AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 20, 2003
REGISTRATION NO. 333-102027
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
AMENDMENT NO. 2 TO
FORM F-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
HSBC HOLDINGS PLC
(Exact name of Registrant as specified in its charter)
---------------------
<Table>
ENGLAND AND WALES 6035 98-0209906
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</Table>
---------------------
<Table>
8 CANADA SQUARE PHILIP S. TOOHEY, ESQ.
LONDON E14 5HQ HSBC BANK USA
ENGLAND ONE HSBC CENTER
TEL. NO.: (011-44-20) 7991-8888 BUFFALO, NEW YORK 14203
(Address, including zip code, and TEL. NO.: (716) 841-2473
telephone number, including area code, of (Name, address and telephone number
registrant's principal executive offices) of agent for service)
</Table>
PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
<Table>
EDWARD F. GREENE, ESQ. VICTOR I. LEWKOW, ESQ. KENNETH H. ROBIN, ESQ. EDWARD D. HERLIHY, ESQ.
CLEARY, GOTTLIEB, PAUL J. SHIM, ESQ. JOHN W. BLENKE, ESQ. CRAIG M. WASSERMAN, ESQ.
STEEN & HAMILTON CLEARY, GOTTLIEB, HOUSEHOLD INTERNATIONAL, INC. WACHTELL, LIPTON,
55 BASINGHALL STREET STEEN & HAMILTON 2700 SANDERS ROAD ROSEN & KATZ
LONDON EC2V 5EH ONE LIBERTY PLAZA PROSPECT HEIGHTS, IL 60070 51 WEST 52ND STREET
ENGLAND NEW YORK, NY 10006 (847) 564-5000 NEW YORK, NY 10019
(011-44-20) 7614-2200 (212) 225-2000 (212) 403-1000
</Table>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As promptly as practicable after the effective date of this
Registration Statement and all other conditions to the merger described in this
Registration Statement have been satisfied or waived.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[HSBC LOGO] SUBJECT TO COMPLETION [HOUSEHOLD LOGO]
DATED FEBRUARY 20, 2003
, 2003
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders of
Household International, Inc., which will be held at
on , 2003, at a.m.
At the meeting, holders of Household capital stock entitled to vote will be
asked to adopt a merger agreement that Household has entered into with HSBC
Holdings plc. In the merger, Household will be merged with and into a wholly
owned subsidiary of HSBC, and as a result HSBC will acquire Household. The table
below indicates the material financial terms of the merger that will apply to
your stock:
<Table>
<Caption>
MARKET PRICE AS OF:
-------------------
ENTITLED NOV. 13, , GENERALLY
CLASS OF STOCK TO VOTE 2002 2003 CONSIDERATION TO BE RECEIVED TAXABLE
- ---------------- -------- -------- -------- ------------------------------------------------------ ---------
Common Yes $22.46 $ Converted into your choice of either 2.675 HSBC No
ordinary shares, valued at $30.04 on November 13, 2002
and $ on , 2003, or 0.535 HSBC American
depositary shares (each representing an interest in 5
HSBC ordinary shares) valued at $29.99 on November 13,
2002 and $ on , 2003
5% preferred Yes $28.50 $ Redeemed at $50, plus accrued and unpaid dividends Yes
$4.30 preferred Yes $48.10 $ Redeemed at $100, plus accrued and unpaid dividends Yes
$4.50 preferred Yes $57.10 $ Redeemed at $103, plus accrued and unpaid dividends Yes
7 5/8% preferred No $20.50 $ Yes
7.50% preferred No $19.95 $ Converted into $25 in cash per depositary Yes
7.60% preferred No $20.29 $ share representing 1/40th of a share ($1,000 per Yes
8 1/4% preferred No $23.00 $ share) plus accrued and unpaid dividends Yes
</Table>
The HSBC ordinary shares to be issued in the merger (including the ordinary
shares underlying the HSBC American depositary shares to be issued in the
merger) will be admitted to the Official List of the U.K. Listing Authority and
to trading on the London Stock Exchange, and will be listed on The Stock
Exchange of Hong Kong Limited, Euronext Paris and the New York Stock Exchange.
The HSBC ordinary shares will trade on the London Stock Exchange under the
symbol "HSBA", on The Stock Exchange of Hong Kong Limited under the symbol "005"
and on Euronext Paris under the symbol "PHSB". The HSBC American depositary
shares to be issued in the merger will be listed on the New York Stock Exchange
and will trade under the symbol "HBC". On November 13, 2002, the last trading
day prior to the announcement of the merger, the mid-market closing price per
HSBC ordinary share and the closing price per HSBC American depositary share
were L7.07 ($ at the then prevailing exchange rate) and $56.05,
respectively, and on , 2003 the last trading day prior to the date of
this document, were L ($ at the then prevailing exchange rate)
and $ , respectively.
AFTER CAREFUL CONSIDERATION, HOUSEHOLD'S BOARD OF DIRECTORS HAS UNANIMOUSLY
DETERMINED THAT THE MERGER IS FAIR TO AND IN THE BEST INTERESTS OF HOUSEHOLD AND
ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE ADOPTION OF
THE MERGER AGREEMENT.
The accompanying document provides a detailed description of the proposed
merger and the merger consideration. I urge you to read the enclosed materials
carefully. PLEASE PAY PARTICULAR ATTENTION TO THE "RISK FACTORS RELATING TO THE
MERGER" BEGINNING ON PAGE 25 FOR A DISCUSSION OF RISKS RELATED TO THE MERGER.
YOUR VOTE IS VERY IMPORTANT. WHETHER OR NOT YOU EXPECT TO VOTE IN PERSON AT
THE SPECIAL MEETING, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND
RETURN IT IN THE ENCLOSED ENVELOPE AS SOON AS POSSIBLE. YOU MAY ALSO GRANT YOUR
PROXY BY TELEPHONE OR ON THE INTERNET AS DESCRIBED IN THE ENCLOSED PROXY CARD.
Giving your proxy now will not affect your right to vote in person if you wish
to attend the special meeting and vote personally.
Sincerely,
WILLIAM F. ALDINGER
Chairman and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE HSBC ORDINARY SHARES OR HSBC AMERICAN
DEPOSITARY SHARES TO BE ISSUED IN THE MERGER OR DETERMINED IF THIS DOCUMENT IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This document is dated , 2003 and is first being mailed to
stockholders on or about , 2003.
HOUSEHOLD INTERNATIONAL, INC.
2700 Sanders Road
Prospect Heights, IL 60070
(847) 564-5000
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2003
To the Stockholders of HOUSEHOLD INTERNATIONAL, INC.:
Notice is hereby given that a special meeting of stockholders of Household
International, Inc. will be held at , on ,
2003, at a.m. for the following purposes:
1. To consider and vote upon a proposal to adopt the Agreement and Plan of
Merger, dated as of November 14, 2002, by and among HSBC Holdings plc, Household
International, Inc. and H2 Acquisition Corporation, pursuant to which, among
other things, Household will be merged with and into H2 Acquisition Corporation,
a wholly owned subsidiary of HSBC, and HSBC will acquire Household. In the
merger, each outstanding share of Household common stock, par value $1.00 per
share, will be converted into the right to receive, at the election of the
holder, either 2.675 HSBC ordinary shares or 0.535 HSBC American depositary
shares, each of which represents an ownership interest in five HSBC ordinary
shares, and each outstanding share of Household 7 5/8% cumulative preferred
stock, Series 2002-B, no par value, 7.50% cumulative preferred stock, Series
2001-A, no par value, 7.60% cumulative preferred stock, Series 2002-A, no par
value, and 8 1/4% cumulative preferred stock, Series 1992-A, no par value, will
be converted into the right to receive cash in the amount of $1,000 per share
($25 per depositary share representing 1/40th of a share), plus all accrued and
unpaid dividends up to but excluding the closing date. Each outstanding share of
Household 5% cumulative preferred stock, no par value, $4.30 cumulative
preferred stock, no par value, and $4.50 cumulative preferred stock, no par
value, will be designated for redemption effective prior to the merger and
Household will deposit the applicable redemption price in trust for the holders
of these shares under the terms of the instruments governing their shares.
2. To transact any other business as may properly come before the special
meeting or any adjournments or postponements thereof.
Holders of record of Household common stock and voting preferred stock,
consisting of 5% cumulative preferred stock, $4.30 cumulative preferred stock
and $4.50 cumulative preferred stock, all as of the close of business on
February 21, 2003, are entitled to vote at the special meeting. Holders of
record of Household's 7 5/8% cumulative preferred stock, 7.50% cumulative
preferred stock, 7.60% cumulative preferred stock and 8 1/4% cumulative
preferred stock are not entitled to vote at the special meeting, and are
entitled to appraisal rights as more fully described in the attached document.
YOUR VOTE IS IMPORTANT. BECAUSE ADOPTION OF THE MERGER AGREEMENT REQUIRES
THE AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST A MAJORITY OF THE OUTSTANDING
SHARES OF HOUSEHOLD COMMON STOCK AND VOTING PREFERRED STOCK, VOTING TOGETHER AS
A SINGLE CLASS, A FAILURE TO VOTE WILL HAVE THE SAME EFFECT AS A VOTE AGAINST
THE MERGER (EXCEPT THAT SHARES OF HOUSEHOLD COMMON STOCK CREDITED TO AN ACCOUNT
UNDER THE HOUSEHOLD INTERNATIONAL TAX REDUCTION INVESTMENT PLAN FOR WHICH VOTING
INSTRUCTIONS ARE NOT RECEIVED WILL BE VOTED BY THE PLAN'S TRUSTEE IN THE SAME
WAY AS THE MAJORITY OF THE SHARES HELD UNDER THE PLAN FOR WHICH VOTING
INSTRUCTIONS ARE RECEIVED). WHETHER OR NOT YOU EXPECT TO VOTE IN PERSON AT THE
SPECIAL MEETING, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND
RETURN IT IN THE ENCLOSED ENVELOPE AS SOON AS POSSIBLE. YOU MAY ALSO GRANT YOUR
PROXY BY TELEPHONE OR ON THE INTERNET AS DESCRIBED IN THE ENCLOSED PROXY CARD.
Giving your proxy now will not affect your right to vote in person if you attend
the special meeting and vote personally.
By Order of the Board of Directors,
KENNETH H. ROBIN
Executive Vice President-General
Counsel and Corporate Secretary
Prospect Heights, Illinois
, 2003
QUESTIONS AND ANSWERS
Q. WHEN AND WHERE IS THE SPECIAL MEETING?
A. The special meeting of Household stockholders will be held at
on , 2003, at a.m.
Q. HOW DO I VOTE?
A. After you have carefully read this document, please mail your signed proxy
card in the enclosed postage-paid envelope to Computershare Investor
Services LLC as soon as possible so that your stock may be represented and
voted at the Household special meeting. You may also grant your proxy by
telephone, on the Internet or vote in person at the Household special
meeting. If your shares are held in "street name", i.e., in the name of a
broker, bank or other record holder, you must either direct the record
holder as to how to vote your stock or obtain a proxy from the record holder
to vote at the special meeting. For more information regarding how to vote
your stock, please refer to "The Special Meeting of Household
Stockholders -- How You Can Vote."
Q. MAY I CHANGE MY VOTE?
A. Yes. You may withdraw your proxy or change your vote by delivering a
later-dated, signed written notice of revocation or proxy card to the
Corporate Secretary of Household before the Household special meeting or by
voting in person at the Household special meeting. You may also withdraw
your proxy or change your vote by telephone or on the Internet as described
in this document.
Q. SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A. No. After the companies complete the merger, HSBC will send instructions to
Household stockholders whose stock was converted in the merger. These
instructions will explain how to exchange certificates representing shares
of Household common stock for either HSBC ordinary shares or HSBC ADSs, and
how to exchange certificates representing shares of Household 7 5/8%
cumulative preferred stock, 7.50% cumulative preferred stock, 7.60%
cumulative preferred stock and 8 1/4% cumulative preferred stock for cash.
Immediately prior to closing, Household will deposit the redemption price of
the Household 5% cumulative preferred stock, $4.30 cumulative preferred
stock and $4.50 cumulative preferred stock in trust for the holders of the
shares, and will take the other steps required to redeem these shares in
accordance with their respective terms. Holders of such preferred stock will
receive a notice of redemption from Household that will explain how to
exchange their stock certificates for the redemption price.
Q. WHEN IS THE MERGER EXPECTED TO BE COMPLETED?
A. HSBC and Household expect to complete the merger during the first quarter of
2003. Because the merger is subject to regulatory approvals in a number of
jurisdictions and other conditions, the companies cannot predict the exact
timing.
Q. WHOM CAN I CALL WITH QUESTIONS?
A. If you have more questions about the merger, or would like additional copies
of this document, you should contact:
Investor Relations Department
Household International, Inc.
2700 Sanders Road
Prospect Heights, IL 60070
(847) 564-5000
investorrelations@household.com
i
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
QUESTIONS AND ANSWERS....................................... i
SUMMARY..................................................... 1
RISK FACTORS RELATING TO THE MERGER......................... 25
FORWARD-LOOKING STATEMENTS.................................. 30
RECENT DEVELOPMENTS......................................... 32
THE SPECIAL MEETING OF HOUSEHOLD STOCKHOLDERS............... 34
Time, Place and Purpose of the Special Meeting......... 34
Who Can Vote at the Special Meeting.................... 34
Vote Required.......................................... 34
How You Can Vote....................................... 35
How to Revoke or Change your Vote...................... 36
Other Business......................................... 36
THE EXTRAORDINARY GENERAL MEETING OF HSBC ORDINARY
SHAREHOLDERS.............................................. 37
THE MERGER.................................................. 38
Background of the Merger............................... 38
Household's Reasons for the Merger..................... 40
Recommendation of Household's Board of Directors....... 42
Opinion of Household's Financial Advisor Relating to
Common Stock.......................................... 42
Opinion of Household's Financial Advisor Relating to
Non-Redeemable Preferred Stock........................ 53
HSBC's Reasons for the Merger.......................... 56
Interests of Household's Executive Officers and
Directors in the Merger............................... 58
Accounting Treatment................................... 65
Other Effects of the Merger............................ 65
Litigation Relating to the Merger...................... 66
REGULATORY MATTERS.......................................... 68
U.S. Antitrust......................................... 68
Other U.S. Regulatory Matters.......................... 68
United Kingdom......................................... 69
Canada................................................. 69
European Union Merger Regulation....................... 69
Other International Regulatory Matters................. 69
MATERIAL U.S. FEDERAL INCOME TAX AND U.K. TAX
CONSEQUENCES.............................................. 70
General................................................ 70
U.S. Federal Income Tax Consequences of the Merger to
U.S. Holders of Household Stock....................... 71
U.S. Federal Income Tax and U.K. Tax Consequences for
U.S. Holders of HSBC Ordinary Shares and HSBC ADSs.... 72
U.S. Federal Income Tax Consequences for Non-U.S.
Holders............................................... 74
U.K. Tax Consequences for Non-U.S. Holders Not Resident
in the United Kingdom................................. 74
THE MERGER AGREEMENT........................................ 75
Form of the Merger..................................... 75
Effective Time and Timing of Closing................... 75
Board of Directors and Officers of the Surviving
Corporation........................................... 75
Consideration to be Received in the Merger............. 75
Redemption of Household Voting Preferred Stock......... 76
Share Election; Exchange Procedures; Fractional
Shares................................................ 76
Stock Options and Other Equity-Based Awards............ 78
Appraisal Rights....................................... 78
</Table>
ii
<Table>
<Caption>
PAGE
----
Representations and Warranties......................... 78
Covenants Relating to the Conduct of Household's
Business.............................................. 79
No Solicitation........................................ 81
Covenants Relating to the Conduct of HSBC's Business... 82
Indemnification and Insurance.......................... 83
Employee Matters....................................... 83
Conditions Precedent to Closing........................ 83
Termination, Amendment and Waiver...................... 85
Effect of Termination.................................. 85
Fees and Expenses...................................... 86
APPRAISAL RIGHTS............................................ 87
MARKET PRICE AND DIVIDEND DATA.............................. 89
Market Prices.......................................... 89
Dividend Data.......................................... 90
BENEFICIAL OWNERSHIP OF HOUSEHOLD COMMON STOCK.............. 92
Beneficial Ownership of Directors and Management of
Household............................................. 92
Beneficial Ownership of Household Stockholders Holding
More Than 5% of Household's Outstanding Stock......... 93
DESCRIPTION OF HSBC......................................... 94
DESCRIPTION OF HOUSEHOLD.................................... 95
DESCRIPTION OF H2 ACQUISITION CORPORATION................... 96
HSBC AND HOUSEHOLD UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION..................................... 97
DESCRIPTION OF HSBC ORDINARY SHARES......................... 120
General................................................ 120
Voting................................................. 120
Disclosure of Interests in Shares...................... 120
Restrictions on Voting................................. 121
Dividends and Other Distributions...................... 121
Liquidation............................................ 121
Untraced Shareholders.................................. 121
Transfer of Shares..................................... 122
Uncertificated Shares.................................. 122
Variation of Class Rights and Alteration of Share
Capital............................................... 122
Pre-emptive Rights..................................... 123
Lien on Shares......................................... 123
Calls.................................................. 123
Forfeiture of Shares................................... 123
Purchase of Shares..................................... 123
DESCRIPTION OF HSBC AMERICAN DEPOSITARY SHARES.............. 124
General................................................ 124
Deposit and Withdrawal of Deposited Securities......... 124
Dividends and Other Distributions...................... 124
Reclassifications, Recapitalizations and Mergers....... 126
Record Dates........................................... 126
Voting Rights.......................................... 126
Disclosure of Interests................................ 126
Amendment and Termination of the Deposit Agreement..... 127
Charges of Depositary.................................. 128
Liability of Holder for Taxes.......................... 128
</Table>
iii
<Table>
<Caption>
PAGE
----
Limitations on Obligations and Liability to HSBC ADS
Holders............................................... 129
Holder's Right to Receive the HSBC Ordinary Shares
Underlying HSBC ADSs.................................. 129
Pre-release of HSBC ADSs............................... 129
Actions by Holders..................................... 130
Requirements for Depositary Actions.................... 130
COMPARISON OF RIGHTS OF HOUSEHOLD COMMON STOCKHOLDERS AND
HSBC ORDINARY SHAREHOLDERS................................ 131
Voting Rights.......................................... 132
Action by Written Consent.............................. 133
Shareholder Proposals and Shareholder Nominations of
Directors............................................. 133
Sources and Payment of Dividends....................... 134
Rights of Purchase and Redemption...................... 135
General Meetings of Shareholders and Stockholders...... 137
Special Meetings of Shareholders and Stockholders...... 137
Appraisal Rights....................................... 139
Pre-emptive Rights..................................... 140
Amendment of Governing Instruments..................... 140
Preferred Stock........................................ 141
Stock Class Rights..................................... 142
Shareholders' Votes on Some Transactions............... 142
Rights of Inspection................................... 144
Standard of Conduct for Directors...................... 145
Classification of the Board of Directors............... 146
Removal of Directors................................... 146
Vacancies on the Board of Directors.................... 146
Liabilities of Directors and Officers.................. 147
Indemnification of Directors and Officers.............. 148
Shareholders' Suits.................................... 149
Provisions Relating to Share Acquisitions.............. 149
Anti-Takeover Measures................................. 150
Disclosure of Interests................................ 151
Limitation on Enforceability of Civil Liabilities Under
U.S. Federal Securities Laws.......................... 152
Short Swing Profits.................................... 153
Proxy Statements and Reports........................... 154
VALIDITY OF SECURITIES...................................... 156
EXPERTS..................................................... 156
CIRCULAR AND U.K. LISTING PARTICULARS....................... 157
FUTURE STOCKHOLDER PROPOSALS................................ 157
WHERE YOU CAN FIND MORE INFORMATION......................... 157
ANNEX A-AGREEMENT AND PLAN OF MERGER........................ A-1
ANNEX B-OPINION OF GOLDMAN, SACHS & CO. .................... B-1
ANNEX C-OPINION OF KEEFE, BRUYETTE & WOODS, INC. ........... C-1
ANNEX D-FULL TEXT OF SECTION 262 OF THE DELAWARE GENERAL
CORPORATION LAW RELATING TO APPRAISAL RIGHTS.............. D-1
ANNEX E-SUMMARY PARTICULARS................................. E-1
</Table>
iv
SUMMARY
This summary highlights selected information from this document. It does
not contain all of the information that is important to you. You should read
this document and the additional documents referred to in this document
carefully to fully understand the merger.
IN THE MERGER, ONE SHARE OF HOUSEHOLD COMMON STOCK MAY BE EXCHANGED FOR 2.675
HSBC ORDINARY SHARES OR 0.535 HSBC ADSS, AT YOUR ELECTION (SEE PAGE 75)
Each holder of Household common stock will receive, at the holder's
election, either 2.675 HSBC ordinary shares or 0.535 HSBC American depositary
shares, or HSBC ADSs, for each share of Household common stock held. We refer to
this as the exchange ratio. Each HSBC ADS represents an ownership interest in
five HSBC ordinary shares. Promptly following the merger, Computershare Investor
Services LLC, as exchange agent, will mail to holders of record of Household
common stock a letter of transmittal for holders to use in making their election
to receive HSBC ordinary shares or HSBC ADSs.
HOUSEHOLD PREFERRED STOCK WILL BE REDEEMED FOR CASH OR EXCHANGED FOR CASH IN THE
MERGER (SEE PAGE 75)
Each holder of Household 7 5/8% cumulative preferred stock, 7.50%
cumulative preferred stock, 7.60% cumulative preferred stock and 8 1/4%
cumulative preferred stock will receive cash in the amount of $25 per depositary
share representing 1/40th of a share ($1,000 per share), plus all accrued and
unpaid dividends up to but excluding the closing date. This preferred stock is
referred to in this document as the non-voting preferred stock.
Each outstanding share of Household 5% cumulative preferred stock, $4.30
cumulative preferred stock and $4.50 cumulative preferred stock will be
designated for redemption effective prior to the merger and Household will
deposit the applicable redemption price in trust for the holders of these shares
under the terms of the instruments governing their shares. This preferred stock
is referred to in this document as the voting preferred stock.
THE IMPLIED VALUE OF THE CONSIDERATION PER SHARE OF HOUSEHOLD COMMON STOCK THAT
YOU WILL RECEIVE WILL DEPEND ON THE MARKET PRICE OF HSBC ORDINARY SHARES AND
HSBC ADSS ON THE DATE THE CONSIDERATION IS RECEIVED; THAT VALUE MAY BE HIGHER OR
LOWER THAN IT WAS ON NOVEMBER 13, 2002, ON THE DATE THIS DOCUMENT WAS MAILED OR
ON THE DATE OF THE SPECIAL MEETING OF HOUSEHOLD STOCKHOLDERS (SEE PAGE 89).
The dollar value of the consideration that Household common stockholders
will receive as a result of the merger will depend on the price of HSBC ordinary
shares or HSBC ADSs that Household stockholders elect to receive and the pounds
sterling/U.S. dollar exchange rate on the date the merger consideration is
received. The market value of the consideration that holders of Household common
stock will receive for each share of Household common stock owned will be equal
to either 2.675 times the market price of an HSBC ordinary share, or 0.535 times
the market price of an HSBC ADS.
Based on the closing mid-market price of HSBC ordinary shares on the London
Stock Exchange and the then current pounds sterling/U.S. dollar exchange rate:
- on November 13, 2002, the last full trading day in London prior to the
announcement of the merger, the implied value per share of Household
common stock was $30.04, and
- on , 2003, the last full trading day in London before printing
this document, the implied value per share of Household common stock was
$ .
Based on the closing market price of the HSBC ADSs on the New York Stock
Exchange:
- on November 13, 2002, the implied value per share of Household common
stock was $29.99, and
- on , 2003, the implied value per share of Household common
stock was $ .
The exchange ratio of either 2.675 HSBC ordinary shares or 0.535 HSBC ADSs
to be received in the merger for each share of Household common stock is fixed.
There will be no adjustment to the exchange ratio for changes in the market
price of either Household common stock or HSBC ordinary shares or HSBC ADSs.
Accordingly, the market value of the HSBC ordinary shares or
1
HSBC ADSs to be received by holders of Household common stock in the merger will
depend on the market price of HSBC ordinary shares and HSBC ADSs at the time
they are received and could vary significantly from the market value on
November 13, 2002, on February , 2003 or on the date of the special meeting of
Household stockholders. As a result of the fixed exchange ratio, holders of
Household common stock bear the risk of a decline in the market price of HSBC
ordinary shares or HSBC ADSs.
THERE ARE DIFFERENCES BETWEEN OWNING HSBC ADSS AND HSBC ORDINARY SHARES (SEE
PAGES 124-130)
HSBC ADSs have been created to allow U.S. stockholders more easily to hold
interests in HSBC ordinary shares and to trade those interests on the New York
Stock Exchange. Each HSBC ADS represents an ownership interest in, and the
holder may at any time convert this interest into, five HSBC ordinary shares.
Your rights as a holder of HSBC ADSs will in some cases be different from the
rights of a holder of HSBC ordinary shares. For example:
- DIVIDENDS AND OTHER DISTRIBUTIONS: Holders of HSBC ADSs will receive cash
dividends or other distributions in proportion to the number of HSBC
ordinary shares represented by such HSBC ADSs, less the fees and expenses
(if any) of The Bank of New York.
- VOTING RIGHTS: Holders of HSBC ADSs are entitled to vote on a poll on
matters submitted to holders of HSBC ordinary shares. The Bank of New
York will enable a holder of HSBC ADSs to attend and vote on a poll at a
meeting by appointing the holder its proxy for the underlying HSBC
ordinary shares. If the holder does not wish to attend a meeting, the
holder may instruct The Bank of New York to appoint another person to
attend and vote on a poll on the holder's behalf. In neither case will
the person appointed by The Bank of New York be entitled to vote on a
show of hands.
- TAXES:
- A transfer for value of HSBC ordinary shares is generally subject to
U.K. stamp duty tax of 0.5%, payable by the purchaser.
- A transfer for value of HSBC ADSs is not subject to U.K. stamp duty or
to U.K. stamp duty reserve tax.
- If a holder of HSBC ADSs exercises its right to convert its HSBC ADSs
into HSBC ordinary shares, the transfer of the underlying HSBC ordinary
shares from the depositary to the HSBC ADS holder is subject to stamp
duty tax at the fixed rate of L5 per transfer.
- If a holder of HSBC ordinary shares exercises its right to convert its
HSBC ordinary shares into HSBC ADSs, the transfer of the HSBC ordinary
shares to the depositary is subject to stamp duty or stamp duty reserve
tax equal to 1.5% of the value of the shares (rounded up, in the case
of stamp duty, to the nearest L5). HSBC has agreed to pay such stamp
duty or stamp duty reserve tax in connection with the initial issuance
of HSBC ADSs in connection with the merger.
THE HSBC ORDINARY SHARES AND HSBC ADSS TO BE ISSUED IN THE MERGER WILL BE LISTED
AND TRADED ON VARIOUS EXCHANGES (SEE PAGE 89)
The HSBC ordinary shares to be issued in the merger (including the ordinary
shares underlying the HSBC ADSs to be issued in the merger) will be admitted to
the Official List of the U.K. Listing Authority and to trading on the London
Stock Exchange, and will be listed on The Stock Exchange of Hong Kong Limited,
Euronext Paris and the New York Stock Exchange. The HSBC ordinary shares will
trade on the London Stock Exchange under the symbol "HSBA", on The Stock
Exchange of Hong Kong Limited under the symbol "005" and on Euronext Paris under
the symbol "PHSB". The HSBC ADSs to be issued in the merger will be listed on
the New York Stock Exchange and will trade under the symbol "HBC".
HOLDERS OF HOUSEHOLD COMMON STOCK ARE ENTITLED TO THE BENEFIT OF THE HSBC SECOND
INTERIM DIVIDEND IN LIEU OF THE FINAL DIVIDEND FOR 2002 (SEE PAGES 79 AND 82)
The merger will not be completed prior to the record date for HSBC's second
interim dividend. As
2
a result, the holders of Household common stock will not be entitled to receive
that dividend on the HSBC ordinary shares or HSBC ADSs they receive in the
merger. However, the Household board of directors is entitled, in its
discretion, to declare and pay additional cash dividends on the Household common
stock, and otherwise to take appropriate steps, so that holders of Household
common stock receive further dividends per share of Household common stock up
to, in the aggregate, 2.675 times the HSBC second interim dividend per HSBC
ordinary share, unless HSBC has taken alternative steps, reasonably acceptable
to Household, to provide the same economic benefit to holders of Household
common stock. Household expects, subject to applicable law, that Household's
board of directors will declare a dividend on Household common stock with a
record date immediately prior to the completion of the merger, with the dividend
to be paid on May 6, 2003, the same day that the HSBC second interim dividend is
paid, or if the merger is completed subsequent to May 6, 2003, to be paid
promptly following the merger. For more information on historical dividends paid
to holders of Household common stock and HSBC ordinary shares and HSBC ADSs,
please refer to "Market Price and Dividend Data".
THE MERGER IS GENERALLY TAX FREE TO HOLDERS OF HOUSEHOLD COMMON STOCK AND
TAXABLE TO HOLDERS OF HOUSEHOLD PREFERRED STOCK (SEE PAGE 70)
[Wachtell, Lipton, Rosen & Katz and Cleary, Gottlieb, Steen & Hamilton have
delivered to Household and HSBC, respectively, their opinions, dated the date of
this document, that (1) the merger will be treated for U.S. federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the U.S.
tax code, (2) each transfer of property to HSBC by a stockholder of Household
pursuant to the merger will not be subject to Section 367(a)(1) of the U.S. tax
code and (3) U.S. holders of Household common stock will not recognize any
taxable gain or loss on the exchange of their stock for HSBC ordinary shares or
HSBC ADSs, but will recognize a taxable gain or loss in respect of any cash
received instead of a fractional HSBC ordinary share (or fractional HSBC ADS)
that they would otherwise be entitled to receive. U.S. holders of Household
preferred stock (whether their stock is converted into the right to receive cash
in the merger or designated for redemption for cash prior to the merger) will
recognize a taxable gain or loss on the exchange of their stock for cash.]
OWNING HSBC ORDINARY SHARES IS DIFFERENT FROM OWNING HOUSEHOLD COMMON STOCK (SEE
PAGE 131)
As a result of the merger, holders of Household common stock will receive,
at their election, either HSBC ordinary shares or HSBC ADSs. Each HSBC ADS
represents an ownership interest in five HSBC ordinary shares. There are
differences between the rights of a holder of common stock in Household, a
Delaware corporation, and the rights of a holder of ordinary shares in HSBC, an
English company. For example:
- only holders representing 5% or more of the voting power of HSBC or 100
shareholders holding shares paid up as to an average sum, per
shareholder, of not less than L100, acting together, will, with prior
written notice to HSBC, be able to propose resolutions to be considered
at annual general meetings of HSBC, whereas any Household stockholder who
is entitled to vote at the meeting may bring business before a Household
stockholders' meeting,
- persons acquiring 3% or more of the voting power of HSBC will generally
be required to make public disclosures and notifications with respect to
their ownership,
- amendments to HSBC's Memorandum and Articles of Association will require
the approval of at least 75% of the votes cast at a shareholders' meeting
of HSBC, whereas amendments to Household's Certificate of Incorporation
require the affirmative vote of holders of a majority of the outstanding
stock entitled to vote thereon,
- except in limited circumstances, holders of HSBC ordinary shares will not
be entitled to appraisal rights in mergers or any other types of
transactions,
- HSBC generally will not have the same freedom as Household has to adopt
defensive measures in the event of a takeover bid, and
- although holders of HSBC ordinary shares will be permitted to initiate
lawsuits on behalf of the company in limited circumstances, holders will
not be able to initiate
3
shareholder class action lawsuits against HSBC.
You should also be aware that it may be difficult to effect service of
process to begin a lawsuit in a U.S. court against directors and officers of
HSBC who are not residents of the United States.
HOUSEHOLD AND HSBC BELIEVE THE MERGER WILL BENEFIT BOTH COMPANIES (SEE PAGES 40
AND 56)
Household believes that the merger will make it more competitive in several
important ways. Household expects the merger to improve its ability to fund the
continued growth of its business. Additionally, Household believes that the
merger will provide it with the ability to create additional product offerings
in the United States targeted to prime and near-prime consumers and to extend
its business into new markets in which HSBC already has a significant presence.
HSBC believes that the merger creates significant opportunities to
strengthen its business in a way that benefits its shareholders and is
consistent with its strategic objectives. HSBC believes that the merger meets
HSBC's stated objective of growing consumer assets and improves the geographic
balance of HSBC's earnings, significantly increasing the contribution from North
America. By expanding its U.S. consumer finance operations through the merger,
HSBC seeks to add an asset class that further diversifies its portfolio to
offset its potential exposure to increased concentration risk. In addition, HSBC
believes that the merger offers significant opportunities to extend Household's
business model into countries and territories currently served by HSBC and
broadens the product range available to the enlarged customer base. The
combination of the businesses is expected to produce cost savings in the areas
of administrative support and through consolidating card processing. HSBC also
expects that funding costs for the Household business will be lower in the
future as a result of the financial strength and diversity of HSBC. The merger
is expected to be accretive to earnings per share for 2003 on a U.K. GAAP basis.
THERE ARE RISKS THAT YOU SHOULD CONSIDER IN VOTING ON THE MERGER AGREEMENT,
INCLUDING FACTORS THAT MAY REDUCE THE ANTICIPATED BENEFITS OF THE MERGER (SEE
PAGE 25)
Although Household and HSBC believe the merger will benefit both companies,
there are risks that you should consider in voting on the merger agreement,
including factors that may reduce the anticipated benefits of the merger for
holders of Household common stock, including that:
- the value of HSBC ordinary shares or HSBC ADSs to be received by holders
of Household common stock in the merger will fluctuate, and as a result
of the fixed exchange ratio, holders of Household common stock bear the
risk of a decline in the market price of HSBC ordinary shares or HSBC
ADSs;
- the market value of the HSBC ordinary shares or HSBC ADSs to be issued in
the merger will be subject to fluctuations in the exchange rate between
the U.S. dollar and the pound sterling;
- the rights of holders of HSBC ADSs to be issued in the merger will not be
the same as, and may be less favorable than, the rights of holders of
HSBC ordinary shares to be issued in the merger;
- the removal of Household from the S&P 500 Index and other market indices
could result in mutual funds and other investment vehicles selling HSBC
ordinary shares and HSBC ADSs received in the merger, which could
adversely affect the market prices for HSBC ordinary shares and HSBC ADSs
following the merger;
- shareholders in the United States may decide to sell Household common
stock and HSBC ordinary shares or HSBC ADSs, which could cause a decline
in their market prices;
- the opinions, each dated November 14, 2002, obtained by Household from
its financial advisors will not reflect changes in circumstances between
the signing of the agreement and the merger, and Household has not
obtained updated fairness opinions;
- regulatory requirements or conditions may reduce the anticipated benefits
of the merger;
4
- Household's business, including the business of lending to non-prime
consumers, involves special legal, regulatory and reputational
considerations;
- there are legal actions relating to the merger and Household's prior
financial disclosures;
- the merger agreement limits Household's ability to pursue alternatives to
the merger; and
- Household's executive officers and directors have interests in the merger
that are different from your interest as a Household stockholder.
THE HOUSEHOLD BOARD UNANIMOUSLY RECOMMENDS THAT HOUSEHOLD STOCKHOLDERS VOTE
"FOR" ADOPTION OF THE MERGER AGREEMENT (SEE PAGE 42)
Household's board of directors has determined that the merger agreement and
the merger are advisable, fair to, and in the best interests of Household and
its stockholders and has unanimously approved the merger agreement and the
merger and unanimously recommends that Household stockholders vote "FOR"
adoption of the merger agreement.
HOLDERS OF HOUSEHOLD NON-VOTING PREFERRED STOCK HAVE APPRAISAL RIGHTS IN THE
MERGER (SEE PAGE 87)
Holders of Household common stock and Household voting preferred stock do
not have appraisal rights in the merger. Only holders of Household non-voting
preferred stock have statutory appraisal rights in the merger and may perfect
those rights by following in all respects the procedures specified in Section
262 of the Delaware General Corporation Law.
To perfect your appraisal rights:
- you must deliver a written demand for appraisal to Household before the
vote on the merger is taken at the special meeting and continuously hold
your shares of record through the completion of the merger; and
- you, or another dissenting holder, must file a petition with the Delaware
Court of Chancery within 120 days after the effective date of the merger,
demanding a determination of the fair value of the shares.
As a holder of depositary shares each representing an ownership of 1/40th
of a share of a class of Household non-voting preferred stock, if you wish to
exercise and perfect your appraisal rights, you must do so by acting through the
depositary that is the record holder of the shares. You should send a written
notice to the depositary instructing it to take the actions summarized above on
your behalf.
GOLDMAN, SACHS & CO. AND KEEFE, BRUYETTE & WOODS, INC. CONSIDER THE MERGER
CONSIDERATION FAIR, FROM A FINANCIAL POINT OF VIEW, TO HOUSEHOLD COMMON
STOCKHOLDERS AND HOLDERS OF NON-REDEEMABLE PREFERRED STOCK, RESPECTIVELY (SEE
PAGES 42 AND 53)
Household retained Goldman, Sachs & Co. as its financial advisor in
connection with the merger. In addition, Household retained Keefe, Bruyette &
Woods, Inc. to perform a financial analysis of certain classes of Household's
preferred stock and to render an opinion as to the fairness, from a financial
point of view, of the consideration to be received in the merger by the holders
of these classes of preferred stock. Household retained two different financial
advisors in order for the Household board of directors to obtain separate,
independent opinions regarding the fairness, from a financial point of view, of
the consideration to be received in the merger by the holders of Household
common stock, on the one hand, and the holders of this preferred stock, on the
other.
Goldman Sachs delivered a written opinion to Household's board of directors
that, as of November 14, 2002, and based upon and subject to the factors and
assumptions set forth therein, the exchange ratio of 2.675 HSBC ordinary shares
or 0.535 HSBC ADSs for each share of Household common stock is fair, from a
financial point of view, to holders of Household common stock. Goldman Sachs
will be paid $5 million upon the mailing of this document to Household's
stockholders and will be paid a further $22 million if the merger is completed.
Keefe, Bruyette & Woods delivered a written opinion to Household's board
that, as of November 14, 2002, and based upon and subject to the factors and
assumptions set forth therein, the consideration to be received by holders of
Household 7 5/8% cumulative preferred stock, 7.50% cumulative preferred stock
and 7.60% cumulative preferred stock in the merger is fair, from a financial
point of view, to such holders. Keefe, Bruyette & Woods was
5
paid $333,000 on its retention to render a fairness opinion, and will be paid an
additional $333,000 upon the mailing of this document to Household's
stockholders and a further $334,000 if the merger is completed.
Both opinions were provided for the information and assistance of
Household's board of directors in connection with its consideration of the
merger. Neither opinion is a recommendation to any Household stockholder as to
how to vote. The full text of each of the Goldman Sachs opinion and the Keefe,
Bruyette & Woods opinion, which set forth assumptions made, procedures followed,
matters considered and limitations on review undertaken in connection with the
opinions, is attached to this document as Annex B and Annex C, respectively. You
should read both opinions carefully.
The three series of Household voting preferred stock are being redeemed
pursuant to their terms and the 8 1/4% cumulative preferred stock is being
converted into cash consideration equal to its current redemption price and,
accordingly, no fairness opinion was requested or obtained with respect to these
series of preferred stock.
HOUSEHOLD EXECUTIVE OFFICERS AND DIRECTORS HAVE INTERESTS IN THE MERGER THAT
DIFFER FROM YOUR INTERESTS IN THE MERGER (SEE PAGE 58)
Household's executive officers and directors have economic interests in the
merger in addition to the interest they share with you as a holder of Household
stock. These interests exist because of rights the executive officers have
pursuant to the terms of the equity plans maintained by Household, which provide
for the accelerated vesting of some stock-based awards in connection with
transactions such as the merger. The merger will not result in the accelerated
vesting of any of the stock options to acquire shares of Household common stock
held by the non-employee directors of Household, although these options will
become HSBC stock options in the merger. These interests also exist in the case
of the executive officers, due to the terms of employment agreements with
Household, which provide for severance benefits in the event of qualifying
employment terminations after a change of control. In addition, nine executive
officers of Household have entered into new employment agreements that will
become effective upon the completion of the merger, pursuant to which they will
continue to have senior management positions in Household, will receive payments
under their pre-existing employment agreements with Household, and will receive
compensation including salary, bonus and equity grants from HSBC following the
merger. Pursuant to the terms of these new employment agreements, subject to
satisfaction of the terms and conditions of those agreements, the nine
executives, including Messrs. Aldinger, Schoenholz and Mehta, would be entitled
to receive the following amounts and interests in the aggregate: annual base
salary aggregating $4.9 million per year; annual bonus aggregating approximately
$9.25 million per year; HSBC restricted stock grants with an aggregate grant
date value of $40.5 million vesting in equal annual installments over either a
three-or five-year period. As described in detail on page 63, the approximate
aggregate payments in satisfaction of the cash severance obligations under the
existing employment agreements and employment protection agreements between
Household and each of the nine executives who have entered into new employment
agreements with Household, including Messrs. Aldinger, Schoenholz and Mehta, is
$58 million. Assuming the merger is completed on March 31, 2003, the number of
stock options to acquire shares of Household common stock held by the nine
executives who have entered into new employment agreements with Household,
including Messrs. Aldinger, Schoenholz and Mehta, that will vest and become
exercisable as a result of the merger is 2,023,125 in the aggregate, which
options have an in-the-money value of $0, based on the closing price per share
of Household common stock on February 18, 2003. Assuming the merger is completed
on March 31, 2003, the number of Household restricted stock rights held by the
nine executives, including Messrs. Aldinger, Schoenholz and Mehta, that will
vest and become free of restrictions as a result of the merger is 461,008 in the
aggregate, which restricted stock rights have a value of approximately $12.7
million in the aggregate, based on the closing price per share of Household
common stock on February 18, 2003.
Following the merger, Mr. Aldinger, the current chairman and chief
executive officer of Household, will continue to serve as chairman and chief
executive officer of Household until January 1, 2004 and thereafter as chairman
and chief executive officer of Household and HSBC North America, Inc. Mr.
Aldinger will also serve as a member of the HSBC board of directors. Following
the merger, Mr. Schoenholz will continue to serve as House-
6
hold's president and chief operating officer, and Mr. Mehta will continue to
serve as a group executive of Household. As described in detail beginning on
page 58, there are substantial financial interests to be conveyed to the
executive officers of Household, including Messrs. Aldinger, Schoenholz and
Mehta, under either the terms of existing or new employment agreements and due
to the accelerated vesting of stock options and restricted stock rights in
respect of Household common stock.
Pursuant to the terms of the new employment agreements with each of Messrs.
Aldinger, Schoenholz and Mehta, subject to satisfaction of the terms and
conditions of those agreements, each of these executives would be entitled to
receive the following amounts and interests:
- Mr. Aldinger: annual base salary of $1 million; annual bonus of $4
million; a special retention grant of HSBC restricted stock with a grant
date value of $10 million vesting in three equal annual installments; two
subsequent annual grants of HSBC restricted shares each with a grant date
value of $5.5 million vesting in three equal annual installments.
- Mr. Schoenholz: annual base salary of $650,000; annual bonus of $1.5
million; a special retention grant of HSBC restricted stock with a grant
date value of $3 million vesting in three equal annual installments.
- Mr. Mehta: annual base salary of $550,000; annual bonus of $1.125
million; a special retention grant of HSBC restricted stock with a grant
date value of $5 million vesting in five equal annual installments.
As described in detail on page 63, the approximate payment in satisfaction
of the cash severance obligations under the existing employment agreements
between Household and each of Messrs. Aldinger, Schoenholz and Mehta is $20.30
million, $10.64 million and $8.60 million, respectively. Assuming the merger is
completed on March 31, 2003, the number of stock options to acquire shares of
Household common stock held by each of Messrs. Aldinger, Schoenholz and Mehta
that will vest and become exercisable as a result of the merger is 1,015,000,
256,000 and 256,000, respectively, which options have an in-the-money value of
$0, based on the closing price per share of Household common stock on February
18, 2003. Assuming the merger is completed on March 31, 2003, the number of
Household restricted stock rights held by each of Messrs. Aldinger, Schoenholz
and Mehta that will vest and become free of restrictions as a result of the
merger is 134,420, 84,012 and 84,012, respectively, which restricted stock
rights have a value of approximately $3.7 million, $2.3 million and $2.3
million, respectively, based on the closing price per share of Household common
stock on February 18, 2003.
Following the merger, HSBC has agreed that Household will continue to be
obligated to indemnify and will continue to maintain directors' and officers'
insurance covering the officers and directors of Household relating to events
occurring before completion of the merger.
HSBC WILL ASSUME HOUSEHOLD STOCK OPTIONS AND OTHER EQUITY AWARDS (SEE PAGES 63
AND 78)
When HSBC and Household complete the merger, outstanding options to
purchase, and other equity-based awards in respect of, shares of Household
common stock, granted to Household employees and directors under Household's
equity-based plans, will be assumed by HSBC and become options to purchase and
awards in respect of HSBC ordinary shares. The number of shares subject to these
options and awards, and the exercise price of the options, will be adjusted to
reflect the exchange ratio. Options and awards that have not previously vested
will vest upon completion of the merger, except for options and awards granted
after November 14, 2002. Assuming the merger is completed on March 31, 2003,
options to acquire an aggregate of 2,143,125 shares of Household common stock
held by Household's executive officers will vest and become exercisable as a
result of the merger, which options have a weighted average exercise price of
$53.44, and an aggregate of 526,750 Household restricted stock rights held by
Household's executive officers will vest and become free of restrictions as a
result of the merger.
THE MERGER AGREEMENT IS ATTACHED (SEE PAGE 75 AND ANNEX A)
The terms and conditions of the merger are contained in the merger
agreement, which is attached as Annex A to this document. Please read it
carefully.
7
HOLDERS OF HOUSEHOLD COMMON STOCK AND SOME HOLDERS OF HOUSEHOLD PREFERRED STOCK
CAN VOTE ON THE MERGER (SEE PAGE 34)
The holders of record of Household common stock and voting preferred stock,
as of the close of business on February 21, 2003, which is the record date for
the special meeting, are entitled to receive notice of and to vote at the
special meeting.
The holders of Household non-voting preferred stock are entitled to receive
notice of, but are not entitled to vote at, the special meeting.
A MAJORITY VOTE OF HOUSEHOLD STOCKHOLDERS IS REQUIRED TO ADOPT THE MERGER
AGREEMENT (SEE PAGE 34)
The adoption of the merger agreement requires the affirmative vote of the
holders of a majority of the outstanding shares of Household stock entitled to
vote, voting together as a single class. Each share of common stock and each
share of voting preferred stock is entitled to one vote. Failure to grant your
proxy by telephone or on the Internet, to return a properly executed proxy card
or to vote in person at the special meeting will have the same effect as a vote
"AGAINST" adoption of the merger agreement (except that shares of Household
common stock credited to an account under the Household International Tax
Reduction Investment Plan for which voting instructions are not received will be
voted by the plan's trustee in the same way as the majority of the shares held
under the plan for which voting instructions are received).
A MAJORITY VOTE OF HSBC ORDINARY SHAREHOLDERS IS REQUIRED TO APPROVE THE MERGER
(SEE PAGE 37)
At an extraordinary general meeting of HSBC shareholders expected to occur
on the same day as the Household special meeting, HSBC ordinary shareholders
will vote on a resolution to approve the merger and authorize the directors of
HBSC to allot the necessary HSBC ordinary shares to be issued in connection with
the merger.
The merger is conditioned on approval of the resolution, which will require
the approval of a majority of the votes cast on a show of hands or on a poll at
the HSBC extraordinary general meeting. On a show of hands every HSBC ordinary
shareholder who is present in person, including corporate representatives of
corporate shareholders, is entitled to one vote. On a poll, every HSBC ordinary
shareholder who is present in person, including corporate representatives of
corporate shareholders, or by proxy is entitled to one vote for each HSBC
ordinary share held.
