EXHIBIT B
THIS OPTION AND SECURITIES ISSUABLE UPON EXERCISE HEREOF MAY NOT BE OFFERED
OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933, OR (ii) AN APPLICABLE EXEMPTION FROM
REGISTRATION THEREUNDER. ANY SALE PURSUANT TO CLAUSE (ii) OF THE PRECEDING
SENTENCE MUST BE ACCOMPANIED BY AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO THE ISSUER OF THIS OPTION TO THE EFFECT THAT SUCH SALE IS
NOT IN VIOLATION OF THE ACT.
STOCK OPTION
------------
1. Grant of Option. Pursuant to the Securities Purchase Agreement,
---------------
dated as of December 6, 1994 (the "Securities Purchase Agreement"), between the
Continental Corporation, a New York corporation (the "Corporation"), and CNA
Financial Corporation, a Delaware corporation (the "Optionee"), the Corporation
hereby grants to the Optionee, for the period beginning on (x) if the Merger
-
Agreement terminates pursuant to Section 7.1(iv) or Section 7.1(vii) thereof,
the Termination Date or (y) if the Merger Agreement terminates other than
-
pursuant to Section 7.1(iv) or Section 7.1(vii) thereof, the earlier of the
120th day after the Termination Date or the date of the occurrence of a
Specified Corporate Action (the "Commencement Date"), and ending at
December 9, 2001 (the "Expiration Date"), the exclusive and irrevocable right
and option (this "Option")
to purchase from the Corporation for cash in an amount equal to $125,000,000.00
(the "Exercise Price") a total of 62,500 shares (the "Shares") of Cumulative
Preferred Stock, Series G (the "Series G Preferred Stock"), par value $4.00 per
share, of the Corporation, as such Series G Preferred Stock is designated in the
Certificate of Incorporation of the Corporation. Accordingly, the exercise
price per Share shall be $200.00 (the "Exercise Price Per Share"). Notwith-
standing the foregoing, if, prior to the Commencement Date, all then outstanding
Chicago Preferred Stock is redeemed or purchased pursuant to Section 15 of the
Securities Purchase Agreement, the Option will terminate and such date of re-
demption or purchase will be deemed to be the Expiration Date.
2. Defined Terms. Capitalized terms used but not defined herein
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shall have the meanings specified in the Securities Purchase Agreement.
3. Exercise of Option. This Option may be exercised in whole or in
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part by the Optionee from time to time between the Commencement Date and the
Expiration Date. Upon any partial exercise of this Option, the remainder of
this Option shall remain in effect and may be exercised at any time or times
thereafter until the Expiration Date. If the Optionee wishes to exercise this
Option, the Optionee
2
shall send a written notice to the Corporation specifying its intention to
exercise this Option and setting forth a date (not less than 5 business days and
not more than 10 business days from the date of such notice), time and place for
the closing of such purchase. The place specified in such notice shall be the
offices of the Corporation unless otherwise agreed to by the Optionee and the
Corporation. Each date on which the notice is sent to the Corporation by a
means provided for in Section 8.3 hereof shall be deemed to be the exercise date
with respect to such purchase and is referred to herein as the "Exercise Date."
The Option may be exercised only with respect to full shares of Series G
Preferred Stock. No fractional shares of Series G Preferred Stock shall be
issued.
4. Payment and Delivery of Certificates.
------------------------------------
a. Delivery of Funds and the Acknowledgement. Upon any
-----------------------------------------
exercise of all or any part of this Option, the Optionee shall on the Exercise
Date (i) deliver to the Corporation an Election to Exercise in the form of
Exhibit A hereto and (ii) make payment to the Corporation of the aggregate
Exercise Price Per Share for the Shares being purchased by delivery of a
certified or bank check or by wire transfer of immediately available funds to a
bank designated by the Corporation.
