equal distribution
to all policyholders.
Because the Donegal proposal did not provide additional capital to the Insurance Companies and was inconsistent with their
strategic plan of continued independence, the Boards of Directors of the Company and the Insurance Companies determined
that the request was contrary to the best interests of the Insurance Companies and declined to consider the request.
The Department of Insurance of the Commonwealth of Pennsylvania subsequently denied Donegal's application to acquire Old
Guard.
On Jan. 7, 1997, the President of Donegal, Donald Nikolaus, purportedly in his individual capacity as a policyholder of Old
Guard Mutual Insurance Company, and through the same law firm that represents Donegal, filed in the Commonwealth Court
of Pennsylvania a Petition for Review of the approval of the Plan by the Insurance Department of the Commonwealth of
Pennsylvania.
The suit was filed against the Insurance Department of the Commonwealth of Pennsylvania, the Honorable Linda Kaiser, the
Pennsylvania Insurance Commissioner, the Company and the Insurance Companies.
Mr. Nikolaus contends that the Pennsylvania Insurance Company Mutual to Stock Conversion Act (the "Act"), which was
passed overwhelmingly by the Pennsylvania General Assembly and which permits the Conversion, is constitutionally defective
for procedural reasons and because the Plan does not provide for compensation to policyholders.
Mr. Nikolaus asked the Commonwealth Court to (1) declare the Act unconstitutional, (2) enjoin the holding of the special
meetings of policyholders to vote upon the Plan (the "Special Meetings"), and (3) direct the Insurance Department of the
Commonwealth of Pennsylvania to rescind its approval of the Plan.
On Feb. 6, 1997, the Commonwealth Court denied Mr. Nikolaus' request to enjoin the holding of the Special Meetings and
the litigation is expected to proceed.
Final adjudication of the case by the Commonwealth Court could take a year or more and the parties then could appeal any
decision to the Pennsylvania Supreme Court and possibly to the United States Supreme Court.
Such appeals, if made, could take an additional two to four years. The Insurance Department of the Commonwealth of
Pennsylvania, the Honorable Linda Kaiser, the Company and the Insurance Companies, believing that the Act is constitutional,
intend to defend this action vigorously.
Moreover, the Company and the Insurance Companies believe that the Company and the Insurance Companies will ultimately
prevail on the merits of the case.
This belief resul ts principally from(i) the existence of court decisions which have consistently upheld the constitutionality of a
similar Pennsylvania statutory provision providing for the conversion to stock form of a Pennsylvania mutual savings bank.
However, no assurance can be given that the Company and the Insurance Companies will ultimately prevail on the merits.
On Feb. 10, 1997, the Company, the Insurance Companies and each of their respective directors were served with an eleven
count combination class action and derivative lawsuit, filed in the United States District Court for the Eastern District of
Pennsylvania against the Company, the Insurance Companies and their directors (the "Class Action").
Two of the named plaintiffs hold a policy in Old Guard Mutual and the other two hold a policy in Goschenhoppen-Home. By
filing the class action portion of the lawsuit, these four policyholders purport to represent all 141,000 policyholders of the
Insurance Companies.
Seven of the eleven counts are similar to the claims by Mr. Nikolaus challenging the constitutionality of the Act, although
certain counts advance a different theory alleging unconstitutional impairment of contract.
The remainder of the class action claims assert theories regarding purported violations of the Act, principally relating to the
description of the Plan in the proxy statement approved by the Insurance Department of the Commonwealth of Pennsylvania
and mailed to policyholders.
The derivative claim was brought against the directors of Insurance Companies, purportedly on behalf of the Insurance
Companies, alleging breach of the fiduciary duty of care in approving and implementing the Plan and the fiduciary duty of
loyalty, presumably in approving the stock-based compensation plans which are contemplated by the Plan.
The stock-based compensation plans are expressly permitted by the Act and were approved by the Insurance Department of
the Commonwealth of Pennsylvania. The suit seeks such compensatory damages as may be allowed by law, a declaration that
the Plan violates the Act and the United States and Pennsylvania Constitutions and the rights of the plaintiffs thereunder, and
such other relief as the court deems appropriate.
The Company, the Insurance Companies and their directors believe they have meritorious defenses to the action and intend to
defend this action vigorously. However, no assurance can be given that the Company, the Insurance Companies and the
directors will ultimately prevail on the merits. In addition, there can be no assurance that additional suits arising out of, or
related to, the Conversion will not be filed.
If the plaintiffs prevail in the litigation described above or in similar additional litigation, the remedy a court would grant or the
amount of damages it might award is uncertain.
A court has broad discretion to fashion a fair and equitable remedy in light of the nature of the constitutional or other violation,
the relative harm to the parties, and the public interest. In some cases, relief is applied on a prospective basis only; in other
cases, relief is applied on a retroactive basis. No prediction can be made concerning the remedy a court would fashion or the
amount of damages it might award. However, two of the more far-reaching possibilities include:
-- A requirement that the Company pay all purchasers of common stock, either on a mandatory basis or at the election of the
purchaser, as damages or otherwise, (i) the Purchase Price paid per share of common stock acquired in the Conversion, plus
interest, (ii) the market value per share of common stock acquired, or (iii) the greater of (i) or (ii), less, in each case, any
proceeds received by such purchaser from the sale of the common stock.
No assurance can be given that the Company would have sufficient funds at that time to honor any such obligation; or
-- The Company could be required to pay or distribute to all or some policyholders of the Insurance Companies, either on a
mandatory basis or at the election of the policyholders, an amount equal to the surplus of the Insurance Companies as of the
date of the Conversion (approximately $38 million), as damages or otherwise. Such distribution could be required to be made
in cash, common stock or other debt or equity securities.
No assurance can be given that the Company would have sufficient funds, or the capacity to borrow sufficient funds, at that
time to honor any such obligation. Any required distribution of common stock or other equity securities would materially dilute
the interests of existing holders of the common stock.
In the event that the Company could not honor its obligations under any remedy imposed by a court, the Company could be
forced to seek the protection of the bankruptcy laws and the Insurance Companies could be deemed insolvent and seized by
the Department of Insurance.
In addition, the existence of litigation could have a material adverse impact on the market price of the common stock during the
pendency of the litigation and an adverse determination of such litigation would have such a material adverse effect.
CONTACT: David E. Hosler, CPCU, president/CEO 717/581-6700 (direct line), 800/732-0050