THERE ARE CONDITIONS THAT MUST BE SATISFIED OR WAIVED BEFORE HSBC AND HOUSEHOLD
ARE REQUIRED TO COMPLETE THE MERGER (SEE PAGE 83)
HSBC and Household are not required to complete the merger unless a number
of conditions are satisfied or, where legally permitted, waived by them. These
include:
- approval of the merger agreement by Household stockholders and HSBC
ordinary shareholders having been obtained,
- approval of the merger (including the expiration or termination of any
applicable waiting periods) having been received from applicable
governmental and regulatory agencies,
- no stop order suspending the effectiveness of Household's registration
statement, of which this document is a part, having been issued, and no
proceeding for that purpose having been initiated or threatened,
- approval for admission or admission to listing or to trading, as the case
may be, having been granted by the various stock exchanges, including the
New York Stock Exchange, on which HSBC ordinary shares and HSBC ADSs to
be issued in connection with the merger will be listed,
- the absence of any statute, order, injunction or similar legal obstacle
prohibiting consummation of the merger, and
- Household having deposited the redemption price of the shares of
Household voting preferred stock in trust for the holders of such shares
so that the shares shall be deemed not outstanding.
In addition, HSBC is not required to complete the merger unless a number of
conditions are satisfied or waived by it. These include:
- Household's representations and warranties in the merger agreement being
true and correct, subject to materiality standards contained in the
merger agreement,
8
- Household having performed in all material respects all obligations
required to be performed by it under the merger agreement,
- HSBC having received a tax opinion from Cleary, Gottlieb, Steen &
Hamilton, to the effect that the merger will qualify as a reorganization
within the meaning of the U.S. tax code and that each transfer of
property to HSBC by a stockholder of Household pursuant to the merger
will not be subject to Section 367(a)(1) of the U.S. tax code,
- no required governmental or regulatory approval of or consent to the
merger being subject to a burdensome condition as defined in the merger
agreement, and
- the absence of any pending or threatened suits, actions or proceedings by
any governmental entity seeking to restrain or prohibit the consummation
of the merger, seeking to impose any burdensome condition or which
otherwise would reasonably be expected to have a material adverse effect
on HSBC or Household.
In addition, Household is not required to complete the merger unless a
number of conditions are satisfied or waived by it. These include:
- HSBC's representations and warranties in the merger agreement being true
and correct, subject to materiality standards contained in the merger
agreement,
- HSBC having performed in all material respects all obligations required
to be performed by it under the merger agreement, and
- Household having received a tax opinion from Wachtell, Lipton, Rosen &
Katz, to the effect that the merger will qualify as a reorganization
within the meaning of the U.S. tax code and that each transfer of
property to HSBC by a stockholder of Household pursuant to the merger
will not be subject to Section 367(a)(1) of the U.S. tax code.
THERE ARE REGULATORY APPROVALS IN THE UNITED STATES AND OTHER COUNTRIES THAT
MUST BE OBTAINED PRIOR TO COMPLETION OF THE MERGER (SEE PAGE 68)
In the United States, the merger is subject to the prior notification
requirements of the Hart-Scott-Rodino Antitrust Improvement Act, which requires
its impact on competition to be reviewed in advance by the Department of Justice
or the Federal Trade Commission. The required waiting period has been
terminated.
The change in control of some Household subsidiaries will also be subject
to regulatory approval, including by the Superintendent of Banks of the State of
New York and the state banking authorities in some other states, some state
insurance departments, and the Office of the Comptroller of the Currency.
Filings with regulatory authorities will also be required or advisable in
other countries in which Household operates, including the United Kingdom, the
Republic of Ireland and Canada.
UNDER SOME CIRCUMSTANCES HSBC OR HOUSEHOLD MAY TERMINATE THE MERGER AGREEMENT
(SEE PAGE 85)
Either HSBC or Household may terminate the merger agreement if:
- the merger is not completed by June 30, 2003 (other than because of a
breach of the merger agreement caused by the party seeking termination),
- Household's stockholders fail to adopt the merger agreement,
- HSBC's shareholders fail to pass the resolution approving the merger
agreement,
- a court or other governmental entity issues a non-appealable final order
permanently restraining the merger, or
- a governmental or regulatory entity which must grant an approval or
consent as a condition to the merger denies such approval or consent (or,
in the case of a termination by HSBC, if such approval or consent is
subject to a burdensome condition) and such action has become final and
non-appealable.
Additionally, HSBC may terminate the merger agreement if:
- there has been a breach of any of Household's representations,
warranties, covenants or agreements, such that HSBC would not be
obligated to consummate the merger, subject in specified cases to the
right of Household to cure the breach within 30 days following written
notice,
9
- Household has willfully and materially breached its obligations under the
agreement not to solicit, encourage or otherwise facilitate an
acquisition proposal and not to discuss, negotiate or agree to an
alternative transaction, except as permitted by the agreement under
specified conditions, or Household's board has failed to recommend the
adoption of the merger agreement, changed its recommendation to the
stockholders, recommended an alternative proposal or failed to call a
meeting of Household's stockholders, or
- Household or any of its representatives has engaged in discussions with
any person in connection with an unsolicited acquisition proposal in a
manner permitted by the agreement and has not ceased all these
discussions within 20 days.
Additionally, Household may terminate the merger agreement if:
- there has been a breach of any of HSBC's representations, warranties,
covenants or agreements set forth in the merger agreement, such that
Household would not be obligated to consummate the merger, subject in
specified cases to the right of HSBC to cure the breach within 30 days
following written notice, or
- HSBC's board has failed to recommend the merger to HSBC's shareholders or
failed to call a meeting of HSBC's shareholders.
UNDER SOME CIRCUMSTANCES HOUSEHOLD WILL BE REQUIRED TO PAY A TERMINATION FEE TO
HSBC IF THE MERGER AGREEMENT IS TERMINATED (SEE PAGE 86)
Household will be required to pay HSBC a termination fee of $550 million if
the merger agreement is terminated when:
- a competing acquisition proposal is known to Household at the time of the
event that gives rise to the termination and, within 12 months after the
termination, Household completes, or enters into an agreement for an
alternative acquisition transaction, or
- Household has willfully and materially breached its obligations not to
solicit an acquisition proposal or Household's board of directors has
changed its recommendation to approve the merger or recommended an
alternative proposal.
THE COMPANIES
HSBC HOLDINGS PLC (SEE PAGE 94)
8 Canada Square
London E14 5HQ
England
(011 44) 20 7991 8888
HSBC is one of the largest banking and financial services organizations in
the world, based on a market capitalization of U.S.$104.9 billion at December
31, 2002. At June 30, 2002, HSBC had total assets of U.S.$746.3 billion and
shareholders' funds of U.S.$51.2 billion. For the year ended December 31, 2001,
HSBC's pre-tax profit was U.S.$8.0 billion on operating income of U.S.$25.9
billion. HSBC is headquartered in London, England.
HOUSEHOLD INTERNATIONAL, INC. (SEE PAGE 95)
2700 Sanders Road
Prospect Heights, Illinois 60070
(847) 564-5000
Household, through its subsidiaries, primarily provides middle-market
consumers with several types of loan products in the United States, Canada and
the United Kingdom. Household offers mortgage loans, VISA and MasterCard and
private label credit cards, auto finance loans, tax refund anticipation loans
and other types of unsecured loans. At December 31, 2002, Household had $107.5
billion in managed receivables and $82.6 billion in owned receivables. For the
year ended December 31, 2002, Household's income before taxes was $2.25 billion
on net revenues of $10.8 billion.
WHERE YOU CAN FIND MORE INFORMATION (SEE PAGE 157)
The Securities and Exchange Commission, or SEC, permits HSBC and Household
to "incorporate by reference" information into this document. This means that
the companies can disclose important information to you by referring to another
document filed separately with the SEC. The information incorporated by
reference is deemed to be part of this document, except for any information
superseded by information contained directly in this document.
10
COMPARATIVE MARKET PRICE DATA
The following table presents per share closing market prices as reported on
the New York Stock Exchange for HSBC ADSs and shares of Household common stock
and the closing mid-market quotation for HSBC ordinary shares as quoted in the
Daily Official List of the London Stock Exchange on November 13, 2002, the last
full trading day prior to public announcement of the signing of the merger
agreement, and on , 2003, the latest practicable date prior to the
printing of this document. The table also presents implied equivalent per share
values for shares of Household common stock by multiplying the price per HSBC
ADS by 0.535.
All references in this document to closing prices on the New York Stock
Exchange mean closing prices excluding extended trading hours. All references in
this document to closing mid-market quotations of HSBC ordinary shares are to
the average of the bid price and the offer price at closing as set out in the
Daily Official List of the London Stock Exchange.
Household stockholders are urged to obtain current market quotations for
the HSBC ordinary shares, HSBC ADSs and Household common stock before making a
decision with respect to the merger.
<Table>
<Caption>
IMPLIED VALUE
PRICE PER SHARE PER SHARE OF
HSBC ORDINARY HSBC ADS OF HOUSEHOLD HOUSEHOLD
SHARE PRICE PRICE COMMON STOCK COMMON STOCK
------------- -------- --------------- -------------
November 13, 2002................ L 7.07 $ 56.05 $ 22.46 $ 29.99
, 2003................... L $ $ $
</Table>
The table below shows, for the periods indicated, the highest and lowest
closing mid-market quotations for one HSBC ordinary share on the London Stock
Exchange and the highest and lowest closing sale prices of one HSBC ADS on the
NYSE, in each case for the periods presented.
<Table>
<Caption>
HSBC ORDINARY
SHARES HSBC ADSS
---------------- ------------
HIGH LOW HIGH LOW
------ ------ ---- ----
(L PER HSBC ($ PER
ORDINARY SHARE) HSBC ADS)
YEAR ENDED DECEMBER 31, 2001
First Quarter........................................ 10.92 7.77 79.7 56.4
Second Quarter....................................... 9.21 8.15 66.0 57.8
Third Quarter........................................ 8.52 6.08 61.9 44.8
Fourth Quarter....................................... 8.91 6.97 63.7 52.5
YEAR ENDED DECEMBER 31, 2002
First Quarter........................................ 8.45 7.67 61.6 54.9
Second Quarter....................................... 8.66 7.40 64.4 56.1
Third Quarter........................................ 7.70 6.44 59.6 51.5
Fourth Quarter....................................... 7.63 6.43 59.8 50.2
YEAR ENDING DECEMBER 31, 2003
First Quarter (through February 18, 2003)............ 7.09 6.26 57.3 52.1
</Table>
11
The table below shows the highest and lowest sale prices of one share of
Household common stock on the NYSE for the periods presented.
<Table>
<Caption>
HOUSEHOLD
COMMON STOCK
-------------
HIGH LOW
----- -----
($ PER SHARE)
YEAR ENDED DECEMBER 31, 2001
First Quarter............................................... 62.00 52.00
Second Quarter.............................................. 69.98 57.45
Third Quarter............................................... 69.49 48.00
Fourth Quarter.............................................. 61.40 51.29
YEAR ENDED DECEMBER 31, 2002
First Quarter............................................... 60.90 43.50
Second Quarter.............................................. 63.25 47.06
Third Quarter............................................... 50.84 26.10
Fourth Quarter.............................................. 32.00 20.00
YEAR ENDING DECEMBER 31, 2003
First Quarter (through February 18, 2003)................... 28.95 25.90
</Table>
CURRENCIES
References in this document to "dollars", "U.S. dollars", "$" and "U.S.$"
are to the currency of the United States; references to "pounds sterling",
"sterling", "pounds", "L", "pence" and "p" (there are 100 pence to each pound)
are to the currency of the United Kingdom and references to "Hong Kong dollars"
and "H.K.$" are to the currency of the Hong Kong Special Administrative Region
of the People's Republic of China, or Hong Kong SAR. Solely for your
convenience, this document contains translations of pounds sterling amounts into
U.S. dollars at specified rates. You should not take these translations as
assurances that the pounds sterling amounts currently represent U.S. dollar
amounts or could be converted into U.S. dollars at the rate indicated or at any
other rate, at any time.
12
COMPARATIVE PER SHARE DATA
The following table presents historical information about HSBC's and
Household's respective earnings per share, dividends per share and book value
per share (under U.K. GAAP for HSBC and under both U.S. GAAP and U.K. GAAP for
Household) and similar information reflecting the merger, which we refer to as
"pro forma" information at or for the six months ended June 30, 2002 and for the
year ended December 31, 2001.
In presenting the comparative pro forma information for the periods shown,
we assumed that HSBC and Household have been combined throughout those periods.
The pro forma information has been prepared under the acquisition method of
accounting under U.K. GAAP and you should refer to "HSBC and Household Unaudited
Pro Forma Condensed Combined Financial Information" on page 91 for further
information about the basis of presentation of this pro forma information.
The information listed as "equivalent pro forma" for Household was obtained
by multiplying the HSBC pro forma amounts under U.K. GAAP by the exchange ratio
of 2.675 HSBC ordinary shares for each share of Household common stock.
The pro forma information is not indicative of the results of future
operations or the actual results that would have been incurred had the merger
been consummated at the beginning of the periods presented. You should read the
data presented below together with the historical consolidated financial
statements, including the related notes, of HSBC and Household that are
incorporated by reference into this document.
<Table>
<Caption>
FOR THE YEAR ENDED AT OR FOR THE SIX MONTHS
DECEMBER 31, 2001 ENDED JUNE 30, 2002
------------------ ------------------------
$ $
HSBC
Basic earnings per ordinary share:
Historical........................................ 0.54 0.35
Pro forma......................................... 0.59 0.38
Diluted earnings per ordinary share:
Historical........................................ 0.53 0.35
Pro forma......................................... 0.59 0.37
Dividends per ordinary share:
Historical and Pro Forma.......................... 0.48 0.205
Net asset value per ordinary share:
Historical........................................ 5.42
Pro forma......................................... 6.03
HOUSEHOLD
Basic earnings per share:
Historical -- U.S. GAAP........................... 3.97 2.13
Historical -- U.K. GAAP........................... 2.94 1.49
Equivalent pro forma -- U.K. GAAP................. 1.58 1.02
Diluted earnings per share:
Historical -- U.S. GAAP........................... 3.91 2.11
Historical -- U.K. GAAP........................... 2.91 1.47
Equivalent pro forma -- U.K. GAAP................. 1.58 0.99
Dividends per share:
Historical -- U.S. GAAP and U.K. GAAP............. 0.85 0.47
Equivalent pro forma -- U.K. GAAP................. 1.28 0.55
Book value per share:
Historical -- U.S. GAAP........................... 18.97
Historical -- U.K. GAAP........................... 29.12
Equivalent pro forma -- U.K. GAAP................. 16.13
</Table>
13
SELECTED HISTORICAL FINANCIAL DATA
HSBC
HSBC prepares its financial statements in accordance with U.K. generally
accepted accounting principles, or U.K. GAAP. It uses the U.S. dollar as its
reporting currency because the U.S. dollar and currencies linked to it form the
major currency bloc in which HSBC transacts its business. In connection with its
listing on the New York Stock Exchange, HSBC also reconciles financial
information to U.S. generally accepted accounting principles, or U.S. GAAP,
which differ in some respects from U.K. GAAP, as described in "HSBC and
Household Unaudited Pro Forma Condensed Combined Financial Information." Except
as otherwise specifically noted, all financial information for HSBC contained in
this document has been prepared in accordance with U.K. GAAP.
The selected financial information which is set forth below as of and for
the years ended December 31, 1997, 1998, 1999 and 2000 has been derived from and
should be read in conjunction with the selected financial data and statistics or
consolidated financial statements and notes thereto of HSBC and its subsidiaries
as set forth in HSBC's annual report on Form 20-F/A for the year ended December
31, 2001. The consolidated financial statements of HSBC as of December 31, 1997,
1998, 1999, 2000 and 2001 and for each of the years in the five-year period
ended December 31, 2001 have been audited by KPMG Audit Plc, chartered
accountants and registered auditor. The selected information which is set forth
below as of and for the year ended December 31, 2001 has been restated to
reflect the adoption of U.K. Financial Reporting Standard 19 "Deferred Tax," and
together with the selected financial information which is set forth below as of
and for the six months ended June 30, 2001 and 2002 is unaudited and should be
read in conjunction with HSBC's report on Form 6-K, dated August 5, 2002,
containing interim financial information for the six months ended June 30, 2001
and 2002 which is incorporated by reference into this document.
<Table>
<Caption>
AT DECEMBER 31, AT JUNE 30,
----------------------------------------------- -------------------
1997 1998 1999 2000 2001 2001 2002
------- ------- ------- ------- ------- -------- --------
$M $M $M $M $M $M $M
Share capital............. 3,406 3,443 4,230 4,634 4,678 4,667 4,725
Shareholders' funds....... 27,080 27,402 33,408 45,570 46,388 46,728 51,178
Capital resources......... 41,562 41,092 44,270 50,964 50,854 52,732 55,440
Customer accounts......... 294,189 308,910 359,972 427,069 449,991 441,828 470,778
Undated subordinated loan
capital................. 3,245 3,247 3,235 3,546 3,479 3,475 3,517
Dated subordinated loan
capital................. 7,281 7,597 12,188 12,676 12,001 11,993 12,199
Loans and advances to
customers*.............. 240,421 235,295 253,567 289,837 308,649 299,471 342,057
Total assets.............. 471,686 483,128 569,139 673,814 696,245 692,191 746,335
</Table>
* Net of suspended interest and provisions for bad and doubtful debts.
14
<Table>
<Caption>
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------ -------------------
1997 1998 1999 2000 2001 2001 2002
------ ------ ------ ------ ------ ------- ---------
$M $M $M $M $M $M $M
AS REPORTED
Net interest income.............. 10,944 11,547 11,990 13,723 14,725 7,192 7,593
Other operating income........... 7,665 8,508 9,012 10,850 11,163 5,609 5,510
Operating profit before
provisions..................... 8,553 9,051 9,653 10,486 10,484 5,251 5,561
Provisions for bad and doubtful
debts.......................... (1,014) (2,637) (2,073) (932) (2,037) (441) (715)
Profit on ordinary activities
before tax..................... 8,130 6,571 7,982 9,775 8,000 5,435 5,057
Profit attributable to
shareholders................... 5,487 4,318 5,408 6,628 4,992 3,540 3,280
Dividends........................ (2,206) (2,495) (2,872) (4,010) (4,467) (1,764) (1,929)
CASH BASIS*
Operating profit before
provisions..................... 8,553 9,061 9,689 10,996 11,283 5,652 5,957
Profit on ordinary activities
before tax..................... 8,130 6,581 8,018 10,300 8,807 5,840 5,458
Profit attributable to
shareholders................... 5,487 4,328 5,444 7,153 5,799 3,945 3,681
</Table>
* HSBC judges its performance by comparing cash returns on cash invested, which
is a non-GAAP measure. Cash basis items are derived by adjusting reported
earnings to eliminate the impact of the amortization of goodwill arising on
acquisitions.
<Table>
<Caption>
AT OR FOR THE
SIX MONTHS ENDED
AT OR FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ -----------------
1997 1998 1999 2000 2001 2001 2002
------ ------ ------ ------ ------ ------ --------
$ $ $ $ $ $ $
PER ORDINARY SHARE+
Basic earnings............... 0.69 0.54 0.65 0.76 0.54 0.38 0.35
Diluted earnings............. 0.68 0.53 0.65 0.75 0.53 0.38 0.35
Dividends.................... 0.277 0.308 0.340 0.435 0.480 0.19 0.205
Net asset value.............. 3.37 3.38 3.95 4.92 4.96 5.01 5.42
SHARE INFORMATION+
U.S.$0.50 ordinary shares in
issue...................... 8,028m 8,067m 8,458m 9,268m 9,355m 9,333m 9,450m
</Table>
+ Per share amounts reported here and throughout the document reflect the share
capital reorganization on July 2, 1999.
15
<Table>
<Caption>
FOR THE
SIX MONTHS ENDED
FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------ ------------------
1997 1998 1999 2000 2001 2001 2002
------ ------ ------ ------ ------ ------ ---------
% % % % % % %
FINANCIAL RATIOS
Dividend payout ratio....... 40.2 57.8 53.1 60.5 89.5 49.8 58.8
Post-tax return on average
total assets.............. 1.37 0.98 1.20 1.33 0.86 1.20 1.04
Return on average
shareholders' funds....... 20.7 15.5 17.5 16.5 10.4 15.1 13.7
Average shareholders' funds
to average total assets... 5.98 5.71 6.24 6.49 6.87 6.76 6.69
</Table>
<Table>
<Caption>
AT DECEMBER 31, AT JUNE 30,
----------------------------------------------- ------------------
1997 1998 1999 2000 2001 2001 2002
------- ------- ------- ------- ------- ------- --------
% % % % % % %
CAPITAL RATIOS
Tier 1 capital............. 9.3 9.7 8.5 9.0 9.0 9.4 9.7
Total capital.............. 14.2 13.6 13.2 13.3 13.0 13.7 13.5
</Table>
AMOUNTS IN ACCORDANCE WITH U.S. GAAP
<Table>
<Caption>
AT OR FOR THE
SIX MONTHS ENDED
AT OR FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -------------------
1997 1998 1999 2000 2001 2001 2002
------- ------- ------- ------- ------- ------- ---------
$M $M $M $M $M $M $M
INCOME STATEMENT DATA FOR
THE PERIOD
Net income available for
ordinary
shareholders........... 5,306 3,934 4,889 6,236 4,911 3,542 1,456
Dividends................ (2,007) (2,328) (2,617) (3,137) (4,394) (2,627) (2,700)
BALANCE SHEET DATA AT
PERIOD END
Total assets............. 476,183 488,856 574,588 680,076 698,312 693,065 747,501
Shareholders' equity..... 28,240 30,351 35,930 48,072 48,444 47,315 52,304
</Table>
<Table>
<Caption>
AT OR FOR THE
SIX MONTHS ENDED
AT OR FOR THE YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -------------------
1997 1998 1999 2000 2001 2001 2002
------- ------- ------- ------- ------- ------- ---------
$ $ $ $ $ $ $
PER ORDINARY SHARE
Basic earnings........... 0.66 0.49 0.59 0.71 0.53 0.38 0.16
Diluted earnings......... 0.66 0.48 0.58 0.70 0.53 0.38 0.15
Dividends................ 0.25 0.29 0.31 0.34 0.48 0.285 0.29
Net asset value.......... 3.52 3.75 4.25 5.19 5.18 5.10 5.54
</Table>
16
HOUSEHOLD
The selected financial information which is set forth below as of and for
the years ended December 31, 1997, 1998, 1999, 2000 and 2001 has been derived
from and should be read in conjunction with the selected financial data and
statistics or consolidated financial statements and notes thereto of Household
and its subsidiaries as set forth in Household's annual report on Form 10-K/A,
for the year ended December 31, 2001. The consolidated financial statements of
Household as of December 31, 2000 and 2001, and for each of the years in the
three-year period ended December 31, 2001, have been audited by KPMG LLP,
Household's independent certified public accountants.
The selected financial information which is set forth below as of and for
the six months ended June 30, 2001 and 2002 is unaudited and should be read in
conjunction with Household's quarterly report on Form 10-Q/A, for the quarter
ended June 30, 2002, which is incorporated by reference herein. Operating
results for the six months ended June 30, 2002 should not be considered
indicative of the results for any future quarters or the year ending December
31, 2002.
For the three months ended September 30, 2002, Household recorded a $525
million pre-tax charge related to Household's agreement in principle with a
multi-state working group of state attorneys general and regulatory agencies to
effect a nationwide resolution of alleged violations of federal and state
consumer protection, consumer finance and banking laws and regulations related
to real estate secured lending from its retail branch consumer lending
operations as operated under the "HFC" and "Beneficial" brand names. Please
refer to Household's quarterly report on Form 10-Q for the period ended
September 30, 2002 for further information. This agreement became effective on
December 16, 2002. Consent decrees or similar documentation have been entered
into with all 50 states and the District of Columbia. On October 11, 2002,
Household announced that it had determined that the continued operation of
Household Bank, f.s.b. was not in Household's long-term strategic interest.
During the fourth quarter of 2002, Household completed the sale of substantially
all of the remaining assets and deposits of Household Bank, f.s.b. A loss of
$240 million (after-tax) was recorded on the disposition of these assets and
deposits.
In October 2002, Household issued 18.7 million shares of common stock for
$400 million and $542 million of 8.875% Adjustable Conversion-Rate Equity
Security Units, or Units. Each Unit consists of both a purchase contract, under
which the purchaser will agree to purchase from Household, for $25 each, shares
of common stock of Household on February 15, 2006, and an 8.875% senior note due
February 15, 2008.
Household's consolidated financial statements are prepared in accordance
with U.S. GAAP.
17
<Table>
<Caption>
AT OR FOR THE SIX MONTHS
AT OR FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------------ -------------------------
1997 1998 1999 2000 2001 2001 2002
--------- --------- --------- --------- ---------- ----------- -----------
(ALL DOLLAR AMOUNTS EXCEPT PER SHARE DATA ARE STATED IN MILLIONS)
STATEMENT OF INCOME DATA
Net interest margin and
other revenues.......... $ 5,966.9 $ 6,294.7 $ 6,616.4 $ 7,905.4 $ 9,606.5 $ 4,539.1 $ 5,395.5
Provision for credit
losses on owned
receivables............. 1,493.0 1,516.8 1,716.4 2,116.9 2,912.9 1,360.7 1,773.9
Operating expenses........ 2,864.9 2,653.5 2,513.0 3,027.3 3,572.6 1,758.9 1,947.6
Policyholders' benefits... 255.9 238.2 258.1 261.7 302.6 150.6 171.4
Merger and integration
related costs........... -- 1,000.0 -- -- -- -- --
Income taxes.............. 444.2 404.4 700.6 868.9 970.8 440.1 504.2
--------- --------- --------- --------- ---------- ---------- ----------
Net income................ $ 908.9 $ 481.8(1) $ 1,428.3 $ 1,630.6 $ 1,847.6 $ 828.8 $ 998.4
========= ========= ========= ========= ========== ========== ==========
PER COMMON SHARE DATA
Basic earnings............ $ 1.90 $ 0.96 $ 2.98 $ 3.44 $ 3.97 $ 1.77 $ 2.13
Diluted earnings.......... 1.86 0.94(1) 2.95 3.40 3.91 1.75 2.11
Dividends declared........ 0.54 0.60 0.68 0.74 0.85 0.41 0.47
Book value................ 12.42 12.47 13.33 16.28 18.69 16.38 18.97
Average number of common
and common equivalent
shares outstanding (in
millions)............... 479.1 496.4 481.8 476.2 468.1 470.8 461.5
BALANCE SHEET DATA
Owned assets.............. $46,638.5 $52,647.7 $60,451.8 $76,309.2 $ 88,910.9 $ 80,526.6 $ 96,806.3
Owned receivables......... 38,682.0 44,205.9 52,289.4 67,357.9 79,874.7 71,754.8 83,137.9
Managed assets(3)......... 71,295.5 72,594.6 80,188.3 96,955.8 109,858.9 100,310.3 119,129.0
Managed receivables(3).... 63,160.5 63,907.7 71,728.3 87,607.4 100,822.7 91,538.5 105,460.6
Deposits.................. 2,344.2 2,105.0 4,980.0 8,676.9 6,562.3 7,943.2 5,611.8
Commercial paper, bank and
other borrowings........ 10,666.1 9,917.9 10,777.8 10,787.9 12,024.3 11,194.8 3,598.7
Senior and senior
subordinated debt....... 23,736.2 30,438.6 34,887.3 45,053.0 56,823.6 48,654.1 73,269.4
Company obligated
mandatorily redeemable
preferred securities of
subsidiary trusts....... 175.0 375.0 375.0 675.0 975.0 875.0 975.0
Preferred stock........... 264.5 164.4 164.4 164.4 455.8 164.4 843.2
Common shareholders'
equity.................. 6,060.4 6,065.6 6,237.0 7,667.2 7,842.9 7,570.3 8,661.2
</Table>
18
<Table>
<Caption>
AT OR FOR THE SIX MONTHS
AT OR FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------------ -----------------------------
1997 1998 1999 2000 2001 2001 2002
--------- --------- --------- --------- ---------- ------------- -------------
% % % % % % %
SELECTED FINANCIAL
RATIOS
OWNED BASIS:
Return on average
owned assets....... 1.97 0.96(1) 2.55 2.35 2.26 2.11 2.18
Return on average
common
shareholders'
equity............. 17.0 7.6(1) 23.2 23.2 24.1 22.2 23.2
Common and preferred
equity and trust
preferred
securities as a
percent of owned
assets(2).......... 13.94 12.55 11.21 11.15 10.43 10.69 10.83
Common dividend
payout ratio....... 29.0 63.8(1) 23.1 21.7 21.7 23.4 22.3
MANAGED BASIS:(3)
Return on average
managed assets..... 1.34 0.66(1) 1.92 1.85 1.83 1.70 1.77
Common and preferred
equity and trust
preferred
securities as a
percent of managed
assets(2).......... 9.14 9.13 8.48 8.81 8.44 8.58 8.80
</Table>
(1) Excluding merger and integration related after-tax costs of $751.0 million
relating to the June 30, 1998 merger with Beneficial Corporation, or
Beneficial, and the $118.5 million after-tax gain on the sale of
Beneficial's Canadian operations, net operating income was $1,114.3 million,
the return on average owned assets was 2.22%, the return on average common
shareholders' equity was 17.9%, the common dividend payout ratio was 27.1%
and the return on average managed assets was 1.54%. This non-GAAP financial
information is being provided for comparison of our operating trends and
should be read in conjunction with our GAAP financial information.
(2) The ratios of common and preferred equity and trust preferred securities as
a percentage of owned and managed assets are non-GAAP financial ratios that
are used by rating agencies as a measure to evaluate capital adequacy. These
ratios may differ from similarly named measures presented by other
companies. Because of their long-term nature and Household's ability to
defer dividends, rating agencies consider trust preferred securities as
equity in calculating these ratios.
(3) Household monitors its operations and evaluates trends on both an owned
basis as shown in its historical financial statements and on a managed
basis, which is a non-GAAP basis. Managed basis reporting adjustments assume
that securitized receivables have not been sold and are still on Household's
balance sheet. Managed basis information is intended to supplement, and
should not be considered a substitute for, owned basis reporting and should
be read in conjunction with reported owned basis results.
19
UNAUDITED SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
HSBC has reached an agreement to acquire Household in accordance with the
terms of a merger agreement entered into on November 14, 2002 between HSBC, H2
(a wholly owned subsidiary of HSBC) and Household. Under the terms of the merger
agreement, Household will be merged with and into H2. Following the acquisition,
H2 will remain a wholly owned subsidiary of HSBC but will be renamed Household
International, Inc.
Holders of Household common stock will be entitled to receive, at their
election for each share of Household common stock, 2.675 HSBC ordinary shares or
0.535 HSBC ADSs, each HSBC ADS representing 5 HSBC ordinary shares. All the
outstanding Household non-voting preferred stock will be converted into a right
to receive from HSBC cash in the aggregate amount of approximately U.S.$1,100
million, together with accrued but unpaid dividends. In addition, all the
outstanding Household voting preferred stock will be designated for redemption
effective prior to the merger and Household will deposit the applicable
redemption price in trust for the holders of these shares under the terms of the
instruments governing their shares.
HSBC and Household are providing the following unaudited selected pro forma
condensed combined financial information to illustrate the impact of the merger
on the companies' historical financial positions and results of operations under
the acquisition method of accounting under U.K. GAAP. In addition, we also are
providing financial information on a U.S. GAAP basis.
For a more detailed explanation of this analysis, please refer to "HSBC and
Household Unaudited Pro Forma Condensed Combined Financial Information."
The unaudited selected pro forma financial information is presented for
illustrative purposes only and is not necessarily indicative of what the
operating results or the financial position of the combined company would have
been had the merger occurred on the respective dates assumed and is not
necessarily indicative of future operating results or financial position of the
combined company.
The unaudited selected pro forma financial information for the year ended
December 31, 2001 and as of and for the six months ended June 30, 2002 is
presented on a U.K. GAAP basis and combines the following:
- HSBC's historical financial information for the year ended December 31,
2001 (as restated following implementation of U.K. Financial Reporting
Standard (FRS) 19 "Deferred Tax") and as of and for the six months ended
June 30, 2002.
- Household's historical financial information on a U.S. GAAP basis for the
year ended December 31, 2001 and as of and for the six months ended June
30, 2002, adjusted to conform with HSBC's accounting policies under U.K.
GAAP.
- Adjustments to give effect to capital security transactions of Household
subsequent to June 30, 2002.
- Pro forma adjustments related to acquisition accounting utilizing the
respective fair values of Household's assets and liabilities as of June
30, 2002.
The unaudited selected pro forma consolidated combined balance sheet
information as of June 30, 2002 assumes the merger was consummated on that date.
The unaudited pro forma condensed combined statements of income information for
the six months ended June 30, 2002 and for the year ended December 31, 2001 give
effect to the merger as if the merger had been consummated on January 1, 2001,
the first day of the earliest financial period presented.
The unaudited selected pro forma financial information is based on, and
derived from, and should be read in conjunction with, the historical
consolidated financial statements and related notes of HSBC and Household,
incorporated by reference in this document. Please refer to "Where You Can Find
More Information".
20
ACQUISITION ACCOUNTING
HSBC intends to account for the merger using acquisition accounting under
U.K. GAAP. Under this method of accounting, the assets and liabilities of
Household will be recorded, as of the completion date of the merger, at their
respective fair values and added to those of HSBC. Financial statements and
reported results of operations of HSBC issued after consummation of the merger
will reflect these values, but prior HSBC financial statements will not be
restated retroactively to reflect the historical financial position or results
of operations of Household.
All unaudited selected pro forma financial information contained in this
document has been prepared using the acquisition method to account for the
merger. Under U.K. GAAP, the final determination of the purchase price is based
on the price of HSBC ordinary shares as of the date the merger is completed. In
addition, the final allocation of the purchase price will be determined after
completion of a thorough analysis to determine the fair values of Household's
assets and liabilities. Accordingly, the final acquisition accounting
adjustments and goodwill may be materially different from those reflected in the
unaudited selected pro forma information presented in this document.
<Table>
<Caption>
AT OR FOR THE
SIX MONTHS
FOR THE YEAR ENDED
ENDED DECEMBER 31, JUNE 30,
2001 2002
------------------ --------------
U.K. GAAP $M $M
OPERATING RESULTS (REPORTED BASIS)
Net interest income......................................... 22,677 12,237
Other operating income...................................... 13,528 6,787
Operating profit before provisions.......................... 16,770 9,276
Provisions for bad and doubtful debts and contingencies..... (6,884) (3,316)
Operating profit............................................ 9,241 5,776
Profit on ordinary activities before tax.................... 10,088 6,174
Profit attributable to shareholders......................... 6,231 3,968
PER ORDINARY SHARE $ $
Basic earnings.............................................. 0.59 0.38
Diluted earnings............................................ 0.59 0.37
OPERATING RESULTS (CASH BASIS) $M $M
Operating profit before provisions.......................... 17,994 9,885
Profit on ordinary activities before tax.................... 11,320 6,788
Profit attributable to shareholders......................... 7,463 4,582
FINANCIAL CONDITION
Loans and advances to customers............................. 444,997
Total assets................................................ 870,989
Customer accounts........................................... 476,670
Shareholders' funds......................................... 65,588
</Table>
HSBC judges its performance by comparing cash returns on cash invested,
which is a non-GAAP measure. Cash basis items are derived by adjusting reported
earnings to eliminate the impact of the amortization of goodwill arising on
acquisitions.
21
<Table>
<Caption>
AT OR FOR THE
SIX MONTHS
FOR THE YEAR ENDED
ENDED DECEMBER 31, JUNE 30,
2001 2002
------------------ --------------
U.S. GAAP $M $M
Estimated net income........................................ 6,371 2,308
Estimated shareholders' equity.............................. 66,898
</Table>
The following table summarizes the reconciling items between Household's
net income on a U.S. GAAP and a U.K. GAAP basis. The reconciling items include
the impact of accounting for the combination of Household and Beneficial in 1998
as an acquisition under U.K. GAAP. Under U.S. GAAP, this combination was
accounted for as a pooling of interests.
<Table>
<Caption>
FOR THE
FOR THE YEAR SIX MONTHS
ENDED ENDED
DECEMBER 31, 2001 JUNE 30, 2002
----------------- -------------
$M $M
Net income under U.S. GAAP.................................. 1,848 998
U.K. GAAP adjustments, net of tax:
Securitizations treated as financing transactions......... (130) (97)
Timing of expense recognition on loan origination and
software costs......................................... (71) (35)
Tax credit on share compensation expense.................. 36 7
Other adjustments (net)................................... (5) --
Amortization of goodwill, primarily relating to
Beneficial............................................. (311) (179)
----- ----
Net income under U.K. GAAP.................................. 1,367 694
===== ====
</Table>
Accounting for the Household/Beneficial merger using acquisition accounting
under U.K. GAAP (as opposed to the pooling of interests method under U.S. GAAP)
will not have an ongoing impact on the financial condition or results of
operations of the combined group.
The following table summarizes the material adjustments which reconcile the
unaudited pro forma combined net income under U.K. GAAP and U.S. GAAP:
<Table>
<Caption>
FOR THE SIX
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, 2001 JUNE 30, 2002
------------------ -----------------
$M $M $M $M
NET INCOME
Profit attributable to shareholders of enlarged HSBC
Group
(U.K. GAAP)........................................... $6,231 $ 3,968
Adjustments to U.K. GAAP financial statements:
Lease financing....................................... $ (40) $ (35)
Debt swaps............................................ 4 --
Shareholders' interest in long-term assurance fund.... (152) (60)
Pension costs......................................... (26) (104)
Stock-based compensation.............................. (359) (151)
Goodwill.............................................. (549) 409
Internal software costs............................... 271 96
Revaluation of property............................... 49 30
Acquisition accounting adjustments relating to
previous acquisitions.............................. 291 129
Accruals accounted derivatives........................ 281 (408)
</Table>
22
<Table>
<Caption>
FOR THE SIX
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, 2001 JUNE 30, 2002
------------------ -----------------
$M $M $M $M
Permanent diminution in value of available-for-sale
securities......................................... -- (51)
Foreign exchange differences on available-for-sale
securities......................................... 312 (1,744)
Foreign exchange losses on Argentine funding.......... -- (450)
Deferred origination expenses......................... 104 40
Interest suspension................................... 6 2
Securitizations....................................... 203 152
Taxation: U.S. GAAP................................... 152 (10)
on reconciling items....................... (212) 543
(60) 533
Minority interest in reconciling items................ 36 77
----- -------
371 (1,535)
Acquisition accounting adjustments relating to the
merger............................................. (231) (125)
------ -------
Estimated pro forma combined net income on a U.S. GAAP
basis................................................. $6,371 $ 2,308
====== =======
</Table>
The following table summarizes the material adjustments which reconcile the
unaudited pro forma combined shareholders' equity under U.K. GAAP and U.S. GAAP:
<Table>
<Caption>
AT
JUNE 30, 2002
-----------------
$M $M
SHAREHOLDERS' EQUITY
Shareholders' funds (U.K. GAAP)............................. $65,588
Adjustments to U.K. GAAP financial statements:
Lease financing........................................... $ (353)
Shareholders' interest in long-term assurance fund........ (897)
Pension costs............................................. (1,335)
Goodwill.................................................. 3,070
Internal software costs................................... 704
Revaluation of property................................... (2,700)
Acquisition accounting adjustments relating to previous
acquisitions........................................... (5,332)
Accruals accounted derivatives............................ (832)
Fair value adjustment for available-for-sale securities... 1,211
Own shares held........................................... (226)
Dividend payable.......................................... 1,929
Deferred origination expenses............................. 387
Interest suspension....................................... 46
Securitizations........................................... 1,855
</Table>
23
<Table>
<Caption>
AT
JUNE 30, 2002
-----------------
$M $M
Taxation: U.S. GAAP....................................... 133
on reconciling items........................... (490)
(357)
Minority interest in reconciling items.................... 342
-------
(2,488)
Acquisition accounting adjustments relating to the
merger................................................. 3,798
-------
Estimated pro forma combined shareholders' equity on a U.S.
GAAP basis................................................ $66,898
=======
</Table>
24
RISK FACTORS RELATING TO THE MERGER
In addition to the other information contained in or incorporated by
reference into this document, you should carefully consider the following risk
factors in deciding whether to vote in favor of the merger. Please also refer to
the additional risk factors identified in the periodic reports and other
documents of HSBC and Household incorporated by reference into this document and
listed in "Where You Can Find More Information."
THE VALUE OF HSBC ORDINARY SHARES OR HSBC ADSS TO BE RECEIVED BY HOLDERS OF
HOUSEHOLD COMMON STOCK IN THE MERGER WILL FLUCTUATE
Upon completion of the merger, each share of Household common stock will be
exchanged for, at the election of the holder, either 2.675 HSBC ordinary shares
or 0.535 HSBC ADSs. There will be no adjustment to the exchange ratio for
changes in the market price of either Household common stock or HSBC ordinary
shares or HSBC ADSs. Accordingly, the market value of the HSBC ordinary shares
or HSBC ADSs that holders of Household common stock will become entitled to
receive upon completion of the merger will depend on the market value of HSBC
ordinary shares and HSBC ADSs at the time of completion of the merger and could
vary significantly from the market value on the date of this document or the
date of the Household special meeting. The market value of the HSBC ordinary
shares or HSBC ADSs to be received in the merger will also continue to fluctuate
after completion of the merger. For historical and current market prices of HSBC
ordinary shares and HSBC ADSs, please refer to "Market Price and Dividend Data."
You should obtain current market quotations for HSBC ordinary shares and HSBC
ADSs and for Household common stock.
THE MARKET VALUE OF THE HSBC ORDINARY SHARES OR HSBC ADSS TO BE ISSUED IN THE
MERGER WILL BE SUBJECT TO CURRENCY FLUCTUATIONS
Fluctuations in the exchange rate between the U.S. dollar and the pound
sterling will affect the dollar equivalent of the pound sterling price of HSBC
ordinary shares traded on the London Stock Exchange, or LSE, and, as a result,
are likely to affect the market price of the HSBC ADSs traded on the New York
Stock Exchange, or NYSE.
THE RIGHTS OF HOLDERS OF HSBC ADSS TO BE ISSUED IN THE MERGER WILL NOT BE THE
SAME AS THE RIGHTS OF HOLDERS OF HSBC ORDINARY SHARES TO BE ISSUED IN THE MERGER
The rights and terms of the HSBC ADSs are designed to replicate, to the
extent reasonably practicable, the rights attendant to HSBC ordinary shares, for
which there is no active trading market in the United States. However, because
of aspects of U.K. law, HSBC's Memorandum and Articles of Association and the
contractual terms of the deposit agreement under which the HSBC ADSs are issued,
the rights of holders of HSBC ADSs are not identical to, and, in some respects,
are less favorable than, the rights of holders of HSBC ordinary shares. For more
information regarding the characteristics of, and differences between, HSBC
ordinary shares and HSBC ADSs, please refer to "Description of HSBC Ordinary
Shares" and "Description of HSBC American Depositary Shares."
THE REMOVAL OF HOUSEHOLD FROM THE S&P 500 INDEX AND OTHER MARKET INDICES COULD
RESULT IN MUTUAL FUNDS AND OTHER INVESTMENT VEHICLES SELLING HSBC ORDINARY
SHARES AND HSBC ADSS RECEIVED IN THE MERGER
Household common stock is presently included in the S&P 500 Index, the
Russell 3000 Index, the Russell 1000 Index, the Wilshire 5000 Index and 31 other
market indices. Goldman Sachs has estimated that mutual funds and other
investment vehicles whose investment objective is to track the performance of
these market indices may currently hold 14.2% of the outstanding shares of
Household common stock. These funds may be required to sell the HSBC ordinary
shares or HSBC ADSs they receive in the merger because HSBC is not, and is not
expected to be, included in these market indices. These sales could adversely
affect the market price for HSBC ordinary shares and HSBC ADSs following the
merger.
25
SHAREHOLDERS IN THE UNITED STATES MAY DECIDE TO SELL HOUSEHOLD COMMON STOCK AND
HSBC ORDINARY SHARES OR HSBC ADSS, WHICH COULD CAUSE A DECLINE IN THEIR MARKET
PRICES
U.S. holders of Household common stock may be disinclined to own shares of
companies that have their primary listing outside the United States. This,
combined with the removal of Household from the S&P 500 Index, as described
above, could result in the sale of HSBC ordinary shares and HSBC ADSs received
in the merger, some of which will end up being held by U.K. and other non-U.S.
investors (such sales being referred to as "flowback"). Goldman Sachs has
estimated, based on assumptions set forth below in this document, that 61.3% of
the HSBC ordinary shares and HSBC ADSs received by holders of shares of
Household common stock in the merger may be sold as a result of the transaction.
These sales could adversely affect the market price for HSBC ordinary shares and
HSBC ADSs following the merger. Please refer to "The Merger -- Opinion of
Household's Financial Advisor Relating to Common Stock -- Flowback Analysis."
THE OPINIONS, EACH DATED NOVEMBER 14, 2002, OBTAINED BY HOUSEHOLD FROM ITS
FINANCIAL ADVISORS WILL NOT REFLECT CHANGES IN CIRCUMSTANCES BETWEEN THE SIGNING
OF THE AGREEMENT AND THE MERGER
Household has not obtained updated opinions from Goldman, Sachs & Co. and
Keefe, Bruyette & Woods, Inc., Household's financial advisors, as of the date of
this document based on its belief that there have been no changes in
circumstances since delivery of the November 14 opinions that necessitate
updated opinions, particularly in view of the fact that the opinions were only
one of several factors considered by Household's board of directors in
determining to approve the merger, and that the then current trading prices for
shares of Household stock and HSBC ordinary shares and HSBC ADSs were only one
of several factors considered by Household's financial advisors in rendering
their fairness opinions. However, changes in the operations and prospects of
HSBC or Household, general market and economic conditions and other factors
which are beyond the control of HSBC and Household, and on which the November
14, 2002 written opinion of Goldman Sachs and the November 14, 2002 written
opinion of Keefe, Bruyette & Woods are based, may alter the value of HSBC or
Household or the prices of HSBC ordinary shares and HSBC ADSs and Household
common and preferred stock by the time the merger is completed. As a result of
the foregoing, holders of Household's common stock, 7 5/8% cumulative preferred
stock, 7.50% cumulative preferred stock and 7.60% cumulative preferred stock
should be aware that the opinions of Goldman Sachs and Keefe, Bruyette & Woods
do not speak as of the time the merger will be completed or as of any date other
than November 14, 2002. For a description of the opinions that Household
received from its financial advisors, please refer to "The Merger -- Opinion of
Household's Financial Advisor Relating to Common Stock" and "The
Merger -- Opinion of Household's Financial Advisor Relating to Non-Redeemable
Preferred Stock." For a description of the other factors considered by
Household's board of directors in determining to approve the merger, please
refer to "The Merger -- Household's Reasons for the Merger."
HSBC MAY FAIL TO REALIZE THE BENEFITS OF THE MERGER
HSBC and Household entered into the merger agreement with the expectation
that the merger would result in significant cost synergies and revenue
enhancements from additional business opportunities. HSBC and Household believe
that the merger will result in a lower cost of funding for Household and
increased cost savings in the areas of administrative support and information
technology and through consolidating card processing. In addition, the merger
offers significant opportunities to capture new customer business for both
companies, to market products to each other's customers, to migrate customers
from Household to HSBC as their financial circumstances improve and to link
Household's Hispanic customer base with HSBC's Mexican banking network, and
HSBC's Mexican banking network, including the recently acquired Grupo Financiero
Bital S.A. de C.V., with Household's consumer finance capabilities for
qualifying emigrants.