3
b. Delivery of the Shares. Upon payment (or deemed payment in
----------------------
accordance with Section 4.1) of the Exercise Price Per Share for the Shares
being purchased, the Corporation shall deliver to the Optionee certificates
representing the number of Shares being purchased by the Optionee from the
Corporation, registered in the name of the Optionee. The issuance of any Shares
upon the exercise of this Option and the delivery of certificates representing
such Shares shall be made without charge to the Holder for any tax or other
charge in respect of such issuance.
c. Put Option. At any time that the Optionee would be entitled
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to cause the redemption of any Shares pursuant to Article 3, Section 6 of the
Certificate of Amendment if it were the holder of such Shares, in lieu of
exercising all or any part of this Option, the Optionee may, in the case of the
Holder's Election Redemption, the first anniversary of the Commencement Date or,
in the case of any other redemption, at any time on or after the Commencement
Date, instead require the Corporation to repurchase this Option (or any portion
thereof) for cash at a price equal to the Value (as hereinafter defined for pur-
poses of this Section 4.3) of this Option. For purposes of this Section 4.3,
the Value of this Option (or such portion) shall equal the product of (i) the
-
number of Shares for
4
which this Option (or such portion) is exercisable, multiplied by (ii) the
--
excess, if any, of (A) the applicable redemption price per Share at such time
-
pursuant to Article 3, Section 6 of the Certificate of Amendment (which will be,
in each case hereunder, the sum of (x) 100% of the Liquidation Preference of
such share and (y) the Additional Amount), over (B) the Exercise Price Per
-
Share. Notwithstanding the foregoing, if the applicable redemption price is the
Holder's Election Redemption Price and the redemption of any portion of this
Option would (I) cause any two of Standard's & Poor's ("S&P"), Moody's Investor
-
Services ("Moody's") and A.M. Best Company ("A.M. Best") to downgrade the rating
of (a) the Corporation's securities, in the case of S&P or Moody's or (b) the
pooled rating of the Subsidiaries of the Corporation engaged in the insurance
business, in the case of A.M. Best or (II) in the reasonable judgment of the
--
Board of Directors of the Corporation have a material adverse effect on the
financial condition of the Corporation, then the Corporation may elect to
deliver with respect to such portion of this Option in lieu of cash senior non-
convertible notes of the Corporation ("Notes") (x) having a final maturity date
no later than December 31, 2006, and (y) having such other terms and conditions
as shall result in a determination that such Notes have a fair market value as
of
5
the date of their proposed issuance at least equal to the sum of (1) the Value
of this Option (or such portion) and (2) customary underwriting discounts and
commissions payable with respect to the sale of securities of a type comparable
to the Notes; provided, however, that if the issuance of senior nonconvertible
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notes would cause the event described in clause (I) of this sentence or in the
-
reasonable judgment of the Board of Directors of the Corporation have a material
adverse effect on the financial condition of the Corporation, then the
Corporation may elect to issue, in lieu of senior nonconvertible notes, subordi-
nated nonconvertible notes (in which case the term "Notes" shall mean such
subordinated nonconvertible notes) or shares of nonconvertible preferred stock
("Redemption Preferred Stock"), in each case having the terms and conditions
described in clauses (x) and (y) of this sentence. The Corporation shall use
its best efforts to cause the Notes or the Redemption Preferred Stock to be
registered for immediate resale pursuant to an effective registration under the
Act prior to the issuance thereof. If such registration statement is not
effective within 60 days of the date of such issuance then the annual interest
rate of the Notes or the annual dividend rate of the Redemption Preferred Stock,
as applicable, shall be increased by 0.5% per annum until such securities are
sold
6
pursuant to an effective registration statement under the Act. For purposes of
this Section 4.3 "fair market value" shall mean the fair market value of the
Notes or Redemption Preferred Stock, as the case may be, as determined by an
investment banking firm of national standing selected by the Corporation and
reasonably acceptable to the Optionees electing to effect such Holder's Election
Redemption. In the case that the Corporation shall be entitled to deliver
either subordinated nonconvertible notes or Redemption Preferred Stock, it shall
be the election of the Corporation whether to deliver such Notes or Redemption
Preferred Stock, except that, if the sale of the security to be delivered by the
Corporation pursuant to the terms hereof would give rise to an additional
liability on the part of the Optionee and it shall so notify the Corporation in
writing, the Corporation shall deliver the type of security specified in such
notice.