HSBC may fail to realize some or all of the benefits of these cost savings
as a result of, among other things, Household's failing to benefit from HSBC's
lower funding costs, the failure successfully to consolidate HSBC's North
American card processing business with Household's or to expand Household's
credit card platforms across wider geographic markets or the continued
duplication of administrative functions. HSBC also may fail to realize some or
all of the benefits of new business opportunities because, among other reasons,
it is unable fully to take advantage of cross-selling opportunities, its
marketing efforts are unsuccessful or it
26
fails to provide an effective infrastructure for linking customers to networks
or retaining customers. Despite Household's experience in forecasting credit
risks and costs, HSBC may also fail to realize some of the benefits of the
merger if the U.S. economy and consumer credit levels significantly deteriorate.
REGULATORY REQUIREMENTS OR CONDITIONS MAY REDUCE THE ANTICIPATED BENEFITS OF THE
MERGER
As a result of the merger, Household's subsidiaries will become subject to
examination by and the supervision of the Board of Governors of the Federal
Reserve System, or the FRB. They will also become subject to the requirements of
the Bank Holding Company Act of 1956, as amended, or the BHCA, which generally
limit the activities in which a financial holding company such as HSBC may
directly or indirectly engage in the United States to those that are "financial
in nature." As of the second anniversary of the merger, any Household subsidiary
engaged in any activity that has not been determined by the FRB to be financial
in nature will have to divest such activity unless it otherwise qualifies for an
exemption under the BHCA. For example, Household currently owns companies or
assets on which it previously foreclosed that are engaged in or involve
activities that are not financial in nature. While none of these businesses is
material to Household or the combined company, as of the second anniversary of
the merger, any such activities may need to be divested. In addition, one or
more of the various banking, consumer finance, insurance and other regulatory
agencies whose approvals are required in connection with the merger may impose
conditions on such approvals. Such requirements or conditions could have an
adverse effect on HSBC or reduce the potential benefits of the merger.
HOUSEHOLD'S BUSINESS, INCLUDING THE BUSINESS OF LENDING TO NON-PRIME CONSUMERS,
INVOLVES SPECIAL LEGAL, REGULATORY AND REPUTATIONAL CONSIDERATIONS
Household's business involves lending to non-prime consumers. These
consumers are individuals who have limited credit histories, modest income, high
debt-to-income ratios or have experienced credit problems caused by occasional
delinquencies, prior charge-offs or other credit related actions. These
consumers generally have higher delinquency and credit loss probabilities and
are charged a higher interest rate to compensate for the additional risk. The
major participants in the business of lending to non-prime consumers, including
Household and its principal competitors, have been subject to litigation,
adverse publicity and regulatory scrutiny involving allegations of improper
practices, including alleged violations of federal and state consumer
protection, consumer finance and banking laws and regulations. Also, Household
has been named in purported class actions by individuals and consumer groups
(such as AARP and ACORN) claiming that its loan products or its lending policies
and practices are unfair or misleading to consumers.
On October 11, 2002, Household announced that it had reached a preliminary
agreement with a multi-state working group of state attorneys general and
regulatory agencies to effect a nationwide resolution of alleged violations of
law relating to real estate secured lending from its retail branch consumer
lending operations. The preliminary agreement became effective as of December
16, 2002. Consent decrees or similar documentation have now been entered into
with all 50 states and the District of Columbia. Under the settlement, Household
has committed to make changes to some of its lending practices, including
providing greater disclosures and alternatives for customers in connection with
non-prime mortgage lending originated by its retail branch network and amending
all branch-originated real estate secured loans to provide that no prepayment
penalty is payable later than 24 months after origination. The settlement
required Household to establish a fund of $484 million to be divided among all
participating states (including the District of Columbia), with each state
receiving a proportionate share based upon the volume of the retail branch
originated real estate secured loans made by Household in that state during the
period of January 1, 1999 to September 30, 2002. Household agreed to deposit
these monies into the fund in three equal installments. On January 15, 2003 and
February 14, 2003, Household made the first two deposits and will make the
remaining deposit on March 17, 2003. Household has also paid $10.2 million to
the states as reimbursement for the expenses of their investigation and will pay
$9.8 million of the fees and expenses of an independent administrator. At its
expense, Household will also retain an independent monitor to report on
Household's compliance with the settlement over the next five years. The various
commitments regarding its business practices that Household has made in
connection with the multi-state settlement are described in greater
27
detail in Household's Current Report on Form 8-K filed with the SEC on October
15, 2002. See "Where You Can Find More Information."
Although each consumer that receives a payment under the settlement must
release Household from all civil claims relating to its consumer lending
practices, the settlement itself does not cause the immediate dismissal of
purported class actions seeking redress for any claims covered by the settlement
and there can be no assurance that all plaintiffs and potential plaintiffs will
participate in the settlement. Also, Household expects that various consumer
groups, including those that have brought purported class actions against
Household in the past, will continue to target Household in the media and with
legal actions in an effort to effect additional changes to the non-prime
mortgage lending industry.
LEGAL ACTIONS RELATING TO THE MERGER AND HOUSEHOLD'S PRIOR FINANCIAL DISCLOSURES
Several derivative and/or purported class action lawsuits have been filed
against Household and various of its directors and officers alleging violations
of fiduciary duty and corporate waste with respect to the merger. Some of these
lawsuits seek to enjoin the merger. While these lawsuits are in their
preliminary stages and Household intends to defend them vigorously, there can be
no assurance that the outcome of these lawsuits will be favorable to Household.
Please refer to "The Merger -- Litigation Relating to the Merger."
In connection with Household's restatement of its prior period financial
results in August 2002 and other disclosure matters, Household, its directors,
some officers and former auditors have been subjected to various legal actions
and proceedings, including several purported class action lawsuits, alleging
violations of the federal securities laws. Although Household believes that its
officers and directors have not committed any wrongdoing and that there will be
no resulting material liability to Household or any of its officers and
directors, there can be no assurance as to the ultimate outcome of these actions
and proceedings.
THE MERGER AGREEMENT LIMITS HOUSEHOLD'S ABILITY TO PURSUE ALTERNATIVES TO THE
MERGER
The merger agreement contains "no shop" provisions that, subject to limited
exceptions, limit Household's ability to discuss, facilitate or commit to
competing third-party proposals to acquire all or a significant part of the
company. Further, there are only limited exceptions to Household's agreement
that Household's board of directors will not withdraw or modify in a way adverse
to HSBC its recommendation to Household stockholders that they vote in favor of
the merger, or recommend any other acquisition proposal. Although Household's
board of directors is permitted to take these actions if it determines that the
failure to do so would be inconsistent with its fiduciary duties, doing so would
entitle HSBC to terminate the merger agreement and to receive a termination fee
of $550 million. Also, in some situations where a competing acquisition proposal
has been made known to Household or its stockholders and the merger agreement is
subsequently terminated for a variety of reasons (including because Household
stockholders fail to approve the merger or because Household, as permitted by
the merger agreement, engages in discussions with a competing acquiror that are
not terminated within 20 days), Household is required to pay HSBC a termination
fee of $550 million if Household completes, or enters into an agreement for, an
alternative acquisition transaction during the 12 months after the termination.
See "The Merger Agreement -- No Solicitation," "-- Termination, Amendment and
Waiver" and "-- Fees and Expenses."
HSBC required Household to agree to these provisions as a condition to
HSBC's willingness to enter into the merger agreement. However, these provisions
might discourage a potential competing acquiror that might have an interest in
acquiring all or a significant part of Household from considering or proposing
that acquisition even if it were prepared to pay consideration with a higher per
share market price than that proposed in the merger, or might result in a
potential competing acquiror proposing to pay a lower per share price to acquire
Household than it might otherwise have proposed to pay as a result of the
termination fee.
HOUSEHOLD'S EXECUTIVE OFFICERS AND DIRECTORS HAVE INTERESTS IN THE MERGER THAT
ARE DIFFERENT FROM YOUR INTEREST AS A HOUSEHOLD STOCKHOLDER
The merger agreement was negotiated with HSBC by executive officers of
Household. It has been approved by Household's board of directors, which is
recommending that Household stockholders vote in
28
favor of the merger agreement. In considering these facts and the other
information contained in this document, you should be aware that Household's
executive officers and directors have economic interests in the merger in
addition to the interest that they share with you of being a holder of Household
stock. As described in detail below, there are substantial financial interests
to be conveyed to each executive officer of Household, including Messrs.
Aldinger, Schoenholz and Mehta, under either the terms of existing or new
employment agreements and due to the accelerated vesting of stock options and
restricted stock rights in respect of Household common stock. For instance, some
of the stock options and shares of restricted stock will vest as a result of the
merger, and Household stock options will become HSBC stock options in the
merger. Nine executive officers, including Mr. Aldinger, have entered into new
employment agreements with Household that will become effective when the merger
is completed, under which they will continue to have senior management positions
in Household, will receive payments and benefits under their pre-existing
employment agreements with Household, and will receive compensation including
salary, bonus and equity grants from HSBC following the merger. Mr. Aldinger
will also become a member of the HSBC board of directors following the merger.
Pursuant to the terms of these new employment agreements, subject to
satisfaction of the terms and conditions of those agreements, the nine
executives, including Messrs. Aldinger, Schoenholz and Mehta, would be entitled
to receive the following amounts and interests in the aggregate: annual base
salary aggregating $4.9 million per year; annual bonus aggregating approximately
$9.25 million per year; HSBC restricted stock grants with an aggregate grant
date value of $40.5 million vesting in equal annual installments over either a
three or five year period. As described in detail on page 63, the approximate
payment in satisfaction of the cash severance obligations under the existing
employment agreements and employment protections agreements between Household
and each of the nine executives who have entered into new employment agreements
with Household, including Messrs. Aldinger, Schoenholz and Mehta, is $58
million. Assuming the merger is completed on March 31, 2003, the number of stock
options to acquire shares of Household common stock held by the nine executives
who have entered into new employment agreements with Household, including
Messrs. Aldinger, Schoenholz and Mehta, that will vest and become exercisable as
a result of the merger is 2,023,125 in the aggregate, which options have an
in-the-money value of $0, based on the closing price per share of Household
common stock on February 18, 2003. Assuming the merger is completed on March 31,
2003, the number of Household restricted stock rights held by the nine
executives, including Messrs. Aldinger, Schoenholz and Mehta, that will vest and
become free of restrictions as a result of the merger is 461,008 in the
aggregate, which restricted stock rights have a value of approximately $12.7
million in the aggregate, based on the closing price per share of Household
common stock on February 18, 2003. The merger will not result in the accelerated
vesting of any of the stock options to acquire shares of Household common stock
held by the non-employee directors of Household, although these options will
become HSBC stock options in the merger. Following the merger, HSBC has agreed
that Household will, subject to specified cost restrictions, maintain directors'
and officers' insurance for a six-year period following completion of the merger
covering the directors and officers of Household relating to events occurring
before completion of the merger. For additional information about these
interests, please see "The Merger -- Interests of Household's Executive Officers
and Directors in the Merger."
29
FORWARD-LOOKING STATEMENTS
This document and the documents incorporated by reference into this
document contain forward-looking statements with respect to the financial
condition, results of operations and business of HSBC, Household and the
combined company.
Statements that are not historical facts, including statements about HSBC's
or Household's beliefs and expectations, are forward-looking statements. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," "potential," "opportunity," "reasonably possible" and variations of
these words and similar expressions are intended to identify forward-looking
statements. These statements are based on current plans, estimates and
projections, and therefore undue reliance should not be placed on them.
Forward-looking statements speak only as of the date they are made, and you
should not assume that they have been revised or updated in the light of new
information or future events.
Forward-looking statements involve inherent risks and uncertainties.
Readers are cautioned that a number of factors could cause actual results to
differ, in some instances materially, from those anticipated or implied in any
forward-looking statement. These factors include, among others:
- changes in general economic conditions in the markets where HSBC and/or
Household operate, such as:
- changes in foreign exchange rates, in both market exchange rates (for
example, between the U.S. dollar and the pound sterling) and
government-established exchange rates (for example, between the Hong
Kong dollar and the U.S. dollar);
- volatility in interest rates, including in Asia and Latin America;
- volatility in equity markets, including in the smaller and less liquid
trading markets in Asia and Latin America;
- lack of liquidity in wholesale lending markets in periods of economic or
political crisis;
- volatility in national real estate markets, particularly consumer-owned
real estate markets;
- continuing or deepening recessions and employment fluctuations; and
- consumer perception of the availability of credit, including price
competition in the market segments served by HSBC and/or Household and
the ramifications or ease of filing for personal bankruptcy;
- changes in governmental policy and regulation, including:
- the monetary, interest rate and other policies of central banks and bank
and other regulatory authorities, including the U.K. Financial Services
Authority, the Bank of England, the Hong Kong Monetary Authority, the
Board of Governors of the U.S. Federal Reserve System, the European
Central Bank, the French Banking Commission and the central banks of
other leading economies or in markets where HSBC and/or Household
operate;
- expropriation, nationalization, confiscation of assets and changes in
legislation relating to foreign ownership;
- initiatives by local, state and national regulatory agencies or
legislative bodies to regulate the practices of lenders serving the
prime, non-prime or sub-prime consumer markets;
- general changes in government policy that may significantly influence
investor decisions in particular markets in which HSBC and/or Household
operate;
- other unfavorable political or diplomatic developments producing social
instability or legal uncertainty which in turn may affect demand for
HSBC's and/or Household's products and services; and
- the costs, effects and outcomes of regulatory reviews, actions or
litigation, including any additional compliance requirements;
30
- the ability of the Government of Argentina through reform of monetary,
fiscal and exchange rate policy to restore economic stability within the
country and thereby attract international support for the measures
necessary to restructure debt obligations and create a viable financial
system;
- the effects of competition in the markets where HSBC and/or Household
operate, including:
- increased competition resulting from legislation permitting new types of
affiliations between banks and financial services companies, including
securities firms, particularly in the United States; and
- competition as a result of, among other things, technological advances;
- the success of HSBC and Household in adequately identifying and managing
risks such as loan losses or delinquency (through hedging and other
techniques), which depends on, among other things, the ability to
anticipate events that cannot be captured by statistical models used by
HSBC and Household;
- the costs, effects and outcomes of any litigation matter that is
determined adversely to HSBC and/or Household or their businesses; and
- the inability of HSBC and/or Household to manage any or all of the
foregoing risks as well as anticipated.
In addition, statements in this document that contemplate the completion of
the merger are subject to risks that the conditions to the merger will not be
satisfied or waived, or that the merger agreement may be terminated, and that,
as a result, the merger will not be completed. For additional information
regarding conditions to the merger, please refer to "The Merger
Agreement -- Conditions Precedent to Closing." For additional information
regarding the respective rights of HSBC and Household to terminate the merger
agreement, please refer to "The Merger Agreement -- Termination, Amendment and
Waiver."
For additional factors which could cause actual results and developments of
HSBC, Household and the combined group to differ from those expressed or implied
by forward-looking statements, please refer to the documents incorporated by
reference into this document listed in "Where You Can Find More Information."
31
RECENT DEVELOPMENTS
On January 15, 2003, Household announced its 2002 fourth-quarter and
full-year earnings. Household's fourth-quarter net income totaled $338.2
million, or $.66 per diluted share. For the full year, Household's net income
totaled $1.6 billion, or $3.22 per diluted share. In 2002, Household incurred a
$333.2 million, after-tax, non-recurring charge relating to its nationwide
settlement with state attorneys general and other regulators in the third
quarter and a $240.0 million after-tax loss on the disposition of the assets and
deposits of Household Bank, f.s.b. (the "Thrift") in the fourth quarter.
Excluding these non-recurring charges, Household would have earned $578.2
million in the fourth quarter and $2.1 billion for the full year. For further
detail on Household's 2002 fourth-quarter and full-year earnings, please refer
to Household's Current Report on Form 8-K filed with the SEC on January 16,
2003, which you can obtain as described under "Where You Can Find More
Information."
Set forth below is selected unaudited financial information for Household
as of and for the three months and year ended December 31, 2002.
<Table>
<Caption>
FOR THE THREE FOR THE YEAR
MONTHS ENDED ENDED
DECEMBER 31, 2002 DECEMBER 31, 2002
-------------------- --------------------
(ALL DOLLAR AMOUNTS EXCEPT PER SHARE DATA ARE
STATED IN MILLIONS)
STATEMENT OF INCOME DATA
Net interest margin and other revenues, excluding
loss on disposition of Thrift assets and deposits..... $2,922.9 $11,178.5
Loss on disposition of Thrift assets and deposits....... 378.2 378.2
Provision for credit losses on owned receivables........ 985.1 3,732.0
Total costs and expenses, excluding settlement charge
and related expenses.................................. 1,111.6 4,290.5
Settlement charge and related expenses.................. -- 525.0
Income taxes............................................ 109.8 695.0
-------- ---------
Net income.............................................. $ 338.2 $ 1,557.8
======== =========
PER COMMON SHARE DATA
Basic earnings.......................................... $ .67 $ 3.26
Diluted earnings........................................ .66 3.22
Dividends declared...................................... .25 .97
Average number of common and common
equivalent shares outstanding (in millions)........... 475.3 464.6
Common dividend payout ratio............................ 37.9% 30.1%
SELECTED FINANCIAL RATIOS
OWNED BASIS:
Return on average owned assets.......................... 1.33% 1.62%
Return on average common shareholders' equity........... 13.9 17.3
MANAGED BASIS:(1)
Return on average managed assets........................ 1.07 1.31
</Table>
32
<Table>
<Caption>
AS OF DECEMBER 31, 2002
-----------------------------
(ALL DOLLAR AMOUNTS EXCEPT
BOOK VALUE PER COMMON
SHARE ARE STATED IN MILLIONS)
BALANCE SHEET DATA
Owned assets................................................ $ 97,860.6
Owned receivables........................................... 82,562.3
Managed assets(1)........................................... 122,794.1
Managed receivables(1)...................................... 107,495.8
Deposits.................................................... 821.2
Commercial paper, bank and other borrowings................. 6,128.3
Senior and senior subordinated debt......................... 74,776.2
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts........................... 975.0
Preferred stock............................................. 1,193.2
Common shareholders' equity................................. 9,222.9
Book value per common share................................. 19.43
</Table>
- ---------------
(1) Household monitors its operations and evaluates trends on both an owned
basis as shown in its historical financial statements and on a managed
basis, which is a non-GAAP basis. Managed basis reporting adjustments assume
that securitized receivables have not been sold and are still on Household's
balance sheet. Managed basis information is intended to supplement, and
should not be considered a substitute for, owned basis reporting and should
be read in conjunction with reported owned basis results.
33
THE SPECIAL MEETING OF HOUSEHOLD STOCKHOLDERS
TIME, PLACE AND PURPOSE OF THE SPECIAL MEETING
The special meeting will be held at , on , 2003,
at a.m. local time. The purpose of the special meeting is to consider and
vote on the proposal to adopt the merger agreement and to consider any other
matters that may properly come before the Household special meeting.
Household's board of directors has unanimously determined that the merger
agreement and the transactions contemplated by the merger agreement, including
the merger, are advisable, fair to and in the best interests of Household and
its stockholders, unanimously approved the merger agreement and the transactions
contemplated by the merger agreement and unanimously recommends that Household
stockholders vote "FOR" adoption of the merger agreement.
WHO CAN VOTE AT THE SPECIAL MEETING
The holders of record of Household common stock and Household voting
preferred stock as of the close of business on February 21, 2003, which is the
record date for the special meeting, are entitled to receive notice of and to
vote, together as a single class, at the special meeting. Holders of Household
non-voting preferred stock are entitled to notice of, but are not entitled to
vote at, the special meeting.
If you own shares that are registered in someone else's name, for example,
in the name of a broker, you need to direct that person to vote those shares or
obtain an authorization from that person and vote those shares yourself at the
meeting. On the record date, there were shares of Household
common stock outstanding held by approximately stockholders of
record, as well as 407,718 shares of 5% cumulative preferred stock, 103,976
shares of $4.50 cumulative preferred stock and 836,585 shares of $4.30
cumulative preferred stock outstanding held by approximately , and
stockholders of record, respectively. The approximate number of holders
of Household common stock was determined by adding the number of record holders
to the estimated number of proxies to be sent to street name holders.
VOTE REQUIRED
The adoption of the merger agreement requires the affirmative vote of the
holders of a majority of the outstanding shares of Household common stock and
Household voting preferred stock entitled to vote on the merger, voting together
as a single class. Each holder of a share of Household common stock and voting
preferred stock is entitled to one vote per share. Failure to grant your proxy
by telephone or on the Internet, to return a properly executed proxy card or to
vote in person will have the same effect as a vote "AGAINST" adoption of the
merger agreement (except that shares of Household common stock credited to an
account under the Household International Tax Reduction Investment Plan for
which voting instructions are not received will be voted by the plan's trustee
in the same way as the majority of the shares held under the plan for which
voting instructions are received).
Under the rules of the NYSE, brokers who hold shares of stock in street
names for customers have the authority to vote those shares in their discretion
on "routine" proposals when they have not received instructions from beneficial
owners. However, brokers are precluded from exercising their voting discretion
with respect to the approval of non-routine matters such as adoption of the
merger agreement and, as a result, absent specific instructions from the
beneficial owner of such shares, brokers are not empowered to vote those shares.
Shares of stock held by brokers for customers who have not provided such voting
instructions on a matter are referred to generally as "broker non-votes."
Abstentions and properly executed broker non-votes will be treated as shares of
stock that are present and entitled to vote at the special meeting for purposes
of determining whether a quorum exists and will have the same effect as votes
"AGAINST" adoption of the merger agreement.
The holders of a majority of the outstanding shares of Household common
stock and voting preferred stock, taken together as a single class, entitled to
be cast as of the record date, represented in person or by proxy, will
constitute a quorum for purposes of the special meeting. A quorum is necessary
to hold the special meeting.
34
HOW YOU CAN VOTE
Each holder of shares of Household common stock and voting preferred stock
outstanding on February 21, 2003, is entitled to one vote per share, voting
together as a single class, at the special meeting. Because the vote on the
merger agreement is based on the number of shares outstanding rather than on the
number of votes cast, failure to vote your shares is effectively a vote
"AGAINST" adoption of the merger agreement (except as described below with
respect to shares of Household common stock held in TRIP accounts). If you are
the record holder of shares of Household common stock or voting preferred stock,
you can vote your shares in any of four ways:
- Granting Your Proxy by Mail. If you choose to grant your proxy by mail,
simply mark your proxy card, date and sign it, and return it in the
postage-paid envelope provided.
- Granting Your Proxy by Telephone. You can grant your proxy by telephone
by calling the toll-free telephone number on your proxy card. You may
grant your proxy by telephone 24 hours a day.
- Granting Your Proxy on the Internet. You can also grant your proxy on
the Internet. The web site where you can grant your proxy is on your
proxy card and is available 24 hours a day.
- Voting in Person. You can also vote in person at the special meeting.
If you grant your proxy by telephone or on the Internet, you should not
return your proxy card. Instructions on how to grant your proxy by telephone or
on the Internet are given on the proxy card included with this document. If you
own shares that are registered in someone else's name, for example, a broker,
you need to direct that person to vote those shares or obtain an authorization
from them and vote those shares yourself at the meeting.
Your proxy represents any shares of Household common stock and/or voting
preferred stock registered in your name, as well as any full or fractional
shares of Household common stock held in your name under the Household Dividend
Reinvestment and Common Stock Purchase Plan, Household Employee Stock Purchase
Plan, Household International Tax Reduction Investment Plan, which we refer to
as "TRIP," or Household Financial Corporation Limited Match and Save Plan. If
you participate in TRIP, to vote your shares of Household common stock held in
your TRIP account you must return your completed proxy/voting instruction card
to Computershare Investor Services LLC in the envelope provided or grant your
proxy by telephone or on the Internet as outlined on the proxy card by
, 2003. Vanguard Fiduciary Trust Company, the TRIP trustee, will
act as your proxy and will vote the shares of Household common stock held in
your TRIP account. If Computershare does not receive your voting instructions
for shares held in your TRIP account by , 2003, your shares will
be voted by Vanguard in the same way as the majority of the TRIP held shares for
which voting instructions are received.
If your shares are held in the name of a bank, broker, trustee or other
holder of record, you must obtain a proxy, executed in your favor, from the
holder of record to be able to vote in person at the special meeting.
If you vote your shares by submitting a proxy, your shares will be voted at
the special meeting as you indicated on your proxy card, telephone proxy or
Internet proxy. If no instructions are indicated on your signed proxy card
(including with respect to proxy cards received for shares held in your TRIP
account), all of your shares will be voted "FOR" the adoption of the merger
agreement.
As of the record date, the directors and executive officers of Household
owned, in the aggregate, outstanding shares of Household common
stock, or collectively approximately % of the outstanding shares of Household
common stock on that date, and no shares of voting preferred stock.
Household will pay the costs of soliciting proxies for the special meeting.
Officers, directors and employees of Household may solicit proxies by telephone,
mail, the Internet or in person. However, they will not be paid for soliciting
proxies. Household hired Georgeson Shareholder Communications, Inc. to solicit
proxies, for which they will be paid $ plus reimbursement of
out-of-pocket expenses. Upon request, Household will reimburse brokerage firms
and other custodians, nominees and fiduciaries for their reasonable
35
expenses in forwarding solicitation material to beneficial owners of shares of
stock entitled to vote on the merger agreement.
HOW TO REVOKE OR CHANGE YOUR VOTE
You can revoke your proxy at any time before it is voted at the special
meeting by:
- giving written notice of revocation to the Corporate Secretary of
Household at Household International, Inc., 2700 Sanders Road, Prospect
Heights, Illinois, 60070, Attention: Corporate Secretary;
- submitting another proper proxy by mail, by telephone or on the Internet;
or
- attending the special meeting and voting by paper ballot in person.
OTHER BUSINESS
Household is not currently aware of any business to be acted upon at the
special meeting other than the matters discussed in this document. However, if
other matters do properly come before the Household special meeting it is
intended that shares represented by proxies will be voted, or not voted, by the
individuals named in the proxies at their discretion. No proxy that is voted
against adoption of the merger agreement will be voted in favor of any
adjournment or postponement of the special meeting for the purpose of soliciting
additional proxies for such adoption.
36
THE EXTRAORDINARY GENERAL MEETING OF HSBC ORDINARY SHAREHOLDERS
In connection with the merger, the board of directors of HSBC has convened
an extraordinary general meeting of HSBC ordinary shareholders to be held at
, on , 2003, at local time.
HSBC ordinary shareholders will not receive this document, but will instead
receive a shareholders' circular prepared in compliance with the laws of the
U.K. and the listing rules of the U.K. Listing Authority, or UKLA, and The Stock
Exchange of Hong Kong Limited, or SEHK.
At the meeting, a resolution will be proposed:
- to approve the merger (including the arrangements to be put in place in
relation to the outstanding options to purchase, and other equity-based
awards in respect of, shares of Household common stock), and authorize
the directors of HSBC (or any duly authorized committee thereof) to take
the necessary steps to implement it, subject to such non-material
modifications as they think fit; and
- to authorize the directors of HSBC to allot HSBC ordinary shares in
satisfaction of HSBC's obligations arising under or as contemplated by
the merger agreement to issue HSBC ordinary shares to existing holders of
Household common stock, to holders of options to purchase, and other
equity-based awards in respect of, Household common stock and to holders
of other Household securities.
The authority to be granted by the resolution will expire at the conclusion
of the annual general meeting of HSBC to be held in 2004, except that if the
merger has been completed by that time, HSBC will remain obligated, and continue
to have the authority, to allot the HSBC ordinary shares issuable to holders of
assumed Household options and other equity-based awards and holders of other
Household securities. The authority is in addition to the existing authority to
allot shares granted to the directors at the annual general meeting of HSBC held
on May 31, 2002, which will remain in full force and effect until its expiry.
The merger is conditioned upon the resolution being passed. The resolution
is being proposed as an ordinary resolution, which requires the approval of a
majority of the votes cast on a show of hands or on a poll at the HSBC
extraordinary general meeting. On a show of hands every HSBC ordinary
shareholder who is present in person, including corporate representatives of
corporate shareholders, shall have one vote. On a poll, every HSBC ordinary
shareholder who is present in person, including corporate representatives of
corporate shareholders, or by proxy shall have one vote for each HSBC ordinary
share he or she holds.
37
THE MERGER
This discussion of the merger is qualified by reference to the merger
agreement, which is attached to this document as Annex A. You should read the
entire merger agreement carefully.
BACKGROUND OF THE MERGER
Household's board of directors and executive officers have periodically
reviewed and assessed Household's business strategy, including the markets in
which it operates, consumer lending trends, the economic and regulatory
environment, funding sources and the opportunities and risks of its various
business operations. In the view of Household's management, Household
historically has been able to generate strong cash flows, capital and
consistently profitable results in a variety of economic environments, and it
was therefore anticipated that Household would continue to have reasonable
access to capital markets. However, Household's management also recognized that
Household was the only major U.S. consumer finance company that did not have
significant access to funding sources (such as retail deposits) other than the
global capital markets and that this could, depending upon prevailing economic
and market conditions, affect Household's relative competitive position.
Further, notwithstanding Household's financial track record, capital markets,
including the secondary trading market for debt issued by Household, recently
became more volatile. Household believes that this is the result of numerous
factors, including reports of participants in the consumer lending industry
experiencing regulatory issues and credit quality problems in their portfolios,
uncertainty surrounding a preliminary agreement by Household and state
regulators to settle lending practices issues and related civil litigation and
adverse actions taken by some credit rating agencies with respect to Household's
short-term and long-term debt.
In 1999 senior management of Household and HSBC first met and developed a
relationship in connection with negotiating a settlement to legal proceedings
involving Household and HSBC brand names in the United Kingdom. Over the
following years, HSBC and Household from time to time informally discussed
potential business relationships, including whether Household could originate
assets for sale to HSBC, whether Household could securitize assets to HSBC's
specification and whether opportunities existed for international joint
ventures.
In late 2001 and early 2002, Household commenced an evaluation of its
business strategy and the various strategic alternatives available to it in
light of the increasingly challenging capital markets and regulatory
environment, as well as continuing trends towards increasing competition and
consolidation within the financial service industry. Over the next several
months, Household management discussed with its financial advisor, Goldman,
Sachs & Co., and its board of directors these trends and other issues relating
to its operating environment and possible strategic alternatives and directions,
including the possibility of various business combinations that could be
expected to address these issues. These discussions also addressed changing
investor perceptions of the consumer lending industry due to recent
developments, including recent regulatory developments such as the Federal Trade
Commission's suit against Citigroup centered on the alleged practices of its
newly-acquired Associates First Capital subsidiary, actions by regulators
involving some specialized credit card lenders with significant non-prime
portfolios and initiatives in several states and municipalities to increase
regulation of industry practices to address purported predatory lending
concerns. During this period, Household had generalized discussions regarding
potential transactions with potentially interested parties, but no offer to
purchase the company was made. On May 1, 2002, Household formally engaged
Goldman Sachs as its financial advisor in connection with the possible sale of
all or a portion of Household.
In April 2002, a meeting took place at the initial suggestion of Sir John
Bond, the Group Chairman of HSBC, between William F. Aldinger, the Chairman and
Chief Executive Officer of Household, and Sir John Bond. At this meeting, Mr.
Aldinger and Sir John had exploratory discussions regarding potential business
opportunities involving Household and HSBC. During the succeeding months and
continuing into the summer, senior executives of Household and HSBC continued
periodically to have informal discussions regarding the environment for
financial services companies and the possible benefits of one or more strategic
transactions between the two companies, including the possibility of joint
ventures in other markets. Capital market conditions became more challenging
during the summer, and it became apparent that Household's
38
potential cost of funds, as evidenced by secondary market bond trading spreads,
had increased significantly. During this period, Household and Goldman Sachs
continued to analyze Household's strategic alternatives.
In September 2002, Mr. Aldinger and Sir John met and agreed to expand the
discussions regarding potential business opportunities to include a possible
combination of Household and HSBC. At various times in October and early
November 2002, senior executives of Household and HSBC had further exploratory
discussions regarding a potential business combination between Household and
HSBC. During this period, HSBC and Household also entered into a confidentiality
agreement. In mid-October, representatives of HSBC and Household discussed using
a fixed exchange ratio structure for a potential transaction, but no specific
value for the exchange ratio was discussed.
In early November 2002, Goldman Sachs and Rohatyn Associates LLC, one of
HSBC's financial advisors, held discussions regarding the potential terms of a
business transaction between Household and HSBC, and HSBC retained Morgan
Stanley & Co. Limited and HSBC Bank plc to act as financial advisors to HSBC.
During the first week of November 2002, Goldman Sachs and Rohaytn Associates
discussed preliminary analyses in support of proposed exchange ratios, and
Household and HSBC commenced preliminary negotiations of the exchange ratio
through their financial advisors. On November 9, 2002, Mr. Aldinger and Sir John
met to discuss the business framework of a potential merger, including financial
and management issues, the possible acquisition consideration and transaction
structure. Mr. Aldinger and Sir John discussed and provisionally agreed (subject
to the approval of their respective boards of directors) on the exchange ratio
for the Household common stock and, over the next several days, Household, HSBC
and their legal advisors engaged in negotiations of the other terms of a
proposed definitive merger agreement, including the consideration to be paid in
the merger to holders of Household's preferred stock, as well as the terms of
retention and employment arrangements that HSBC wished to put in place with key
Household executives in connection with the proposed merger. Household also
retained Keefe, Bruyette & Woods, Inc. for the purpose of performing a financial
analysis of Household's preferred stock that was not currently redeemable (7.50%
cumulative preferred stock, 7.60% cumulative preferred stock and 7 5/8%
cumulative preferred stock) and rendering a fairness opinion with respect to the
consideration to be paid to the holders of such preferred stock in the merger.
Household retained two different financial advisors in order for Household's
board of directors to obtain separate, independent opinions regarding the
fairness, from a financial point of view, of the consideration to be received in
the merger by the holders of Household common stock, on the one hand, and by the
holders of such preferred stock, on the other. Shortly after the retention of
Keefe, Bruyette & Woods, senior management of HSBC and Household agreed that the
consideration for the preferred stock would be the stated liquidation preference
of the preferred stock plus accrued and unpaid dividends to the date the merger
was completed.
At a meeting on November 6, 2002, the Acquisitions and Disposals Committee
of the HSBC board of directors considered a proposal for a potential merger and
authorized Sir John to proceed further with negotiations.
On November 12, 2002, Household's board of directors met to discuss the
terms of the proposed merger. Members of Household's senior management team
presented an overview of Household's business and operations and also discussed
with the board the strategic rationale of the proposed merger and the operating
fit between Household and HSBC. Management of Household and representatives of
Goldman Sachs discussed with the board the market environment for consumer
finance and sub-prime focused companies as it related to Household, including
the limited prospects for Household's common stock returning to its recent
historical trading ranges in the foreseeable future. Representatives of Goldman
Sachs also discussed with the board the consideration to be received by the
holders of Household common stock in the merger and presented to the board the
financial analyses described below under "-- Opinion of Household's Financial
Advisor Relating to Common Stock." During the meeting, the board received the
oral opinion of Goldman Sachs, subsequently confirmed by a written opinion dated
November 14, 2002, that as of the date of the opinion, and subject to the
matters and assumptions set forth in its opinion, the proposed exchange ratio of
2.675 ordinary shares of HSBC for each share of Household common stock was fair,
from a financial point of view, to Household's common stockholders. Keefe,
Bruyette & Woods presented to the board the financial analyses relating to the
consideration to be received by the holders of Household's preferred stock that
is not
39
currently redeemable described under "-- Opinion of Household's Financial
Advisor Relating to Non-Redeemable Preferred Stock." Keefe, Bruyette & Woods
delivered its oral opinion, which was subsequently confirmed by a written
opinion, dated November 14, 2002, that as of the date of the opinion, and
subject to the matters and assumptions set forth in its opinion, the proposed
consideration to be paid to the holders of this preferred stock was fair, from a
financial point of view, to these holders. Household's legal advisors, Wachtell,
Lipton, Rosen & Katz, reviewed with the board the proposed terms of the merger
agreement and key employee retention and employment agreements, discussed the
expected timetable to closing and the various approvals, including stockholder
and regulatory approvals, that would be required to complete the transaction,
and reviewed the legal principles applicable to the Household board's decisions
and actions with respect to the proposed transaction. Household's board of
directors discussed the proposed transaction and asked questions of Household
management and the financial and legal advisors regarding the transaction, after
which the board unanimously approved the merger agreement and proposed merger,
and the proposed retention and employment agreements in connection with the
merger.
At a meeting on November 13, 2002, the HSBC board of directors met to
discuss the terms of the proposed merger and key Household employee retention
and employment agreements. Sir John explained the proposed terms and the
strategic rationale for the merger and presentations were made to the board.
Representatives of Morgan Stanley also participated in the meeting. The members
of the HSBC board of directors present unanimously approved the proposed
transaction and authorized a committee of the board to give the necessary
approval to proceed when all outstanding substantive issues regarding the merger
agreement had been resolved. The committee gave such approval later on November
13, 2002.
Counsel to Household and HSBC continued to negotiate to finalize legal and
technical points on the merger agreement. Early on November 14, 2002, the
parties executed the merger agreement and issued a joint press release
announcing the execution of the merger agreement.
HOUSEHOLD'S REASONS FOR THE MERGER
Household's board of directors consulted with senior management and
Household's financial and legal advisors and considered a number of factors,
including those set forth below, in reaching its decision to approve the merger
and the merger agreement and the transactions contemplated by the merger
agreement, and to recommend that Household's stockholders vote "FOR" adoption of
the merger agreement.
Household's board of directors considered the following factors as
generally supporting its decision to enter into the merger agreement:
- the anticipated strategic fit between HSBC and Household, including
- that HSBC could elect to use its financial strength and access to
capital markets on relatively attractive terms to help address current
Household funding issues,
- that HSBC could leverage Household's strong asset generation
capabilities to grow the combined business, particularly in the United
States,
- the potential for growth outside of the United States by extending
Household's business into markets where HSBC has a strong presence,
- that the limited overlap between the operations of Household and HSBC
would reduce the risk in integrating the two companies, and
- the business opportunities that would result from having an enhanced
product range and lower funding costs in terms of customer origination
and migration following the combination of the two companies;
- the presentation made by Goldman Sachs discussed further below under
"-- Opinion of Household's Financial Advisor Relating to Common Stock,"
and Goldman Sachs' oral opinion, subsequently confirmed by delivery of a
written opinion dated November 14, 2002, to the effect that, as of the
date of the opinion, and subject to the matters and assumptions stated in
its opinion, the exchange ratio in the
40
proposed merger was fair, from a financial point of view, to the holders
of Household common stock. The full text of Goldman Sachs' written
opinion is attached to this document as Annex B;
- the presentation made by Keefe, Bruyette & Woods, described below under
"-- Opinion of Household's Financial Advisor Relating to Non-Redeemable
Preferred Stock," and Keefe, Bruyette & Woods' oral opinion, subsequently
confirmed by delivery of a written opinion dated November 14, 2002, to
the effect that, as of the date of the opinion, and subject to the
matters and assumptions stated in its opinion, the merger consideration
to be received by the holders of Household preferred stock that is not
currently redeemable, was fair, from a financial point of view, to the
holders of such preferred stock. The full text of Keefe, Bruyette &
Woods' written opinion is attached to this document as Annex C;
- the expectation that the merger would be a tax-free transaction for U.S.
federal income tax purposes and that the conversion of the Household
common stock into HSBC ordinary shares or HSBC ADSs would be tax-free to
holders of Household common stock;
- the financial terms of the transaction, including the trading history of
HSBC ordinary shares and HSBC ADSs, the fixed exchange ratio for holders
of Household common stock and the cash consideration to be received in
the merger by holders of Household non-voting preferred stock and the
anticipated redemption of the Household voting preferred stock;
- the expectation that the merger would be accretive to HSBC's earnings per
share under U.K. GAAP in 2003 and 2004, as discussed further below under
"-- Opinion of Household's Financial Advisor Relating to Common
Stock -- Pro Forma Merger Analysis";
- the terms and conditions of the merger agreement, including the nature of
the parties' representations, warranties, covenants and agreements, which
Household's board of directors considered would provide a reasonable
degree of certainty that the merger would be completed;
- Household's business and operating environment, including competitive,
economic, regulatory and capital market conditions; Household's financial
condition, results of operations, business and earnings prospects, as
well as Household's operating environment on a standalone basis, in the
light of relevant factors including the changing conditions in the
economy and in financial markets, recent events involving Household, the
evolving regulatory environment faced by consumer finance companies and
access to capital markets; information available to Household's board of
directors concerning other strategic alternatives; and the belief of
Household's board of directors that, in view of the foregoing and the
matters discussed under "-- Background of the Merger," and
notwithstanding Household's recent historical market prices including a
2002 high of $63.25 per share, the consideration offered by HSBC in the
merger, with an implied value of approximately $30 per share of Household
common stock as of the date of the Household board meeting, was likely to
deliver better value to holders of Household common stock than would be
the case in the foreseeable future in the absence of a transaction with
HSBC;
- HSBC's business, operations, financial condition and earnings and the
result of Household's due diligence investigation of HSBC;
- the required regulatory consents and the likelihood that the merger would
be approved by the requisite regulatory authorities and otherwise
completed pursuant to the terms of the merger agreement; and
- the expectation that the merger could be completed in a reasonable
timeframe.
Household's board of directors considered the following factors generally
weighing against a decision to enter into the merger agreement:
- the difficulties and management distractions inherent in completing a
merger and an integration of the operations of two companies;
- the risk that the potential benefits of the merger might not be fully
achieved;
41
- the risk that the merger might not be consummated, and the possible
adverse implications to customers, investor relations and employee morale
under such circumstances;
- the risk that, although Household has the right under limited conditions
to consider and participate in discussions and negotiations with respect
to alternative acquisition proposals, the provisions of the merger
agreement relating to the potential payment of a $550 million termination
fee may have the effect of discouraging such proposals; and
- the fact that, although the dollar value implied by the exchange ratio
(approximately $30 per share based on then-current market prices)
represented a premium to the then-current market price of Household
common stock, that value was also below recent historical levels for
Household common stock, including a 2002 high of $63.25 per share. Please
refer to "-- Opinion of Household's Financial Advisor Relating to Common
Stock -- Historical Exchange Ratio Analysis."
Household's board of directors also considered the retention and employment
arrangements with key Household employees to be entered into in connection with
the merger agreement and the interests that some Household executive officers
and directors have with respect to the merger in addition to their interests as
holders of Household common stock. See "-- Interests of Household's Executive
Officers and Directors in the Merger".
The foregoing discussion of the information and factors considered by
Household's board of directors, while not exhaustive, includes the material
factors considered by the board of directors. In view of the variety of factors
considered in connection with its evaluation of the merger, Household's board of
directors did not find it practicable to, and did not, quantify or otherwise
assign relative or specific weight or values to any of these factors, and
individual directors may have given different weights to different factors.
RECOMMENDATION OF HOUSEHOLD'S BOARD OF DIRECTORS
After careful consideration, Household's board of directors has unanimously
determined that the merger agreement and the transactions contemplated by the
merger agreement, including the merger, are advisable, fair to and in the best
interests of Household and its stockholders, unanimously approved the merger
agreement and the transactions contemplated by the merger agreement and
unanimously recommends that Household stockholders vote "FOR" adoption of the
merger agreement.
OPINION OF HOUSEHOLD'S FINANCIAL ADVISOR RELATING TO COMMON STOCK
Goldman, Sachs & Co. delivered its oral opinion, subsequently confirmed in
writing to Household's board of directors that, as of the date of the opinion,
and based upon and subject to the factors and assumptions set forth therein, the
exchange ratio of 2.675 HSBC ordinary shares or 0.535 HSBC ADSs to be received
for each share of Household common stock pursuant to the merger agreement was
fair from a financial point of view to the holders of Household common stock.
THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS, DATED NOVEMBER 14,
2002, WHICH SETS FORTH ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED
AND LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS
ATTACHED AS ANNEX B. HOUSEHOLD'S STOCKHOLDERS SHOULD READ THE OPINION IN ITS
ENTIRETY. GOLDMAN SACHS PROVIDED ITS OPINION FOR THE INFORMATION AND ASSISTANCE
OF HOUSEHOLD'S BOARD OF DIRECTORS IN CONNECTION WITH ITS CONSIDERATION OF THE
MERGER. THE GOLDMAN SACHS OPINION IS NOT A RECOMMENDATION AS TO HOW ANY HOLDER
OF SHARES OF HOUSEHOLD COMMON STOCK OR VOTING PREFERRED STOCK SHOULD VOTE WITH
RESPECT TO THE MERGER.
In connection with rendering the opinion described above and performing its
related financial analyses, Goldman Sachs reviewed, among other things:
- the merger agreement;
- annual reports to stockholders and annual reports on Forms 10-K and
10-K/A of Household (including its predecessor companies) for the five
years ended December 31, 2001;
42
- annual reviews to shareholders of HSBC for the five years ended December
31, 2001 and annual reports on Forms 20-F and 20-F/A of HSBC for the
three years ended December 31, 2001;
- certain interim reports to stockholders and quarterly reports on Forms
10-Q and 10-Q/A of Household;
- certain interim reports to shareholders and reports of foreign private
issuers on Form 6-K of HSBC;
- certain other communications from Household and HSBC to their respective
stockholders and shareholders;
- internal financial analyses and forecasts for Household prepared by its
management; and
- certain cost savings and operating synergies projected by the management
of Household to result from the merger.
Goldman Sachs also held discussions with members of the senior managements
of Household and HSBC regarding their assessment of the strategic rationale for,
and the potential benefits of, the transaction contemplated by the merger
agreement and the past and current business operations, financial condition and
future prospects of their respective companies, including discussions with
Household with respect to the importance of the funding environment to the
financial performance of consumer finance companies. In addition, Goldman Sachs
reviewed the reported price and trading activity for the Household common stock
and the HSBC ordinary shares (including price and trading activity for HSBC
ADSs, each of which represents an ownership interest in five HSBC ordinary
shares), compared certain financial and stock market information for Household
and HSBC with similar information for certain other companies, the securities of
which are publicly traded, reviewed the financial terms of certain recent
business combinations in the finance industry specifically and in other
industries generally and performed such other studies and analyses as it
considered appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial, accounting and other information discussed with or reviewed by it and
assumed such accuracy and completeness for the purpose of rendering the opinion
described above. HSBC did not make available to Goldman Sachs any projections of
expected future performance. Accordingly, Goldman Sachs' review of HSBC's
expected future performance was limited to discussions with the management of
HSBC of certain research analysts' estimates. Goldman Sachs assumed with the
consent of Household's board of directors that HSBC's allowances for loan and
lease portfolio losses are in the aggregate adequate to cover all loan and lease
portfolio losses. In addition, Goldman Sachs did not review individual credit
files or make an independent evaluation or appraisal of the assets and
liabilities (including any derivative or off-balance sheet assets and
liabilities) of Household or HSBC or any of their respective subsidiaries, nor
was Goldman Sachs furnished with any such evaluation or appraisal. Goldman Sachs
assumed that all material governmental, regulatory or other consents and
approvals necessary for the consummation of the transaction contemplated by the
merger agreement will be obtained without any adverse effect on Household or
HSBC or their respective subsidiaries or on the expected benefits of the merger.
The following is a summary of the material financial analyses used by
Goldman Sachs in connection with rendering the opinion described above. The
following summary, however, does not purport to be a complete description of the
financial analyses performed by Goldman Sachs. The order of analyses described
does not represent relative importance or weight given to those analyses by
Goldman Sachs. Some of the summaries of the financial analyses include
information presented in tabular format. The tables must be read together with
the full text of each summary and are alone not a complete description of
Goldman Sachs' financial analyses. Except as otherwise noted, the following
quantitative information, to the extent that it is based on market data, is
based on market data as it existed on or before November 14, 2002 and is not
necessarily indicative of current market conditions.
Historical Stock Trading Analysis. Goldman Sachs reviewed the historical
trading prices for the Household common stock for the twelve-month period ended
November 11, 2002. In addition, Goldman Sachs analyzed the consideration to be
received by holders of Household common stock pursuant to the
43
merger agreement in relation to the closing market prices of the Household
common stock on November 11, 2002 and November 8, 2002, based on the closing
price of HSBC ordinary shares on such dates.
This analysis indicated that the price per share to be received by holders
of Household common stock based on the exchange ratio pursuant to the merger
agreement represented:
- a premium of 29.0% based on the November 11, 2002 (the last full trading
day prior to the Household board of directors meeting to discuss the
proposed merger) closing price of $23.07 per share; and
- a premium of 31.3% based on the November 8, 2002 (the last full trading
day prior to the meeting at which Mr. Aldinger and Sir John discussed an
exchange ratio for the Household common stock) closing price of $23.05
per share.
Historical Exchange Ratio Analysis. Goldman Sachs reviewed the closing
prices of Household common stock divided by the corresponding closing prices of
HSBC ADSs over the three-year period ended November 11, 2002. In addition,
Goldman Sachs calculated the average of these historical daily exchange ratios
for the one-month, two-month, three-month, one-year and three-year periods ended
November 11, 2002. The following table presents the results of these
calculations:
<Table>
<Caption>
PERIOD AVERAGE EXCHANGE RATIO
- -------------- --------------
Transaction................................................. 0.535x
November 11, 2002........................................... 0.415
1-Month Average............................................. 0.457
2-Month Average............................................. 0.496
3-Month Average............................................. 0.544
1-Year Average.............................................. 0.813
3-Year Average.............................................. 0.807
</Table>
Comparison of the transaction exchange ratio to historical exchange ratios
is a measure used to analyze the per share consideration to be received by the
holders of Household common stock in relation to the equity capital market's
historical relative valuations of Household common stock and HSBC ADSs. The
analysis indicated that the 0.535 HSBC ADSs to be received in exchange for each
share of Household common stock in the merger represented (1) a premium to the
ratio of the market price of Household common stock to the market price of HSBC
ADSs on November 11, 2002, (2) a premium to the average ratio of such prices for
the one-month and two-month periods ended November 11, 2002 and (3) a discount
to the average ratio of such prices for the three-month, one-year and three-year
periods ended November 11, 2002.
The transaction exchange ratio of 0.535x would result in the holders of
Household common stock owning approximately 12% of the outstanding ordinary
shares of the pro forma combined company following the merger.
SELECTED COMPANIES ANALYSIS
Household Peers. Goldman Sachs reviewed and compared certain financial
information for Household to corresponding financial information, ratios and
public market multiples for the following publicly traded corporations in the
finance industry:
Credit Card Companies
- MBNA Corporation
- Capital One Financial Corporation
- Providian Financial Corporation
- CompuCredit Corporation
- Metris Companies Inc.
44
Mortgage Finance Companies
- Countrywide Financial Corporation
- Doral Financial Corporation
- IndyMac Bancorp, Inc.
Auto Lenders
- AmeriCredit Corp.
- WFS Financial Inc.
Other Consumer Finance Companies
- American Express Company
Commercial Finance Companies
- CIT Group Inc.
- GATX Corporation
- Financial Federal Corporation
- DVI, Inc.
Although none of the selected companies is directly comparable to
Household, the companies included were chosen because they are publicly traded
companies with operations that, for purposes of analysis, may be considered
similar to certain operations of Household.
Goldman Sachs calculated and compared various financial multiples and
ratios based on publicly available financial data as of June 30, 2002,
information it obtained from SEC filings and Institutional Brokers Estimate
System, or IBES, estimates. The multiples and ratios for Household were
calculated using the closing price of Household common stock on November 11,
2002, with Household's equity adjusted to reflect its October 2002 common stock
and convertible securities offering and October 11, 2002 proposed settlement
with state attorneys general. The multiples and ratios for each of the selected
companies were based on the most recent publicly available information. With
respect to the selected companies, Goldman Sachs calculated:
- net income for the twelve months ended June 30, 2002, as a percentage of
the average common equity for that period; and
- net income for the twelve months ended June 30, 2002, as a percentage of
the average managed assets for that period.
Net income to average common equity and net income to average managed
assets are measures used to analyze a company's profitability and operating
performance over a stated period. The analysis indicated that Household's ratios
of net income to average common equity and net income to average managed assets
for the twelve-month period ended June 30, 2002 were higher than the medians of
these ratios for Household's selected peers. Goldman Sachs then compared these
measures to the corresponding values for Household. The results of these
analyses are summarized as follows:
<Table>
<Caption>
SELECTED CREDIT CARD SELECTED MORTGAGE SELECTED SELECTED COMMERCIAL
COMPANIES FINANCE COMPANIES SELECTED AUTO LENDERS CONSUMER FINANCE COMPANIES
---------------------- -------------------- ---------------------- FINANCE -------------------
RANGE MEDIAN RANGE MEDIAN RANGE MEDIAN COMPANY RANGE MEDIAN
------------- ------ ----------- ------ ------------ ------- -------- ---------- ------
Net Income to:
Average Common
Equity............. (13.7)%-24.5% 18.0% 15.0%-29.6% 17.5% 12.0%-27.9% 20.0% 15.1% 1.7%-16.6% 4.0%
Average Managed
Assets............. (2.1)%-1.5% 1.0% 0.2% 0.2% 0.7%-2.1% 1.4% 1.2% 0.3%-2.6% 1.8%
<Caption>
HOUSEHOLD
---------
Net Income to:
Average Common
Equity............. 24.4%
Average Managed
Assets............. 1.8%
</Table>
Goldman Sachs calculated and compared the selected companies' ratios of
November 11, 2002 stock price to calendar year 2002 and 2003 IBES earnings
estimates and June 30, 2002 book value with the corresponding ratios for
Household. Stock price to IBES estimated earnings and stock price to book value
(equity) per share are measures used to analyze the equity capital market's
valuation of a company. The
45
analysis indicated that Household's ratios of November 11, 2002 stock price to
IBES estimated 2003 and 2004 earnings were lower than the medians of these
ratios for Household's selected peers and that its ratio of November 11, 2002
stock price to June 30, 2002 book value was in line with the medians of this
ratio for Household's selected peers. The following table presents the results
of this analysis:
<Table>
<Caption>
SELECTED CREDIT CARD SELECTED MORTGAGE SELECTED SELECTED COMMERCIAL
COMPANIES FINANCE COMPANIES SELECTED AUTO LENDERS CONSUMER FINANCE COMPANIES
--------------------- ------------------ ---------------------- FINANCE -------------------
RATIO RANGE MEDIAN RANGE MEDIAN RANGE MEDIAN COMPANY RANGE MEDIAN
- ----- ----------- ------- --------- ------ ----------- -------- -------- ---------- ------
Price/2002E Earnings*...... 7.5x-14.6x 13.5x 7.7x-9.6x 7.9x 8.6x 8.6x 17.6x 6.2x-14.8x 11.8x
Price/2003E Earnings....... 6.4x-19.3x 7.0x 6.9x-8.1x 7.4x 5.8x-7.6x 6.7x 15.6x 5.3x-12.8x 8.6x
Price/Book................. 0.2x-3.3x 0.6x 1.1x-2.7x 1.4x 0.8x-1.3x 1.0x 3.5x 0.5x-2.1x 1.2x
<Caption>
RATIO HOUSEHOLD
- ----- ---------
Price/2002E Earnings*...... 5.2x
Price/2003E Earnings....... 5.4x
Price/Book................. 1.3x
</Table>
- ---------------
* Ratio not meaningful for two credit card companies and one auto lender
(projected earnings negative for the period).
HSBC Peers. Goldman Sachs reviewed and compared certain financial
information for HSBC to corresponding financial information, ratios and public
market multiples for the following publicly traded corporations in the banking
industry:
Asia Banks
- Hang Seng Bank Limited (which is a subsidiary of HSBC)
- DBS Group Holdings Ltd
United Kingdom Banks
- Royal Bank of Scotland Group plc
- Lloyds TSB Group plc
- Barclays PLC
- HBOS PLC
- Standard Chartered PLC
United States Banks
- Citigroup Inc.
- Bank of America Corp.
- Wells Fargo & Company
- Wachovia Corporation
- Bank One Corporation
- J.P. Morgan Chase & Co.
- U.S. Bancorp
Although none of the selected companies is directly comparable to HSBC, the
companies included were chosen because they are publicly traded companies with
operations that, for purposes of analysis, may be considered similar to certain
operations of HSBC.
Goldman Sachs calculated and compared various financial multiples and
ratios based on publicly available financial data as of June 30, 2002,
information it obtained from SEC filings and IBES estimates. The multiples and
ratios of HSBC were calculated using the closing price of HSBC ordinary shares
on
46
November 11, 2002. The multiples and ratios for each of the selected companies
were based on the most recent publicly available information. With respect to
the selected companies, Goldman Sachs calculated:
- the ratio of price to 2003 IBES estimated earnings, as a multiple of
IBES estimated earnings growth; and
- dividend yield.
Stock price to IBES estimated earnings divided by the median IBES estimated
five-year growth rate is a measure used to analyze the equity capital market's
valuation of a company in relation to its estimated growth prospects. Dividend
yield represents a company's annual dividend paid to shareholders in relation to
its current stock price. The analysis indicated that HSBC's ratio of November
11, 2002 stock price to IBES estimated 2003 earnings per share divided by its
IBES five-year median growth estimate, as well as HSBC's dividend yield, were
higher than the medians of these ratios for HSBC's selected peers. The results
of these analyses are summarized as follows:
<Table>
<Caption>
SELECTED ASIA BANKS SELECTED U.K. BANKS SELECTED U.S. BANKS
-------------------- -------------------- --------------------
RATIO RANGE MEDIAN RANGE MEDIAN RANGE MEDIAN HSBC
- ----- ---------- ------- ---------- ------- ---------- ------- ----
2003E P/E to Growth......... 1.2x-1.4x 1.3x 0.9x-1.8x 1.3x 0.7x-1.2x 1.0x 1.4x
Dividend Yield.............. 2.6%-5.7% 4.2% 2.4%-5.8% 3.7% 2.0%-6.7% 3.1% 4.5%
</Table>
Goldman Sachs also calculated and compared the selected companies'
estimated calendar year 2002 and 2003 price/IBES estimated earnings ratios and
price to book value ratios to the results for HSBC. Stock price to IBES
estimated earnings and stock price to book value (equity) per share multiples
are measures used to analyze the equity capital market's valuation of a company.
The analysis indicated that HSBC's ratios of November 11, 2002 stock price to:
IBES estimated 2002 earnings per share, IBES estimated 2003 earnings per share,
June 30, 2002 stated book value and June 30, 2002 tangible common equity were in
line with the medians of these ratios for HSBC's selected peers. The following
table presents the results of this analysis:
<Table>
<Caption>
SELECTED ASIA BANKS SELECTED U.K. BANKS SELECTED U.S. BANKS
-------------------- -------------------- --------------------
RATIO RANGE MEDIAN RANGE MEDIAN RANGE MEDIAN HSBC
- ----- ----------- ------ ----------- ------ ----------- ------ -----
Price/2002E Earnings..... 16.2x-17.1x 16.6x 10.8x-18.2x 13.6x 10.9x-13.8x 12.0x 15.0x
Price/2003E Earnings..... 13.9x-15.5x 14.7x 10.0x-14.3x 10.8x 8.2x-12.6x 10.8x 14.5x
Price/Book (Stated)...... 1.2x-3.7x 2.4x 1.8x-2.9x 2.0x 1.0x-2.7x 2.1x 2.1x
Price/Book (Tangible).... 1.9x-3.7x 2.8x 2.3x-4.2x 3.3x 1.2x-4.2x 2.8x 2.9x
</Table>
Goldman Sachs compared the historical trading prices for the HSBC ordinary
shares and the selected companies for the twelve-month period ended November 11,
2002. The following table presents the results of this analysis:
<Table>
<Caption>
ONE-YEAR
RETURN
--------
Selected Asia Banks......................................... 9.6%
Selected U.K. Banks......................................... (10.5)%
Selected U.S. Banks......................................... (24.2)%
HSBC........................................................ (9.3)%
Household................................................... (60.4)%
</Table>
In addition, Goldman Sachs compared, for the five-year period ended
November 11, 2002, the average ratio of trading price to next twelve months IBES
earnings estimates for the HSBC ordinary shares and the selected companies.
Stock price to IBES estimated earnings is a measure used to analyze the equity
capital market's valuation of a company. The analysis indicated that HSBC's
average ratio of stock price to IBES
47
estimated earnings over the stated period was higher than the selected U.K.
banks' averages and U.S. banks' averages and in line with the Asia banks'
averages. The following table presents the results of this analysis:
<Table>
<Caption>
AVERAGE HSBC VALUATION PREMIUM TO:
-----------------------------------------------------
FIVE-YEAR THREE-YEAR ONE-YEAR NOVEMBER 11, 2002
--------- ---------- -------- -----------------
Selected U.K. Banks.................... 17% 29% 25% 22%
Selected U.S. Banks.................... 9% 22% 35% 43%
Selected Asia Banks.................... (1)% 3% 2% (1)%
</Table>
Analysis of Exchange Ratio. Goldman Sachs performed certain analyses,
based on historical information and earnings estimates for Household of $4.24
per share in 2003 and $4.66 in 2004 (including estimated adjustments of $0.16
and $0.18 for 2003 and 2004, respectively, as a result of the transition to U.K.
GAAP) provided by management of Household and earnings estimates for Household
provided by IBES at an exchange ratio of 0.535x (which represents the number of
HSBC ADSs that holders of Household common stock may elect to receive for each
share of Household common stock in the merger).
The earnings estimates provided to Goldman Sachs by management were not
prepared with a view to public disclosure. The earnings estimates are
forward-looking statements, made only as of the date of Goldman Sachs' opinion,
and are subject to certain risks and uncertainties that may cause actual results
to differ materially from those estimates; accordingly, such estimates should
not be relied upon by investors as an accurate prediction of future events.
Please refer to "Forward-Looking Statements." Based on the November 11, 2002
closing price of $23.07 for shares of Household common stock (except where
noted) and $55.61 for HSBC ADSs, Goldman Sachs calculated for Household the
implied aggregate consideration (on a diluted basis), the ratio of aggregate
consideration to IBES estimated U.S. GAAP earnings for the calendar years 2003
and 2004 and the ratio of aggregate consideration to U.S. GAAP book value as of
September 30, 2002 (pro forma for Household's recent common stock and
convertible securities offering). The following table presents the results of
Goldman Sachs' analyses:
<Table>
<Caption>
HOUSEHOLD
---------
Exchange ratio.............................................. 0.535x
Implied transaction consideration per share (as of November
11, 2002)................................................. $ 29.75
Implied aggregate consideration -- diluted (millions)....... $14,308
Premium to market price (as of November 11, 2002)........... 29.0%
Premium to market price (as of November 8, 2002)............ 31.3%
Implied aggregate consideration/U.S. GAAP earnings:
IBES estimate 2003..................................... 6.9x
IBES estimate 2004..................................... 5.9x
Management estimate 2003............................... 6.8x
Management estimate 2004............................... 6.1x
Implied aggregate consideration/stated common book value.... 1.6x
Implied aggregate consideration/tangible common book
value..................................................... 1.9x
</Table>
Dividend Discount Analysis. Goldman Sachs performed a dividend discount
analysis on Household and on the combined company following the merger (a) using
earnings estimates for Household provided by Household of $4.40 per share in
2003 and $4.84 per share in 2004, which assume a decrease in Household's cost of
funds from 400-600 basis points over three-year U.S. Treasuries (Household's
spreads for a three-year average maturity prior to the merger announcement) in
the unsecured debt markets to 250 basis points over three-year U.S. Treasuries
by 2005, and (b) using earnings estimates for Household provided by Household of
$4.40 per share in 2003 and $4.84 per share in 2004, with adjustments for the
assumption of a continuation of the current funding environment for Household.
The analysis with respect to the combined company utilized IBES estimated
earnings for HSBC of $3.82 per HSBC ADS in 2003 and $4.24 per HSBC ADS in 2004
and earnings estimates for Household provided by Household of $4.24 per share in
2003 and $4.66 per share in 2004 (including estimated adjustments of $0.16 per
share and $0.18 per share in 2003 and 2004, respectively,
48
as a result of the transition to U.K. GAAP), and synergies for Household within
the combined company projected by Household management, including reduced
funding costs resulting from Household's broader range of funding sources and
tighter new issue spreads (i.e., the difference between the offered yield on
Household securities and a benchmark such as U.S. Treasuries or the London
Interbank Offered Rate, or LIBOR) on unsecured term debt and commercial paper,
increased capacity for commercial paper and reduced expenses resulting from
increased operational efficiencies for Household within the combined company.
Goldman Sachs estimated the implied present values of a share of Household
common stock both on a standalone basis and for the combined company by
calculating an implied net present value of dividends for Household and the
combined company based on historical dividend levels for Household and HSBC for
the years 2003 through 2007 and a terminal value at year-end 2007. Goldman Sachs
calculated implied per share ranges of the Household common stock and the HSBC
ordinary shares using implied terminal values at year-end 2007 based on
multiples of 2008 estimated earnings ranging from 4.8x to 8.8x, with respect to
Household, and 11.7x to 15.7x, with respect to the combined company. The
Household terminal multiples were derived from its six-month average price to
IBES estimated next twelve-months earnings ratio. The terminal multiples for the
combined company were derived from a weighted average of HSBC and Household
price to earnings ratios (based on Household management projected 2003 earnings
for Household and IBES estimated 2003 earnings for HSBC). These implied terminal
value indications were then discounted to an implied present value using
discount rates ranging from 11.9% to 15.9%, with respect to Household, and 9.3%
to 13.3%, with respect to the combined company. The discount rates with respect
to Household were derived from the estimated cost of Household's equity and a
blended cost of equity for the combined company, calculated using the Capital
Asset Pricing Model and certain assumptions, including a market premium,
predicted betas (as calculated by Barra, an analytical service) for Household
and HSBC, respectively, and a risk-free rate derived from the yield on ten-year
U.S. Treasuries. A stock's beta is a measure of the volatility of its price
relative to the overall stock market. The blended cost of equity for the
combined company was calculated using the Capital Asset Pricing Model and a
blended beta (based on Household management projected 2003 earnings for
Household and IBES estimated 2003 earnings for HSBC). The ranges of terminal
value multiples were chosen to reflect sensitivities to the market valuation as
of November 11, 2002 for Household and the weighted average market valuation as
of November 11, 2002 for the combined company based upon 2004 IBES estimated
earnings contributions. The range of discount rates was chosen to reflect
sensitivities to the estimated cost of equity for Household and HSBC as of
November 11, 2002. The following table presents the results of this analysis:
<Table>
<Caption>
IMPLIED PER SHARE VALUE*
-------------------------
MIDPOINT** RANGE***
---------- ------------
Household (improving funding environment)................... $31.16 $21.68-42.11
Household (continuation of current funding environment)..... $23.43 $16.42-31.51
HSBC and Household combined................................. $39.55 $32.45-47.69
</Table>
- ---------------
* Present value of assumed dividends and implied terminal value of Household
common stock and combined company shares.
** Implied per share values assuming discount rates of 13.9%, with respect to
Household, and 11.3%, with respect to the combined company.
*** Range of implied per share values assuming discount rates of 11.9% to 15.9%,
with respect to Household, and 9.3% to 13.3%, with respect to the combined
company.
Pro Forma Merger Analysis. Goldman Sachs prepared pro forma analyses of
the financial impact of the merger using earnings estimates and projected
synergies for Household prepared by Household's management and earnings
estimates from IBES for HSBC. The analyses indicated pro forma earnings
accretion, primarily derived from the premium multiple of stock price to IBES
estimated 2003 and 2004 earnings at which HSBC trades (and has historically
traded) in relation to Household. The analyses with respect to the combined
company also assumed synergies for Household projected by Household's
management. For each of the years 2003 and 2004, Goldman Sachs compared the
earnings per share, or EPS, of HSBC ordinary shares, on a standalone basis, to
the EPS of the common stock of the combined company, both including and
excluding
49
synergies. Goldman Sachs performed this analysis based on the closing prices of
Household common stock and HSBC ADSs on November 11, 2002. Based on such
analyses, the proposed transaction would be accretive to HSBC's IBES estimated
2003 earnings by 9.9% with synergies and 8.2% without synergies, and IBES
estimated 2004 earnings by 12.8% with synergies and 8.4% without synergies.
In addition, based on the current quarterly dividend of $0.25 paid on the
Household common stock, or $1.00 per share annualized, and the HSBC dividend
paid in 2002 of $2.47 per HSBC ADS, holders of Household common stock would
receive an additional $0.32 in dividends on a pro forma per share of Household
common stock basis, representing an implied dividend accretion to Household
stockholders of approximately 32%.
Goldman Sachs analyzed the potential impact of the proposed merger on
HSBC's market valuation and, thereby, the consideration to be received by
Household stockholders. Using the assumed accretion to HSBC IBES estimated 2004
EPS of 12.8% with synergies and 8.4% without synergies, Goldman Sachs calculated
the stock price of the combined company at various ratios of price to estimated
2004 pro forma earnings. After accounting for the assumed EPS accretion from the
proposed merger with synergies, Goldman Sachs estimated that HSBC's ratio of
price to estimated 2004 earnings could decline from 13.1x to 11.6x before having
a negative impact on HSBC's share price. Excluding synergies, HSBC's ratio of
price to estimated 2004 earnings could decline from 13.1x to 12.1x before having
a negative impact on HSBC's stock price. The following table presents the
results of this analysis:
<Table>
<Caption>
HSBC PRICE TO ESTIMATED 2004 EARNINGS
------------------------------------------------------------
WEIGHTED CURRENT BREAKEVEN
AVERAGE* HSBC P/E**
-------- ------- ---------
11.3X 11.8X 12.2X 12.6X 13.1X 12.1X
-------- ------- ------- ------- ------- ---------
Combined company stock price
(without synergies)***............. $ 52.08 $ 54.13 $ 56.18 $ 58.23 $ 60.28 $ 55.61
Adjusted implied premium to Household
common stockholders................ 20.8% 25.5% 30.3% 35.0% 39.8% 29.0%
11.3X 11.8X 12.2X 12.6X 13.1X 11.6X
------- ------- ------- ------- ------- -------
Combined company stock price
(with synergies)****............... $ 54.20 $ 56.33 $ 58.46 $ 60.59 $ 62.72 $ 55.61
Adjusted implied premium to Household
common stockholders................ 25.7% 30.6% 35.6% 40.5% 45.5% 29.0%
</Table>
- ---------------
* Based on 2004 U.K. GAAP earnings contribution as estimated by management
for Household and IBES for HSBC.
** Breakeven P/E is the estimated price to earnings ratio at which the
combined company must trade in order to maintain HSBC's November 11, 2002
ADS price of $55.61. Assuming accretion to HSBC IBES estimated 2004
earnings of 8.4% (without synergies) or 12.8% (with synergies), a P/E ratio
higher than the breakeven P/E would result in an increase in the trading
price for the HSBC ordinary shares, and a P/E ratio lower than the
breakeven P/E would result in a decreased trading price for the HSBC
ordinary shares.
*** Assumes 8.4% 2004E U.K. GAAP EPS accretion to HSBC.
**** Assumes 12.8% 2004E U.K. GAAP EPS accretion to HSBC.
Flowback Analysis. Goldman Sachs performed an analysis of the possible
effect of flowback, and compared estimated flowback to the average daily trading
volume of HSBC ordinary shares and HSBC ADSs across all exchanges, using
institutional shareholdings as of June 30, 2002. Assuming sales of HSBC ordinary
shares and HSBC ADSs received in the merger by 70% of retail and active
institutional holders of Household common stock, sales of HSBC ordinary shares
and HSBC ADSs received in the merger by all passive institutional holders of
Household common stock upon removal of Household from the S&P 500 Index, and
purchases of combined company stock upon re-weighting of HSBC in U.K. indices,
this illustrative analysis
50
indicated that an estimated 61.3% of HSBC ordinary shares and HSBC ADSs received
by holders of Household common stock in the merger would be sold as a result of
the transaction. The market value of these HSBC ordinary shares and HSBC ADSs,
based on the exchange ratio and the $55.61 closing price of HSBC ADSs on
November 11, 2002 would represent approximately 17 times the average daily
trading volume of HSBC ordinary shares and HSBC ADSs, based on the average daily
trading volume for HSBC ordinary shares and HSBC ADSs across all exchanges for
the three-month period ended November 11, 2002. The number of days of trading
volume represented by various levels of sales of acquiror stock to be received
by holders of acquired company stock in a merger is a measure used to analyze
the ability of the market to absorb potential sales of acquiror stock as a
result of a merger transaction. The following table presents an analysis of the
potential effect of these sales at various assumed sales levels:
<Table>
<Caption>
PERCENTAGE OF TOTAL SHARES SOLD
-------------------------------------------------------------------
50% 60% 61.3%* 70% 80% 90% 100%
------- ------- ------- ------- ------- ------- -------
Total market value of sales
($bn).................... $7.2 $8.6 $8.8 $10.0 $11.4 $12.9 $14.3
% of current HSBC float.... 6.8% 8.2% 8.4% 9.6% 10.9% 12.3% 13.6%
Days of trading volume**... 14 days 17 days 17 days 19 days 22 days 25 days 28 days
</Table>
- ---------------
* Goldman Sachs' estimate of the percentage of HSBC ordinary shares and HSBC
ADSs received by holders of Household common stock in the merger to be sold
as a result of the transaction.
** Equals market value of sales divided by $516 million average daily worldwide
trading volume of HSBC ordinary shares and HSBC ADSs for the three months
prior to November 11, 2002.
Goldman Sachs calculated the ratios of the equity value of the merger to
the market capitalization of HSBC and to the three-month average daily trading
volume of HSBC as of November 11, 2002. The ratios of merger equity value to
market capitalization and trading volume of the acquiror are measures used to
analyze the ability of the market to absorb potential sales of acquiror stock as
a result of a merger transaction. Goldman Sachs compared these ratios to the
equity values of each of the ten largest foreign acquisitions of U.S. companies
as percentages of acquiror market capitalization on the date of announcement and
as ratios to acquiror average daily trading volume for the three months prior to
the announcement.
<Table>
<Caption>
TEN LARGEST CROSS-BORDER ACQUISITIONS OF A U.S. TARGET
(IN MILLIONS)
----------------------------------------------------------------------------------------
DEAL SIZE
AS A % OF DAYS OF
ANNOUNCEMENT ACQUIROR DEAL ACQUIROR TRADING
DATE ACQUIROR SIZE TARGET SIZE SIZE VOLUME*
- ------------ ------------ -------- -------------------- ------- --------- -------
January 18, 1999 Vodafone $ 54,462 AirTouch $65,845 121 380.9
Group Communications
August 11, 1998 British $ 74,812 Amoco $55,040 74 341.8
Petroleum Co
May 7, 1998 Daimler-Benz $ 91,520 Chrysler $40,466 44 659.6
April 1, 1999 BP Amoco $156,889 ARCO $33,702 21 55.6
July 24, 2000 Deutsche $138,171 VoiceStream Wireless $30,823 22 76.7
Telekom
July 12, 2000 UBS $ 56,547 PaineWebber $16,543 29 69.2
NOVEMBER 14, 2002 HSBC $105,432 HOUSEHOLD $14,308** 14 27.7
December 7, 1998 Scottish $ 11,590 PacifiCorp $12,589 109 298.2
Power
December 6, 1999 Cap Gemini NA Ernst & Young $11,774 NA 149.6
August 30, 2000 AXA Group $ 52,065 AXA Financial $11,190 21 78.2
February 18, 1999 Aegon $ 57,782 TransAmerica $10,791 19 26.8
</Table>
- ---------------
* Trading volume based on the three-month average for acquirers' daily trading
volume across all listed exchanges.
51
** Based on November 11, 2002 closing prices.
This analysis indicated that, assuming, for illustrative purposes, sales of
100% of HSBC ordinary shares and HSBC ADSs received by holders of Household
stock in the merger, the equity value of the merger equals 14% of the acquiror's
pre-announcement market capitalization, and a multiple of 27.7x the three-month
average daily trading volume of HSBC stock.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Goldman Sachs' opinion. In arriving at its fairness determination,
Goldman Sachs considered the results of all of its analyses and did not
attribute any particular weight to any factor or analysis considered by it.
Rather, Goldman Sachs made its determination as to fairness on the basis of its
experience and professional judgment after considering the results of all of its
analyses. No company or transaction used in the above analyses as a comparison
is directly comparable to Household or HSBC or the contemplated transaction.
Goldman Sachs prepared these analyses solely for the purpose of Goldman
Sachs' providing its opinion to Household's board of directors as to the
fairness from a financial point of view of the merger. These analyses do not
purport to be appraisals or necessarily to reflect the prices at which
businesses or securities actually may be sold. Analyses based upon forecasts of
future results are not necessarily indicative of actual future results, which
may be significantly more or less favorable than suggested by these analyses.
Because these analyses are inherently subject to uncertainty, being based upon
numerous factors or events beyond the control of the parties or their respective
advisors, none of Household, HSBC, Goldman Sachs or any other person assumes
responsibility if future results are materially different from those forecasted.
As described above in "-- Household's Reasons for the Merger," Goldman
Sachs' opinion to Household's board of directors was one of many factors taken
into consideration by Household's board of directors in making its determination
to approve the merger agreement. The foregoing summary does not purport to be a
complete description of the analyses performed by Goldman Sachs in connection
with the fairness opinion and is qualified in its entirety by reference to the
written opinion of Goldman Sachs attached as Annex B.
Goldman Sachs, as part of its investment banking business, is continually
engaged in performing financial analyses with respect to businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities and private placements as well as for financial analyses for
estate, corporate and other purposes. Goldman Sachs is familiar with Household
having provided certain investment banking services to Household from time to
time, including having acted as joint lead manager for a public offering of $300
million of preferred stock of Household in September 2001; having acted as sole
bookrunner for a public offering of 18.7 million shares of common stock of
Household and $542 million of Adjustable Conversion-Rate Equity Security Units
of Household in October 2002; having acted as commercial paper dealer for
Household, commencing in October 2002; and having acted as its financial advisor
in connection with, and having participated in certain of the negotiations
leading to, the merger agreement. Household paid total fees and commissions to
Goldman Sachs of $1.2 million and $17.2 million in 2001 and 2002, respectively.
Goldman Sachs also has provided investment banking services to HSBC from
time to time, including having acted as lead manager for a public offering of $4
billion aggregate principal amount of Non-cumulative Perpetual Preferred Stock
of HSBC in May 2000; and having acted as HSBC's financial advisor in connection
with its acquisition of CCF S.A., formerly known as Credit Commercial de France
S.A., in July 2000.
Household's board of directors selected Goldman Sachs as its financial
advisor because it is an internationally recognized investment banking firm that
has substantial experience in transactions similar to the merger.
Goldman Sachs provides a full range of financial advisory and securities
services and, in the course of its normal trading activities, may from time to
time effect transactions and hold securities, including derivative instruments,
of Household or HSBC for its own account and for the accounts of customers.
52
Goldman Sachs may provide investment banking services to Household, HSBC
and their respective subsidiaries in the future.
Pursuant to the terms of an engagement letter between Household and Goldman
Sachs, Household has agreed to pay Goldman Sachs a transaction fee of
$27,000,000, $5,000,000 of which will be paid upon the mailing of this document
to Household's stockholders and $22,000,000 of which will be paid upon
completion of the merger. In addition, Household has agreed to reimburse Goldman
Sachs for its reasonable expenses, including attorneys' fees and disbursements,
and to indemnify Goldman Sachs and related persons against various liabilities,
including certain liabilities under the federal securities laws.
OPINION OF HOUSEHOLD'S FINANCIAL ADVISOR RELATING TO NON-REDEEMABLE PREFERRED
STOCK
Household engaged Keefe, Bruyette & Woods, Inc., or KBW, to render an
opinion regarding the fairness, from a financial point of view, of the cash
consideration to be paid under the merger agreement to the holders of each
depositary share representing one-fortieth of a share of Household 7 5/8%
cumulative preferred stock, 7.50% cumulative preferred stock or 7.60% cumulative
preferred stock, which collectively constitute the outstanding currently
non-redeemable preferred stock of Household. Household selected KBW because KBW
is a nationally recognized investment banking firm with substantial experience
in transactions similar to the merger. As part of its investment banking
business, KBW is continually engaged in the valuation of banking and financial
service company securities in connection with acquisitions. Household did not
provide specific instructions to, or place any limitation on, KBW with respect
to the procedures to be followed or factors to be considered by KBW in
performing its analyses or providing its opinion.
KBW attended and made a presentation to the meeting of Household's board of
directors on November 12, 2002. During this meeting, KBW rendered an oral
opinion (subsequently confirmed in a written opinion dated November 14, 2002)
that, as of the date of the opinion and based upon and subject to the factors
and assumptions set forth in KBW's written opinion, the cash consideration to be
received in the merger was fair, from a financial point of view, to the holders
of the currently non-redeemable preferred stock.
The full text of KBW's written opinion is attached as Annex C to this
document and is incorporated herein by reference. Holders of the currently
non-redeemable preferred stock are urged to read that opinion in its entirety
for a description of the procedures followed, assumptions made, matters
considered and qualifications and limitations on the review undertaken by KBW.
KBW's opinion is directed to Household's board of directors and addresses
only the cash consideration to be received under the merger agreement by holders
of the currently non-redeemable preferred stock. KBW's opinion does not address
the consideration to be received under the merger agreement by the holders of
Household common stock or the underlying business decision to engage in the
merger and does not constitute a recommendation to any stockholder of Household
entitled to vote at the special meeting as to how that stockholder should vote
or act on any matter related to the proposed merger.
In arriving at its opinion, KBW:
- reviewed the merger agreement;
- reviewed Household's Certificate of Incorporation and the certificates of
designations of the currently non-redeemable preferred stock;
- reviewed certain publicly available business and financial information
relating to Household and HSBC;
- reviewed other information, including the terms, call provisions, and
conditions of the currently non-redeemable preferred stock of Household;
- reviewed the credit ratings and certain financial and market data of the
currently non-redeemable preferred stock of Household;
53
- compared certain financial and credit rating information, and information
for selected other issues of preferred securities, trust preferred
securities and debt securities that KBW deemed similar to the currently
non-redeemable preferred stock of Household; and
- considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria that KBW
deemed relevant.
In connection with its review, KBW did not assume any responsibility for
independent verification of any of the foregoing information and KBW relied on
this information being complete and accurate in all material respects. In
addition, KBW was not requested to make, and did not make, an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of Household or of HSBC, nor did KBW review any loan or credit files of
Household and KBW was not furnished with any such evaluations, appraisals or
reviews. KBW also assumed that Household has adequately reserved against losses
that may be incurred as a result of non-performing or defaulting loans. KBW did
not express any opinion as to the prices at which the currently non-redeemable
preferred stock of Household would trade at any time, and KBW assumed that the
merger will be completed in accordance with the terms and conditions outlined in
the merger agreement. KBW's opinion was necessarily based upon available
information and financial, economic, market and other conditions as they existed
and could be evaluated on the date it was rendered.
The KBW opinion was among several factors taken into consideration by
Household's board of directors in making its determination to approve the merger
agreement and the merger. Consequently, the analyses described below should not
be viewed as determinative of the decision of the board of directors or
management of Household with respect to the fairness of the cash consideration
to be received under the merger agreement by holders of the currently
non-redeemable preferred stock.
The following is a summary of the material analyses presented by KBW to
Household's board of directors on November 12, 2002, in connection with its
opinion. The summary is not a complete description of the analyses underlying
the KBW opinion or the presentation made by KBW to Household's board of
directors, but summarizes the material analyses performed and presented in
connection with such opinion. The preparation of a fairness opinion is a complex
analytic process involving various determinations as to the most appropriate and
relevant methods of financial analysis and the application of those methods to
the particular circumstances. Therefore, a fairness opinion is not readily
susceptible to partial analysis or summary description. In arriving at its
opinion, KBW did not attribute any particular weight to any analysis or factor
that it considered, but rather made qualitative judgments as to the significance
and relevance of each analysis and factor. The financial analyses summarized
below include information presented in tabular format. Accordingly, KBW believes
that its analyses and the summary of its analyses must be considered as a whole
and that selecting portions of its analyses and factors or focusing on the
information presented below in tabular format, without considering all analyses
and factors or the full narrative description of the financial analyses,
including the methodologies and assumptions underlying the analyses, could
create a misleading or incomplete view of the process underlying its analyses
and opinion. The tables alone are not a complete description of the financial
analyses.
PREMIUM TO CURRENT MARKET PRICE. KBW compared the cash consideration of $25
per depositary share to be paid under the merger agreement to the holders of
depositary shares representing fractional shares of the currently non-redeemable
preferred stock to the current market price of each depositary share of
currently non-redeemable preferred stock. Based on the market price as of the
close of business on November 11, 2002, the cash consideration of $25
represented the following premiums to the market price:
<Table>
<Caption>
CURRENT PROPOSED PREMIUM TO
PRICE(1) TRANSACTION MARKET
-------- ----------- ----------
7.50% cumulative preferred stock....................... $20.15 $25.00 24.1%
7.60% cumulative preferred stock....................... $20.55 $25.00 21.6%
7 5/8% cumulative preferred stock...................... $20.40 $25.00 22.6%
</Table>
- ---------------
(1) Price data as of close of market on November 11, 2002. Source: Bloomberg.
54
The analysis indicated that the cash consideration to be paid to the
holders of depositary shares under the merger agreement offered them a premium
of at least 21.6% to the then current market price of their shares.
SUMMARY OF CURRENTLY NON-REDEEMABLE PREFERRED STOCK. KBW analyzed the key
terms and characteristics of each series of currently non-redeemable preferred
stock, including the dates at which each series would become mandatorily
redeemable by Household pursuant to its terms. Those terms and characteristics
are summarized in the following tables:
<Table>
<Caption>
TRADING ORIGINAL PAYMENT COUPON
SYMBOL ISSUE DATE COUPON FREQUENCY TYPE CUMULATIVE MATURITY
- ------- ---------- ------ --------- ------ ---------- ---------
HI-H 9/10/02 7 5/8% Quarterly Fixed Yes Perpetual
HI-G 3/18/02 7.60% Quarterly Fixed Yes Perpetual
HI-S 9/20/01 7.50% Quarterly Fixed Yes Perpetual
</Table>
<Table>
<Caption>
RATINGS
TRADING ------------- DEPOSITARY SHARES AMOUNT
SYMBOL CALLABLE MOODY'S S&P ISSUE PRICE OUTSTANDING OUTSTANDING
- ------- --------- ------- --- ----------- ----------------- --------------
HI-H 9/17/07 Baa2 BBB $25.00 14.0 million $350.0 million
at $25.00
HI-G 3/25/07 Baa2 BBB $25.00 16.0 million $400.0 million
at $25.00
HI-S 9/27/06 Baa2 BBB $25.00 12.0 million $300.0 million
at $25.00
</Table>
In addition, KBW reviewed the voting rights and ranking of each series of
currently non-redeemable preferred stock. KBW noted that the redemption
provisions of the currently non-redeemable preferred stock would limit potential
upside in their market prices even with favorable credit trends.
TRADING HISTORY OF AFFECTED PREFERRED STOCK. KBW analyzed the current, high,
low and average yield spread of the currently non-redeemable preferred stock
measured relative to U.S. 30-year treasuries. The results of that analysis are
summarized in the following table:
<Table>
<Caption>
AMOUNT
ISSUE OUT- CURRENT MARKET YIELD SPREAD SINCE ISSUED(2)
TRADING PRICE STANDING PRICE(1) VALUE CURRENT YIELD ---------------------------------
SYMBOL ($) ($M) ($) ($M) YIELD TO CALL CURRENT HIGH LOW AVERAGE
- ------- ------ -------- -------- ------ ------- ------- ------- ----- ----- -------
HI-H 25.00 350.0 20.40 285.6 9.34% 11.73% +4.79% +5.92% +3.15% +3.99%
HI-G 25.00 400.0 20.55 328.8 9.25% 13.16% +4.74% +4.74% +2.19% +2.92%
HI-S 25.00 300.0 20.15 241.8 9.31% 14.24% +4.75% +4.75% +2.08% +2.61%
------ -----
1,050.0 856.2
</Table>
- ---------------
(1) Price data as of close of market on November 11, 2002. Source: Bloomberg.
(2) Yield spread measures since issue date; spread measured relative to 30-year
treasury (5 3/8, maturing February 15, 2031).
The analysis indicated that the yield-spread of the currently
non-redeemable preferred stock relative to U.S. 30-year treasuries was at or
near its highest level since its issue date.
KBW also reviewed with Household's board of directors the trading price
history of each series of currently non-redeemable preferred stock since its
date of issuance.
55
COMPARABLE ANALYSIS. KBW analyzed a group of comparably-rated preferred,
trust preferred and debt securities issued by banking companies and the
securities of selected financial services companies in order to assess the
current trading market for similar securities issued by a peer group. The
results of the comparison are set out in the following table:
<Table>
<Caption>
RATING
ISSUE -------------- BID SIDE IMPLIED
ISSUER DATE MOODY'S S&P COUPON MATURITY SPREAD YIELD(1)
- ------ -------- ------- ---- ------ -------- -------- --------
Zions Bancorporation............... 12/19/96 Baa1 BBB- 8.536% 12/15/26 +3.10% 7.84%
FleetBoston Financial Corp......... 03/14/97 A3 BBB 8.400% 03/15/27 +3.05% 7.79%
Comerica Incorporated.............. 04/18/97 A3 BBB+ 9.980% 12/31/26 +2.90% 7.64%
Washington Mutual Inc.............. 05/30/97 Baa1 BBB- 8.375% 06/01/27 +2.85% 7.59%
M&T Bank Corporation............... 06/05/97 Baa1 BBB- 8.277% 06/01/27 +2.80% 7.54%
Compass Bancshares, Inc............ 01/15/97 A3 BBB- 8.230% 01/15/27 +2.75% 7.49%
First Tennessee National Corp...... 12/30/96 A3 BBB 8.070% 01/06/27 +2.70% 7.44%
North Fork Bancorporation, Inc..... 12/05/97 A3 BBB 8.000% 12/15/27 +2.70% 7.44%
Ford Motor Credit.................. 02/22/02 A3 BBB 7.600% 03/31/32 +3.64% 8.38%
General Motors Accept Corp......... 08/01/02 A2 N/A 7.350% 08/08/32 +3.01% 7.75%
Countrywide Capital III............ 06/04/97 Baa1 BBB+ 8.050% 06/15/27 +2.80% 7.54%
</Table>
- ---------------
(1) Based on 30-year treasury yield of 4.74%.
KBW noted that the comparable issues had bid side yield spreads in the
range of 2.70% to 3.64%, implying yields in the range of 7.44% to 8.38%,
compared with the currently non-redeemable preferred stock which, as of November
11, 2002, had spreads in the range 4.74% to 4.79%, implying yields in the range
of 9.25% to 9.34%. KBW noted that the current trading market and bid side
spreads for Household's currently non-redeemable preferred stock were more
characteristic of the market for sub-investment grade securities.
Household's board of directors engaged KBW as an independent contractor to
act as financial advisor to Household regarding the consideration to be paid to
holders of the currently non-redeemable preferred stock in the merger. As part
of its investment banking business, KBW is continually engaged in the valuation
of banking and financial services company securities in connection with
acquisitions, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements and valuations for various other
purposes. As specialists in the securities of banking and financial services
companies, KBW has experience in, and knowledge of, the valuation of banking and
financial services enterprises. In the ordinary course of its business as a
broker-dealer, KBW may, from time to time, purchase securities from, and sell
securities to, Household and HSBC and as a market-maker in securities, KBW may
from time to time have a long or short position in, and buy or sell, debt or
equity securities of Household and HSBC for KBW's own account and for the
accounts of its customers.
Household and KBW have entered into an agreement relating to the services
to be provided by KBW in connection with the rendering of its fairness opinion.
Household agreed to pay KBW a cash fee of $333,000 promptly after entering into
the agreement. In addition, Household has agreed to pay KBW a cash fee of
$333,000 promptly after the mailing of this document and to pay KBW a cash fee
of $334,000 at the time of consummation of the merger. Pursuant to the KBW
engagement agreement, Household has also agreed to reimburse KBW for reasonable
out-of-pocket expenses and disbursements incurred in connection with KBW's
engagement and to indemnify KBW against various liabilities, including
liabilities under the federal securities laws. Other than as set forth in this
paragraph, Household has not paid any fees or commissions to KBW during the last
two years.
HSBC'S REASONS FOR THE MERGER
The merger brings together one of the world's most successful deposit
gatherers with one of the world's largest generators of assets, and creates
significant opportunities to strengthen HSBC's business in a way that benefits
its shareholders and is consistent with its strategic objectives.
56
The merger improves the geographic balance of HSBC's earnings,
significantly increasing the contribution from the North American business. On
the basis of reported performance in the first six months of 2002, adjusted in
the case of Household to U.K. GAAP, each of the North American, Asian and
European segments would have contributed about 30% to the enlarged group's
pre-tax profit on a cash basis. Household offers HSBC national coverage in the
United States for consumer lending, credit cards and credit insurance through
varied distribution channels including approximately 1,400 offices in 46 states,
over 10,500 franchised auto dealerships, 140 retail merchant relationships, over
250 correspondent mortgage broker relationships and multiple web sites.
Nevertheless, this improved geographic balance might not prove beneficial to
HSBC if the U.S. economy is weaker than generally anticipated over the medium
and long term.
At June 30, 2002, HSBC had placed approximately $120 billion into the
inter-bank market and had liquid bond portfolios of approximately $180 billion.
As a result of diminished corporate credit demand, HSBC faces potential
challenges in deploying other capital without increasing concentration risk. By
expanding its U.S. consumer finance operations through the merger, HSBC seeks to
add an asset class that further diversifies its portfolio to offset its
potential exposure to increased concentration risk. HSBC is aware, however, that
some customers and investors could react negatively to HSBC being associated
with sub-prime lending and that pending litigation and negative publicity
associated with allegations of improper lending practices by companies in this
sector, including Household, could reduce the benefits of the merger to HSBC.
Please refer to "Risk Factors Relating to the Merger."
In terms of customer focus, the merger meets HSBC's stated objective of
growing consumer assets, adding over 50 million consumer accounts worldwide and
total assets of $122 billion on a U.K. GAAP basis as of June 30, 2002. The
current subdued outlook for world economies, interest rates, inflation and
corporate profitability increases the attractiveness of being able to access
directly consumers at the point in time when they are contemplating entering
into a financial transaction or reviewing their financial affairs. In this
regard HSBC believes that Household's technology platforms and practices, in
particular, in the areas of marketing, database management and credit scoring
capability, are at the forefront of global practice, and that the merger will
allow for the leveraging of these practices throughout the enlarged group.
The combination of HSBC with Household creates a top 10 credit card issuer
globally, and presents a significant opportunity to achieve cost benefits for
the enlarged group by consolidating HSBC's North American card processing
business, presently outsourced, with that of Household's. HSBC expects the
significant scalability in volume of Household's credit card platforms to allow
for low cost expansion across wider geographic markets.
The merger offers significant opportunities to extend Household's business
model into countries and territories currently served by HSBC and broadens the
product range available to the enlarged customer base. HSBC believes that the
merger will allow the enlarged group to capture valuable customer business that
currently falls outside either company's franchise. It expects that the merger
will permit the enlarged group to market "prime" products through Household's
origination channels in the United States and "non-prime" products to HSBC's
deposit customers who are not eligible for HSBC's traditional loan products. It
also expects that the merger will allow customers, who might otherwise have
ceased to be Household customers as their financial circumstances improve, to
migrate from Household to HSBC, thereby remaining customers of the enlarged
group. HSBC also intends to link Household's Hispanic customer base with its
Mexican banking network for remittance services and to link HSBC's Mexican
banking network, including the recently acquired Grupo Financiero Bital S.A. de
C.V., with Household's consumer finance capabilities to serve qualifying
emigrants. However, it is possible that some of these opportunities will not be
realized.