5. Transfer.
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a. Restrictions on Transferability. The Optionee will not
-------------------------------
effect any sale, assignment, transfer, disposition by gift or distribution in
liquidation or otherwise ("Transfer") (including any Transfer upon foreclosure
of a pledge or other security interest), pledge, mortgage, hypothecation or
grant of a security interest of or in this
7
Option or any of the Shares or any Subordinated Notes issued upon exchange for
the Shares (the "Exchange Notes") that under applicable law requires prior
regulatory approval until such regulatory approval has been obtained. The
Optionee agrees that, until the earlier of (i) the Effective Time (as such term
is defined in the Merger Agreement) and (ii) the Termination Date, it will not
Transfer any portion of the Option, except to an Affiliate of the Optionee who
agrees to be bound by the restrictions of this Section 5 and of Sections 6.1 and
6.4 of the Securities Purchase Agreement. The Optionee will not Transfer,
pledge, mortgage, hypothecate or grant a security interest in this Option, any
of the Shares or Exchange Notes (unless, with respect to such Shares or Exchange
Notes, such Shares or Exchange Notes were previously issued pursuant to an
effective registration statement under the Securities Act of 1933, as amended
(the "Act")) except pursuant to (A) an effective registration statement under
the Act or (B) an applicable exemption from registration under the Act. In
connection with any Transfer by the Optionee pursuant to clause (B) of the
immediately preceding sentence, the Optionee shall furnish to the Corporation an
opinion of counsel reasonably satisfactory to the Corporation to the effect that
the proposed transfer or conveyance would not be in violation of the Act. The
8
Optionee may not, during the period (the "Restricted Period") ending upon the
earliest to occur of (i) the third anniversary of the date hereof, (ii) a Change
of Control, (iii) a breach by the Corporation of any of its obligations under
any of Sections 6.6, 6.13, 6.14, 6.16, 6.17, 6.18 or Section 14 of the
Securities Purchase Agreement or any of its material obligations under the
Registration Rights Agreement or any of its material obligations under the
Merger Agreement giving rise to a right of termination under Section 7.1(iv)
thereof, and (iv) the date on which the full amount of dividends payable on the
Series E Preferred Stock, Series F Preferred Stock, Series G Preferred Stock,
Series H Preferred Stock or Series T Preferred Stock for any two quarterly
dividend periods shall not have been paid, the Optionee will not Transfer any
portion of the Option, the Shares or the Exchange Notes except (1) to an
Affiliate of the Purchaser, who agrees to be bound by the restrictions of this
Section 5.1 and Sections 6.1 and 6.4 of the Securities Purchase Agreement,
(2) to a person or entity who agrees to be bound by the restrictions of this
Section 5.1 and Sections 6.1 and 6.4 of the Securities Purchase Agreement, the
Transfer to whom has been approved in advance by the Board of Directors of the
Corporation, (3) to a person or entity who after such Transfer will beneficially
own (to the know
9
ledge of the Optionee, based solely on the representation and warranty of such
person or entity, and knowledge available from a review of publicly available
filings made by such person or entity with respect to the beneficial ownership
of Common Stock under Section 13 of the Exchange Act) less than 5% of the Common
Stock on a fully diluted basis, (4) pursuant to Rule 144 under the Act, or (5)
pursuant to a tender offer (a) commenced by the Corporation or (b) commenced by
any other person or entity with respect to which the Board of Directors of the
Corporation shall send to shareholders a statement that the Board of Directors
(x) recommends approval of such tender offer, or (y) is neutral with respect to
such tender offer. Other than as set forth in the first sentence of this
Section 5.1, nothing contained in this Section 5.1 shall restrict or prohibit
the Purchaser from pledging, mortgaging, hypothecating or granting a security
interest in, or granting participation rights in, the Option, the Shares or the
Exchange Notes; provided, however, that if a pledgee, mortgagee or holder of