HSBC and Household currently utilize compatible systems architectures,
which is expected to allow for cost savings through consolidation and common
purchasing. The combination of businesses is also expected to produce cost
savings in the areas of administrative support and through consolidating card
processing. HSBC also expects that funding costs for the Household business will
be lower in the future as a result of the financial strength and funding
diversity of HSBC. However, some or all of these anticipated cost savings and
reduced funding costs may not be realized.
57
In addition, based solely on an arithmetic calculation excluding synergies
the merger is expected to be accretive to earnings per share for 2003 on a U.K.
GAAP basis. Such calculation would be obtained by dividing the combined earnings
of HSBC and Household by the new number of HSBC ordinary shares in issue as a
result of the merger, and comparing the result to the existing earnings per
share for HSBC. As set forth under "HSBC and Household Unaudited Pro Forma
Condensed Combined Financial Information," on a pro forma basis after giving
effect to the adjustments necessary to reconcile Household's results from U.S.
GAAP to U.K. GAAP and the acquisition accounting adjustments, the merger would
have been accretive to basic and diluted earnings per HSBC ordinary share of the
enlarged HSBC Group for both the six months ended June 30, 2002 and the year
ended December 31, 2001.
INTERESTS OF HOUSEHOLD'S EXECUTIVE OFFICERS AND DIRECTORS IN THE MERGER
Household's executive officers and directors have economic interests in the
merger in addition to the interest they share with you as a holder of Household
common stock generally.
As described in detail below, there are substantial financial interests to
be conveyed to each executive officer of Household, including Messrs. Aldinger,
Schoenholz and Mehta, under the terms of either existing or new employment
agreements and due to the accelerated vesting of stock options and restricted
stock rights in respect of Household common stock. For instance, some of the
executive officers' stock options and shares of restricted stock will vest as a
result of the merger, and their Household stock options will become HSBC stock
options in the merger. Nine executive officers, including Mr. Aldinger, have
entered into new employment agreements with Household that will become effective
when the merger is completed, under which they will continue to have senior
management positions in Household, will receive payments and benefits under
their pre-existing employment agreements with Household, and will receive
compensation including salary, bonus and equity grants from HSBC following
completion of the merger. Mr. Aldinger will also become a member of the HSBC
board of directors following the merger. The merger will not result in the
accelerated vesting of any of the stock options to acquire shares of Household
common stock held by the non-employee directors of Household, although these
options will become HSBC stock options in the merger. Following the merger, HSBC
has agreed that Household will, subject to specified cost restrictions, maintain
directors' and officers' insurance for a six-year period following completion of
the merger covering the directors and officers of Household relating to events
occurring before completion of the merger.
Household's board of directors was aware of these interests and considered
them, among other matters, in approving the merger agreement and the
transactions contemplated by the merger agreement.
Mr. Aldinger's New Employment Agreement with Household. At the request of
HSBC, Mr. Aldinger has entered into an agreement relating to his employment with
Household following completion of the merger. The term of Mr. Aldinger's
agreement will begin upon completion of the merger and will end on the third
anniversary of that date. Under the new employment agreement, Mr. Aldinger will
serve as chairman and chief executive officer of Household until January 1, 2004
and thereafter as chairman and chief executive officer of Household and HSBC
North America, Inc. The agreement further provides that, during its term, Mr.
Aldinger will serve as a member of the HSBC board of directors. During the term
of the agreement, Mr. Aldinger will be paid an annual base salary equal to his
annual base salary as of the date that the merger agreement was signed, and an
annual bonus in an amount at least equal to the annual average of Mr. Aldinger's
bonuses earned with respect to years 1999, 2000 and 2001 (pro rated for any
partial year).
Within thirty days of completion of the merger, or, if the completion of
the merger occurs during the two-month period prior to March 3, 2003, within
thirty days after such date, subject to the approval of the trustee of HSBC's
Restricted Share Plan, Mr. Aldinger will receive a one-time special retention
grant of HSBC restricted shares with a value equal to $10 million, based on the
closing price of HSBC ordinary shares as of the date of grant. The special
restricted shares will vest in three equal installments on each of the first
three anniversaries of the completion of the merger, as long as Mr. Aldinger
remains employed on each applicable vesting date, subject to accelerated vesting
upon a termination of employment by Household without "cause," by Mr. Aldinger
for "good reason" or due to his death or disability. After each of the first and
second anniversaries of the completion of the merger, subject to the approval of
the trustee of HSBC's Restricted
58
Share Plan, Mr. Aldinger will receive an additional grant of restricted shares
of HSBC with a value equal to at least $5.5 million, based on the closing price
of HSBC ordinary shares on the applicable date of grant. These restricted shares
will generally be subject to the same terms and conditions as the special
restricted share grant. To the extent all or a portion of any of the foregoing
grants of restricted shares cannot be made under HSBC's Restricted Share Plan,
Mr. Aldinger will receive a cash bonus equal to the amount of the restricted
share grant that he was not able to receive, subject to the same general terms
and conditions as the restricted share grant.
As described in the narrative above and summarized in the table below,
assuming the continued employment of Mr. Aldinger for the relevant periods under
the new employment agreement and the satisfaction of the other terms and
conditions of such agreement, he would be entitled to receive the following
amounts and interests: annual base salary of $1 million; annual bonus of $4
million; a special retention grant of HSBC restricted shares with a value of $10
million on the date of grant vesting in three equal annual installments; a grant
of HSBC restricted shares on or following each of the first two anniversaries of
the completion of the merger each with a value of $5.5 million on the date of
grant vesting in three equal annual installments.
<Table>
<Caption>
ONE-TIME EACH OF TWO PERIOD OF VESTING
RESTRICTED STOCK SUBSEQUENT ANNUAL OF RETENTION AND
ANNUAL SALARY ANNUAL BONUS RETENTION GRANT STOCK GRANTS SUBSEQUENT ANNUAL GRANTS
- ------------- ------------ ---------------- ----------------- ------------------------
$1 million $4 million $10 million $5.5 million 3 equal annual
installments
</Table>
During the term, except with respect to benefits under qualified and
non-qualified excess and supplemental defined benefit retirement plans, Mr.
Aldinger will receive employee benefits and perquisites that are no less
favorable than those provided to him immediately prior to the date of the merger
agreement. Effective as of the completion of the merger, Mr. Aldinger's benefits
under Household's qualified and non-qualified excess and supplemental defined
benefit retirement plans will be frozen, and Mr. Aldinger will be entitled to
receive the retirement benefits provided under his existing employment
agreement.
Mr. Aldinger's new employment agreement provides that if his employment is
terminated during the term by him for "good reason," or by Household for reasons
other than "cause" or disability, he will be entitled to:
- a pro rata target annual bonus for the fiscal year of the date of
termination;
- a payment equal to his annual base salary plus the average of his annual
bonuses with respect to the three-year period ended 2001, times the
number of full and partial months from the date of termination until the
third anniversary of the completion of the merger, divided by twelve;
- the immediate vesting and exercisability of each stock option, restricted
stock award and other equity-based award or performance award (or cash
equivalent) that is outstanding as of the date of termination and
treatment as retirement eligible for purposes of exercising any such
award;
- for the remainder of his life and that of his current spouse, continued
medical and dental benefits at Household's cost; and
- his retirement benefits in a lump sum.
If any payments or benefits that Mr. Aldinger receives are subject to the
excise tax imposed under Section 4999 of the Internal Revenue Code, his
employment agreement provides for an additional payment to restore him to the
after-tax position that he would have been in had the excise tax not been
imposed.
The new employment agreement also provides that, during his employment with
Household, and for a period of one year after the termination of his employment
for any reason, other than a termination of employment by Household without
"cause" or a resignation by Mr. Aldinger for "good reason," Mr. Aldinger may not
become associated with certain competitive entities that are actively engaged in
the consumer lending business (including mortgage and credit card lending) and
may not solicit the business of any entity that was a significant commercial
customer or client of Household and its subsidiaries during the six-month period
prior
59
to his termination date. The new employment agreement also contains a
confidentiality provision and a restriction on Mr. Aldinger's ability to solicit
or hire Household employees following certain terminations of his employment.
Upon completion of the merger, Mr. Aldinger's new employment agreement will
supersede his existing employment agreement with Household, and Mr. Aldinger's
employment under his existing employment agreement will be deemed to have been
terminated due to a "qualifying termination," entitling him to the cash payments
under that agreement. Please refer to "-- Existing Household Employment
Agreements and Employment Protection Agreements."
New Executive Officer Employment Agreements with Household. At the request
of HSBC, the following eight additional executive officers of Household have
entered into employment agreements relating to their employment with Household
following completion of the merger: Messrs. Schoenholz, Mehta, Detelich,
Friederich, Harvey, Kelly and Robin and Ms. Derickson (whose positions with
Household following completion of the merger are set forth below). The term of
the new executive officer employment agreements will begin upon completion of
the merger and will end on the third anniversary of that date. Under the new
employment agreements, each executive will generally serve in the same position
that such executive held as of the date of the merger agreement. During the
term, each executive will be paid an annual base salary of not less than such
executive's annual base salary as of the date of the merger agreement and will
receive an annual bonus in an amount at least equal to 75% of the annual average
of such executive's bonuses earned with respect to the three-year period ended
December 31, 2001 (pro rated for any partial year). During the term, each of the
executives will be eligible to participate, as approved by the HSBC board, in
any equity-based incentive compensation plan or program of HSBC as in effect
from time to time for similarly situated senior executives of Household. In
addition, during the term, each executive will be eligible to participate in the
various retirement, welfare and fringe benefit plans, programs and arrangements
of Household, in accordance with the terms of such plans, programs and
arrangements, provided that they will not receive age and service credit under
the Household retirement plans that would be duplicative of the age and service
credit that they are entitled to under the existing employment agreements or
employee protection agreements, as applicable.
Within thirty days of completion of the merger, or, if the completion of
the merger occurs during the two-month period prior to March 3, 2003, within
thirty days after such date, subject to the approval of the trustees of HSBC's
Restricted Share Plan, each of the executives will receive a one-time special
retention grant of HSBC restricted shares, vesting in equal annual installments
over a three- or five-year period, with the grant value and vesting period
applicable to each of the executive officers set forth below. Upon termination
of an executive's employment by Household without "cause" or by an executive as
a result of a material breach of the agreement by Household, the restricted
shares will immediately vest. To the extent all or a portion of the grant of
restricted shares cannot be made under HSBC's Restricted Share Plan, the
executive will receive a one-time cash bonus equal to the amount of the
restricted share grant that such executive was not able to receive, subject to
the same general terms and conditions as the restricted share grant.
As described in the narrative above and summarized in the table below,
assuming the continued employment following the merger of each of Messrs.
Schoenholz, Mehta, Detelich, Friederich, Harvey, Kelly and Robin and Ms.
Derickson for the relevant periods under the new employment agreements and the
satisfaction of the other terms and conditions of such agreements, each
executive would be entitled to receive the following amounts and interests:
- Mr. Schoenholz (President and Chief Operating Officer): annual base
salary of $650,000; annual bonus of $1.5 million; and a retention grant
of HSBC restricted shares with a value of $3 million on the date of
grant, vesting in three equal installments on each of the first three
anniversaries of the completion of the merger.
- Mr. Mehta (Group Executive): annual base salary of $550,000; annual bonus
of $1.125 million; and a retention grant of HSBC restricted shares with a
value of $5 million on the date of grant, vesting in five equal
installments on each of the first five anniversaries of the completion of
the merger.
60
- Mr. Detelich (Group Executive): annual base salary of $500,000; annual
bonus of $314,225; and a retention grant of HSBC restricted shares with a
value of $3.75 million on the date of grant, vesting in five equal
installments on each of the first five anniversaries of the completion of
the merger.
- Mr. Friedrich (Executive Vice President): annual base salary of $400,000;
annual bonus of $393,750; and a retention grant of HSBC restricted shares
with a value of $1.5 million on the date of grant, vesting in three equal
installments on each of the first three anniversaries of the completion
of the merger.
- Mr. Harvey (Group Executive and Chief Information Officer): annual base
salary of $500,000; annual bonus of $537,500; and a retention grant of
HSBC restricted shares with a value of $5 million on the date of grant,
vesting in five equal installments on each of the first five
anniversaries of the completion of the merger.
- Mr. Kelly (Executive Vice President, Administration): annual base salary
of $400,000; annual bonus of $531,250; and a retention grant of HSBC
restricted shares with a value of $1.5 million on the date of grant,
vesting in three equal installments on each of the first three
anniversaries of the completion of the merger.
- Mr. Robin (Executive Vice President, General Counsel and Corporate
Secretary): annual base salary of $400,000; annual bonus of $518,750; and
a retention grant of HSBC restricted shares with a value of $1.5 million
on the date of grant, vesting in three equal installments on each of the
first three anniversaries of the completion of the merger.
- Ms. Derickson (Group Executive): annual base salary of $500,000; annual
bonus of $337,500; and a retention grant of HSBC restricted shares with a
value of $3.75 million on the date of grant, vesting in five equal
installments on each of the first five anniversaries of the completion of
the merger.
<Table>
<Caption>
ONE-TIME PERIOD OF
ANNUAL RESTRICTED STOCK VESTING OF
NAME POSITION SALARY ANNUAL BONUS RETENTION GRANT RETENTION GRANT
- ---- -------- ------ ------------ ---------------- ---------------
Schoenholz... President & Chief $650,000 $1.5 million $3 million 3 equal annual
Operating Officer installments
Mehta...... Group Executive $550,000 $1.125 million $5 million 5 equal annual
installments
Detelich... Group Executive $500,000 $314,225 $3.75 million 5 equal annual
installments
Friedrich... Executive Vice $400,000 $393,750 $1.5 million 3 equal annual
President installments
Harvey..... Group Executive & $500,000 $537,500 $5 million 5 equal annual
Chief Information installments
Officer
Kelly...... Executive Vice $400,000 $531,250 $1.5 million 3 equal annual
President, installments
Administration
Robin...... Executive Vice $400,000 $518,750 $1.5 million 3 equal annual
President, General installments
Counsel & Corporate
Secretary
Derickson... Group Executive $500,000 $337,500 $3.75 million 5 equal annual
installments
</Table>
If during the term of the new employment agreements, an executive's
employment is terminated by Household other than for "cause" or disability or by
the executive for "good reason," subject to the executive's execution of a
general release in favor of Household and its affiliates, the executive will
continue to receive the executive's base salary and the annual bonus described
above at the time and in the manner such payments would have been paid had the
executive remained employed for the remainder of the term, and to the extent
61
permitted under the terms of the applicable plans, the continuation of welfare
benefits, umbrella liability insurance and automobile and financial counseling
allowances from the date of termination until the earlier of the executive
becoming eligible to participate in similar plans of another employer and the
last day of the term.
The new employment agreements also provide that, during their term and
during the one-year period following any resignation by the executive of
employment other than a resignation that results from a material breach of the
agreement by Household, the executive may not become associated with competitive
entities that are actively engaged in the consumer lending business (including
mortgage and credit card lending) and may not solicit the business of any entity
that was a significant commercial customer or client of Household and its
subsidiaries during the six-month period prior to the executive's termination
date. The new employment agreements also contain a confidentiality provision and
a restriction on the executive's ability to solicit or hire Household employees
following terminations of the executive's employment under some conditions.
Upon completion of the merger, these new employment agreements will
supersede each executive's existing employment agreement or employment
protection agreement, as applicable, with Household (except that the excise tax
gross-up provision in the existing agreements will survive), and each
executive's employment under the existing employment agreement or employment
protection agreement will be deemed to have been terminated due to a "qualifying
termination," entitling the executive to the cash payments thereunder. Please
refer to "-- Existing Household Employment Agreements and Employment Protection
Agreements."
Existing Household Employment Agreements and Employment Protection
Agreements.
The following executive officers of Household are each party to an
employment agreement that contains change of control severance provisions:
Messrs. Aldinger, Schoenholz, Mehta, Detelich, Harvey, Hill, Kelly and Robin.
Messrs. Friedrich and McDonald and Ms. Derickson are each party to an employment
protection agreement that contains a change of control severance provision.
Pursuant to the terms of these agreements, if, during the three-year period
(18-month period under the employment protection agreements) following a change
of control, the employment of a covered executive is terminated due to a
"qualifying termination," which includes a termination other than for "cause" or
disability, or by the covered executive for "good reason" (including a
termination of employment by an executive with an employment agreement for any
reason during the 60-day period after the 12-month anniversary of the change of
control or, in the case of Mr. Aldinger, during the three-year period following
the change of control), the covered executive will be entitled to receive a cash
payment consisting of:
- a pro rata annual bonus through the date of termination, based on the
highest of the annual bonuses payable to the executive during the three
years preceding the year in which the termination occurs;
- a payment equal to three times (1.5 times under the employment protection
agreements) the sum of the covered executive's base salary and highest
annual bonus; and
- a payment equal to the value of three years (18 months under the
employment protection agreements) of additional employer contributions
under Household's tax-qualified and supplemental defined contribution
plans.
As described in the narrative above and summarized in the table below, upon
a qualifying termination following completion of the merger, Messrs. Aldinger,
Schoenholz, Mehta, Detelich, Friederich, Harvey, Hill, Kelly, McDonald and Robin
and Ms. Derickson would be eligible to receive approximately the following
amounts in satisfaction of the cash severance obligations described above under
their existing agreements with Household: Mr. Aldinger -- $20.30 million; Mr.
Schoenholz -- $10.64 million; Mr. Mehta: $8.60 million; Mr. Detelich -- $1.58
million; Mr. Friederich -- $1.83 million; Mr. Harvey -- $4.33 million; Mr.
Hill --
62
$2.98 million; Mr. Kelly -- $4.36 million; Mr. McDonald -- $1.15 million; Mr.
Robin -- $4.36 million; Ms. Derickson -- $1.89 million; which payments have an
aggregate value of approximately $62 million.
<Table>
<Caption>
APPROXIMATE PAYMENT IN
SATISFACTION OF
NAME POSITION CASH SEVERANCE OBLIGATIONS
- ---- -------- --------------------------
Aldinger..... Chairman & Chief Executive Officer $20.30 million
Schoenholz... President & Chief Operating Officer $10.64 million
Mehta........ Group Executive $ 8.60 million
Detelich..... Group Executive $ 1.58 million
Friedrich.... Executive Vice President -- Mortgage Services $ 1.83 million
Harvey....... Executive Vice President -- Chief Information $ 4.33 million
Officer
Hill......... Managing Director -- UK $ 2.98 million
Kelly........ Executive Vice President -- Administration $ 4.36 million
McDonald..... Senior Vice President & Chief Accounting Officer $ 1.15 million
Robin........ Executive Vice President -- General Counsel, $ 4.36 million
Corporate Secretary
Derickson.... Group Executive $ 1.89 million
</Table>
In addition, upon a qualifying termination following a change of control,
each covered executive will be entitled to continued welfare benefit coverage
for three years (18 months under the employment protection agreements) after the
date of termination, three years (18 months under the employment protection
agreements) of additional age and service credit under Household's tax-qualified
and supplemental defined benefit retirement plans, and outplacement services. If
any amounts or benefits received under the employment agreements, employment
protection agreements or otherwise are subject to the excise tax imposed under
section 4999 of the Internal Revenue Code, an additional payment will be made to
restore the executive to the after-tax position in which he or she would have
been if the excise tax had not been imposed.
STOCK OPTIONS AND RESTRICTED STOCK RIGHTS
Upon completion of the merger, each outstanding and unexercised stock
option to acquire shares of Household common stock held by any current or former
employee or director of Household will be assumed by HSBC and converted into,
and become a right to acquire, the number of HSBC ordinary shares (rounded to
the nearest whole HSBC ordinary share) equal to the number of shares of
Household common stock subject to the Household stock option multiplied by the
exchange ratio. The exercise price of each converted HSBC stock option (per HSBC
ordinary share) will equal the exercise price per share of the Household stock
option divided by the exchange ratio (rounded to the nearest whole cent). The
converted number of HSBC ordinary shares and related exercise price will be
adjusted as necessary pursuant to the Internal Revenue Code with respect to
stock options intended to qualify as "incentive stock options" under Section 422
of the Internal Revenue Code. Upon completion of the merger, each right to
receive shares of Household common stock, including Household restricted stock
rights, or benefits measured based on the value of Household common stock, will
cease to represent the right to receive shares of Household common stock or
benefits measured thereby and will be converted into, and become a right to
receive, the number of HSBC ordinary shares or benefits measured thereby
(rounded to the nearest whole HSBC ordinary share) equal to the product of the
number of shares of Household common stock subject to such Household right and
the exchange ratio. The converted HSBC stock options and other equity-based
awards will continue to be subject to the same terms and conditions as were
applicable to them immediately prior to the completion of the merger. At or
prior to the time that the holder of a converted HSBC stock option or other
equity-based award is entitled to receive the HSBC ordinary shares underlying
such option or award, such holder will be entitled to choose whether to receive
HSBC ordinary shares or HSBC ADSs.
Pursuant to the terms of the equity-based plans of Household and the award
agreements thereunder, stock options to acquire Household common stock and
Household restricted stock rights, including stock options and restricted stock
rights granted to Household's executive officers and directors, will fully vest
or
63
become free of restrictions immediately prior to the merger becoming effective,
and the stock options granted under each of the Household long-term incentive
plans will remain exercisable until the expiration of their original term. The
Household equity-based plans and the award agreements thereunder provide that
stock options to acquire Household common stock and Household restricted stock
rights granted after November 14, 2002, including stock options and restricted
stock rights held by Household's executive officers, will not vest or become
free of restrictions upon completion of the merger; however, these awards will
vest upon a termination of employment by Household for a reason other than due
to death, disability or "cause" or by the employee for "good reason." In light
of the proposed merger, the non-employee directors of Household waived their
regular annual grant of stock options under the Household 1996 Long-Term
Executive Incentive Plan (which would be automatically made on the same date
that the annual grants are awarded to employees generally), and instead will
receive, prior to the completion of the merger, a cash payment of equivalent
value.
As summarized in the table below, assuming the merger is completed on March
31, 2003, stock options to acquire an aggregate of 2,143,125 shares of Household
common stock held by Household's executive officers will vest and become
exercisable as a result of the merger, which options have a weighted average
exercise price of $53.44, and an aggregate of 526,750 Household restricted stock
rights held by Household's executive officers will vest and become free of
restrictions as a result of the merger. The merger will not result in the
accelerated vesting of any of the stock options to acquire shares of Household
common stock held by the non-employee directors of Household, although these
options will become HSBC stock options in the merger, and none of the Household
non-employee directors are holders of restricted stock rights.
<Table>
<Caption>
IN-THE-MONEY
VALUE OF
OPTIONS THAT VALUE OF
WILL VEST ON UNVESTED
COMPLETION OF RESTRICTED
MERGER AS OF RESTRICTED STOCK AS OF
OPTIONS THAT FEBRUARY 18, STOCK RIGHTS FEBRUARY 18,
NAME POSITION WILL VEST(1) 2003(2) THAT WILL VEST(1) 2003
- ---- -------- -------------- ------------- ----------------- ------------
Aldinger..... Chairman & Chief 1,015,000 $ 0 134,420 $3,705,959
Executive Officer
Schoenholz... President & Chief 256,000 $ 0 84,012 $2,316,211
Operating Officer
Mehta........ Group Executive 256,000 $ 0 84,012 $2,316,211
Detelich..... Group Executive 44,375 $ 0 16,803 $ 463,259
Friedrich.... Executive Vice 57,500 $ 0 35,000 $ 964,950
President -- Mortgage
Services
Harvey....... Executive Vice 86,250 $ 0 35,272 $ 972,490
President -- Chief
Information Officer
Hill......... Managing Director -- UK 75,000 $ 0 33,605 $ 926,490
Kelly........ Executive Vice 130,500 $ 0 33,605 $ 926,490
President --
Administration
McDonald..... Senior Vice President & 45,000 $ 0 32,137 $ 886,017
Chief Accounting
Officer
Robin........ Executive Vice 120,000 $ 0 16,803 $ 463,259
President -- General
Counsel, Corporate
Secretary
Derickson.... Group Executive 57,500 $ 0 21,081 $ 581,203
</Table>
- ---------------
(1) Assuming the merger is completed on March 31, 2003.
(2) The lowest exercise price for the stock options to acquire Household common
stock that will vest on completion of the merger is $45.38.
64
INDEMNIFICATION OF OFFICERS AND DIRECTORS
In the merger agreement, HSBC has agreed that all rights to
indemnification, expense advancement and exculpation from liabilities for acts
or omissions occurring prior to the effective time of the merger now existing in
favor of current and former directors and officers of Household and its
subsidiaries as provided in their respective organizational documents and
indemnification arrangements will continue in full force and effect in
accordance with their terms after the effective time of the merger. Furthermore,
HSBC will cause the surviving company in the merger to, from the effective time
of the merger, indemnify each present and former director and officer of
Household and its subsidiaries in their capacities as such against all losses,
expenses, claims, damages or liabilities arising out of acts or omissions
occurring on or prior to the effective time of the merger, to the fullest extent
permitted under the Delaware General Corporation Law and other applicable law.
In the event that the surviving corporation in the merger consolidates or merges
with another person and is not the surviving entity, or transfers all or
substantially all of its assets to another person, HSBC has agreed that proper
provision will be made so that the successors and assigns of the surviving
corporation will assume the obligations described above.
In the merger agreement, HSBC has further agreed that, for a period of six
years after the effective time of the merger, the surviving corporation in the
merger will maintain in effect policies of directors' and officers' liability
insurance with coverage at least as favorable in amount and scope as the
policies maintained by Household and its subsidiaries on the date of the merger
agreement with respect to matters arising on or before the effective time of the
merger. However, HSBC is not obligated to pay aggregate premiums that exceed
250% of the aggregate premiums for this insurance paid by Household on an
annualized basis as of the date of the merger agreement. In the event that the
surviving corporation is unable to maintain such insurance, it will use its
reasonable best efforts to obtain as much comparable insurance as is available
for the maximum premium indicated in the preceding sentence.
ACCOUNTING TREATMENT
HSBC intends to account for the merger using acquisition accounting under
U.K. GAAP. Under this method of accounting, the assets and liabilities of
Household will be recorded, as of the completion date of the merger, at their
respective fair values and added to those of HSBC. Financial statements and
reported results of operations of HSBC issued after consummation of the merger
will reflect these values, but prior HSBC financial statements will not be
restated retroactively to reflect the historical financial position or results
of operations of Household.
All unaudited pro forma financial information contained in this document
has been prepared using the acquisition method to account for the merger. Under
U.K. GAAP, the final determination of the purchase price is based on the price
of HSBC ordinary shares as of the date the merger is completed. In addition, the
final allocation of the purchase price will be determined after completion of a
thorough analysis to determine the fair values of Household's assets and
liabilities. Accordingly, the final acquisition accounting adjustments and
goodwill may be materially different from those reflected in the unaudited pro
forma condensed combined financial information presented in this document.
OTHER EFFECTS OF THE MERGER
The content and timing of reports and notices that HSBC files with the SEC
differ in several respects from the reports and notices that Household currently
files. HSBC is, and following the merger will continue to be, a foreign private
issuer for the purposes of the reporting rules under the Securities Exchange Act
of 1934, or the Exchange Act.
As a U.S. reporting company, Household must file with the SEC, among other
reports and notices:
(1) an annual report on Form 10-K within 90 days (scheduled to be reduced
to 60 days by December 15, 2004 under recently adopted SEC rules) after
the end of each fiscal year;
(2) quarterly reports on Form 10-Q within 45 days (scheduled to be reduced
to 35 days by December 15, 2005 under recently adopted SEC rules) after
the end of each fiscal quarter; and
65
(3) reports on Form 8-K upon the occurrence of material corporate events.
As a foreign private issuer, pursuant to the requirements of the Exchange
Act, HSBC is required to:
(1) file with the SEC an annual report on Form 20-F within six months after
the end of each fiscal year; and
(2) furnish to the SEC reports on Form 6-K as required.
HSBC is not required under the Exchange Act to file quarterly reports on
Form 10-Q after the end of each fiscal quarter.
In addition, the content and timing of reports and notices that holders of
HSBC ordinary shares and HSBC ADSs receive differ from the reports and notices
that are currently received by Household stockholders. As a U.S. reporting
company, Household must mail to its stockholders in advance of each annual
meeting of stockholders:
(1) an annual report containing audited financial statements; and
(2) a proxy statement that complies with the requirements of the Exchange
Act.
As a foreign private issuer, HSBC will, following the merger, continue to
be exempt from the rules under the Exchange Act prescribing the furnishing and
content of annual reports and proxy statements to its shareholders, but will
continue to be required to file with the SEC annual reports on Form 20-F, and
reports on Form 6-K as required and to make other filings as required by English
and Hong Kong SAR law or regulatory requirements. HSBC sends HSBC ordinary
shareholders and HSBC ADS holders a copy of its annual report and accounts or a
summary thereof. For additional information, please refer to "Description of
HSBC Ordinary Shares" and "Description of HSBC American Depositary Shares."
If the merger is completed, the Household common stock and each series of
Household preferred stock will be delisted from the NYSE and will be
deregistered under the Exchange Act. It is also expected that Household will no
longer be a reporting company under the Exchange Act.
Household common stock is presently included in the S&P 500 Index. Mutual
funds and other investment vehicles whose investment objective is to track the
performance of the S&P 500 Index currently hold a substantial amount of
Household common stock. These funds will be required to sell their Household
stock (or the HSBC ordinary shares or HSBC ADSs they receive in the merger) as a
result of Household's removal from the S&P 500 Index. These sales could
adversely affect the market price for the HSBC ordinary shares and HSBC ADSs.
In addition, after the merger the relative weight of HSBC in the U.K.
series of the Financial Times Stock Exchange Actuaries Indices is expected to
increase and may increase on other global indices. As a result, pension funds,
unit trusts and other investment vehicles whose investment objective is to track
the performance of these indices are likely to increase their holdings of HSBC
ordinary shares.
LITIGATION RELATING TO THE MERGER
Several lawsuits have been filed alleging violations of law with respect to
the merger. These lawsuits are described below. The lawsuits are in their
preliminary stages; Household believes that the claims against it lack merit and
intends to defend the lawsuits vigorously.
Two of the lawsuits are pending in the Circuit Court of Cook County,
Illinois, Chancery Division. One, McLaughlin v. Aldinger et al., No. 02 CH
20683, asserts claims on behalf of a purported class of holders of Household
common stock against Household and some of its officers and directors for breach
of fiduciary duty in connection with the merger on the grounds that the
defendants allegedly failed to take appropriate steps to maximize the value of a
merger transaction for holders of Household common stock. The McLaughlin
complaint contends that plaintiffs will suffer irreparable harm unless the
merger is enjoined, but seeks only damages. The other, Pace v. Aldinger et al.
No. 02 CH 19270, is both a derivative lawsuit on behalf of Household and a
purported class action on behalf of holders of Household common stock. This
lawsuit was filed prior to the announcement of the merger and originally
asserted claims relating to Household's pre-
66
merger accounting practices. It has since been amended to allege that Household
and some of its officers and directors breached their fiduciary duties in
connection with the merger and, among other things, seeks to enjoin the merger.
A third lawsuit relating to the merger, Williamson v. Aldinger et al., No.
03 C00331, is pending in the United States District Court for the Northern
District of Illinois. This derivative lawsuit on behalf of Household claims that
some of Household's officers and directors breached their fiduciary duties and
committed corporate waste by agreeing to the merger and allegedly failing to
take appropriate steps to maximize the value of a merger transaction. The
complaint seeks to enjoin the merger.
67
REGULATORY MATTERS
HSBC and Household have agreed to use their reasonable best efforts to
obtain all regulatory approvals required to complete the merger and the other
transactions contemplated by the merger agreement. While HSBC and Household
believe that they will be able to obtain these regulatory approvals, HSBC and
Household cannot predict whether the required regulatory approvals will be
obtained within the time frame contemplated by the merger agreement or on
conditions that would not be detrimental to HSBC or Household, or whether these
approvals will be obtained at all. Under the merger agreement, in connection
with obtaining these approvals HSBC is not required to agree to, or to permit
Household to agree to, any limitation, divestiture or condition that would
materially and adversely impact HSBC or Household. HSBC and Household are not
aware of any other material governmental approvals or actions that are required
prior to completion of the acquisition other than those described below.
U.S. ANTITRUST
Transactions like the merger are reviewed by the Antitrust Division of the
United States Department of Justice, which we refer to as the Antitrust
Division, or the United States Federal Trade Commission, which we refer to as
the FTC, to determine whether they comply with applicable antitrust law. Under
the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and
the related rules, the merger cannot be completed until both HSBC and Household
furnish information and materials to the Antitrust Division and the FTC and a
required waiting period has ended. On November 27, 2002, HSBC and Household
filed their pre-merger notification and report forms with the Antitrust
Division. Early termination of the waiting period was granted effective December
16, 2002.
Even after the termination of the waiting period, at any time before or
after the acquisition is completed, the Antitrust Division, the FTC or any state
could take action under the antitrust laws as it deems necessary or desirable in
the public interest, including seeking to enjoin the acquisition or seeking
divestiture of substantial assets of HSBC or Household or their subsidiaries.
Private parties may also seek to take legal action under the antitrust laws
under some circumstances. Based upon an examination of information available
relating to the businesses in which the parties are engaged, HSBC and Household
believe that the completion of the merger will not violate U.S. antitrust laws.
However, HSBC and Household can give no assurance that a challenge to the merger
on antitrust grounds will not be made or, if a challenge is made, of the result.
OTHER U.S. REGULATORY MATTERS
Applications or notifications are also required to be filed with various
state banking departments in connection with the change in control of
Household's subsidiaries that act as mortgage bankers, sales finance companies
or licensed lenders, or that engage in other consumer finance activities. These
authorities may disapprove the change in control of such subsidiaries based upon
the criteria set forth in the applicable laws and regulations. Applications were
submitted by HSBC on November 27, 2002 with the New York State Banking
Department for approval of the change in control of those of Household's
subsidiaries that are licensed to engage in consumer financing activities in New
York. The Superintendent of Banks of the State of New York is required to render
a decision with respect to such applications within 90 days after acceptance of
the application, unless such deadline is extended. Applications or appropriate
notifications have also been filed in all other states that require such filings
including Tennessee, Illinois, Maryland, Wisconsin, Oklahoma and Delaware.
The change in control of Household's subsidiaries that act as insurance
underwriters or agencies is also subject to the receipt of necessary approvals
from various U.S. state insurance regulatory authorities. The insurance laws and
regulations of most states generally require that, to proceed with the
acquisition of control of an insurance company domiciled in a state through the
acquisition of or merger with the holding company parent of the insurance
company, the acquiror must obtain the prior approval of the insurance regulatory
authority of that state. In this regard, completion of the merger is subject to
the prior approval of the insurance regulatory authorities of Arizona, Delaware,
Michigan, New York and Ohio and applications are being made
68
to the insurance departments of those states. In addition, notices have been
sent to insurance regulators in other, non-domiciliary states notifying them of
the merger. No prior approval is required by these states.
In order to complete the merger, HSBC must also obtain the approval of the
Office of the Comptroller of the Currency, or OCC, under the Change in Bank
Control Act for the change in control of Household Bank (SB), N.A., a limited
purpose credit card bank and a subsidiary of Household. HSBC filed a Change in
Bank Control Act notice with the OCC on November 27, 2002. A decision by the OCC
is expected to be received within 60 days of the date as of which the notice is
deemed complete, unless the review period is extended.
UNITED KINGDOM
The merger is conditioned on confirmation having been received by HSBC from
the U.K. Office of Fair Trading, in terms reasonably satisfactory to HSBC, that
the U.K.'s Secretary of State for Trade and Industry does not intend to refer
the merger to the U.K.'s Competition Commission.
HSBC and Household notified the Office of Fair Trading of the merger on
November 29, 2002 by way of a prescribed statutory merger notice, under the
merger control provisions of the Fair Trading Act 1973. The U.K.'s Secretary of
State announced on January 17, 2003 that she has decided not to refer the merger
to the U.K.'s Competition Commission.
The merger is conditioned, under the Financial Services and Markets Act
2000, on the approval of the U.K. Financial Services Authority, or FSA. HSBC is
obliged to notify the FSA of the merger because it would result in HSBC holding
10% or more of the shares in a parent undertaking, and therefore acquiring
"control" of a U.K. authorized person (HFC Bank plc, Hamilton Insurance Company
Limited and Hamilton Life Assurance Company Limited). Applications were filed
with the FSA on December 6, 2002, and the FSA has a maximum period of three
months to determine whether to approve the change of control or whether to
impose such conditions as it considers appropriate.
CANADA
HSBC is required to file an application with the Canadian Office of the
Superintendent of Financial Institutions for prior approval of the indirect
acquisition of Household's Canadian subsidiaries, which was made on January 15,
2003. HSBC and Household are also required to file a pre-notification under the
Canadian Competition Act in connection with the change in control of Household's
Canadian subsidiaries which was made on January 17, 2003.
EUROPEAN UNION MERGER REGULATION
Notification to the European Commission is not required under the European
Union Merger Regulation.
OTHER INTERNATIONAL REGULATORY MATTERS
In addition to the required filings in the United States, the United
Kingdom and Canada, an application for change in control of Household's
subsidiaries in the Republic of Ireland has been filed. An antitrust filing has
been made in the Federal Republic of Germany and the German Federal Cartel
Office has determined that the merger does not have any effect on the German
domestic market and so no further consideration is required. An antitrust filing
has also been made in the Republic of Ireland and confirmation has been received
that no order is to be made under relevant legislation. In addition, HSBC and
Household conduct operations in a number of other jurisdictions and HSBC and
Household are currently reviewing whether other filings or approvals may be
required or desirable in these other jurisdictions in connection with the
completion of the merger.
69
MATERIAL U.S. FEDERAL INCOME TAX AND U.K. TAX CONSEQUENCES
GENERAL
The following is a discussion of the material U.S. federal income tax
consequences of the merger to Household stockholders and the material U.S.
federal income tax consequences and U.K. tax consequences related to the
ownership of HSBC ordinary shares or HSBC ADSs.
The discussion does not purport to be a comprehensive description of all
the U.S. federal income tax or U.K. tax consequences that may be relevant to any
particular Household stockholder, including tax consequences that arise from
rules of general application or that are generally assumed to be known by
stockholders. In particular, the discussion deals only with holders that hold
their Household common stock or preferred stock, and will hold their HSBC
ordinary shares or HSBC ADSs, as capital assets. The discussion does not address
the tax treatment of Household stockholders that are subject to special rules,
such as stockholders:
- that are banks, insurance companies, dealers in securities or persons
that elect mark-to-market treatment,
- that hold their Household stock or will hold their HSBC ordinary shares
or HSBC ADSs as a position in part of a straddle, conversion transaction,
constructive sale or other integrated investment comprised of one or more
other investments,
- that hold both Household preferred stock and Household common stock,
- who own or will own, directly or indirectly, 10% or more of HSBC's voting
shares,
- whose "functional currency" is not the U.S. dollar,
- who exercise their right to dissent from the merger,
- who received their Household stock by exercising employee stock options
or otherwise as compensation,
- who are resident or ordinarily resident in the United Kingdom for U.K.
tax purposes, or
- who will hold their HSBC ordinary shares or HSBC ADSs for the purposes of
a trade, profession or vocation carried on in the United Kingdom through
a branch or agency.
In addition, this discussion does not address U.S. holders (as described
below) of Household stock who will own 5% or more of the HSBC ordinary shares,
measured by vote or value, either directly or indirectly through attribution
rules, immediately after the merger, because those shareholders are subject to
special U.S. federal income tax rules, would generally be required to enter into
a "gain recognition agreement" with the Internal Revenue Service, and may be
required to recognize taxable gain or loss for U.S. federal income tax purposes
in respect of the transaction in some circumstances.
This discussion also does not address U.S. state or local taxation or
taxation by countries other than the United States and the United Kingdom.
This discussion is based on existing U.S. federal income tax law and U.K.
tax law, including statutes, regulations, administrative rulings and court
decisions, all as in effect on the date of this document. All of these
authorities are subject to change, or change in interpretation (possibly with
retroactive effect). The discussion assumes that the merger will be completed in
accordance with the terms of the merger agreement. Any change in any of the
foregoing authorities or failure of the assumptions to be true could alter the
tax consequences discussed below.
Household stockholders should consult their own tax advisers as to the U.S.
federal income tax, U.K. tax and other tax consequences to them of the merger
and the ownership and disposition of HSBC ordinary shares or HSBC ADSs,
including the income tax consequences arising from their own unique facts and
circum-
70
stances, and including any estate, inheritance, gift, state, local or non-U.S.
federal income tax consequences of the merger.
As used in this discussion, the term "U.S. holder" means, before the
merger, a beneficial owner of Household common stock or preferred stock, and,
after the merger, a beneficial owner of HSBC ordinary shares or HSBC ADSs, who
is for U.S. federal income tax purposes:
- an individual U.S. citizen or resident,
- a U.S. corporation, or
- otherwise subject to U.S. federal income tax on a net income basis in
respect of Household common stock or preferred stock or HSBC ordinary
shares or HSBC ADSs.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO U.S. HOLDERS OF HOUSEHOLD
STOCK
The following is a discussion of the material U.S. federal income tax
consequences related to the merger. This discussion applies to you only if you
are a U.S. holder.
TAX OPINION CONDITION TO CLOSING
The obligation of Household to complete the merger is conditioned upon
Household's receipt of an opinion from Wachtell, Lipton, Rosen & Katz, and the
obligation of HSBC to complete the merger is conditioned upon HSBC's receipt of
an opinion from Cleary, Gottlieb, Steen & Hamilton, in each case to be delivered
at the time of the merger and substantially to the effect that the merger will
qualify as a reorganization within the meaning of Section 368(a) of the U.S. tax
code and that each transfer of property to HSBC by a stockholder of Household
pursuant to the merger will not be subject to Section 367(a)(1) of the U.S. tax
code. [In addition, in connection with the mailing of this document to
stockholders of Household, Wachtell, Lipton, Rosen & Katz and Cleary, Gottlieb,
Steen & Hamilton have delivered to Household and HSBC, respectively, their
opinions, dated the date of this document, that (1) the merger will be treated
for U.S. federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the U.S. tax code, (2) each transfer of property to HSBC by a
stockholder of Household pursuant to the merger will not be subject to Section
367(a)(1) of the U.S. tax code and (3) the U.S. holders of Household common
stock will not recognize any taxable gain or loss on the exchange of their stock
for HSBC ordinary shares or HSBC ADSs, but will recognize a taxable gain or loss
in respect of any cash received instead of a fractional HSBC ordinary share (or
fractional HSBC ADS) that they would otherwise be entitled to receive.] Each of
these tax opinions will be based on assumptions noted in such opinion and on
representations of Household and HSBC contained in certificates signed by
officers of Household and HSBC. Accordingly, the following discussion, to the
extent it describes matters of law and legal conclusions, sets forth the
material U.S. federal income tax consequences of the merger to you under the law
in effect as of the date of this document.
U.S. HOLDERS OF HOUSEHOLD COMMON STOCK
If you are a U.S. holder of Household common stock, you will not recognize
any taxable gain or loss for U.S. federal income tax purposes upon your receipt
of HSBC ordinary shares or HSBC ADSs in the merger. However, different rules
apply to any cash received in lieu of fractional HSBC ordinary shares or
fractional HSBC ADSs in the merger, as discussed further below.
The aggregate tax basis of the HSBC ordinary shares or HSBC ADSs received
by you in the merger, including any fractional share interests to which you
would be entitled but for the special treatment of fractional share interests
described below, will equal the aggregate tax basis of the Household common
stock exchanged for HSBC ordinary shares or HSBC ADSs. The holding period of
such HSBC ordinary shares or HSBC ADSs will include the holding period of the
Household common stock exchanged therefor.
Fractional interests in HSBC ordinary shares or HSBC ADSs will not be
issued to Household stockholders in the merger. Instead, any fractional share
interests that Household stockholders otherwise would have been entitled to
receive will be sold and the proceeds will be paid to those shareholders. If you
71
receive cash in respect of a fractional interest in an HSBC ordinary share or
HSBC ADS, you will recognize taxable gain or loss equal to the difference
between the amount of cash received for the fractional share interest and your
tax basis in the Household common stock exchanged which is allocable to the
fractional share interest. Any such gain or loss generally will be capital gain
or loss, and generally will be long-term capital gain or loss with respect to
Household common stock held for more than 12 months at the completion of the
merger.
U.S. HOLDERS OF HOUSEHOLD PREFERRED STOCK
Whether your preferred stock is being converted into the right to receive
cash in the merger or being redeemed effective immediately prior to the merger,
you will recognize taxable gain or loss for U.S. federal income tax purposes
equal to the difference between the amount of cash received for your Household
preferred stock and your tax basis in that stock. Any such gain or loss
generally will be capital gain or loss, and generally will be long-term capital
gain or loss with respect to Household preferred stock held for more than 12
months at the completion of the merger.
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING
You may be subject, under some circumstances, to information reporting and
possibly backup withholding with respect to the amount of cash received unless
you provide proof of an applicable exemption or a correct taxpayer
identification number and otherwise comply with applicable requirements of the
backup withholding rules. Any amount withheld under the backup withholding rules
is not an additional tax and may be refunded or credited against your federal
income tax liability, so long as the required information is furnished to the
Internal Revenue Service.
U.S. FEDERAL INCOME TAX AND U.K. TAX CONSEQUENCES FOR U.S. HOLDERS OF HSBC
ORDINARY SHARES AND HSBC ADSS
The following is a discussion of the material U.S. federal income tax and
U.K. tax consequences related to the acquisition, ownership and disposition of
HSBC ordinary shares or HSBC ADSs. Except for the summaries under "-- U.K. Stamp
Duty and Stamp Duty Reserve Tax," this discussion applies to you only if you are
a U.S. holder that is not resident or ordinarily resident in the United Kingdom
and will not hold HSBC ordinary shares or HSBC ADSs for the purposes of a trade,
profession or vocation carried on in the United Kingdom through a branch or
agency.
U.K. TAXATION OF DIVIDENDS
Dividends that you receive on HSBC ordinary shares or HSBC ADSs will not be
subject to any U.K. withholding tax.
U.K. TAXATION OF DISPOSITIONS
Dispositions of HSBC ordinary shares or HSBC ADSs that you make will not
give rise to any U.K. tax on chargeable gains.
U.K. STAMP DUTY AND STAMP DUTY RESERVE TAX
U.K. stamp duty is generally chargeable on documents effecting the transfer
of U.K. shares. Where no such document is created, or stamp duty is not paid, an
equivalent liability to stamp duty reserve tax, or SDRT, may arise. SDRT may
also arise on the issue of shares into a clearance system, or as set forth
below.
In general, a transfer or issue of HSBC ordinary shares to the depositary
in exchange for HSBC ADSs is subject to stamp duty or SDRT. For this purpose,
the current rate of stamp duty and SDRT is 1.5% (rounded up, in the case of
stamp duty, to the nearest L5). The rate is applied, in each case, to the amount
or value of the consideration given for the transfer of the HSBC ordinary shares
or the value of the shares if there is no such consideration, or their issue
price. To the extent that such stamp duty is paid on any such transfer of HSBC
ordinary shares, no SDRT should be payable on that transfer.
Under the merger agreement, H2 Acquisition Corporation has agreed to pay
any U.K. stamp duty and SDRT which becomes payable on the proposed merger,
including stamp duty and SDRT on the issue of
72
HSBC ADSs and HSBC ordinary shares. This will, however, apply only in relation
to issuances of HSBC ADSs that Household stockholders elect to receive as merger
consideration by so specifying in a duly executed letter of transmittal or that
are issued upon exercise of existing Household stock options that are assumed by
HSBC. Furthermore, H2 Acquisition Corporation will not pay any incremental stamp
duty or SDRT that arises where a letter of transmittal is submitted by someone
other than the Household stockholder to whom the letter of transmittal has been
addressed. Where HSBC ordinary shares are later transferred to the depositary,
or a nominee of that depositary, U.K. stamp duty or SDRT will be payable by the
holder of those HSBC ordinary shares as described above.
Provided that the instrument of transfer is not executed in the United
Kingdom and remains at all subsequent times outside the United Kingdom, no U.K.
stamp duty will be required to be paid on any transfer of HSBC ADSs. An
agreement to transfer HSBC ADSs will not give rise to a liability for SDRT.
The transfer for value of HSBC ordinary shares, as opposed to HSBC ADSs,
will generally give rise to U.K. stamp duty or SDRT at the rate of 0.5% (rounded
up, in the case of stamp duty, to the nearest L5). The rate is applied to the
price payable for the relevant HSBC ordinary shares. A transfer of ordinary
shares from a nominee into the name of their beneficial owner, including the
transfer of underlying HSBC ordinary shares from the depositary to an HSBC ADS
holder, is subject to stamp duty at the fixed rate of L5 per transfer.
SDRT is generally the liability of the purchaser and U.K. stamp duty is
usually paid by the purchaser.
U.S. FEDERAL INCOME TAX TREATMENT OF HSBC ADSs
If you hold HSBC ordinary shares in HSBC ADS form, you will be treated as
holding the underlying ordinary shares for U.S. federal income tax purposes, and
deposits and withdrawals of ordinary shares in exchange for HSBC ADSs will not
be taxable events.
U.S. FEDERAL INCOME TAX TREATMENT OF DIVIDENDS
You must include cash dividends paid on ordinary shares in ordinary income
on the date that you or the HSBC ADS depositary receives them. Dividends paid by
HSBC will not be eligible for the dividends received deduction available to some
U.S. corporate holders.
If you qualify for benefits under the current income tax treaty in effect
between the United States and the United Kingdom, you will be eligible, subject
to generally applicable limitations, to receive a special foreign tax credit
equal to one-ninth of the amount of cash dividends that you receive on the HSBC
ordinary shares or HSBC ADSs, so long as you make an election to include in
income, as an additional notional dividend, an amount equal to the tax credit.
You should consult your tax adviser with respect to this special foreign tax
credit, and should note that the United States has signed, but not ratified, a
new income tax treaty with the United Kingdom that would eliminate this benefit.
U.S. FEDERAL INCOME TAX TREATMENT OF DISPOSITIONS
You will generally recognize taxable capital gain or loss for U.S. federal
income tax purposes upon the sale or exchange of HSBC ordinary shares or HSBC
ADSs, measured by the difference between the amount received and your tax basis
in the HSBC ordinary shares or HSBC ADSs. Such gain or loss will be long-term
capital gain or loss if you have held the HSBC ordinary shares or HSBC ADSs for
more than one year, including the holding period for any Household common stock
exchanged for such HSBC ordinary shares or HSBC ADSs.
U.S. INFORMATION REPORTING AND BACKUP WITHHOLDING
You may be subject, under some circumstances, to information reporting and
possibly backup withholding with respect to dividends and proceeds from the sale
or other disposition of HSBC ordinary shares or HSBC ADSs, unless you provide
proof of an applicable exemption or correct taxpayer identification number and
otherwise comply with applicable requirements of the backup withholding rules.
Any amount withheld under the backup withholding rules is not additional tax and
may be refunded or credited against your federal income tax liability, so long
as the required information is furnished to the Internal Revenue Service.
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U.S. FEDERAL INCOME TAX CONSEQUENCES FOR NON-U.S. HOLDERS
The following is a discussion of the material U.S. federal income tax
consequences of acquiring, holding, and disposing of HSBC ordinary shares or
HSBC ADSs by you if you are, with respect to the United States, a foreign
corporation or a non-resident alien individual.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO NON-U.S. HOLDERS OF
HOUSEHOLD STOCK
You will not recognize taxable gain or loss on your exchange of Household
common stock for HSBC ordinary shares or HSBC ADSs. You also will not recognize
taxable gain on your receipt of cash instead of fractional HSBC ordinary shares
or HSBC ADSs or your receipt of cash in exchange for Household preferred stock,
unless
- the gain is effectively connected with your conduct of a trade or
business in the United States, or
- if you are an individual, you are present in the United States for 183
days or more in the taxable year of the merger and other conditions are
met.
Payments of cash to you generally are not subject to information reporting
or backup withholding. You may, however, be required to provide certification of
your non-U.S. status to establish your exemption from information reporting and
backup withholding.
U.S. FEDERAL INCOME TAX TREATMENT OF NON-U.S. HOLDERS OF HSBC ORDINARY SHARES
OR HSBC ADSs
You generally will not be subject to U.S. federal income tax on dividends
paid on HSBC ordinary shares or HSBC ADSs, unless the dividends are effectively
connected with your conduct of a trade or business in the United States.
You also will generally not be subject to U.S. federal income tax on gain
realized on a sale or exchange of HSBC ordinary shares or HSBC ADSs, unless
- the gain is effectively connected with your conduct of a trade or
business in the United States, or
- if you are an individual, you are present in the United States for 183
days or more in the taxable year of the sale or exchange and other
conditions are met.
Payments of dividends or proceeds from the disposition of HSBC ordinary
shares or HSBC ADSs generally are not subject to information reporting or backup
withholding. You may, however, be required to provide certification of your
non-U.S. status in connection with payments received within the United States or
from the HSBC ADS depositary or other U.S. related payors to establish your
exemption from information reporting and backup withholding.
U.K. TAX CONSEQUENCES FOR NON-U.S. HOLDERS NOT RESIDENT IN THE UNITED KINGDOM
Subject to the comments in the following paragraph, a holder that is not a
U.S. holder and who is not resident in the United Kingdom, or a non-U.K. foreign
holder, will generally be treated for U.K. tax purposes in respect of his or her
holding of HSBC ordinary shares or HSBC ADSs in the same way that U.S. holders
are treated for U.K. tax purposes. Please refer to "-- U.S. Federal Income Tax
and U.K. Tax Consequences for U.S. Holders of HSBC Ordinary Shares and HSBC
ADSs".
Non-U.K. foreign holders should note that they will not generally have the
benefit of the income tax treaty in effect between the United States and the
United Kingdom in relation to their holding of HSBC ordinary shares or HSBC
ADSs, although they may have the benefit of another applicable income tax treaty
between the United Kingdom and the country in which they are resident.
Non-U.K. foreign holders should seek advice from an independent tax adviser
about the tax consequences of the proposed merger and of holding and disposing
of HSBC ordinary shares or ADRs representing HSBC ADSs.
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THE MERGER AGREEMENT
HSBC and Household believe that this summary describes all of the material
terms of the merger agreement. However, because the merger agreement is the
primary legal document that governs the merger, you should carefully read the
complete text of the merger agreement for its precise legal terms and other
information that may be important to you. The merger agreement is included as
Annex A to this document and is incorporated by reference in this document.
FORM OF THE MERGER
If all of the conditions to the merger are satisfied or waived in
accordance with the merger agreement, Household will merge with and into H2
Acquisition Corporation, a wholly owned subsidiary of HSBC created solely for
the purpose of giving effect to the merger, and the separate corporate existence
of Household will cease. H2 Acquisition Corporation will be the surviving
corporation in the merger and will continue its corporate existence under
Delaware law. The Certificate of Incorporation and by-laws of H2 Acquisition
Corporation as in effect immediately prior to the effective time will be the
certificate of incorporation and by-laws of the surviving corporation.
EFFECTIVE TIME AND TIMING OF CLOSING
The merger agreement provides that the merger will be completed on the
fifth business day following the first day on which all conditions in the merger
agreement have been fulfilled or waived. If the closing date would occur within
five business days of the last day of a calendar month, HSBC may at its option,
upon waiving specified conditions to the merger, delay the closing date until
the last day of the calendar month.
The merger will become effective when HSBC and Household file a certificate
of merger with the Secretary of State of the State of Delaware or at a later
time if so specified in the certificate of merger. Although HSBC and Household
expect to complete the merger by the end of the first quarter of 2003, the
merger is subject to regulatory approvals in a number of jurisdictions and the
companies cannot predict the exact time of the merger's completion. For more
information about regulatory approvals to which the merger is subject, please
refer to "Regulatory Matters."
BOARD OF DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
The directors of H2 Acquisition Corporation will continue to be the
directors of the surviving corporation following the merger. The officers of
Household immediately prior to the merger will become the officers of the
surviving corporation following the merger.
CONSIDERATION TO BE RECEIVED IN THE MERGER
Upon completion of the merger, each issued and outstanding share of
Household common stock will be cancelled and converted into the right to
receive, at the election of the holder, 2.675 HSBC ordinary shares or 0.535 HSBC
ADSs (each HSBC ADS representing an ownership interest in five HSBC ordinary
shares). For more information about the characteristics of and difference
between HSBC ordinary shares and HSBC ADSs, please refer to "Description of HSBC
Ordinary Shares" and "Description of HSBC American Depositary Shares."
Upon completion of the merger, each issued and outstanding share of
Household non-voting preferred stock will be cancelled and converted into the
right to receive cash in the amount of $1,000 per share ($25 per depositary
share representing 1/40th of a share), plus all accrued and unpaid dividends up
to but excluding the closing date, without interest. Holders of Household
non-voting preferred stock are entitled to assert dissenters' appraisal rights
instead of receiving this consideration. For a description of these dissenters'
rights, please refer to "Appraisal Rights."
All shares of Household common stock and non-voting preferred stock will no
longer be outstanding following the merger and will be cancelled and retired and
will cease to exist. If you are a holder of a certificate
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representing those shares you will no longer have any rights with respect to
those shares except the right to receive HSBC ordinary shares, HSBC ADSs and/or
cash as described above or, if applicable, appraisal rights.
Pursuant to their terms, the outstanding 8.875% Adjustable Conversion-Rate
Equity Securities Units will remain outstanding following the merger, with the
purchase contract portion of such Units to be converted, as a result of the
merger, into contracts to purchase HSBC ordinary shares in lieu of shares of
Household common stock.
Pursuant to their terms, the rights to subscribe for shares of Household
common stock under the zero-coupon convertible debt securities of Household will
be converted, as a result of the merger, into rights to subscribe for HSBC
ordinary shares.
REDEMPTION OF HOUSEHOLD VOTING PREFERRED STOCK
Immediately prior to closing and as a condition to HSBC's obligation to
proceed with the merger, Household will deposit the redemption price of the
Household voting preferred stock in trust for the holders of the shares, and
will take the other steps required to redeem the shares in accordance with their
terms. As provided in the certificates of designation governing these shares of
preferred stock, upon the deposit in trust of the redemption price these shares
will no longer be deemed to be outstanding. The aggregate amount of the
redemption price of the Household voting preferred stock outstanding as of the
date of this document is $114.8 million, plus accrued and unpaid dividends to
the date of redemption.
SHARE ELECTION; EXCHANGE PROCEDURES; FRACTIONAL SHARES
HSBC has appointed Computershare Investor Services LLC as exchange agent
for the purpose of exchanging certificates formerly representing shares of
Household common stock and non-voting preferred stock for, as applicable, HSBC
ordinary shares or HSBC ADSs or cash. The exchange agent will mail to each
holder of record of Household common stock or non-voting preferred stock a
letter of transmittal for use in effecting delivery of certificates representing
these shares to the exchange agent. The letter of transmittal will require each
holder of Household common stock to make an election to receive either HSBC
ordinary shares or HSBC ADSs. If a holder of Household common stock does not
make an election, the exchange agent will return the letter of transmittal to
the holder for completion. If a holder of Household common stock elects to
receive HSBC ordinary shares, the holder will receive the HSBC ordinary shares
in certificated form unless the holder elects in the letter of transmittal to
receive them in uncertificated form through CREST.
Upon surrender of a certificate representing Household common stock for
cancellation to the exchange agent together with a duly executed letter of
transmittal, the holder will be entitled to receive in exchange:
- the whole number of HSBC ordinary shares or HSBC ADSs that the Household
common stockholder has the right to receive pursuant to the merger
agreement;
- the amount of any cash in lieu of fractional HSBC ordinary shares or HSBC
ADSs as described below, and
- any dividends or other distributions on the HSBC ordinary shares or HSBC
ADSs, as applicable, that have a record date after the date of completion
of the merger and shall have been declared and paid prior to the exchange
(in the event that a dividend or other distribution has a record date
after the completion of the merger and has been declared but not yet paid
prior to the exchange, the holder will be entitled to be paid such
dividend or other distribution at the same time as all other holders of
HSBC ordinary shares or HSBC ADSs).
Upon surrender of a certificate for a depositary share representing 1/40th
of a share of Household non-voting preferred stock for cancellation to the
exchange agent together with a duly executed letter of transmittal, the holder
will be entitled to receive in exchange:
- cash in the amount of $25 per depositary share, and
- all accrued and unpaid dividends up to but excluding the closing date,
without interest.
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With respect to both common stock and preferred stock, taxes will be
withheld as required.
Household certificates that are surrendered will be cancelled. No interest
will be paid or accrued on any amount payable upon surrender of stock
certificates. No holder of unsurrendered certificates will receive any dividends
or other distributions with respect to HSBC ordinary shares or HSBC ADSs to
which the holder is entitled under the merger agreement, or be entitled to vote
such HSBC ordinary shares, until the Household certificate registered to the
holder is surrendered to the exchange agent.
YOU SHOULD NOT SEND YOUR HOUSEHOLD STOCK CERTIFICATES TO THE EXCHANGE AGENT
UNTIL YOU HAVE RECEIVED TRANSMITTAL MATERIALS FROM THE EXCHANGE AGENT. DO NOT
RETURN HOUSEHOLD STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
HOLDERS OF SHARES OF VOTING PREFERRED STOCK SHOULD NOT SEND SHARE
CERTIFICATES TO THE EXCHANGE AGENT. THESE SHARES WILL BE DESIGNATED FOR
REDEMPTION BY HOUSEHOLD EFFECTIVE IMMEDIATELY PRIOR TO THE MERGER, AND THE
HOLDERS OF THESE SHARES SHOULD FOLLOW THE INSTRUCTIONS INCLUDED IN THE NOTICE OF
REDEMPTION THEY WILL RECEIVE FROM HOUSEHOLD.
HSBC will not issue fractional ordinary shares or HSBC ADSs to holders of
Household common stock in the merger. Instead, at HSBC's election (which must be
made prior to the effective time of the merger):
- the exchange agent will aggregate and sell from time to time on the LSE
the fractional HSBC ordinary shares (including HSBC ordinary shares
underlying fractional HSBC ADSs) that would otherwise be issued. For each
fractional HSBC ordinary share or HSBC ADS that otherwise would have been
issued to you, you will receive a proportionate interest in the net
proceeds (after commissions, transfer taxes and other out-of-pocket
transaction costs, including customary expenses of the exchange agent) of
these sales. Because fractional shares will be aggregated and sold from
time to time after completion of the merger as shares of Household common
stock are surrendered for exchange, the market value of an HSBC ordinary
share upon which this cash amount is based will vary and, depending on
when you surrender your Household common stock for exchange, you may
receive more or less cash with respect to a fractional HSBC ordinary
share or HSBC ADS than a Household common stockholder who surrenders
shares at a different time and you will have no recourse against HSBC,
Household, the exchange agent, the depositary or any other person as a
result of the difference; or
- HSBC will pay you an amount in cash equal to (A) the fractional share
interest to which you would be entitled (after taking into account all
shares of Household common stock held by you as of the effective time),
multiplied by (B) (x) the closing mid-market price (disregarding extended
hours) on the date of the completion of the merger of HSBC ordinary
shares (as reported in the Daily Official List of the LSE), if you have
elected to receive HSBC ordinary shares, or (y) the closing price
(disregarding extended hours) of HSBC ADSs (as reported on the NYSE
Composite Transaction Tape (as reported in the Wall Street Journal
(National Edition), or, if not reported therein, any other authoritative
source)) if you have elected to receive HSBC ADSs.
No interest will be paid in respect of cash paid in lieu of a fractional
HSBC ordinary share or HSBC ADS or any dividends or distributions declared or
paid on the HSBC ordinary shares or HSBC ADSs issued in the merger.
Immediately following the merger, Household's transfer books will be closed
and there will be no transfers on the transfer books of Household of Household
common stock or preferred stock outstanding before the merger.
The merger agreement provides that if any certificates representing shares
of Household common stock or non-voting preferred stock have not been
surrendered within 12 months after completion of the merger, to the extent
permitted by applicable law, the rights of these holders will cease and they
will no longer be entitled to receive HSBC ordinary shares or HSBC ADSs or cash,
as the case may be. If the surviving corporation requests, the exchange agent
will sell any remaining HSBC ordinary shares on the LSE and the proceeds from
those sales, together with any remaining cash representing unpaid payments to
holders of Household non-voting preferred stock, will be paid to the surviving
corporation as soon as practicable. Applicable state escheat laws may require
that unclaimed merger consideration be surrendered to appropriate state
authorities.
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If any of your Household share certificates have been lost, stolen or
destroyed, you will be entitled to obtain the applicable merger consideration
after you make an affidavit of that fact and post a bond in a customary amount
to protect HSBC against claims related to your lost, stolen or destroyed stock
certificates.
STOCK OPTIONS AND OTHER EQUITY-BASED AWARDS
Upon completion of the merger, each outstanding and unexercised stock
option to acquire shares of Household common stock held by any current or former
employee or director of Household will be assumed by HSBC and converted into,
and become a right to acquire, the number of HSBC ordinary shares (rounded to
the nearest whole HSBC ordinary share) equal to the number of shares of
Household common stock subject to the Household stock option multiplied by the
exchange ratio. The exercise price of each converted HSBC stock option (per HSBC
ordinary share) will equal the exercise price per share of the Household stock
option divided by the exchange ratio (rounded to the nearest whole cent). The
converted number of HSBC ordinary shares and related exercise price will be
adjusted as necessary pursuant to the Internal Revenue Code with respect to
stock options intended to qualify as "incentive stock options" under Section 422
of the Internal Revenue Code. Upon completion of the merger, each right to
receive shares of Household common stock, including Household restricted stock
rights, or benefits measured based on the value of Household common stock, will
cease to represent the right to receive shares of Household common stock or
benefits measured thereby and will be converted into, and become a right to
receive, the number of HSBC ordinary shares or benefits measured thereby
(rounded to the nearest whole HSBC ordinary share) equal to the product of the
number of shares of Household common stock subject to such Household right and
the exchange ratio. The converted HSBC stock options and other equity-based
awards will continue to be subject to the same terms and conditions as were
applicable to them immediately prior to the completion of the merger. At or
prior to the time that the holder of a converted HSBC stock option or other
equity-based award is entitled to receive the HSBC ordinary shares underlying
such option or award, such holder will be entitled to choose whether to receive
HSBC ordinary shares or HSBC ADSs.
APPRAISAL RIGHTS
For a detailed summary of who may be entitled to assert dissenters' rights
of appraisal in the merger, please refer to "Appraisal Rights."
REPRESENTATIONS AND WARRANTIES
The merger agreement contains representations and warranties made by both
HSBC and Household regarding, among other things:
- corporate matters, including due organization and qualification;
- capitalization;
- authority relative to execution and delivery of the merger agreement;
- absence of conflicts with, or violations of, organizational documents or
other obligations as a result of the merger;
- required governmental filings and consents;
- accuracy of information contained in documents filed with governmental
entities including, in the case of Household, insurance and bank
regulatory agencies;
- accuracy of information supplied for inclusion in this document and other
similar documents;
- absence of undisclosed liabilities;
- absence of material adverse changes as defined in the merger agreement;
- compliance with applicable laws and regulations, including, in the case
of Household, the status of the agreement in principle with a working
group of state attorneys general concerning commitments by
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Household relating to secured real estate lending having become effective
(which has occurred), and the estimated related financial impact of the
agreement not being materially more adverse than a pre-tax charge of $525
million recorded by Household in the third quarter of 2002 and a
projected after tax earnings impact of $50 million in 2003, $100 million
in 2004 and $150 million in 2005 (as previously publicly disclosed by
Household);
- litigation matters; and
- tax matters.
In addition, Household has made other representations and warranties about
itself to HSBC regarding, among other things:
- material contracts (including with respect to consents required to be
obtained in connection with the merger);
- regulatory agreements with various government entities;
- title to all owned real property and assets, and validity of leases
relating to leased real property and assets;
- outstanding secured or unsecured loans, advances, credit card lines and
credit card receivables originated by Household;
- servicing agreements and securitization matters;
- employee benefits and labor matters;
- intellectual property;
- environmental liabilities;
- company insurance policies;
- actions of Household with respect to the Rights Agreement, dated July 9,
1996, between Household and Harris Trust and Savings Bank;
- risk management and derivatives;
- inapplicability of state takeover statutes to this transaction; and
- the receipt of fairness opinions from Household's financial advisors.
The representations and warranties contained in the merger agreement do not
survive the consummation of the merger.
COVENANTS RELATING TO THE CONDUCT OF HOUSEHOLD'S BUSINESS
Subject to some exceptions, Household has agreed that except with HSBC's
prior written consent, Household will conduct its business in the ordinary
course consistent with past practice during the period from the signing of the
merger agreement until the completion of the merger. Household has also agreed
to use reasonable best efforts to preserve its present business organizations,
to keep available the services of current officers and key employees and
preserve existing relationships and goodwill with persons with whom it does
business. Household has also agreed that, prior to the completion of the merger,
it will not, among other things, do any of the following without the written
consent of HSBC or as disclosed to HSBC prior to executing the merger agreement:
- declare or pay dividends other than regular cash dividends in respect of
Household's preferred stock and the regular Household fourth quarter cash
dividend on Household common stock, currently expected to be declared in
the fourth quarter of 2002 and paid in January 2003; however, in the
event that the merger will not be completed until after the record date
for HSBC's second interim dividend in lieu of final dividend for 2002,
which currently is expected to be declared by HSBC in March 2003
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and paid in May 2003, Household's board of directors is entitled in its
discretion to declare and pay additional cash dividends on the Household
common stock, and otherwise to take appropriate steps, so that holders of
Household common stock receive, prior to the completion of the merger,
further dividends per share of Household common stock up to, in the
aggregate, 2.675 times the HSBC second interim dividend per HSBC ordinary
share, unless HSBC has taken alternative steps, reasonably acceptable to
Household, to provide the same economic benefit of such dividend to
holders of Household common stock;
- split, combine or reclassify any capital stock of Household or its
subsidiaries;
- amend the terms of any option, warrant or right to acquire any securities
of Household or its subsidiaries;
- settle, pay or discharge any suit arising out of a shareholder's equity
interest in Household;
- purchase, redeem, or modify the terms of any indebtedness of Household or
its subsidiaries;
- issue, sell, pledge, dispose of or encumber capital stock or securities
or other rights to acquire shares of capital stock in Household or its
subsidiaries outside of the parameters set forth in the merger agreement;
- amend any charter documents of Household or its subsidiaries;
- acquire or agree to acquire any business other than acquisitions of
consumer finance receivables in the ordinary course of business in
accordance with past practices for cash consideration;
- sell, encumber or subject to any lien any material properties or assets
other than in the ordinary course of business;
- except for borrowings under existing credit facilities or lines of credit
or refinancing of existing indebtedness, incur indebtedness or in any way
assume the indebtedness of a person other than one of its wholly owned
subsidiaries, except in the ordinary course of business;
- change its accounting methods or materially change any of its methods of
reporting income and deductions for federal income tax purposes, except
as required by changes in applicable law;
- make any material change in any material practice relating to the pricing
of residential mortgage and consumer loans, loan credit policy or loan
collection, relating to securitization transactions or relating to
calculating allowances for losses or reserves, except as required by
applicable law or regulation;
- restructure or materially change its investment securities portfolio or
its gap position;
- amend, except in the ordinary course of business, or knowingly violate in
any material respect the terms of any material contracts, or create,
renew or amend any agreement or contract containing any restriction on
the ability of the company to conduct its business as it is currently
conducted or to engage in any type of activity or business;
- (1) enter into or terminate any employee benefit plan, (2) grant any
salary increase (except for increases granted to current employees other
than officers in the ordinary course of business consistent with past
practice), (3) make any award or grant under any employee benefit plan,
(4) grant or increase any termination or severance payment (other than
payments required under existing arrangements with current employees
other than officers in the ordinary course of business consistent with
past practice) or (5) increase the benefits under any employee benefit
plan;
- pay, loan or advance any amount to, or enter into any agreement or
arrangement with, any of its officers, directors or affiliates (or
immediate family members of any officer or director), other than
compensation in the ordinary course of business consistent with past
practice;
- make any material tax election or settle any material income tax
liability;
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- pay or settle any litigation, claims or obligations in excess of $1
million, other than in the ordinary course of business consistent with
past practice or liabilities incurred in the ordinary course of business
since September 30, 2002 or contemplated by Household's most recent
financial statements included in its SEC filings made before November 12,
2002;
- agree or consent to any material agreements or material modifications of
any agreement with any governmental entity in respect of the operations
of its business (except (1) consent decrees contemplated by the agreement
in principle between Household and a working group of state attorneys
general and regulatory agencies, (2) as required by law to renew company
permits or agreements in accordance with ordinary practice or (3) to
effect the transactions contemplated by the merger agreement).
NO SOLICITATION
Household has agreed that it and its representatives will not:
- solicit, initiate or encourage (including by way of furnishing
information), or take any other action designed to facilitate any
inquiries or proposals which constitute an acquisition proposal by any
other party;
- participate in any discussions or negotiations regarding an alternative
transaction; or
- enter into any agreement regarding any alternative transaction.
However, Household and its board are not prohibited, prior to the Household
special meeting, from considering and participating in discussions and
negotiations with respect to a bona fide acquisition proposal received by
Household, if Household's board:
- concludes in good faith (after consultation with a nationally recognized
investment banking firm) that the acquisition proposal would, if
accepted, be reasonably capable of being consummated and would, if
consummated, constitute a superior proposal not solicited in violation of
the merger agreement; and
- determines in good faith (after consultation with outside legal counsel)
that failure to do so would be inconsistent with the directors' fiduciary
duties.
If Household does not limit the duration of these discussions and
negotiations to 20 days, HSBC has the right to terminate the merger agreement
and would be entitled to a termination fee of $550 million if Household agrees
to, or enters into, an alternative transaction within 12 months after HSBC
terminates the merger agreement. See "-- Fees and Expenses."
An acquisition proposal is any inquiry or proposal regarding
- any merger, share exchange, consolidation, sale of assets, sale of shares
of capital stock (including by way of a tender offer), or
- any similar transactions involving Household or its subsidiaries that,
if consummated, would constitute an alternative transaction.
An "alternative transaction" is:
- any transaction through which any person other than HSBC or its
affiliates directly or indirectly acquires or would acquire more than 25%
of the outstanding Household common stock or voting power or of any new
class or series of preferred stock that would be entitled to a class or a
series vote with respect to the merger whether from Household or pursuant
to a tender offer or otherwise;
- any merger or other business combination involving Household (other than
the merger with HSBC);
- any transaction through which any person other than HSBC or its
affiliates acquires or would acquire control of assets (including for
this purpose equity securities of Household and equity securities of the
entity surviving any merger or business combination including any of
Household's subsidiaries) of
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Household or any of its subsidiaries representing more than 25% of the
fair market value of all the assets, net revenues or net income of
Household and its subsidiaries; or
- any other consolidation, business combination, recapitalization or
similar transaction other than those contemplated by the merger agreement
as a result of which the holders of Household common stock immediately
prior to the transaction do not, in the aggregate, own at least 75% of
each of the outstanding common stock and the voting power of the
surviving or resulting entity in substantially the same proportion as
those holders held Household common stock immediately prior to the
transaction.
A "superior proposal" is a proposal made by a third party to acquire,
directly or indirectly (including through a merger, consolidation or similar
transaction), for consideration consisting of cash and/or securities, all of the
Household common stock entitled to vote generally in the election of directors
or all or substantially all of the assets of Household, on terms which the
Household board reasonably believes (after consultation with a financial advisor
of nationally recognized reputation and outside legal counsel) to be reasonably
capable of completion and, if completed, more favorable from a financial point
of view to its stockholders than the merger and the transactions contemplated by
the merger agreement, taking into account at the time of determination any
changes to the financial terms of the merger agreement proposed by HSBC.
Household has agreed
- to notify HSBC promptly (but in no event later than 24 hours) if it
receives any acquisition proposal or any material modification to any
acquisition proposal, or any request for nonpublic information by any
person who has made or is considering making an acquisition proposal, and
provide relevant information regarding the acquisition proposal or
request;
- to notify HSBC promptly (and in any event within 24 hours) if it enters
into negotiations or discussions concerning any acquisition proposal; and
- to cease any existing negotiations or discussions with any persons other
than HSBC with respect to any acquisition proposal, and to use reasonable
best efforts to cause all persons other than HSBC who have been furnished
with confidential information in connection with an acquisition proposal
to return or destroy that information.
Except as expressly permitted by the merger agreement, neither Household's
board of directors nor any committee of Household's board of directors is
permitted to, in a manner adverse to HSBC:
- withdraw, modify or qualify, the recommendation by the board of the
merger, or take any action or make any statement in connection with the
Household stockholder meeting inconsistent with its approval of the
merger agreement; or
- recommend any acquisition proposal other than the merger.
However, Household's board of directors may, after three days prior notice
to HSBC, take such action to the extent that it determines in good faith (after
due consultation with outside counsel) that failure to do so would be
inconsistent with its fiduciary duties.
COVENANTS RELATING TO THE CONDUCT OF HSBC'S BUSINESS
Except as consented to by Household in writing, HSBC has agreed that, prior
to the completion of the merger, it will not, among other things, do any of the
following:
- declare or pay dividends, other than the second interim dividend in lieu
of final dividend for 2002 in respect of the HSBC ordinary shares, which
is expected to be declared in March 2003 and paid in May 2003;
- split, combine or reclassify any capital stock of HSBC;
- acquire or agree to acquire any other corporation or other business
organization, unless such action would not reasonably be expected to
delay or impede the merger; or
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- amend any charter documents of HSBC or its subsidiaries in a manner that
would materially delay or impede the merger or be adverse to holders of
Household's capital stock, giving effect to the merger.
In addition, the HSBC board of directors is obligated, subject to its fiduciary
duties under applicable law, to recommend that HSBC's shareholders approve the
merger.
INDEMNIFICATION AND INSURANCE
HSBC has agreed to cause the surviving corporation to indemnify each
present and former director and officer of Household and its subsidiaries in
their capacities as such against all losses, expenses, claims, damages or
liability arising out of acts or omissions occurring on or prior to the
effective time of the merger, to the fullest extent permitted under the Delaware
General Corporation Law and other applicable law and to maintain in effect
Household's current directors' and officers' liability insurance for a period of
six years, subject to specified cost limitations. For more information, please
refer to, "The Merger -- Interests of Household's Executive Officers and
Directors in the Merger -- Indemnification of Officers and Directors."
EMPLOYEE MATTERS
HSBC has agreed that for a period of one year following the merger, with
respect to employees of the surviving corporation and its subsidiaries (so long
as they are employed by the surviving corporation or such subsidiary), it will:
- pay such employees an annual salary or hourly wage and bonus and annual
incentives (other than equity-based awards) that are no less than those
payable to such employees immediately prior to the merger; and
- provide such employees in the aggregate with employee benefits that are
substantially similar in the aggregate to the employee benefits provided
to such employees pursuant to Household's benefit plans (other than
equity-based benefits) immediately prior to the merger.
In addition, HSBC has agreed to:
- generally recognize each employee's service with Household prior to the
completion of the merger for purposes of eligibility to participate,
vesting credits and, solely with respect to vacation and severance
benefits, benefit accruals, in each case under the HSBC plans in which
such employees are eligible to participate following the completion of
the merger;
- waive any exclusion for pre-existing conditions under any HSBC medical or
health plans, provided the employee would have been entitled to coverage
under a corresponding Household plan; and
- honor the Household employment agreements, employment protection
agreements and severance plans consistent with their terms and the
accrued benefits under each of Household's non-qualified deferred
compensation plans and retirement plans.
However, HSBC has no obligation to continue the employment of any Household
employee for any period following the merger.
CONDITIONS PRECEDENT TO CLOSING
The obligations of both HSBC and Household to effect the merger are subject
to the satisfaction or waiver of the following conditions:
- the registration statement on Form F-4 registering the HSBC ordinary
shares to be exchanged for Household common stock filed by HSBC with the
SEC having become effective under the Securities Act and no stop order or
proceedings seeking a stop order having been entered by the SEC or being
pending;
- approval for admission or admission to listing or trading (as the case
may be) of the HSBC ordinary shares having been granted on the Official
List of the UKLA, the LSE, Euronext Paris and the SEHK,
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and authorization for listing of the HSBC ordinary shares and HSBC ADSs
on the NYSE having been granted, subject to official notice of issuance;
- approval of the merger agreement by HSBC ordinary shareholders and
Household stockholders having been obtained;
- approval of the merger (including the expiration or termination of any
applicable waiting periods) having been received from applicable
governmental and regulatory agencies;
- the absence of any statute, order, injunction or similar legal obstacle
prohibiting consummation of the merger; and
- the Household voting preferred stock being deemed not outstanding by
reason of Household's deposit of the redemption price.
In addition, the obligation of HSBC to effect the merger is subject to the
satisfaction or waiver of the following conditions:
- the representations and warranties of Household set forth in the merger
agreement being true and correct except where the failure to be true and
correct would not in the aggregate have a material adverse effect on
Household or, in the case of specified representations and warranties,
true and correct in all but de minimis respects and in the case of other
specified representations and warranties, true and correct in all
material respects, in each case, as of the date of the merger agreement
and (except to the extent such representations and warranties speak as of
an earlier date) as of the closing date as though made on and as of the
closing date, and HSBC having received a certificate on behalf of
Household to that effect;
- Household having performed in all material respects all obligations
required to be performed by it under the merger agreement, and HSBC
having received a certificate on behalf of Household to that effect;
- HSBC having received a tax opinion from Cleary, Gottlieb, Steen &
Hamilton, to the effect that the merger will qualify as a reorganization
within the meaning of the U.S. tax code and that each transfer of
property to HSBC by a stockholder of Household pursuant to the merger
will not be subject to Section 367(a)(1) of the U.S. tax code;
- no governmental or regulatory consent required to be obtained as a
condition to the merger being conditioned upon the imposition of a
burdensome condition as defined in the merger agreement; and
- the absence of any pending or threatened suits, actions or proceedings by
a governmental entity seeking to restrain or prohibit the consummation of
the merger or any of the other transactions contemplated by the merger
agreement, seeking to impose any burdensome condition or which otherwise
would reasonably be expected to have a material adverse effect on HSBC or
Household.
In addition, the obligation of Household to effect the merger is subject to
the satisfaction or waiver of the following conditions:
- the representations and warranties of HSBC set forth in the merger
agreement being true and correct except where the failure to be true and
correct would not have a material adverse effect on HSBC or, in the case
of specified representations and warranties, true and correct in all
material respects, in each case, as of the date of the merger agreement
and (except to the extent such representations and warranties speak as of
an earlier date) as of the closing date, as though made on and as of the
closing date and Household having received a certificate to that effect;
- HSBC having performed in all material respects all obligations required
to be performed by it under the merger agreement and Household having
received a certificate to that effect; and
- Household having received a tax opinion from Wachtell, Lipton, Rosen &
Katz, to the effect that the merger will qualify as a reorganization
within the meaning of the U.S. tax code and that each transfer
84
of property to HSBC by a stockholder of Household pursuant to the merger
will not be subject to Section 367(a)(1) of the U.S. tax code.
Household does not intend to waive the condition that Household has
received a favorable tax opinion from Wachtell, Lipton, Rosen & Katz and HSBC
does not intend to waive the condition that HSBC has received a favorable tax
opinion from Cleary, Gottlieb, Steen & Hamilton.
TERMINATION, AMENDMENT AND WAIVER
The merger agreement may be terminated at any time prior to the completion
of the merger by the mutual written consent of Household and HSBC, or by either
Household or HSBC if:
- the merger is not completed by June 30, 2003 (other than because of a
breach of the merger agreement caused by the party seeking termination);
- Household's stockholders fail to adopt the merger agreement at the
Household special meeting or any adjournment thereof;
- HSBC's shareholders fail to pass the resolution approving the merger at
the HSBC extraordinary general meeting or any adjournment thereof;
- a competent court or other governmental entity issues a non-appealable
final order permanently restraining the merger; or
- a governmental entity which must grant a regulatory approval as a
condition to the merger denies approval of the merger (or, in the case
HSBC, if such approval is subject to a burdensome condition) and such
action has become final and non-appealable.
The merger agreement may also be terminated by HSBC if:
- there has been a breach of any of Household's representations,
warranties, covenants or agreements, the breach has not been cured within
30 days following written notice of the breach or cannot by its nature be
cured within 30 days, and the breach, if occurring on the closing date,
would constitute the failure of a condition to closing;
- Household has willfully and materially breached its "no solicitation"
obligations, or Household's board has failed to recommend in the proxy
statement the adoption of the merger agreement, changed its
recommendation to the Household stockholders, recommended an alternative
proposal or failed to call a meeting of Household's stockholders; or
- Household or any of its representatives has engaged in discussions with
any person in connection with an acquisition proposal and not ceased all
discussions within 20 days of the first date of any such discussions.
The merger agreement may also be terminated by Household if:
- there has been a breach of any of HSBC's representations, warranties,
covenants or agreements set forth in the merger agreement, and the breach
has not been cured within 30 days following written notice of the breach
or cannot by its nature be cured within 30 days, and the breach, if
occurring on the closing date, would constitute the failure of a
condition to closing; or
- HSBC's board has failed to recommend the merger to HSBC's ordinary
shareholders or failed to call a meeting of HSBC's ordinary shareholders.
EFFECT OF TERMINATION
In the event the merger agreement is terminated as described above, the
merger agreement will become void and neither HSBC nor Household will have any
liability pursuant to the merger agreement, except that:
- Both HSBC and Household will remain liable for any willful breach of, or
willful misrepresentation in, the merger agreement; and
85
- Household may be required to pay HSBC a termination fee under the
circumstances described below in "-- Fees and Expenses."
FEES AND EXPENSES
Household has agreed to pay to HSBC a termination fee of $550 million if
any of the following occurs:
- either party terminates the agreement because the merger was not
completed by June 30, 2003 without the Household special meeting and vote
on the merger having occurred, if
- any alternative transaction was made known to Household or its
stockholders, and was not withdrawn at least 15 days prior to, June 30,
2003, and
- an alternative transaction is consummated or an agreement with respect
to any alternative transaction is entered into within 12 months after
the date of termination;
- either party terminates the agreement because Household's stockholders
failed to adopt the merger agreement at the Household special meeting or
any adjournment thereof, if
- an acquisition proposal was made known to Household or its stockholders
prior to the taking of the vote, and
- any alternative transaction is consummated or an agreement with respect
to any alternative transaction is entered into within 12 months after
the date of termination;
- HSBC terminates the agreement as a result of Household's breaching any of
its covenants or agreements in the merger agreement in such a manner that
HSBC would be entitled not to complete the merger, if
- an acquisition proposal was made known to Household or its stockholders
prior to the occurrence of the breach, and
- any alternative transaction is consummated or an agreement with respect
to any alternative transaction is entered into within 12 months after
the date of termination;
- HSBC terminates the agreement because Household has willfully and
materially breached its "no solicitation" obligations, or Household's
board has failed to recommend in the proxy statement the adoption of the
merger agreement, changed its recommendation to the Household
stockholders or recommended an alternative proposal or failed to call a
meeting of Household's stockholders; or
- HSBC terminates the agreement because Household or its representatives
have had discussions with any person in connection with an acquisition
proposal, Household and its representatives have not ceased those
discussions within 20 days and Household consummates or enters into an
agreement with respect to any alternative transaction within 12 months
after the date of termination.
In any situation described above, where more than one event is a condition
to the payment of the termination fee (for example, the termination of the
merger agreement and consummating or entering into an agreement relating to an
alternative transaction), the fee is not payable until the later of the events
has occurred. Except as described above, each party is obligated to pay its own
expenses in connection with the merger.
86
APPRAISAL RIGHTS
Holders of Household common stock and voting preferred stock are not
entitled to appraisal rights in connection with the merger. Delaware law
entitles record holders of shares of Household non-voting preferred stock,
consisting of Household's 7 5/8% cumulative preferred stock, 7.50% cumulative
preferred stock, 7.60% cumulative preferred stock and 8 1/4% cumulative
preferred stock who follow the procedures specified in Section 262 of the
Delaware General Corporation Law to have these shares appraised by the Delaware
Court of Chancery and to receive the "fair value" of these shares as determined
by the court in lieu of the merger consideration.
Computershare Trust Company of New York, as depositary, is the holder of
record of the shares of Household's 7 5/8% cumulative preferred stock,
Household's 7.50% cumulative preferred stock and Household's 7.60% cumulative
preferred stock. Harris Trust and Savings Bank, as depositary, is the holder of
record of the shares of Household's 8 1/4% cumulative preferred stock.
As a holder of depositary shares each representing an ownership of 1/40th
of a share of a class of Household non-voting preferred stock, you must exercise
and perfect your appraisal rights by acting through the applicable depositary.
If you wish to exercise and perfect your appraisal rights, you should send a
written notice to the depositary at the following address, instructing it to
take the necessary actions summarized in this section in respect of your
proportional ownership in the shares the depositary holds of record:
<Table>
<Caption>
Computershare Trust Company of New York Harris Trust and Savings Bank
2 North LaSalle Street 311 West Monroe Street
Chicago, Illinois 60602 Chicago, Illinois 60603
Attention: Edward Gurgul Attention:
---------------------
</Table>
IN ORDER TO EXERCISE SUCH RIGHTS, A HOLDER OF HOUSEHOLD NON-VOTING
PREFERRED STOCK MUST DEMAND AND PERFECT THE RIGHTS IN ACCORDANCE WITH SECTION
262.
The following is intended as a brief summary of the material provisions of
the Delaware statutory procedures required to be followed in order to dissent
from the merger and perfect appraisal rights. This summary, however, is not a
complete statement of all applicable requirements and is qualified in its
entirety by reference to Section 262 of the Delaware General Corporation Law,
the full text of which appears in Annex D of this document.
Section 262 requires that stockholders be notified that appraisal rights
will be available not less than 20 days before the special meeting to vote on
the merger. A copy of Section 262 must be included with such notice. This
document constitutes Household's notice to the holders of the Household
non-voting preferred stock of the availability of appraisal rights in connection
with the merger in compliance with the requirements of Section 262. If you are a
holder of Household non-voting preferred stock and wish to consider exercising
your appraisal rights, you should carefully review the text of Section 262
contained in Annex D since failure timely and properly to comply with the
requirements of Section 262 will result in the loss of your appraisal rights
under Delaware law.
Holders of Household non-voting preferred stock who elect to demand
appraisal of their shares must:
- deliver to Household a written demand for appraisal of the shares before
the vote with respect to the merger is taken; and
- continuously hold such shares of record through the completion of the
merger.
If a holder of Household non-voting preferred stock fails to comply with
these conditions and the merger is completed, such holder will be entitled to
receive the cash payment for the shares as provided for in the merger agreement,
but such holder will have no appraisal rights with respect to the shares.
ALL DEMANDS FOR APPRAISAL SHOULD BE ADDRESSED TO THE SECRETARY OF HOUSEHOLD
AT HOUSEHOLD INTERNATIONAL, INC., 2700 SANDERS ROAD, PROSPECT HEIGHTS, ILLINOIS
60070, AND MUST BE DELIVERED BEFORE THE VOTE ON THE MERGER IS TAKEN AT THE
SPECIAL MEETING. ALL DEMANDS FOR APPRAISAL MUST BE EXECUTED BY, OR ON BEHALF OF,
THE RECORD HOLDER OF THE SHARES FOR WHICH APPRAISAL RIGHTS ARE BEING EXERCISED.
THE DEMAND MUST REASONABLY INFORM HOUSEHOLD OF THE IDENTITY OF THE HOLDER AND
THE INTENTION OF THE HOLDER TO DEMAND APPRAISAL OF HIS, HER OR ITS SHARES.
87
Within 10 days after the effective date of the merger, HSBC must give
written notice that the merger has become effective to each holder who has
properly filed a written demand for appraisal. At any time within 60 days after
the effective date, any holder who has demanded appraisal has the right to
withdraw the demand and to accept the cash payment specified by the merger
agreement for his or her shares. Within 120 days after the effective date,
either HSBC or any holder who has complied with the requirements of Section 262
may file a petition in the Delaware Court of Chancery demanding a determination
of the fair value of the shares held by all holders entitled to appraisal. HSBC
has no obligation or intention to file such a petition in the event there are
dissenting stockholders. Accordingly, the failure of a holder to file such a
petition within the period specified could nullify the holder's previously
written demand for appraisal.
If a petition for appraisal is duly filed by a holder and a copy of the
petition is delivered to HSBC, HSBC will then be obligated, within 20 days after
receiving service of a copy of the petition, to provide the Chancery Court with
a duly verified list containing the names and addresses of all holders who have
demanded an appraisal of their shares. After notice to dissenting holders, the
Chancery Court is empowered to conduct a hearing upon the petition, and to
determine those holders who have complied with Section 262 and who have become
entitled to the appraisal rights provided thereby. The Chancery Court may
require the holders who have demanded payment for their shares to submit their
stock certificates to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with that direction, the Chancery Court may dismiss the proceedings as to that
holder.
After determination of the holders entitled to appraisal of their shares,
the Chancery Court will appraise the shares, determining their fair value
exclusive of any element of value arising from the accomplishment or expectation
of the merger, together with a fair rate of interest. When the value is
determined, the Chancery Court will direct the payment of such value, with
interest thereon accrued during the pendency of the proceeding, if the Chancery
Court so determines, to the holders entitled to receive the same, upon surrender
by such holders of the certificates representing those shares.
In determining fair value, the Chancery Court is required to take into
account all relevant factors. A holder of Household non-voting preferred stock
should be aware that the fair value of such holder's shares as determined under
Section 262 could be more, the same, or less than the value that such holder is
entitled to receive under the terms of the merger agreement.
Costs of the appraisal proceeding may be imposed upon HSBC and the holders
participating in the appraisal proceeding by the Chancery Court as the Chancery
Court deems equitable in the circumstances. Upon the application of a holder,
the Chancery Court may order all or a portion of the expenses incurred by any
holder in connection with the appraisal proceeding, including, without
limitation, reasonable attorneys' fees and the fees and expenses of experts, to
be charged pro rata against the value of all shares entitled to appraisal. Any
holder who had demanded appraisal rights will not, after the effective date, be
entitled to vote shares subject to that demand for any purpose or to receive
payments of dividends or any other distribution with respect to those shares,
other than with respect to payment as of a record date prior to the effective
date. If no petition for appraisal is filed within 120 days after the effective
date of the merger, or if the holder delivers a written withdrawal of his or her
demand for appraisal and an acceptance of the merger within 60 days after the
effective date of the merger, then the right of that holder to appraisal will
cease and that holder will be entitled to receive the cash payment for shares of
his, her or its shares pursuant to the merger agreement. Any withdrawal of a
demand for appraisal made more than 60 days after the effective date of the
merger may only be made with the written approval of the surviving corporation.
However, no appraisal proceeding in the Chancery Court may be dismissed as to
any stockholder without the approval of the court.
IN VIEW OF THE COMPLEXITY OF SECTION 262, HOLDERS OF HOUSEHOLD NON-VOTING
PREFERRED STOCK THAT MAY WISH TO DISSENT FROM THE MERGER AND PURSUE APPRAISAL
RIGHTS SHOULD PROMPTLY CONSULT THEIR LEGAL ADVISORS.
88
MARKET PRICE AND DIVIDEND DATA
MARKET PRICES
HSBC
HSBC ordinary shares are traded and, following the merger, will continue to
be traded on the LSE under the symbol "HSBA", on the SEHK under the symbol "005"
and on Euronext Paris under the symbol "PHSB". HSBC ADSs, each representing an
ownership interest in five HSBC ordinary shares, are issued by the depositary
and are traded on the NYSE under the symbol "HBC."