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such security interest forecloses on the Option, the Shares or the Exchange
Notes during the Restricted Period, it may do so only if such pledgee, mortgagee
or holder of such security interest agrees to be bound by the restrictions of
this Section 5.1 and Sections 6.1 and 6.4 of the Securities
10
Purchase Agreement. Notwithstanding the foregoing, if none of the events
specified in any of clauses (ii), (iii) or (iv) above has occurred (whether
before or after termination of the Restricted Period), then the Purchaser shall
not, prior to the fifth anniversary of December 9, 1994, Transfer any portion
of the Option, the Shares or the Exchange Notes to any person or entity who
after such Transfer will own (to the knowledge of the Purchaser, based solely on
the representations and warranty of the Person, and knowledge available from a
review of publicly available filings made by such person or entity with respect
to the beneficial ownership of Common Stock under Section 13 of the Exchange
Act) more than 5% of the Common Stock of the Company on a fully diluted basis,
unless such person or entity agrees to be bound by the terms and restrictions of
the penultimate sentence of Section 6.1, Section 6.4 and Section 7 of the
Purchase Agreement and this penultimate sentence of Section 6.1 of the Purchase
Agreement. Notwithstanding the foregoing, nothing contained herein shall
prohibit any Transfer, pledge, mortgage, hypothecation or grant of a security
interest of or in the Option by any insurance regulator acting as conservator or
receiver.
b. Restrictive Legend. Until such time as (i) a registration
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statement with respect to the sale of
11
this Option shall have become effective under the Act and the Option shall have
been disposed of in accordance with such registration statement, (ii) this
Option shall have been sold as permitted by Rule 144 under the Act and the
purchaser thereof does not receive "restricted securities" as defined in Rule
144 or (iii) this Option shall have been otherwise transferred, a new Option not
bearing a legend restricting further transfer shall have been delivered by the
Corporation and subsequent public distribution of this Option shall not in the
opinion of counsel to the Optionee require registration under the Act, this
Option shall be subject to a stop-transfer order and shall bear the legend set
forth hereon. So long as the Shares or Exchange Notes are Registrable
Securities, the Shares or Exchange Notes shall be subject to a stop-transfer
order and shall bear the following legend by which each holder thereof shall be
bound:
"[THE SHARES REPRESENTED BY THIS CERTIFICATE AND ANY SHARES OR OTHER
SECURITIES ISSUABLE UPON EXCHANGE HEREOF] [THIS NOTE] MAY NOT BE OFFERED OR
SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 OR (ii) AN APPLICABLE EXEMPTION FROM REGISTRATION
THEREOF. ANY SALE PURSUANT TO CLAUSE (ii) OF THE PRECEDING SENTENCE MUST
BE ACCOMPANIED BY AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
ISSUER OF THESE SECURITIES TO THE EFFECT SUCH SALE IS NOT IN VIOLATION OF
THE ACT."
c. Removal of Legends. After termination of the requirement
------------------
that all or part of such legend be placed
12
upon this Option, a certificate representing the Shares or an Exchange Note, the
Corporation shall, upon receipt by the Corporation of evidence reasonably
satisfactory to it that such requirement has terminated and upon the written
request of the holder of this Option, such Shares or such Exchange Note, issue a
new Option, certificate for such Shares or Exchange Note that does not bear such
legend.
d. Transfer of Option. Subject to Section 5.1, this Option
-------------------
shall be transferable, in whole or in part, upon delivery thereof to the
Corporation accompanied by an Assignment substantially in the form of Exhibit B
hereto duly endorsed by the Optionee. Upon any registration of transfer, the
Corporation shall deliver a new Option to the person entitled thereto. This
Option may be exchanged, at the option of the Optionee, for another Option, or
other Options of different denominations, of like tenor and representing in the
aggregate the right to purchase a like number of Shares upon surrender to the
Corporation.