The table below shows, for the periods indicated, the highest and lowest
closing mid-market quotations for one HSBC ordinary share on the LSE and the
highest and lowest closing sale prices of one HSBC ADS on the NYSE, in each case
for the periods presented.
<Table>
<Caption>
HSBC ORDINARY
SHARES HSBC ADSS
---------------- --------------
HIGH LOW HIGH LOW
------ ------ ----- -----
(L PER HSBC ($ PER
ORDINARY SHARE) HSBC ADS)
YEAR ENDED DECEMBER 31, 2001
First Quarter....................................... 10.92 7.77 79.7 56.4
Second Quarter...................................... 9.21 8.15 66.0 57.8
Third Quarter....................................... 8.52 6.08 61.9 44.8
Fourth Quarter...................................... 8.91 6.97 63.7 52.5
YEAR ENDED DECEMBER 31, 2002
First Quarter....................................... 8.45 7.67 61.6 54.9
Second Quarter...................................... 8.66 7.40 64.4 56.1
Third Quarter....................................... 7.70 6.44 59.6 51.5
Fourth Quarter...................................... 7.63 6.43 59.8 50.2
YEAR ENDING DECEMBER 31, 2003
First Quarter (through February 18, 2003)........... 7.09 6.26 57.3 52.1
</Table>
The closing mid-market quotation for one HSBC ordinary share on the LSE and
the closing sale price of one HSBC ADS on the NYSE, in each case on November 13,
2002, the last full trading day before the public announcement of the signing of
the merger agreement, were L7.07 per HSBC ordinary share and $56.05 per HSBC ADS
and on , 2003, the last full trading day for which information was
available prior to the printing of this document, were L per HSBC ordinary
share and $ per HSBC ADS.
89
HOUSEHOLD
Household common stock is traded on the NYSE under the symbol "HI." This
table shows the highest and lowest sale prices of one share of Household common
stock on the NYSE for the periods presented.
<Table>
<Caption>
HOUSEHOLD
COMMON STOCK
-------------
HIGH LOW
----- -----
($ PER SHARE)
YEAR ENDED DECEMBER 31, 2001
First Quarter............................................... 62.00 52.00
Second Quarter.............................................. 69.98 57.45
Third Quarter............................................... 69.49 48.00
Fourth Quarter.............................................. 61.40 51.29
YEAR ENDED DECEMBER 31, 2002
First Quarter............................................... 60.90 43.50
Second Quarter.............................................. 63.25 47.06
Third Quarter............................................... 50.84 26.10
Fourth Quarter.............................................. 32.00 20.00
YEAR ENDED DECEMBER 31, 2003
First Quarter (through February 18, 2003)................... 28.95 25.90
</Table>
The closing sale price of one share of Household common stock on the NYSE
on November 13, 2002, the last full trading day before the public announcement
of the signing of the merger agreement, was $22.46 and on , 2003,
the last full trading day for which information was available prior to the
printing of this document, was $ .
HOUSEHOLD STOCKHOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR
THE HSBC ORDINARY SHARES, HSBC ADSS AND HOUSEHOLD COMMON STOCK BEFORE MAKING A
DECISION WITH RESPECT TO THE MERGER.
DIVIDEND DATA
HSBC
The following table sets forth dividends announced and paid in respect of
HSBC ordinary shares for the periods indicated. Dividends have historically been
paid semi-annually, with the regular interim dividend with respect to the first
six months of HSBC's fiscal year payable in October to shareholders of a record
date in August and the regular final dividend (or second interim dividend in
lieu of the regular final dividend) with respect to the second six months of
HSBC's fiscal year payable in April or May of the following year to shareholders
of a record date in March of that following year. Please refer to "Description
of HSBC Ordinary Shares -- Dividends and Other Distributions" "Description of
HSBC American Depositary Shares -- Dividends and Other Distributions," and
"Material U.S. Federal Income Tax and U.K. Tax Consequences --
90
U.S. Federal Income Tax and U.K. Tax Consequences for U.S. Holders of HSBC
Ordinary Shares and HSBC ADSs."
<Table>
<Caption>
DIVIDENDS PER HSBC
ORDINARY SHARE(1)
------------------------------
FIRST SIX SECOND SIX
MONTHS MONTHS TOTAL
--------- ---------- -----
YEAR ENDED DECEMBER 31,
1997................................................ $.108 $.169 $.277
1998................................................ $.123 $.185 $.308
1999................................................ $.133 $.207 $.340
2000................................................ $.150 $.285 $.435
2001................................................ $.190 $.290 $.480
2002................................................ $.205
</Table>
- ---------------
(1) The share capital was re-organized in 1999 by the cancellation of the 75p
and H.K.$10 ordinary shares and the issue in substitution therefor of three
ordinary shares of U.S.$0.50 par value for each ordinary share. The
dividends per share for 1997 and 1998 have been restated accordingly.
Dividends for 1997 were declared in sterling and, at the shareholder's
election, paid in either sterling or Hong Kong dollars, or satisfied by the
issue of new shares in lieu of a cash dividend. In the table above sterling
dividends have been translated into U.S. dollars at the noon buying rates
in New York City for cable transfers in sterling as certified for customs
purposes by the Federal Reserve Bank of New York for the dates on which
dividends were paid.
Holders of HSBC ADSs have the right to receive dividends on the HSBC
ordinary shares represented by their HSBC ADSs. For additional information about
the rights of holders of HSBC ADSs to receive dividends, please refer to
"Description of HSBC American Depositary Shares."
HOUSEHOLD
The following table sets forth dividends declared and subsequently paid in
respect of Household common stock for the periods indicated.
<Table>
<Caption>
DIVIDENDS DECLARED PER SHARE OF
HOUSEHOLD COMMON STOCK
---------------------------------
QUARTER
-------------------------
1ST 2ND 3RD 4TH TOTAL
---- ---- ---- ---- -----
YEAR ENDED DECEMBER 31,
1997........................................... $.13 $.13 $.14 $.14 $.54
1998........................................... $.15 $.15 $.15 $.15 $.60
1999........................................... $.17 $.17 $.17 $.17 $.68
2000........................................... $.17 $.19 $.19 $.19 $.74
2001........................................... $.19 $.22 $.22 $.22 $.85
2002........................................... $.22 $.25 $.25 $.25 $.97
</Table>
91
BENEFICIAL OWNERSHIP OF HOUSEHOLD COMMON STOCK
BENEFICIAL OWNERSHIP OF DIRECTORS AND MANAGEMENT OF HOUSEHOLD
The following table lists the beneficial ownership, as of January 20, 2003,
of shares of Household common stock by each director and nominee for director,
and the executive officers of Household, individually and as a group.
"Beneficial ownership" includes shares for which an individual has direct or
indirect voting or investment power and includes any shares the individual has a
right to acquire within 60 days. No director or executive officer owns any
shares of Household preferred stock.
<Table>
<Caption>
NUMBER OF NUMBER OF
SHARES COMMON
BENEFICIALLY STOCK
NAME OF BENEFICIAL OWNER OWNED(1) EQUIVALENTS(2) TOTAL(3)
- ------------------------ ------------ -------------- ---------
William F. Aldinger.............................. 3,516,394 36,717 3,553,111
Robert J. Darnall................................ 63,347 14,634 77,981
Sandra L. Derickson.............................. 34,809 4,246 39,055
Gary G. Dillon................................... 121,442 14,165 135,607
Anthea Disney.................................... 10,170 1,165 11,335
John A. Edwardson................................ 63,092 10,418 73,510
J. Dudley Fishburn............................... 39,861 1,515 41,376
Cyrus F. Freidheim, Jr........................... 59,856 10,289 70,145
James H. Gilliam, Jr.(4)......................... 140,907 2,046 142,953
Kenneth M. Harvey................................ 170,306 5,022 175,328
Louis E. Levy.................................... 48,200 9,534 57,734
George A. Lorch.................................. 59,487 11,287 70,774
Siddharth N. Mehta............................... 701,864 27,068 728,932
John D. Nichols.................................. 236,019 21,991 258,010
James B. Pitblado................................ 73,027 3,243 76,270
Larree M. Renda.................................. 18,000 50 18,050
David A. Schoenholz.............................. 868,915 17,536 886,451
S. Jay Stewart................................... 60,370 8,052 68,422
--------- ------- ---------
Directors and Executive Officers as a Group...... 6,286,066 198,978 6,485,044
</Table>
- ---------------
(1) Directors and executive officers have sole voting and investment power over
shares listed above, except as follows. The number of shares of Household
common stock held by spouses or children in which beneficial ownership is
disclaimed is as follows: Mr. Nichols, 13,200; and directors and executive
officers as a group, 13,200. The number of shares of Household common stock
held by spouses, children and charitable or family foundations in which
voting and investment power is shared (or presumed to be shared) is as
follows: Mr. Aldinger, 136,500; Mr. Darnall, 2,000; Mr. Schoenholz, 25,238;
and directors and executive officers as a group, 163,738. The number of
shares of Household common stock held under Household's employee benefit
plans in which participants have voting rights and/or investment power is as
follows: Mr. Aldinger, 23,587; Ms. Derickson, 809; Mr. Harvey, 7,810; Mr.
Mehta, 2,812; Mr. Schoenholz, 22,919; and directors and executive officers
as a group, 57,937. The number of shares included in the table above which
may be acquired by Household's executive officers through March 21, 2003,
pursuant to the exercise of employee stock options is: Mr. Aldinger,
3,096,000, of which 631,250 vested options are held by Mr. Aldinger's family
partnership and 1,538,750 vested options are held by Mr. Aldinger's
revocable trust; Ms. Derickson, 32,500; Mr. Harvey, 136,750; Mr. Mehta,
652,000; Mr. Schoenholz, 713,900; and directors and executive officers as a
group, 5,175,386.
(2) Represents the number of Household common stock share equivalents owned by
executive officers under Household's Supplemental TRIP and Deferred
Compensation Plan and by directors under Household's
92
Deferred Fee Plan for Directors and the Deferred Phantom Stock Plan for
Directors. These share equivalents do not have voting rights, but are valued
according to the market price of the Household common stock. The share
equivalents accrue dividends at the same rate as the Household common stock.
(3) Based on 474,613,339 shares outstanding as of December 31, 2002, no director
or executive officer beneficially owns directly or indirectly more than 1%
of Household common stock and directors and executive officers as a group
beneficially own approximately 1.4% of the Household common stock.
Household's employees held 10,802,781 shares of Household common stock in
TRIP as of December 31, 2002, excluding the shares held by directors and
executive officers shown in the table. Household's Pooled Investment Fund
("PIF"), which holds assets of Household's domestic pension plan, held
1,112,546 shares of Household common stock as of December 31, 2002.
Together, TRIP and PIF held 2.5% of the Household common stock outstanding
on December 31, 2002.
(4) As trustee of The Hodson Trust and a director of the CTW Foundation, Mr.
Gilliam has shared voting and investment power over 680,005 shares of
Household common stock. Mr. Gilliam disclaims beneficial ownership of such
shares and, therefore, they are not included in the shares listed above.
BENEFICIAL OWNERSHIP OF HOUSEHOLD STOCKHOLDERS HOLDING MORE THAN 5% OF
HOUSEHOLD'S OUTSTANDING COMMON STOCK
The following table lists four owners who have advised Household that they
hold more than 5% of Household's common stock outstanding as of December 31,
2002.
<Table>
<Caption>
NUMBER OF SHARES OF
HOUSEHOLD COMMON STOCK PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
------------------------------------ ---------------------- --------
Capital Research and............................... 38,735,000(1) 8.2%
Management Company
333 South Hope Street
Los Angeles, CA 90071
Davis Selected Advisers, L.P. ..................... 27,565,640(2) 6.0%
2949 East Elvira Road, Suite 101
Tucson, AZ 85706
</Table>
- ---------------
(1) Capital Research and Management Company filed a Schedule 13G with the SEC
disclosing that, as of December 31, 2002, it had sole dispositive power over
38,735,000 shares of Household common stock for which beneficial ownership
is disclaimed, and no sole or shared voting power over shares of Household
common stock.
(2) Davis Selected Advisers, L.P., filed a Schedule 13G with the SEC disclosing
that, as of December 31, 2001, it had sole dispositive power and sole voting
power over 27,565,640 shares of Household common stock.
93
DESCRIPTION OF HSBC
HSBC is one of the largest banking and financial services organizations in
the world, with a market capitalization of U.S.$105 billion at December 31,
2002. At June 30, 2002, HSBC had total assets of U.S.$746 billion and
shareholders' funds of U.S.$51 billion. For the year ended December 31, 2001,
HSBC's pre-tax profit was U.S.$8 billion on operating income of U.S.$26 billion.
HSBC is a strongly capitalized banking group with a total capital ratio of 13.0%
and a tier 1 capital ratio of 9.0% as of December 31, 2001.
Headquartered in London, HSBC operates through long-established businesses
in Europe; Hong Kong SAR; the rest of Asia-Pacific, including the Middle East
and Africa; North America; and Latin America. Within each of these geographical
regions, the principal businesses operate essentially as domestic banks and
typically have a large retail deposit base, together with strong liquidity and
capital ratios, and provide services to personal, commercial and large corporate
and institutional customers. By using HSBC's highly efficient technological
links, businesses are able to access HSBC's wide range of products and services
and adapt them to local customer needs. In addition, in some key
locations -- London, Hong Kong SAR, New York, Geneva, Paris and
Dusseldorf -- HSBC has significant investment and private banking operations
which, together with its commercial banks, enable HSBC to service the full range
of requirements of its high net worth personal and large corporate and
institutional customers.
Through its international network of some 8,000 offices in 80 countries and
territories, HSBC provides a comprehensive range of financial services: personal
financial services; commercial banking; corporate investment banking and
markets; private banking; and other activities. As part of its strategy, HSBC
created an international brand in 1998, using HSBC and its hexagon symbol in
most of its areas of operation.
HSBC's largest and best-known subsidiaries and their primary areas of
operation are:
<Table>
- The Hongkong and Shanghai Banking Hong Kong SAR, with an extensive network
Corporation Limited throughout Asia-Pacific
- Hang Seng Bank Limited Hong Kong SAR
- HSBC Bank plc United Kingdom
- CCF S.A., previously known as Credit France
Commercial de France S.A.
- HSBC Bank USA New York State in the United States
- HSBC Bank Brasil S.A.-Banco Multiplo Brazil
- HSBC Private Banking Holdings (Suisse) Switzerland, Luxembourg, Guernsey and
S.A. Monaco (through various subsidiaries)
</Table>
You can obtain additional information regarding HSBC and its business and
financial condition in the documents described under "Where You Can Find More
Information."
94
DESCRIPTION OF HOUSEHOLD
Household was created in 1981 as a result of a shareholder approved
restructuring of Household Finance Corporation ("HFC"), which was established in
1878. Household is a non-operating holding company. Household's subsidiaries
primarily provide middle-market consumers with several types of loan products in
the United States, Canada and the United Kingdom. Household, through its
subsidiaries (including Beneficial Corporation, which was acquired in 1998),
offers real estate secured loans, auto finance loans, MasterCard and VISA credit
cards, private label credit cards, tax refund anticipation loans, retail
installment sales financing loans and other types of unsecured loans, as well as
credit and specialty insurance products. At September 30, 2002, Household had
approximately 32,000 employees and over 50 million active consumer accounts.
As a non-operating holding company, Household's primary source of funds is
cash received from its subsidiaries, principally in the form of dividends.
Dividend distributions to Household from its banking and insurance subsidiaries
may be restricted by foreign, federal and state laws and regulations. Dividend
distributions from foreign subsidiaries may also be restricted by exchange
controls of the country in which the subsidiary is located. Also, as a holding
company, the rights of any of Household's creditors or stockholders to
participate in the assets of any subsidiary upon its liquidation or
recapitalization will be subject to the prior claims of the subsidiary's
creditors, except in cases where Household is a creditor with recognized claims
against the subsidiary. Nevertheless, there are no restrictions that currently
materially limit Household's ability to make payments to its creditors or to pay
dividends on its preferred stock or common stock at current levels. Also, there
are no restrictions which Household reasonably believes are likely to materially
limit future payments to its creditors or dividends.
You can obtain additional information regarding Household and its business
and financial condition in the documents described under "Where You Can Find
More Information."
95
DESCRIPTION OF H2 ACQUISITION CORPORATION
H2 Acquisition Corporation is a wholly owned subsidiary of HSBC organized
under the laws of Delaware. It was incorporated in November 2002 solely for use
in the merger and is engaged in no other business.
96
HSBC AND HOUSEHOLD
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
INTRODUCTION
HSBC has reached an agreement to acquire Household in accordance with the
terms of a merger agreement entered into on November 14, 2002 between HSBC, H2
(a wholly owned subsidiary of HSBC) and Household. Under the terms of the merger
agreement, Household will be merged with and into H2. Following the acquisition,
H2 will remain a wholly owned subsidiary of HSBC but will be renamed Household
International, Inc.
Holders of Household common stock will be entitled to receive, at their
election for each share of Household common stock, 2.675 HSBC ordinary shares or
0.535 HSBC ADSs, each HSBC ADS representing 5 HSBC ordinary shares. All the
outstanding Household non-voting preferred stock will be converted into a right
to receive from HSBC cash in the aggregate amount of approximately U.S.$1,100
million, together with accrued but unpaid dividends. In addition, all the
outstanding Household voting preferred stock will be designated for redemption
effective prior to the merger and Household will deposit the applicable
redemption price in trust for the holders of these shares under the terms of the
instruments governing their shares.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
HSBC and Household are providing the following unaudited pro forma
condensed combined financial information and explanatory notes, which we refer
to as the pro forma financial information, to illustrate the impact of the
merger on the companies' historical financial positions and results of
operations under the acquisition method of accounting.
The pro forma financial information for the year ended December 31, 2001
and as of and for the six months ended June 30, 2002 is presented on a U.K. GAAP
basis and combines the following:
- HSBC's historical financial information for the year ended December 31,
2001 (as restated following implementation of U.K. Financial Reporting
Standard (FRS) 19 "Deferred Tax") and as of and for the six months ended
June 30, 2002.
- Household's historical financial information on a U.S. GAAP basis for the
year ended December 31, 2001 and as of and for the six months ended June
30, 2002, adjusted to conform with HSBC's accounting policies under U.K.
GAAP.
- Adjustments to give effect to capital security transactions of Household
subsequent to June 30, 2002.
- Pro forma adjustments related to acquisition accounting utilizing the
respective fair values of Household's assets and liabilities as of June
30, 2002.
The unaudited pro forma consolidated combined balance sheet as of June 30,
2002 assumes the merger was consummated on that date. The unaudited pro forma
condensed combined statements of income for the six months ended June 30, 2002
and for the year ended December 31, 2001 give effect to the merger as if the
merger had been consummated on January 1, 2001, the first day of the earliest
financial period presented.
The pro forma financial information is based on, and derived from, and
should be read in conjunction with, the historical consolidated financial
statements and related notes of HSBC and Household, incorporated by reference in
this document. Please refer to "Where You Can Find More Information".
The pro forma financial information is presented for illustrative purposes
only and is not necessarily indicative of what the operating results or the
financial position of the combined company would have been had the merger
occurred on the respective dates assumed and is not necessarily indicative of
future operating results or financial position of the combined company.
97
ACQUISITION ACCOUNTING
HSBC intends to account for the merger using acquisition accounting under
U.K. GAAP. Under this method of accounting, the assets and liabilities of
Household will be recorded, as of the completion date of the merger, at their
respective fair values and added to those of HSBC. Financial statements and
reported results of operations of HSBC issued after consummation of the merger
will reflect these values, but prior HSBC financial statements will not be
restated retroactively to reflect the historical financial position or results
of operations of Household.
All pro forma financial information contained in this document has been
prepared using the acquisition method to account for the merger. Under U.K.
GAAP, the final determination of the purchase price is based on the price of
HSBC ordinary shares as of the date the merger is completed. In addition, the
final allocation of the purchase price will be determined after completion of a
thorough analysis to determine the fair values of Household's assets and
liabilities. Accordingly, the final acquisition accounting adjustments and
goodwill may be materially different from those reflected in the pro forma
information presented in this document.
98
HSBC AND HOUSEHOLD
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2002
<Table>
<Caption>
ACQUISITION PRO FORMA
ACCOUNTING ENLARGED
HSBC HOUSEHOLD ADJUSTMENTS HSBC GROUP
--------- --------------------------------------- ----------- ----------
U.K. GAAP U.S. GAAP ADJUSTMENTS U.K. GAAP U.K. GAAP U.K. GAAP
--------- ----------- ----------- --------- ----------- ----------
$M $M $M $M
(NOTE 1) (NOTES 1,4) (NOTE 5) $M (NOTES 3,6) $M
Interest income............... $14,229 $ 5,155 $1,754(a,c,i) $ 6,909 $(254) $20,884
Interest expense.............. (6,636) (1,920) (342)(c) (2,262) 251 (8,647)
------- ------- ------ ------- ----- -------
NET INTEREST INCOME........... 7,593 3,235 1,412 4,647 (3) 12,237
Other operating income........ 5,510 1,989 (718)(b,c) 1,271 6 6,787
------- ------- ------ ------- ----- -------
OPERATING INCOME.............. 13,103 5,224 694 5,918 3 19,024
Operating expenses excluding
goodwill.................... (7,146) (1,858) (167)(a,h) (2,025) 32 (9,139)
Goodwill amortization......... (396) -- (180)(f,g) (180) (33) (609)
------- ------- ------ ------- ----- -------
OPERATING PROFIT BEFORE
PROVISIONS.................. 5,561 3,366 347 3,713 2 9,276
Provisions for bad and
doubtful debts and
contingencies............... (718) (1,864) (734)(c,i) (2,598) -- (3,316)
Loss from foreign currency
redenomination in
Argentina................... (45) -- -- -- -- (45)
Amounts written off fixed
asset investments........... (139) -- -- -- -- (139)
------- ------- ------ ------- ----- -------
OPERATING PROFIT.............. 4,659 1,502 (387) 1,115 2 5,776
Share of operating profits
less losses of associates
and joint ventures.......... 48 -- -- -- -- 48
Gains on disposal of
investments and fixed
assets...................... 350 -- -- -- -- 350
------- ------- ------ ------- ----- -------
PROFIT ON ORDINARY ACTIVITIES
BEFORE TAX.................. 5,057 1,502 (387) 1,115 2 6,174
Tax on profit on ordinary
activities.................. (1,315) (504) 83(j) (421) (8) (1,744)
------- ------- ------ ------- ----- -------
PROFIT ON ORDINARY ACTIVITIES
AFTER TAX................... 3,742 998 (304) 694 (6) 4,430
Minority interests............ (462) -- -- -- -- (462)
------- ------- ------ ------- ----- -------
PROFIT ATTRIBUTABLE TO
SHAREHOLDERS................ $ 3,280 $ 998 $ (304) $ 694 $ (6) $ 3,968
======= ======= ====== ======= ===== =======
PER ORDINARY SHARE
- - Basic earnings.............. $ 0.35 $ 2.13 $ 1.49 $ 0.38
- - Diluted earnings............ 0.35 2.11 1.47 0.37
======= ======= ======= =======
Average number of ordinary
shares in issue (in
millions)................... 9,298 457 450 10,564
Average number of ordinary
shares in issue assuming
dilution (in millions)...... 9,404 462 455 10,691
======= ======= ======= =======
</Table>
The Notes to the Unaudited Pro Forma Condensed Combined Financial Information
are an integral part of this Statement.
99
HSBC AND HOUSEHOLD
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2001
<Table>
<Caption>
ACQUISITION PRO FORMA
ACCOUNTING ENLARGED
HSBC HOUSEHOLD ADJUSTMENTS HSBC GROUP
--------- ---------------------------------------- ----------- ----------
U.K. GAAP U.S. GAAP ADJUSTMENTS U.K. GAAP U.K. GAAP U.K. GAAP
--------- ----------- ----------- --------- ----------- ----------
$M $M $M $M
(NOTE 1) (NOTES 1,4) (NOTE 5) $M (NOTES 3,6) $M
Interest income.............. $ 35,261 $ 9,999 $ 3,317(a,c,i) $13,316 $(861) $ 47,716
Interest expense............. (20,536) (4,174) (1,039)(c) (5,213) 710 (25,039)
-------- ------- ------- ------- ----- --------
NET INTEREST INCOME.......... 14,725 5,825 2,278 8,103 (151) 22,677
Other operating income....... 11,163 3,479 (1,125)(b,c) 2,354 11 13,528
-------- ------- ------- ------- ----- --------
OPERATING INCOME............. 25,888 9,304 1,153 10,457 (140) 36,205
Operating expenses excluding
goodwill................... (14,605) (3,390) (315)(a,h) (3,705) 99 (18,211)
Goodwill amortization........ (799) (59) (300)(f,g) (359) (66) (1,224)
-------- ------- ------- ------- ----- --------
OPERATING PROFIT BEFORE
PROVISIONS................. 10,484 5,855 538 6,393 (107) 16,770
Provisions for bad and
doubtful debts and
contingencies.............. (2,686) (3,036) (1,162)(c,i) (4,198) -- (6,884)
Loss from foreign currency
redenomination in
Argentina.................. (520) -- -- -- -- (520)
Amounts written off fixed
asset investments.......... (125) -- -- -- -- (125)
-------- ------- ------- ------- ----- --------
OPERATING PROFIT............. 7,153 2,819 (624) 2,195 (107) 9,241
Share of operating profits
less losses of associates
and joint ventures......... 73 -- -- -- -- 73
Gains on disposal of
investments and fixed
assets..................... 774 -- -- -- -- 774
-------- ------- ------- ------- ----- --------
PROFIT ON ORDINARY ACTIVITIES
BEFORE TAX................. 8,000 2,819 (624) 2,195 (107) 10,088
Tax on profit on ordinary
activities................. (1,988) (971) 143(j) (828) (21) (2,837)
-------- ------- ------- ------- ----- --------
PROFIT ON ORDINARY ACTIVITIES
AFTER TAX.................. 6,012 1,848 (481) 1,367 (128) 7,251
Minority interests........... (1,020) -- -- -- -- (1,020)
-------- ------- ------- ------- ----- --------
PROFIT ATTRIBUTABLE TO
SHAREHOLDERS............... $ 4,992 $ 1,848 $ (481) $ 1,367 $(128) $ 6,231
======== ======= ======= ======= ===== ========
PER ORDINARY SHARE
- - Basic earnings............. $ 0.54 $ 3.97 $ 2.94 $ 0.59
- - Diluted earnings........... 0.53 3.91 2.91 0.59
======== ======= ======= ========
Average number of ordinary
shares in issue (in
millions).................. 9,237 462 459 10,503
Average number of ordinary
shares in issue assuming
dilution (in millions)..... 9,336 468 465 10,625
======== ======= ======= ========
</Table>
The Notes to the Unaudited Pro Forma Condensed Combined Financial Information
are an integral part of this Statement.
100
HSBC AND HOUSEHOLD
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS AT JUNE 30, 2002
<Table>
<Caption>
ACQUISITION PRO FORMA
HSBC HOUSEHOLD SUBSEQUENT ACCOUNTING ENLARGED
-------- ------------------------------------------------ ADJUSTMENTS ADJUSTMENTS HSBC GROUP
U.K. U.S. U.K. ----------- ----------- ----------
GAAP GAAP ADJUSTMENTS GAAP U.K. GAAP U.K. GAAP U.K. GAAP
-------- ----------- ----------- -------- ----------- ----------- ----------
$M $M $M $M $M
(NOTE 1) (NOTES 1,4) (NOTE 5) $M (NOTE 2) (NOTES 3,6) $M
ASSETS
Cash and short-term
assets.................. $ 30,710 $ 639 $ -- $ 639 $(114) $(1,440) $ 29,795
Hong Kong SAR Government
certificates of
indebtedness............ 8,986 -- -- -- -- -- 8,986
Loans and advances to
banks................... 100,965 244 -- 244 -- -- 101,209
Loans and advances to
customers............... 342,057 81,641 19,239(a,c,i) 100,880 -- 2,060 444,997
Debt securities and equity
shares.................. 181,502 5,640 --(e) 5,640 -- -- 187,142
Interests in joint
ventures, associates and
participating
interests............... 1,233 -- -- -- -- -- 1,233
Intangible fixed assets... 15,111 1,541 4,634(f,g) 6,175 -- 2,332 23,618
Tangible fixed assets..... 13,988 550 (33)(h) 517 -- -- 14,505
Other assets.............. 51,783 7,429 151(b,c,e,i,j) 7,580 -- 141 59,504
-------- ------- ------- -------- ----- ------- --------
Total assets.............. $746,335 $97,684 $23,991 $121,675 $(114) $ 3,093 $870,989
======== ======= ======= ======== ===== ======= ========
LIABILITIES
Hong Kong SAR currency
notes in circulation.... $ 8,986 $ -- $ -- $ -- $ -- $ -- $ 8,986
Deposits by banks......... 61,455 684 -- 684 -- -- 62,139
Customer accounts......... 470,778 5,612 (20)(b) 5,592 -- 300 476,670
Debt securities in
issue................... 28,683 76,184 20,494(b,c) 96,678 (781) 1,420 126,000
Other liabilities......... 102,934 4,725 (97)(a,b,c,d, 4,628 -- 718 108,280
e,f,h,i)
Subordinated
liabilities............. 15,716 975 -- 975 -- 30 16,721
Minority interests........ 6,605 -- -- -- -- -- 6,605
Ordinary share capital.... 4,725 457 (7)(d) 450 23 160 5,358
Preference share
capital................. -- 843 -- 843 236 (1,079) --
Reserves.................. 46,453 8,204 3,621 11,825 408 1,544 60,230
-------- ------- ------- -------- ----- ------- --------
Shareholders' funds....... 51,178 9,504 3,614 13,118 667 625 65,588
-------- ------- ------- -------- ----- ------- --------
Total liabilities......... $746,335 $97,684 $23,991 $121,675 $(114) $ 3,093 $870,989
======== ======= ======= ======== ===== ======= ========
</Table>
The Notes to the Unaudited Pro Forma Condensed Combined Financial Information
are an integral part of this Statement.
101
HSBC AND HOUSEHOLD
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
NOTE 1 -- BASIS OF PRESENTATION
The pro forma financial information for the year ended December 31, 2001
and as of and for the six months ended June 30, 2002 is presented on a U.K. GAAP
basis and combines the following:
- HSBC's historical financial information for the year ended December 31,
2001 (as restated following implementation of U.K. Financial Reporting
Standard (FRS) 19 "Deferred Tax") and as of and for the six months ended
June 30, 2002.
- Household's historical financial information on a U.S. GAAP basis for the
year ended December 31, 2001 and as of and for the six months ended June
30, 2002, adjusted to conform with HSBC's accounting policies under U.K.
GAAP as described in Notes 4 and 5.
- Adjustments to give effect to capital security transactions of Household
subsequent to June 30, 2002 as described in Note 2.
- Pro forma adjustments related to acquisition accounting utilizing the
respective fair values of Household's assets and liabilities as of June
30, 2002 as described in Notes 3 and 6.
The unaudited pro forma condensed combined balance sheet as of June 30,
2002 assumes the merger was consummated on that date. The unaudited pro forma
condensed combined statements of income for the six months ended June 30, 2002
and for the year ended December 31, 2001 give effect to the merger as if the
merger had been consummated on January 1, 2001, the first day of the earliest
financial period presented.
The pro forma financial information includes estimated costs and
adjustments to record assets and liabilities of Household at their respective
fair values. The pro forma costs and adjustments represent HSBC management's
best estimate based on available information at this time. They are subject to
updates as variables change, additional information becomes available and
additional analyses are performed. For the purpose of the pro forma financial
information, the purchase price has been based on the closing mid-market price
of an HSBC ordinary share on the London Stock Exchange on November 13, 2002, the
last day prior to the public announcement of the signing of the merger
agreement. Under U.K. GAAP, the final determination of the purchase price is
based upon the price of HSBC ordinary shares as of the date the merger is
completed. In addition, the final allocation of the purchase price will be
determined after completion of a thorough analysis to determine the fair values
of Household's assets and liabilities. Accordingly, the final acquisition
accounting adjustments and goodwill may be materially different from those
reflected in the pro forma financial information presented herein.
Additionally, changes to Household's shareholders' funds including net
income from July 1, 2002 through to the date the merger is completed will also
affect the amount of goodwill recorded as the pro forma financial information
does not include net income for any period subsequent to June 30, 2002 nor does
it reflect two significant items announced subsequent to June 30, 2002. These
items comprise:
(i) the $525 million pre-tax charge recorded by Household in the third
quarter of 2002 related to Household's agreement in principle with a
multi-state working group of state attorneys general and regulatory
agencies to effect a nationwide resolution of alleged violations of federal
and state consumer protection, consumer finance and banking laws and
regulations related to real estate secured lending from its retail branch
consumer lending operations as operated under the HFC and Beneficial brand
names; and
(ii) the impact of Household's announcement on October 11, 2002 that
it had determined that the continued operation of Household Bank, f.s.b.
was not in Household's long-term strategic interest. During the fourth
quarter of 2002, Household completed the sale of substantially all of the
remaining assets and deposits of Household Bank, f.s.b. A loss of $240
million (after tax) was recorded on the disposition of these assets and
deposits. However, the fair value of Household Bank, f.s.b.'s assets and
liabilities as of June 30, 2002 is reflected in the acquisition accounting
adjustments in the unaudited pro forma condensed combined balance sheet as
of June 30, 2002.
102
HSBC AND HOUSEHOLD
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION -- (CONTINUED)
HSBC and Household entered into the merger agreement with the expectation
that the merger would result in significant funding benefits, cost and revenue
synergies and cost savings in the areas of information technology,
administrative support and consolidating of card processing. The pro forma
financial information does not include any impact of the expected benefits and
synergies and there can be no assurance that the combined group will realize
these anticipated benefits in full or at all.
The pro forma financial information is presented for illustrative purposes
only and is not necessarily indicative of the operating results that would have
occurred or financial position if the merger had been consummated during the
period or as of the date for which the pro forma financial information is
presented, nor is it necessarily indicative of future operating results or the
financial position of the combined group.
NOTE 2 -- SUBSEQUENT ADJUSTMENTS
The pro forma financial information includes adjustments for capital
security transactions occurring subsequent to June 30, 2002 that impact the
purchase price. The following table reconciles common stock outstanding and
shareholders' funds derived from Household's unaudited historical financial
statements to the amounts included in the pro forma financial information prior
to the acquisition accounting adjustments.
<Table>
<Caption>
TOTAL
COMMON STOCK SHAREHOLDERS'
OUTSTANDING FUNDS
------------ -------------
$M
Household U.S. GAAP -- June 30, 2002........................ 456,624,866 $ 9,504
U.K. GAAP adjustments:
Forward purchase agreements recorded as a liability under
U.K. GAAP (Note 5)..................................... (6,133,490) (341)
Beneficial merger using acquisition accounting (as opposed
to the pooling of interests method under U.S. GAAP)
(Note 5)............................................... 5,443
All other adjustments (Note 5)............................ -- (1,488)
----------- -------
Subtotal after U.K. GAAP adjustments........................ 450,491,376 13,118
Subsequent equity issues:
September 2002 preferred stock offering................... -- 350
October 2002 common stock offering........................ 18,700,000 400
October 2002 Adjustable Conversion-Rate Equity Security
Units offering (21,663,000 units of which $1.45 per
unit was allocated to shareholders' funds)............. -- 31
Merger related transactions:
Restricted stock rights which fully vest upon completion
of the merger.......................................... 4,077,074 --
Preferred stock to be redeemed by Household prior to
merger (5%, $4.30 and $4.50 cumulative issuances)...... -- (114)
----------- -------
Household shareholders' funds............................... 473,268,450 $13,785
=========== =======
Of which preferred stock to be purchased by HSBC............ $ 1,079
=======
</Table>
NOTE 3 -- PURCHASE PRICE COMPUTATION AND ALLOCATION
The computation of the purchase price on a U.K. GAAP basis included in the
pro forma financial information is based on the following:
- Value of HSBC ordinary shares to be issued in exchange for 473,268,450
shares of Household common stock (as explained in Note 2) based on the
closing mid-market price of an HSBC ordinary share on the London Stock
Exchange on November 13, 2002, the last day prior to the public
announcement of
103
HSBC AND HOUSEHOLD
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION -- (CONTINUED)
the signing of the merger agreement, and the exchange ratio of 2.675 HSBC
ordinary shares for each share of Household common stock.
- Fair value as of June 30, 2002 of options outstanding at that date to
purchase shares of Household common stock granted to Household employees
and directors under Household's option plans. When HSBC and Household
complete the merger, all Household options will vest (except for options
granted in November 2002) and will be assumed by HSBC and become options
to purchase HSBC ordinary shares. The number of shares subject to these
options and the exercise price of the options will be adjusted to reflect
the exchange ratio.
- Fair value of the conversion obligations of the 8.875% Adjustable
Conversion-Rate Equity Security Units issued in October 2002. When HSBC
and Household complete the merger, the obligation of the holders of
Adjustable Conversion-Rate Equity Security Units to purchase shares of
Household common stock will become obligations to purchase HSBC ordinary
shares. The number of shares subject to these obligations and price at
which they are to be issued will be adjusted to reflect the exchange
ratio.
- Cash consideration to be paid by HSBC to the holders of Household
non-voting preferred stock.
- Acquisition costs to be paid by HSBC estimated at $265 million. Of this
amount, $213 million relates to U.K. stamp duty or stamp duty reserve
tax, the calculation of which assumes all holders of Household common
stock elect to receive HSBC ADSs rather than HSBC ordinary shares.
No account has been taken in the determination of the purchase price for
the purpose of the pro forma financial information of the value of the HSBC 2002
second interim dividend to which economic benefit the holders of Household
common stock are entitled under the merger agreement. HSBC expects to declare
the amount of the 2002 second interim dividend in March 2003 and pay it in May
2003.
In allocating the purchase price to the tangible assets and liabilities of
Household, adjustments have been made to:
- eliminate Household's existing goodwill and intangibles under U.K. GAAP
as of June 30, 2002, which relate primarily to the acquisition of
Beneficial in 1998 (see Note 5); and
- reflect the respective fair values of the tangible assets and liabilities
of Household as at June 30, 2002.
The fair value adjustments relate primarily to the valuation of Household's
financial assets and liabilities (including derivatives) considering market
rates as of June 30, 2002. The fair value adjustments also include amounts
relating to change in control payments and the provision for bad and doubtful
debts as follows:
- Of the amount payable under 10 employment agreements which will come into
effect on the completion of the merger, HSBC has estimated that an amount
of approximately $45 million would have been payable under employment
arrangements existing prior to November 13, 2002 and this amount has been
included as a fair value adjustment. HSBC intends to record a charge, in
addition, of $55 million in connection with such agreements immediately
after completion of the merger.
- HSBC's policies on loan loss provisioning on consumer assets are in
principle the same as those of Household, seeking to maintain, on a
prudent and consistent basis, amounts sufficient to cover probable losses
of principal, interest and fees based on analyses of trends in
contractual delinquency and historical loss experience. HSBC intends,
following the merger and subject to receipt of regulatory and other
approvals, to hold Household's private label credit card receivables
within HSBC's U.S. banking subsidiary. As a result, HSBC anticipates
regulatory accounting charge-off guidelines issued by the Federal
Financial Institutions Examination Council, or FFIEC, will need to be
applied to these receivables following completion of the merger.
Implementation of such guidelines will result in private label credit
card receivables being charged-off at 6 months contractually delinquent
versus the current
104
HSBC AND HOUSEHOLD
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION -- (CONTINUED)
Household practice of being charged-off at 9 months contractually
delinquent. HSBC's plans for ultimate collection on these receivables
will therefore be demonstrably different from those of Household due to
the shorter charge-off period. As a result, the fair value adjustments
include an adjustment to the provision for bad and doubtful debts for
these private label credit card receivables of approximately $200 million
to reflect the expected impact of the implementation of the FFIEC
guidelines.
The initial computation of the purchase price, the allocation of the
purchase price to the net tangible assets of Household based on fair values
estimated at June 30, 2002, and the resulting amount of goodwill under U.K. GAAP
are presented below.
<Table>
<Caption>
$M
-------
Purchase price:
Value of HSBC ordinary shares to be issued.................. $14,217
Fair value of outstanding Household stock options........... 140
Fair value of equity portion of Adjustable Conversion-Rate
Equity Security Units..................................... 53
Cash consideration to be paid by HSBC for cumulative
preferred stock........................................... 1,100
Acquisition costs payable by HSBC........................... 265
-------
Total purchase price........................................ 15,775
Less:
Net tangible assets and liabilities acquired under U.K.
GAAP
Household shareholders' funds.......................... $13,785
Less: Household existing intangibles including goodwill
under U.K. GAAP....................................... (6,175)
-------
Book value of net tangible assets and liabilities
acquired......................................... 7,610
-------
Less:
Fair value adjustments:
- to increase assets......................... 2,201
- to increase liabilities.................... (2,488)
-------
(287)
-------
Fair value of net tangible assets and liabilities
acquired.............................................. (7,323)
Acquisition costs payable by Household................. 55
-------
Goodwill under U.K. GAAP.................................... $ 8,507
=======
</Table>
Under U.K. GAAP there are no separately identifiable intangible assets
acquired.
NOTE 4 -- RECLASSIFICATIONS TO CONFORM HOUSEHOLD HISTORICAL FINANCIAL
INFORMATION TO HSBC PRESENTATION UNDER U.K. GAAP
Reclassifications have been made to the Household historical financial
information presented under U.S. GAAP to conform to HSBC's presentation under
U.K. GAAP. None of these reclassification adjustments has an impact on net
income or common shareholders' equity.
NOTE 5 -- U.K. GAAP ADJUSTMENTS TO HISTORICAL HOUSEHOLD STATEMENTS OF INCOME AND
BALANCE SHEET
Household prepares its consolidated financial statements in accordance with
U.S. GAAP. For purposes of preparing the pro forma financial information,
Household's historical consolidated financial statements have
105
HSBC AND HOUSEHOLD
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION -- (CONTINUED)
been adjusted to conform with HSBC's accounting policies under U.K. GAAP by
giving effect to the adjustments described below.
a. Deferred Origination Expenses
Under U.S. GAAP, some direct loan origination costs are deferred and
recognized over the life of the related loans as a reduction in the loans'
yield. Under U.K. GAAP, HSBC applies a more restricted definition of the
directly incurred origination expenses which are deferred and subsequently
amortized over the life of the loans and classified as operating expenses. The
impact of aligning with HSBC's accounting policies is to reduce the amount of
origination costs deferred on the balance sheet, to reduce correspondingly the
amortization cost from deferred origination costs, and to increase operating
expenses.
b. Derivative Financial Instruments
Under U.S. GAAP, all derivatives are recognized on the balance sheet at
their fair value. Derivatives are designated either as a fair value hedge, a
cash flow hedge, a hedge of a net investment in a foreign operation or a
non-hedging derivative. Changes in the fair value of derivatives designated as
fair value hedges, along with the change in fair value of the hedged asset or
liability that is attributable to the hedged risk, are recorded in current
period earnings. Changes in the fair value of derivatives designated as cash
flow hedges, to the extent effective as a hedge, are recorded in accumulated
other comprehensive income and reclassified into earnings in the period during
which the hedged item affects earnings. Changes in the fair value of derivatives
used to hedge net investment in foreign operations, to the extent effective as a
hedge, are recorded in common shareholders' equity as a component of the
cumulative translation adjustment account within accumulated other comprehensive
income. Changes in the fair value of derivative instruments not designated as
hedging instruments and ineffective portions of changes in the fair value of
hedging instruments are recognized in earnings in the period of change in fair
value.
Under U.K. GAAP, non-trading derivatives, including qualifying interest
rate swaps, are accounted for on an equivalent basis to the underlying assets,
liabilities or net positions. Any profit or loss arising is recognized on the
same basis as that arising from the related assets, liabilities or positions.
For purposes of the presentation of Household's U.K. GAAP financial
information, all adjustments to measure non-trading derivatives at fair value
have been reversed.
c. Receivables Sold and Serviced with Limited Recourse and Securitization
Revenue
Some receivables have been securitized and sold to investors with limited
recourse with servicing rights retained by Household. Under U.S. GAAP, the
receivables are removed from the balance sheet and a gain on sale is recognized
for the difference between the carrying value of the receivables and the sales
proceeds. The resulting gain is adjusted by a provision for estimated probable
losses under the recourse provisions based on historical experience and
estimates of expected future performance.
In connection with these transactions, an interest-only strip receivable,
representing the contractual right to receive interest and other cash flows from
Household's securitization trusts, is recorded. The interest-only strip
receivables are reported at fair value with unrealized gains and losses recorded
as adjustments to common shareholders' funds in accumulated other comprehensive
income, net of income taxes.
Under U.K. GAAP, the Household securitizations are treated as financing
transactions. The securitized receivables are treated as owned by Household and
consequently are included on Household's balance sheet. Any gains recorded under
U.S. GAAP on these transactions and fair value adjustments to the interest-only
strip receivables are reversed. For some securitization transactions, the
receivables and associated debt are reported under U.K. GAAP under a "linked
presentation" format where the debt is non-recourse and is repayable only from
benefits generated by the assets being financed or by transfer of the assets
themselves. In
106
HSBC AND HOUSEHOLD
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION -- (CONTINUED)
a linked presentation, the non-recourse debt is shown deducted from the related
gross receivables on the face of the balance sheet.
d. Forward Purchase Agreements
Under U.S. GAAP, the agreements Household has entered into to purchase, on
a forward basis, shares of its common stock have been treated as equity
instruments. Under U.K. GAAP, the fair value of such agreements has been
recorded as a liability and deducted from shareholders' funds.
e. Investment Securities
Under U.S. GAAP, available-for-sale securities are measured at fair value
with unrealized gains and losses excluded from earnings and reported net of
applicable taxes within accumulated other comprehensive income.
Under U.K. GAAP, debt securities and equity shares intended to be held on a
continuing basis are disclosed as investment securities and are included in the
balance sheet at cost less provision for any permanent diminution in value.
All of Household's available-for-sale securities are classified under U.K.
GAAP as investment securities. Accordingly, in the pro forma presentation, all
such securities have been recorded at cost and the equity adjustment for
unrealized gains and losses has been reversed.
f. Goodwill
Under U.S. GAAP, amortization of goodwill recorded in past business
combinations ceased on January 1, 2002. Prior to that time, goodwill was
amortized over its estimated useful life. Under U.K. GAAP, for acquisitions
prior to 1998, goodwill was charged against reserves in the year of acquisition.
For acquisitions made since January 1, 1998, goodwill is included in the balance
sheet and amortized over its useful economic life on a straight-line basis.
In the pro forma presentation, for acquisitions prior to 1998, goodwill
arising has been eliminated in other reserves and related goodwill amortization
prior to 2002 has been reversed. For post-1998 acquisitions, amortization has
been included in the December 31, 2001 and June 30, 2002 income statements.
g. Household's Merger with Beneficial Corporation
On June 30, 1998, Household merged with Beneficial Corporation, or
Beneficial, a consumer finance company headquartered in Wilmington, Delaware.
Each outstanding share of Beneficial common stock was converted into 3.066
shares of Household's common stock, resulting in the issuance of approximately
168.4 million shares of Household common stock to the former Beneficial
stockholders. In addition, each share of Beneficial's convertible preferred
stock was converted into Household common stock and each share of Beneficial's
other preferred stock was converted into newly created Household preferred stock
with terms substantially similar to those of the previously existing Beneficial
preferred stock. Under U.S. GAAP, the merger was accounted for as a pooling of
interests, and, as such, the consolidated financial statements of Household
include the financial position, results of operations and changes in cash flows
of Beneficial for all periods presented.