6. Reservation of Shares. The Corporation shall retain and reserve
----------------------
a sufficient number of shares of Series G Preferred Stock in order to meet its
obligation hereunder. The Corporation agrees not to issue, sell, assign,
pledge, hypothecate, transfer or otherwise dispose of any shares of
13
Series G Preferred Stock except in accordance with this Option.
7. Amendment of Certificate of Amendment. Prior to the issuance of
-------------------------------------
any Shares upon exercise of this Option, without the prior written consent of
the Optionee, the Corporation will not (i) alter or repeal the Certificate of
Incorporation so as to affect the holders of Series G Preferred Stock adversely
or (ii) authorize, adopt or approve an amendment to the Certificate of
Incorporation that would increase or decrease the par value of the Series G
Preferred Stock, or alter or change the powers, preference or special rights of
the Series G Preferred Stock. Notwithstanding the foregoing, nothing in this
Section 7 shall prohibit the Corporation from effecting a recapitalization,
reorganization, consolidation or merger of, or sale by, the Corporation prior to
the Commencement Date or, if after the Commencement Date, if (A)(a) such
recapitalization, reorganization, consolidation, merger or sale constitutes a
Specified Corporate Action, (b) the Corporation has sufficient funds legally
available to it (after giving effect to such transaction) to redeem, at the then
applicable price under Section 4.3 pursuant to the terms hereof, the Option,
(c) such redemption shall not be prohibited by any agreement to which the
Corporation or any of its Subsidiaries is a party, by
14
applicable law or otherwise, (d) the Board of Directors of the Corporation,
including a majority of the directors who are not officers or employees of the
Corporation, shall have adopted a resolution confirming that such funds are
available and that the Optionee (pursuant to Section 4.3) has the right to
require such redemption and (e) the Corporation shall have set aside sufficient
funds to meet the applicable redemption payments through the Specified Corporate
Action Redemption Date (except that no funds need be set aside with respect to
any portion of the Option if the Optionee has notified the Corporation that it
will not require redemption of such portion under Section 4.3) or (B) (1) the
Corporation shall be the resulting or surviving corporation, (2) the resulting
or surviving corporation will have after such recapitalization, reorganization,
consolidation or merger no Senior Stock or Parity Stock (each as defined in the
Certificate of Amendment) either authorized or outstanding (except such Parity
Stock of the Corporation as may have been authorized or outstanding immediately
preceding such consolidation or merger) or such stock of the resulting or
surviving corporation (having the same powers, preferences and special rights of
any such Parity Stock) as may be issued in exchange therefor), (3) the Optionee
will receive in exchange for this Option an option to purchase the same
15
number of shares of stock, with the same preferences, rights and powers, of the
resulting or surviving corporation, (4) after such recapitalization,
reorganization, consolidation or merger the resulting or surviving corporation
shall not be in breach of any of the terms hereof, any of the Material
Provisions of the Securities Purchase Agreement (as defined in the Certificate
of Amendment) or any of its material obligations under the Registration Rights
Agreement and (5) all or substantially all the holders of the outstanding shares
of capital stock of the Corporation immediately prior to such consolidation or
merger are entitled to receive shares representing 50% or more of the then
outstanding shares of capital stock of the resulting or surviving corporation
entitled to vote generally in the election of directors.
8. Miscellaneous.
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a. Binding Effect and Assignment. This Option and all of the
-----------------------------
provisions hereof shall be binding upon and inure to the benefit of the Optionee
and the Corporation and their respective successors and assigns.
b. Amendments and Modifications. This Option may not be
----------------------------
modified, amended, altered or supplemented except upon the execution and
delivery of a written agreement executed by the parties hereto.
16
c. Notices. All notices or other communications given or made
-------
hereunder shall be validly given or made if in writing and delivered by
facsimile transmission or in person at, mailed by registered or certified mail,
return receipt requested, postage prepaid, or sent by a reputable overnight
courier to, the following addresses (and shall be deemed effective at the time
of receipt thereof).
If to the Corporation:
The Continental Corporation
180 Maiden Lane
New York, New York 10038
Telecopy: (212) 440-3857
Attention: Chief Executive Officer
with copies to:
The Continental Corporation
180 Maiden Lane
New York, New York 10038
Telecopy: (212) 440-3857
Attention: General Counsel
Debevoise & Plimpton
875 Third Avenue
New York, New York 10022
Telecopy: (212) 909-6836
Attention: Edward A. Perell, Esq.
If to the Optionee:
CNA Financial Corporation
CNA Plaza
Chicago, Illinois 60685
Telecopy: (312) 822-1297
Attention: General Counsel
17
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Telecopy: (212) 403-2000
Attention: Craig M. Wasserman, Esq.
or to such other address as the person or entity to whom notice is to be given
may have previously furnished notice in writing to the other in the manner set
forth above.
d. Lost Options. Upon receipt of evidence satisfactory to the
-------------
Corporation of the loss, theft, destruction or mutilation of this Option and
upon reimbursement of the Corporation's reasonable incidental expenses, the Cor-
poration shall execute and deliver to the Optionee a new Option of like date,
tenor and denomination.
e. No Rights of a Shareholder. The Optionee shall not have,
--------------------------
solely on account of such status, any rights of a shareholder of the
Corporation, either at law or in equity, or to any notice of meetings of share-
holders or of any other proceedings of the Corporation. No adjustment shall be
made for dividends or other rights for which the record date is prior to the
issuance of a certificate or certificates for Shares upon each exercise of this
Option.
18
f. Entire Agreement. This Option, together with the Securities
----------------
Purchase Agreement and the Certificate of Amendment, contains the entire
understanding of the Optionee and the Corporation in respect of the subject
matter hereof, and supersedes all prior negotiations and understandings between
the parties with respect to such subject matter. Subsequent to exercise of this
Option into Shares, all rights and preferences of such Shares shall be as
specified in the Certificate of Amendment.
g. Governing Law. The validity, construction, enforcement and
-------------
interpretation of this Option shall be governed by the laws of the State of New
York applicable to agreements made and to be performed entirely within such
State.
h. Captions. The captions, headings and arrangements used in
--------
this Option are for convenience only and do not in any way affect, limit,
amplify or modify the terms and provisions hereof.
19
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
duly executed on the 9th day of December, 1994.
THE CONTINENTAL CORPORATION
By: /s/ John P. Mascotte
____________________________
Name: John P. Mascotte
Title: Chairman
Attest:
/s/ William F. Gleason, Jr.
___________________________
Name: William F. Gleason, Jr.
Title: Secretary
20
Exhibit A
---------
FORM OF ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase ______
shares of Cumulative Preferred Stock, Series G ("Series G Preferred Stock"), par
value $4.00 per share, of The Continental Corporation covered by the within
Option and tenders payment herewith in the amount of $_____ in accordance with
the terms thereof, and requests that certificates for such securities be issued
in the name of, and delivered to:
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of shares of Series G Preferred Stock shall not be all the
shares of Series G Preferred Stock covered by the within Option, that a new
Option for the balance of the shares of Series G Preferred Stock covered by the
within Option be registered in the name of, and delivered to, the undersigned at
the address stated below.
Dated: ___________________
Signature:__________________________
Witness: __________________
21
EXHIBIT B
---------
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, ___________________ hereby sells, assigns, and
transfers unto ______________________ an Option to purchase __________ shares of
Cumulative Preferred Stock, Series G, par value $4.00 per share, of The Conti-
nental Corporation
22