Under U.K. GAAP, the merger of Household and Beneficial has been accounted
for using acquisition accounting and, as such, the assets and liabilities of
Beneficial at June 30, 1998 would have been recorded at their respective fair
values and added to the assets and liabilities of Household. Such fair value
adjustments would not have been significant. The excess of the purchase price
over the net tangible assets of Beneficial has been recorded as goodwill and
reflected in the Household U.K. GAAP balance sheet at June 30, 2002. The
107
HSBC AND HOUSEHOLD
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION -- (CONTINUED)
amortization of this goodwill over a 20-year estimated life has been reflected
in the Household U.K. GAAP income statements for the year ended December 31,
2001 and for the six months ended June 30, 2002.
h. Costs of Software for Internal Use
Under U.S. GAAP, costs incurred in the application development stage of the
development of software are capitalized and amortized over the estimated useful
life of the software. Under U.K. GAAP, HSBC generally expenses costs of software
developed for internal use. In the pro forma presentation, any software costs
capitalized under U.S. GAAP have been expensed in the period incurred and the
resulting amortization has been eliminated.
i. Interest Suspension
Household and HSBC suspend interest income on real estate secured, personal
non-credit card and commercial loans when principal or interest payments are
more than three months contractually past due. However, HSBC also reverses any
interest income previously recognized in the period. In the pro forma
presentation, all accrued interest on the above products more than three months
contractually past due has been reversed together with any loss reserves
allocated to that accrued interest.
j. Income Taxes
Where appropriate, the adjustments from U.S. GAAP to U.K. GAAP on the
statements of income of Household have been tax effected assuming an effective
tax rate of 36.5%.
Under U.S. GAAP, tax credits on share compensation expense are not recorded
in arriving at net income, but instead are recorded as part of shareholders'
equity. Under U.K. GAAP, such credits form part of the profit for the year.
Adjustments made to the statement of income under each item described above
to conform Household's U.S. GAAP consolidated financial statements with HSBC's
accounting policies under U.K. GAAP are as follows:
<Table>
<Caption>
FOR THE YEAR FOR THE SIX MONTHS
ENDED ENDED
DECEMBER 31, 2001 JUNE 30, 2002
----------------- ------------------
$M $M
INTEREST INCOME
(a) Deferred origination expenses................... $ 203 $ 111
(c) Receivables sold and serviced with limited
recourse and securitization revenue............ 3,133 1,650
(i) Interest suspension............................. (19) (7)
------- ------
3,317 1,754
------- ------
INTEREST EXPENSE
(c) Receivables sold and serviced with limited
recourse and securitization revenue............ (1,039) (342)
------- ------
(1,039) (342)
------- ------
OTHER OPERATING INCOME
(b) Derivative financial instruments................ (1) 3
(c) Receivables sold and serviced with limited
recourse and securitization revenue............ (1,124) (721)
------- ------
(1,125) (718)
------- ------
</Table>
108
HSBC AND HOUSEHOLD
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION -- (CONTINUED)
<Table>
<Caption>
FOR THE YEAR FOR THE SIX MONTHS
ENDED ENDED
DECEMBER 31, 2001 JUNE 30, 2002
----------------- ------------------
$M $M
OPERATING EXPENSES EXCLUDING GOODWILL
(a) Deferred origination expenses.................... (308) (151)
(h) Costs of software for internal use............... (7) (16)
------- ------
(315) (167)
------- ------
GOODWILL AMORTIZATION
(f) Goodwill........................................ 40 (10)
(g) Household's merger with Beneficial............... (340) (170)
------- ------
(300) (180)
------- ------
PROVISIONS FOR BAD AND DOUBTFUL DEBTS AND
CONTINGENCIES
(c) Receivables sold and serviced with limited
recourse and securitization revenue.............. (1,174) (739)
(i) Interest suspension.............................. 12 5
------- ------
(1,162) (734)
------- ------
TAX ON PROFIT ON ORDINARY ACTIVITIES
(j) Tax effect of adjustments........................ 107 76
(j) Tax credit on share compensation expense......... 36 7
------- ------
143 83
------- ------
Total adjustments.................................... $ (481) $ (304)
======= ======
</Table>
109
HSBC AND HOUSEHOLD
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION -- (CONTINUED)
Adjustments made to the balance sheet under each item described above to
conform Household's U.S. GAAP consolidated financial statements with HSBC's
accounting policies under U.K. GAAP are as follows:
<Table>
<Caption>
AS AT
JUNE 30, 2002
-----------------
$M
-------
LOANS AND ADVANCES TO CUSTOMERS
(a) Deferred origination expenses................................. $ (386)
(c) Receivables sold and serviced with limited recourse and
securitization revenue........................................ 19,537
(i) Interest suspension........................................ 88
-------
19,239
=======
DEBT SECURITIES AND EQUITY SHARES
(e) Investment securities....................................... --
-------
--
=======
INTANGIBLE FIXED ASSETS
(f) Goodwill.................................................... (809)
(g) Household's merger with Beneficial.......................... 5,443
-------
4,634
=======
TANGIBLE FIXED ASSETS
(h) Costs of software for internal use.......................... (33)
-------
(33)
-------
OTHER ASSETS
(b) Derivative financial instruments............................ (535)
(c) Receivables sold and serviced with limited recourse and
securitization revenue....................................... 44
(e) Investment securities....................................... 8
(i) Interest suspension........................................ (135)
(j) Income taxes............................................... 769
-------
151
-------
CUSTOMER ACCOUNTS
(b) Derivative financial instruments............................ (20)
-------
(20)
-------
DEBT SECURITIES IN ISSUE
(b) Derivative financial instruments............................ (945)
(c) Receivables sold and serviced with limited recourse and
securitization revenue...................................... 21,439
-------
20,494
-------
OTHER LIABILITIES
Tax effect of adjustments to:
(a) Deferred origination expenses............................... (141)
(b) Derivative financial instruments............................ 299
Receivables sold and serviced with limited recourse and
(c) securitization revenue...................................... (678)
(e) Investment securities....................................... 3
(f) Goodwill.................................................... (222)
(h) Costs of software for internal use.......................... (12)
(i) Interest suspension......................................... (18)
</Table>
110
HSBC AND HOUSEHOLD
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION -- (CONTINUED)
<Table>
<Caption>
AS AT
JUNE 30, 2002
-----------------
$M
-------
(b) Derivative financial instruments............................ (438)
(d) Forward purchase agreements................................. 341
(j) Income taxes................................................ 769
-------
(97)
TOTAL ADJUSTMENT TO SHAREHOLDERS' FUNDS........................... 3,614
=======
ORDINARY SHARE CAPITAL
(d) Forward purchase agreements................................. $ (7)
RESERVES
(a) Deferred origination expenses............................... $ (245)
(b) Derivative financial instruments............................ 569
Receivables sold and serviced with limited recourse and
(c) securitization revenue...................................... (1,180)
(e) Investment securities....................................... 5
(f) Goodwill.................................................... (587)
(h) Costs of software for internal use.......................... (21)
(i) Interest suspension......................................... (29)
-------
Other Adjustments (Note 2)........................................ (1,488)
Forward purchase agreements recorded as a liability under U.K.
GAAP............................................................ (334)
Beneficial merger using acquisition accounting (Note 2)........... 5,443
-------
3,621
-------
TOTAL ADJUSTMENTS TO SHAREHOLDERS' FUNDS.......................... $ 3,614
=======
</Table>
NOTE 6 -- ACQUISITION ACCOUNTING ADJUSTMENTS TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED STATEMENTS OF INCOME AND BALANCE SHEET
The unaudited pro forma balance sheet as at June 30, 2002 includes pro
forma merger adjustments related to the computation of the purchase price and
allocation of the purchase price to the tangible assets and liabilities of
Household under U.K. GAAP as described in Note 3.
Acquisition accounting adjustments are summarized as follows:
<Table>
<Caption>
FOR THE FOR THE
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 2001 JUNE 30, 2002
----------------- ----------------
$M $M
INTEREST INCOME
Amortization of fair value adjustment to receivables...... $(813) $(244)
Reduction of interest receivable from debt securities..... (48) (10)
----- -----
(861) (254)
----- -----
</Table>
111
HSBC AND HOUSEHOLD
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION -- (CONTINUED)
<Table>
<Caption>
FOR THE FOR THE
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 2001 JUNE 30, 2002
----------------- ----------------
$M $M
INTEREST EXPENSE
Amortization of fair value adjustments relating to:
Derivatives............................................ 190 30
Deposits............................................... 142 52
Senior debt............................................ 377 168
Subordinated liabilities............................... 1 1
----- -----
710 251
----- -----
OTHER OPERATING INCOME
Amortization of fair value adjustments to insurance
reserve and investment securities...................... 11 6
OPERATING EXPENSES EXCLUDING GOODWILL
Reversal of current year amortization of intangibles...... 99 32
GOODWILL AMORTIZATION
Amortization of goodwill.................................. (66) (33)
TAX ON PROFIT ON ORDINARY ACTIVITIES
Tax effect of reversing amortization of fair value
adjustments............................................ (21) (8)
----- -----
$(128) $ (6)
===== =====
</Table>
<Table>
<Caption>
AS AT JUNE 30, 2002
------------------------------------
$M $M
CASH AND SHORT-TERM ASSETS
Redemption cost of preference shares...................... $(1,100)
Acquisition expenses...................................... (295)
Parachute payment......................................... (45)
-------
$(1,440)
LOANS AND ADVANCES TO CUSTOMERS
Fair value adjustment (including provision of $200
million)............................................... 2,060
INTANGIBLE FIXED ASSETS
Goodwill on acquisition................................... 8,507
Pre-acquisition goodwill and existing intangible fixed
assets................................................. (6,175)
-------
2,332
OTHER ASSETS
Fair value adjustment to derivatives receivable........... 535
Fair value adjustment to pensions......................... (387)
Fair value adjustment to insurance investments............ (7)
-------
141
</Table>
112
HSBC AND HOUSEHOLD
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION -- (CONTINUED)
<Table>
<Caption>
AS AT JUNE 30, 2002
------------------------------------
$M $M
CUSTOMER ACCOUNTS
Fair value adjustment..................................... (300)
DEBT SECURITIES IN ISSUE
Fair value adjustment..................................... (1,420)
OTHER LIABILITIES
Fair value adjustment to derivatives liability............ (455)
Fair value adjustment to other liabilities................ (175)
Fair value adjustment to periodic payment annuity......... (270)
Taxation.................................................. 207
Acquisition expenses...................................... (25)
-------
(718)
SUBORDINATED LIABILITIES
Fair value adjustment..................................... (30)
-------
TOTAL ADJUSTMENT TO SHAREHOLDERS' FUNDS..................... $ 625
=======
</Table>
The unaudited pro forma income statements for the six months ended June 30,
2002 and for the year ended December 31, 2001 include amortization of the
goodwill and fair value adjustments determined as of June 30, 2002. HSBC
proposes to amortize the goodwill arising on the merger over a period of 20
years. Under U.K. GAAP, the fair value adjustments to tangible assets and
liabilities are amortized over the remaining lives of the relevant assets and
liabilities.
In addition, the unaudited pro forma condensed combined income statements
for the six months ended June 30, 2002 and for the year ended December 31, 2001
are adjusted to:
- exclude the amortization of Household's existing goodwill and intangible
assets under U.K. GAAP including goodwill relating to Beneficial as
described in Note 5; and
- exclude the dividends payable on the preferred stock of Household which
is redeemable on completion of the merger and reduce pro forma interest
income on the cash consideration payable by Household and HSBC on such
redemption.
NOTE 7 -- SIGNIFICANT DIFFERENCES BETWEEN U.K. GAAP AND U.S. GAAP
The pro forma financial information has been prepared in accordance with
U.K. GAAP, which differs in some respects from U.S. GAAP.
A detailed explanation of the significant differences relating to HSBC and
the reconciliation of HSBC's net income and shareholders' equity between U.K.
GAAP and U.S. GAAP are contained in HSBC's annual report on Form 20-F/A for the
year ended December 31, 2001 and report on Form 6-K, dated August 5, 2002,
containing interim financial information for the six months ended June 30, 2002,
incorporated herein by reference. A detailed explanation of the significant
differences relating to the reconciliation of Household's net income and
shareholders' equity between U.K. GAAP and U.S. GAAP is set forth in Note 5.
The explanations of all these differences are summarized following the
tables below.
113
HSBC AND HOUSEHOLD
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION -- (CONTINUED)
NOTE 8 -- ESTIMATED PRO FORMA COMBINED NET INCOME AND SHAREHOLDERS' EQUITY ON A
U.S. GAAP BASIS
The following table summarizes the material adjustments which reconcile the
unaudited pro forma combined net income under U.K. GAAP and U.S. GAAP:
<Table>
<Caption>
FOR THE SIX
FOR THE YEAR ENDED MONTHS ENDED
DECEMBER 31, 2001 JUNE 30, 2002
------------------ -----------------
$M $M $M $M
NET INCOME
Profit attributable to shareholders of enlarged HSBC
Group
(U.K. GAAP)........................................... $6,231 $ 3,968
Adjustments to U.K. GAAP financial statements:
(a) Lease financing................................... $ (40) $ (35)
(b) Debt swaps........................................ 4 --
(c) Shareholders' interest in long-term assurance
fund.............................................. (152) (60)
(d) Pension costs..................................... (26) (104)
(e) Stock-based compensation.......................... (359) (151)
(f) Goodwill.......................................... (549) 409
(g) Internal software costs........................... 271 96
(h) Revaluation of property........................... 49 30
(i) Acquisition accounting adjustments relating to
previous acquisitions........................... 291 129
(j) Accruals accounted derivatives.................... 281 (408)
(k) Permanent diminution in value of
available-for-sale securities..................... -- (51)
(l) Foreign exchange differences on available-for-sale
securities...................................... 312 (1,744)
(m) Foreign exchange losses on Argentine funding...... -- (450)
(n) Deferred origination expenses..................... 104 40
(o) Interest suspension............................... 6 2
(p) Securitizations................................... 203 152
(q) Taxation: U.S. GAAP............................... 152 (10)
on reconciling items......................... (212) 543
(60) 533
(r) Minority interest in reconciling items............ 36 77
----- -------
371 (1,535)
(s) Acquisition accounting adjustments relating to the
merger............................................ (231) (125)
------ -------
Estimated pro forma combined net income on a U.S. GAAP
basis................................................. $6,371 $ 2,308
====== =======
</Table>
114
HSBC AND HOUSEHOLD
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION -- (CONTINUED)
The following table summarizes the material adjustments which reconcile the
unaudited pro forma combined shareholders' equity under U.K. GAAP and U.S. GAAP:
<Table>
<Caption>
AT
JUNE 30, 2002
-----------------
$M $M
SHAREHOLDERS' EQUITY
Shareholders' funds (U.K. GAAP)............................. $65,588
Adjustments to U.K. GAAP financial statements:
(a) Lease financing....................................... $ (353)
(c) Shareholders' interest in long-term assurance fund.... (897)
(d) Pension costs......................................... (1,335)
(f) Goodwill.............................................. 3,070
(g) Internal software costs............................... 704
(h) Revaluation of property............................... (2,700)
(i) Acquisition accounting adjustments relating to
previous acquisitions................................. (5,332)
(j) Accruals accounted derivatives........................ (832)
(k) Fair value adjustment for available-for-sale
securities............................................ 1,211
(t) Own shares held....................................... (226)
(u) Dividend payable...................................... 1,929
(n) Deferred origination expenses......................... 387
(o) Interest suspension................................... 46
(p) Securitizations....................................... 1,855
(q) Taxation: U.S. GAAP................................... 133
on reconciling items.............................. (490)
(357)
(r) Minority interest in reconciling items................ 342
-------
(2,488)
(s) Acquisition accounting adjustments relating to the
merger................................................ 3,798
-------
Estimated pro forma combined shareholders' equity on a U.S.
GAAP basis................................................ $66,898
=======
</Table>
The following summarizes the reasons for the significant differences
between U.K. GAAP and U.S. GAAP as applicable to the net income and shareholders
equity of the enlarged HSBC Group in the Pro Forma Condensed Combined Financial
Information.
(a) Lease financing
Under U.K. GAAP, finance lease income is recognized so as to give a
constant rate of return on the net cash investment in the lease, taking into
account tax payments and receipts associated with the lease.
Under U.S. GAAP, unearned income on finance leases is taken to income at a
rate calculated to give a constant rate of return on the investment in the
lease, but no account is taken of the tax flows generated by the lease.
(b) Debt swaps
Under U.K. GAAP, assets acquired in exchange for other advances in order to
achieve an orderly realization are reported as advances. The assets acquired are
recorded at the carrying value of the advances
115
HSBC AND HOUSEHOLD
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION -- (CONTINUED)
disposed of at the date of the exchange, with any provision having been duly
updated. Any subsequent deterioration in their value will be recorded as an
additional provision.
Under U.S. GAAP, debt securities and equity shares acquired in exchange for
advances in order to achieve an orderly realization are required to be accounted
at their fair value, usually their secondary market value, at the date of
exchange. Certain of these debt swaps qualify as securities and accordingly are
classified as available-for-sale.
(c) Shareholders' interest in long-term assurance fund
Under U.K. GAAP, the shareholders' interest in the in-force life assurance
and fund policies of the long-term assurance funds are valued at the net present
value of the profits inherent in such policies. This value includes a prudent
valuation of the discounted future earnings expected to emerge from business
currently in force, taking into account factors such as recent experience and
general economic conditions, together with the surplus retained in the long-term
assurance funds. These are determined annually in consultation with independent
actuaries and are included in 'Other assets'.
Under U.S. GAAP, the net present value of these profits is not recognized.
An adjustment is made to amortize acquisition costs and fees in accordance with
SFAS 97 'Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments'.
(d) Pension costs
Under U.K. GAAP, pension costs, based on actuarial assumptions and methods,
are charged so as to allocate the cost of providing benefits over the average
remaining service lives of employees.
U.S. GAAP prescribes a similar method of actuarial valuation but requires
assets to be assessed at fair value and the assessment of liabilities to be
based on current settlement rates. Certain variations from regular cost are
allocated in equal amounts over the average remaining service lives of current
employees.
(e) Stock-based compensation
In HSBC, executive share options are granted at fair value, and employees
are granted shares at a 20 per cent discount to the fair value at the date of
grant under HSBC's Save-As-You-Earn schemes. In neither case, under U.K. GAAP,
are compensation costs recognized for such awards. For longer term and other
restricted share award schemes, the fair value of the shares awarded is charged
to compensation cost over the period in respect of which performance conditions
apply. To the extent the award is adjusted by virtue of performance conditions
being met or not, the compensation cost is adjusted in line with this.
Under U.S. GAAP, SFAS 123 "Employers' Accounting for Pensions" encourages a
fair value based method of accounting for stock-based compensation plans which
has been adopted. Under the fair value method, compensation cost is measured at
date of grant based on the value of the award and is recognized over the service
period, which is usually the vesting period.
(f) Goodwill
Under U.K. GAAP, for acquisitions prior to 1998, goodwill arising on the
acquisition of subsidiary undertakings, associates or joint ventures was charged
against reserves in the year of acquisition.
In 1998, HSBC adopted FRS 10. For acquisitions made on or after January 1,
1998, goodwill is included in the balance sheet on a straight-line basis. FRS 10
allows goodwill previously eliminated against reserves to be reinstated, but
does not require it. In common with many other U.K. companies, HSBC elected not
to reinstate such goodwill. HSBC considered whether reinstatement would
materially assist the understanding of readers of its accounts who were already
familiar with U.K. GAAP and decided that it would not.
116
HSBC AND HOUSEHOLD
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION -- (CONTINUED)
Goodwill included in the balance sheet is tested for impairment when
necessary by comparing the recoverable amount of an entity with the carrying
value of its net assets, including attributable goodwill. The recoverable amount
of an entity is the higher of its value in use, generally the present value of
the expected cash flows from the entity, and its net realizable value.
At the date of disposal of subsidiary undertakings, associates or joint
ventures, any unamortized goodwill or goodwill charged directly against
reserves, is included in HSBC's share of total net assets of the undertaking in
the calculation of the profit on disposal of the undertaking.
Under U.S. GAAP, goodwill acquired up to June 30, 2001 is capitalized and
amortized over its estimated useful life but not more than 25 years. Under the
transition requirements of SFAS 142 "Goodwill and Other Intangible Assets",
goodwill acquired after June 30, 2001 is capitalized but not amortized, and is
subject to annual impairment testing as required under APB 17 "Intangible
Assets". All goodwill ceased to be amortized from December 31, 2001.
U.S. GAAP requires the recoverability of goodwill to be assessed whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Impairment of goodwill relating to an entity is
recognized if the sum of the estimated future cashflows (undiscounted and
without interest charges) expected to be generated by that entity is less than
its carrying amount. If impairment is assessed to exist, the amount recognized
is the amount by which the carrying amount of the entity exceeds its fair value.
(g) Internal software costs
Under U.K. GAAP, costs of software developed for internal use are generally
expensed as they are incurred.
Under U.S. GAAP, costs incurred in the application development stage of
internal software must be capitalized and amortized over its estimated useful
life.
(h) Revaluation of property
Under U.K. GAAP, HSBC values its properties on an annual basis and
adjustments arising from such revaluations are taken to reserves. HSBC
depreciates non-investment properties based on cost or the revalued amounts. No
depreciation is charged on investment properties other than leaseholds with 20
years or less to expiry.
U.S. GAAP does not permit revaluations of property although it requires
recognition of asset impairment. Any realised surplus or deficit is therefore
reflected in income on disposal of the property. Depreciation is charged on all
properties based on cost.
(i) Acquisition accounting adjustments relating to previous acquisitions
Under U.K. GAAP, certain costs which relate to either post-acquisition
management decisions or decisions prior to the acquisition are required to be
expensed to the profit and loss account and cannot be capitalized as goodwill,
as may be required by U.S. GAAP.
In addition, under U.K. GAAP, the Beneficial merger, as explained in Note
5(g) to Unaudited Pro Forma Condensed Combined Financial Information, would have
been accounted for using acquisition accounting whereas it was accounted for
under U.S. GAAP as a pooling of interests.
(j) Accruals accounted derivatives
Under U.K. GAAP, internal derivatives used to hedge banking book
transactions may be accruals accounted but under U.S. GAAP, all derivatives are
held at fair value. With the exception of certain subsidiaries in North America,
HSBC has not elected to satisfy the more prescriptive documentation
117
HSBC AND HOUSEHOLD
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION -- (CONTINUED)
requirements of SFAS 133 "Accounting for Derivatives Instruments and Hedging
Instruments" in respect of derivative contracts.
(k) Available-for-sale securities
Under U.K. GAAP, investment securities are included in the balance sheet at
cost less provision for any permanent diminution in value.
Under U.S. GAAP, available-for-sale securities are included in the balance
sheet at fair value and where an available-for-sale security experiences an
other than temporary decline in fair value below cost, this decline is treated
as realised and included in earnings.
(l) Foreign exchange differences on available-for-sale securities
Under U.K. GAAP, investment securities denominated in currencies other than
the functional currency of the entity concerned are included at cost less
provisions for permanent diminution translated at the year end rate. Foreign
exchange differences arising from this translation are recorded in the profit
and loss account.
Under U.S. GAAP, those investment securities categorised as
available-for-sale are held at fair value with any valuation differences
(including those attributable to foreign exchange movements) being recorded as
"Other Comprehensive Income".
(m) Foreign exchange losses on Argentine funding
Following pesification, HSBC Argentina's balance sheet primarily reflected
Argentine peso assets more than fully funded by Argentine peso liabilities. In
addition, HSBC Argentina had residual external U.S. dollar liabilities which
essentially represented a portion of the loss recognized in 2001. Under U.K.
GAAP, these U.S. dollar liabilities are treated as a separate operation with the
U.S. dollar as the unit of account, as they are no longer funding the ongoing
business.
Under U.S. GAAP, this accounting treatment is not possible and the U.S.
dollar liabilities are treated as part of the Argentine operation which accounts
in Argentine pesos. As a result, as the Argentine peso has weakened, the U.S.
dollar denominated liabilities generate a substantial loss in Argentine pesos
which is reflected in U.S. GAAP income. However, as the pro forma financial
information is prepared in U.S. dollars and economically there is no change in
the amount of U.S. dollars owing an exactly offsetting gain is reflected in the
U.S. GAAP accounts in reserves.
(n) Deferred origination expenses
This reverses the adjustment made to Household's U.S. GAAP numbers to
conform to HSBC's U.K. GAAP accounting policies. (See note 5a)
(o) Interest suspension
This reverses the adjustment made to Household's U.S. GAAP numbers to
conform to HSBC's U.K. GAAP accounting policies. (See note 5i).
(p) Securitizations
This reverses the adjustment made to Household's U.S. GAAP numbers to
conform to HSBC's U.K. GAAP accounting policies. (See note 5c).
(q) Taxation
Under U.K. GAAP, deferred tax is generally provided in the accounts for all
timing differences, subject to the recoverability of deferred tax assets.
118
HSBC AND HOUSEHOLD
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION -- (CONTINUED)
Under U.S. GAAP, deferred tax assets and liabilities are recognized in
respect of all temporary differences. A valuation allowance is raised against
any deferred tax asset where it is more likely than not that the asset, or a
part thereof, will not be realized.
In addition, where appropriate, the adjustments from U.K. GAAP to U.S. GAAP
on net income and shareholders' equity have been tax effected at the relevant
effective tax rate.
(r) Minority interest in reconciling items
This reflects the appropriate share of adjustments attributable to minority
interests.
(s) Acquisition accounting adjustments relating to the merger
The acquisition accounting adjustments under U.K. and U.S. GAAP relating to
the merger are different primarily due to the recognition under U.K. GAAP of
goodwill relating to the acquisition of Beneficial. In addition, the fair value
adjustments are different as the book values of Household's tangible assets and
liabilities are different under U.K. GAAP and U.S. GAAP.
(t) Own shares held
U.K. GAAP allows for the inclusion of own shares held within equity shares.
AICPA Accounting Research Bulletin 51 "Consolidated Financial Statements"
requires a reduction in shareholders' equity for own shares held.
(u) Dividend payable
Under U.K. GAAP, dividends declared after the period end are recorded in
the period to which they relate.
Under U.S. GAAP, dividends are recorded in the period in which they are
declared.
119
DESCRIPTION OF HSBC ORDINARY SHARES
The following information is a summary of the material terms of the HSBC
ordinary shares of nominal value U.S.$0.50 each, as set out in HSBC's Memorandum
and Articles of Association and relevant provisions of the U.K. Companies Act
1985, as amended, which we refer to in this document as the Companies Act.
Holders of Household common stock are encouraged to read the full HSBC
Memorandum and Articles of Association which were filed as an exhibit to HSBC's
Registration Statement on Form F-3/A (no. 333-92024) and are incorporated into
this document by reference.
GENERAL
The authorized share capital of HSBC consists of 15,000,000,000 ordinary
shares of nominal value U.S.$0.50 each, 301,500 non-voting deferred shares of
nominal value L1 each, 10,000,000 euro preference shares of nominal value E0.0l
each, 10,000,000 dollar preference shares of nominal value U.S.$0.01 each and
10,000,000 sterling preference shares of nominal value L0.01 each.
HSBC maintains two share registers, a principal share register in London
and an overseas branch share register in Hong Kong SAR.
VOTING
Unless otherwise required by the Companies Act or the HSBC Memorandum and
Articles of Association, shareholders vote by ordinary resolution (such as for
the election of directors, the declaration of a dividend, the appointment of
auditors, an increase of authorized share capital or the grant of authority to
allot shares) at general meetings.
Subject to the restrictions referred to under "-- Restrictions on Voting"
and any special voting rights or restrictions attached to any class of shares,
ordinary resolutions will be decided on a show of hands by a simple majority of
shareholders present and voting at the meeting where each shareholder has one
vote, regardless of the number of shares held, unless a poll is demanded. On a
poll, every holder who is present in person or by proxy and entitled to vote
shall have one vote for each HSBC ordinary share held. Holders of record of HSBC
ordinary shares may appoint a proxy to attend and vote on their behalf.
The chairman of the meeting has the casting vote in the event of a tie in
either a show of hands or poll vote, in addition to any other vote he may have.
HSBC will send out written notice at least 21 days before an annual general
meeting or an extraordinary general meeting convened to consider a special
resolution, and at least 14 days before all other extraordinary general
meetings. For general meetings to be valid, at least three shareholders entitled
to vote must be present in person or by proxy.
A corporate shareholder may appoint a representative to attend and vote at
a general meeting on its behalf.
DISCLOSURE OF INTERESTS IN SHARES
Section 212 of the Companies Act gives HSBC the power to require persons
whom it believes to be, or to have been within the previous three years,
interested in its voting shares, to disclose prescribed particulars of those
interests. Failure to supply the information required may lead to
disenfranchisement of the relevant shares and, where those shares represent at
least 0.25% of the HSBC ordinary shares in issue, a prohibition on their
transfer and receipt of dividends and other payments in respect of those shares.
In this context, the term "interest" is broadly defined and will generally
include an interest of any kind whatsoever in voting shares, including the
interest of a holder of an HSBC ADS.
A similar power is given to HSBC by the Securities (Disclosure of
Interests) Ordinance which applies to companies listed on the SEHK.
120
RESTRICTIONS ON VOTING
Any shareholder (or any other person appearing to be interested in the
shares) who has been served with a notice under section 212 of the Companies
Act, as described above, and has not given HSBC any information required by the
notice within 14 days from receiving the notice, will not be entitled to be
present or to vote either personally or by proxy at a general meeting unless the
directors determine that this restriction should not apply.
A shareholder can vote (whether in person or by proxy) and exercise other
rights or privileges as a shareholder only if he has paid all calls or other
amounts presently due.
DIVIDENDS AND OTHER DISTRIBUTIONS
HSBC may, by ordinary resolution, declare dividends, but it may not pay
dividends in excess of the amount recommended by the directors. Except as
otherwise provided by the terms of issue or special rights of any shares,
dividends are declared and paid pro rata according to the amounts paid on the
HSBC ordinary shares during any portion or portions of the period in respect of
which the dividends are paid. The board of directors of HSBC may declare and pay
interim dividends. Dividends declared but not yet paid do not bear interest. The
board may deduct from any dividend declared but not yet paid to any person any
amounts due from that person to HSBC on account of calls or otherwise in
relation to the HSBC ordinary shares. The directors may, if authorized by an
ordinary resolution, offer shareholders the right to elect to receive HSBC
ordinary shares instead of cash for the whole or any part of any dividend. The
board can forfeit a shareholder's right to a dividend that remains unclaimed for
12 years. Dividends with respect to HSBC ADSs issued by The Bank of New York (in
its capacity as depositary) will be paid in U.S. dollars or invested in
additional HSBC ADSs for participants in the dividend reinvestment plan operated
by the depositary.
LIQUIDATION
If HSBC is wound up, after payment of all liabilities and the deduction of
any provision made under section 719 of the Companies Act or section 187 of the
Insolvency Act 1986 (which enables the liquidator to make payments to employees
or former employees on the cessation or transfer of HSBC's business), the
remaining assets available for distribution to holders of the HSBC ordinary
shares will be distributed among the shareholders in proportion to the number of
shares that they hold. On the date of the distribution, the amount paid to any
shareholder whose shares are not fully paid up will be reduced to reflect the
amount owed. After receiving approval of the shareholders by an extraordinary
resolution and meeting any legal requirements, the liquidator may divide the
assets in kind among the shareholders in the manner that it sees fit.
UNTRACED SHAREHOLDERS
HSBC can sell any HSBC ordinary shares (including any further shares issued
in respect of those HSBC ordinary shares) if the holder has not cashed any
cheque, order or warrant payable and HSBC has not received any communication in
respect of the HSBC ordinary shares from the relevant shareholder (or other
person entitled to the HSBC ordinary shares) for a period of 12 years during
which at least three dividends were payable with respect to the HSBC ordinary
shares. HSBC must advertise its intention to sell the HSBC ordinary shares in
newspapers published in the United Kingdom and in Hong Kong SAR (in the manner
specified in HSBC's Memorandum and Articles of Association) and inform the stock
exchanges on which HSBC ordinary shares and HSBC ADSs are listed and traded.
HSBC may then sell the HSBC ordinary shares if it does not receive any
response from the shareholder within three months of publishing the
advertisements. After selling the HSBC ordinary shares, HSBC will owe the former
shareholder (or other person previously entitled to the HSBC ordinary shares)
only the sale amount, without interest.
121
TRANSFER OF SHARES
HSBC ordinary shares may be transferred by an instrument in any usual form
or in any other form acceptable to the directors. The directors may refuse to
register a transfer:
(1) if it is of HSBC ordinary shares which are not fully paid (unless
to do so would prevent dealing in the HSBC ordinary shares taking place on
an open and proper basis);
(2) if it is not stamped (if required);
(3) if it is not duly presented for registration together with the
share certificate and other evidence of title as the directors reasonably
require;
(4) if it is in respect of more than one class of shares or shares
denominated in different currencies;
(5) if it is in favor of more than four persons jointly;
(6) if HSBC has a lien on the shares; or
(7) in some circumstances, if the holder has failed to provide the
required particulars as described under "-- Disclosure of Interests in
Shares."
The transferor will remain the holder of the shares concerned until the
name of the transferee is entered in the share register in respect of the
transfer.
If the board refuses to register a transfer of a share it must inform the
transferee of its refusal within two months of receiving the transfer request.
The board must return the refused instrument of transfer to the person
depositing it, except in the case of suspected fraud.
The registration of transfers may be suspended at any time and for any
periods as the directors may determine, although these suspensions may not
exceed 30 days in any year.
Unless expressly provided by HSBC's Memorandum and Articles of Association
or required by law or court order, HSBC cannot recognize any person other than
the registered holder of a share as the owner of such share.
UNCERTIFICATED SHARES
HSBC ordinary shares may be held in uncertificated form. HSBC may refuse to
register a transfer of uncertificated shares only in limited circumstances, such
as where prohibited by court order. Please refer to "-- Disclosure of Interests
in Shares" and "-- Restrictions on Voting."
VARIATION OF CLASS RIGHTS AND ALTERATION OF SHARE CAPITAL
Subject to the provisions of the Companies Act, the consent in writing of
the holders of at least three-quarters in nominal value of the issued shares in
a class, or the sanction by the shareholders of that class of an extraordinary
resolution passed at a separate general meeting, is required to vary or abrogate
the rights of the class, unless otherwise provided by the terms of issue of the
shares of that class. Two persons holding or representing by proxy at least
one-third of the nominal amount of the shares of the relevant class must be
present for the separate general meeting to be valid. The issuance of new shares
ranking in priority to or pari passu with an existing class of shares is not
considered to be a "variation" in the rights of already existing shares, unless
the existing shares provide so expressly.
HSBC may also vary or abrogate rights attached to the HSBC ordinary shares
by a special resolution without the separate consent or sanction of the holders
of any class of HSBC ordinary shares so long as the rights attached to all the
HSBC ordinary shares are varied or abrogated in the same manner and to the same
extent.
HSBC may issue shares with rights or restrictions as it sees fit, including
redeemable shares, so long as it does so in accordance with the Companies Act
and HSBC's Memorandum and Articles of Association and without reducing any
rights attached to any existing shares.
122
HSBC can increase its share capital, consolidate and divide all or any of
its share capital into shares of a larger amount, sub-divide all or any of its
share capital into shares of a smaller amount (subject to the provisions of the
Companies Act) or cancel any shares not taken or agreed to be taken by any
person and reduce the amount of its authorized share capital accordingly.
PRE-EMPTIVE RIGHTS
As HSBC is a company incorporated in the United Kingdom, in general, its
shareholders have automatic pre-emptive rights pursuant to section 89 of the
Companies Act. These pre-emptive rights can, however, be overridden by a special
resolution of shareholders.
LIEN ON SHARES
HSBC has a lien on shares which are not fully paid (to the extent permitted
by the Companies Act). The board may waive the lien in whole or in part, or
temporarily, and may sell shares subject to a lien as it sees fit. The board is
entitled to sell a share subject to the lien only after giving 14 days' notice
of its intent to sell in default.
CALLS
The board may from time to time make calls on the shareholders for any
amounts unpaid on the shares. These calls must be made with 14 days' notice
specifying the time, place and manner of payment which may include payment in
installments. The person on whom a call is made remains liable for the call
despite any subsequent transfer of the shares on which the call was made. The
joint holders of a share are jointly and severally liable for the payment of all
calls.
Shareholders who have not paid all calls (and any accrued interest) due are
not entitled to receive a dividend or vote at shareholders' meetings either in
person or by proxy (except as proxy for another member), are not counted as
present and may not form part of a quorum.
FORFEITURE OF SHARES
If any shareholder does not pay any part of any call on or before the
payment date, the board may send the shareholder a notice of the amount unpaid
(including interest and other costs and expenses incurred by HSBC) and if the
shareholder does not pay the amount owed within 14 days after receiving the
notice, the board may forfeit the relevant share, at any time before full
payment is made. The forfeited share and any dividends declared or other moneys
payable in respect of the forfeited share will then become the property of HSBC.
PURCHASE OF SHARES
HSBC can purchase any of its own shares of any class, including any
redeemable shares, in any manner that it deems fit, subject to the provisions of
the Companies Act, the Hong Kong Code on Share Repurchases, the listing rules of
the UKLA and the SEHK and HSBC's Memorandum and Articles of Association.
123
DESCRIPTION OF HSBC AMERICAN DEPOSITARY SHARES
GENERAL
The Bank of New York, as depositary, issues HSBC ADSs in certificated or
book-entry form. Each HSBC ADS will represent an ownership interest in five HSBC
ordinary shares which have been deposited with the depositary. The office of The
Bank of New York is located at 101 Barclay Street, 22 West, New York, NY 10286.
The holder may hold HSBC ADSs either directly or indirectly through his
broker or other financial institution. This description assumes the holder holds
his HSBC ADSs directly. If the holder holds the HSBC ADSs indirectly, he must
rely on the procedures of his broker or other financial institution to assert
the rights of HSBC ADS holders described in this section. Any indirect holder
should consult with his broker or financial institution to find out what those
procedures are.
The following is a summary of the deposit agreement. Because it is a
summary, it does not contain all the information that may be important to
holders of HSBC ADSs. For more complete information, the holder should read the
entire agreement and the American Depositary Receipt, or ADR, evidencing the
HSBC ADSs. Copies of the agreement and the ADR will be available for inspection
at the office of The Bank of New York. The laws of the State of New York govern
the deposit agreement.
The term deposited securities, as used in this description, includes HSBC
ordinary shares deposited under the deposit agreement and other securities, cash
and property received by The Bank of New York in respect of the HSBC ordinary
shares, or in respect of any other securities, property or cash previously
received, and held under the deposit agreement.
DEPOSIT AND WITHDRAWAL OF DEPOSITED SECURITIES
The Bank of New York will issue the HSBC ADSs that the holder is entitled
to receive against deposits of HSBC ordinary shares. The Bank of New York will
issue additional HSBC ADSs if the holder or his broker deposits HSBC ordinary
shares, along with any appropriate instruments of transfer or endorsement, with
the custodian. The Bank of New York may also require the holder to deliver
evidence of necessary governmental approvals and an agreement transferring his
right as a shareholder to receive dividends or other property. Upon payment of
its fees and of any taxes or charges, such as stamp taxes or stock transfer
taxes or fees, The Bank of New York will register the appropriate number of HSBC
ADSs in the names the holder requests and will issue book-entry HSBC ADSs or, if
the holder specifically requests, deliver certificates representing the HSBC
ADSs at its New York office to the persons the holder requests.
The holder may submit a written request to withdraw HSBC ordinary shares
and turn in his certificated HSBC ADSs, if any, at the New York office of The
Bank of New York. Upon payment of its fees and of any taxes or charges, such as
stamp taxes, stock transfer taxes or fees, The Bank of New York will deliver at
the office of its custodian in London the deposited securities underlying the
HSBC ADSs, and at The Bank of New York's New York office any dividends or
distributions with respect to the deposited securities represented by the HSBC
ADSs, or any proceeds from the sale of any dividends, distributions or rights
held by The Bank of New York. Alternatively, at the holder's request, risk and
expense, The Bank of New York will deliver the deposited securities at its New
York office.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Bank of New York will pay the holder of HSBC ADSs the cash dividends or
other distributions it or the custodian receives on HSBC ordinary shares or
other deposited securities, after deducting its fees and expenses (if any). The
holder will receive these distributions in proportion to the number of HSBC
ordinary shares his HSBC ADSs represent.
124
CASH
The Bank of New York will convert any cash dividend or other cash
distribution HSBC pays on the HSBC ordinary shares, other than any dividend or
distribution paid in U.S. dollars, into U.S. dollars. If that is not possible on
a reasonable basis, or if any approval from any government is needed and cannot
be obtained, the deposit agreement allows The Bank of New York to distribute the
non-U.S. currency only to those HSBC ADS holders to whom it is possible to do so
or to hold the non-U.S. currency it cannot convert for the account of the HSBC
ADS holders who have not been paid. It will not invest the non-U.S. currency and
it will not be liable for any interest.
Before making a distribution, The Bank of New York will deduct any
withholding taxes that must be paid under applicable laws. It will distribute
only whole U.S. dollars and cents and will add any fractional cents to the next
distribution.
SHARES
The Bank of New York will distribute new HSBC ADSs representing any HSBC
ordinary shares HSBC distributes as a dividend or free distribution, if HSBC
requests it to make this distribution. The Bank of New York will only distribute
whole HSBC ADSs. It may sell HSBC ordinary shares which would require it to
issue a fractional HSBC ADS and distribute the net proceeds in the same way as
it does with cash. If The Bank of New York does not distribute additional cash
or HSBC ADSs, each HSBC ADS will also represent the new HSBC ordinary shares.
RIGHTS TO RECEIVE ADDITIONAL SHARES
If HSBC offers holders of securities any rights to subscribe for additional
HSBC ordinary shares or any other rights, The Bank of New York will take actions
necessary to make these rights available to the holder of HSBC ADSs. If The Bank
of New York determines that it is not legal or not feasible to make these rights
available to the holder, The Bank of New York may sell the rights and allocate
the net proceeds to holders' accounts. The Bank of New York may allow rights
that are not distributed or sold to lapse.
If The Bank of New York makes rights available to the holder of HSBC ADSs,
upon instruction from the holder it will exercise the rights and purchase the
HSBC ordinary shares on his behalf. The Bank of New York will then deposit the
HSBC ordinary shares and issue HSBC ADSs to the holder. The Bank of New York
will only exercise rights if the holder pays it the exercise price and any other
charges the rights require the holder to pay.
U.S. securities laws may restrict the sale, deposit, cancellation and
transfer of the HSBC ADSs issued after exercise of rights. In this case, The
Bank of New York may issue the HSBC ADSs under a separate restricted deposit
agreement which will contain the same provisions as the deposit agreement,
except for changes needed to put the restrictions in place. The Bank of New York
will not offer the holder rights unless those rights and the securities to which
the rights relate are either exempt from registration or have been registered
under the Securities Act with respect to a distribution to the holder. HSBC will
have no obligation to register under the Securities Act those rights or the
securities to which they relate.
OTHER DISTRIBUTIONS
The Bank of New York will send to the holder anything else HSBC distributes
on deposited securities by any means The Bank of New York thinks is legal, fair
and practical. If it cannot make the distribution in that way, The Bank of New
York may decide to sell what HSBC distributed -- for example by public or
private sale -- and distribute the net proceeds, in the same way as it does with
cash.
HSBC will have no obligation to take any other action to permit the
distribution of HSBC ADSs, HSBC ordinary shares, rights or anything else to HSBC
ADS holders.
125
RECLASSIFICATIONS, RECAPITALIZATIONS AND MERGERS
If HSBC:
- changes the nominal or par value of any of the HSBC ordinary shares,
- reclassifies, splits or consolidates any of the HSBC ordinary shares,
- distributes securities on any of the HSBC ordinary shares which are not
in turn distributed to HSBC ADS holders, or
- recapitalizes, reorganizes, merges, consolidates, sells its assets, or
takes any similar action,
the cash, shares or other securities received by The Bank of New York will
become new deposited securities under the deposit agreement. Each HSBC ADS will
automatically represent its equal share of the new deposited securities. The
Bank of New York will, if HSBC asks it to, issue new HSBC ADSs or ask the holder
to surrender his outstanding HSBC ADSs in exchange for new HSBC ADSs identifying
the new deposited securities.
RECORD DATES
Each time a dividend is payable or other distribution is made, or a meeting
of shareholders is scheduled, HSBC may set a record date to establish the
shareholders eligible to receive the dividend or distribution or to attend the
meeting. The Bank of New York will coordinate with HSBC to fix any dividend
record date relating to the HSBC ADSs to the same dividend record date as
established by HSBC.
VOTING RIGHTS
The HSBC ADS holder may instruct The Bank of New York, as depositary, as to
the exercise of voting rights at HSBC's shareholder meetings of holders of the
same class of securities as the deposited securities represented by HSBC ADSs.
The Bank of New York will enable the holder to attend and on a poll vote at
a meeting by appointing him its proxy for the HSBC ordinary shares or other
deposited securities underlying his HSBC ADSs. If the holder does not wish to
attend a meeting, the holder may instruct The Bank of New York to appoint
another person to attend and on a poll vote on the holder's behalf.
The Bank of New York will notify the holder of the upcoming meeting and
arrange to deliver relevant materials to him. The materials will (1) describe
the meeting time, place and the matters to be voted on and (2) explain how the
holder may give instructions for his HSBC ordinary shares to be voted. For
instructions to be valid, The Bank of New York must receive them on or before
the date specified in the instructions. The Bank of New York will, to the extent
practical, subject to applicable law and the provisions of HSBC's Memorandum and
Articles of Association, vote the HSBC ordinary shares or other deposited
securities as the holder instructs. The Bank of New York will only vote as the
holder instructs.
Although The Bank of New York will try to send the notice of the meeting
reasonably in advance of the meeting, HSBC will not be able to assure that the
holder will receive the voting materials in time to ensure that the holder can
give instructions for his HSBC ordinary shares to be voted. In addition, The
Bank of New York and its agents are not responsible for failing to carry out
voting instructions or for the manner of carrying out voting instructions.
DISCLOSURE OF INTERESTS
The obligation of a holder of HSBC ordinary shares and other persons with
an interest in the HSBC ordinary shares to disclose information to HSBC under
English law and Hong Kong SAR law applies to HSBC ADS holders and any other
persons with an interest in the HSBC ADSs. The consequence of failure to comply
with these provisions will be the same for an HSBC ADS holder and any other
persons with an interest in the HSBC ADS as for a holder of HSBC ordinary
shares. Please refer to "-- Description of HSBC Ordinary Shares -- Disclosure of
Interests in Shares." The Bank of New York will co-operate with HSBC's efforts
to comply with the disclosure requirements and ownership limitations.
126
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
HSBC may agree with The Bank of New York to amend, for any reason, the
deposit agreement and the HSBC ADSs without the holder's consent. If the
amendment adds or increases fees or charges, except for taxes and other
governmental charges, or prejudices an important right of HSBC ADS holders, it
will only become effective 30 days after The Bank of New York notifies the
holder of the amendment. At the time an amendment becomes effective, the holder
is considered, by continuing to hold his HSBC ADSs, to agree to the amendment
and to be bound by the agreement as amended. However, no amendment will impair
the holder's right to receive the deposited securities in exchange for his HSBC
ADSs.
The Bank of New York will terminate the deposit agreement if HSBC asks it
to do so in which case it must notify the holder at least 90 days before
termination. The Bank of New York may also terminate the agreement if The Bank
of New York informs HSBC that it would like to resign and HSBC does not appoint
a new depositary bank within 90 days.
After termination, The Bank of New York and its agents will be required to
do only the following under the agreement: (l) collect dividends and other
distributions on the deposited securities, (2) sell rights offered to holders of
deposited securities and (3) deliver shares and other deposited securities upon
cancellation of HSBC ADSs. At any time after one year following termination of
the deposit agreement, The Bank of New York may sell any remaining deposited
securities. After that, The Bank of New York will hold the money it received on
the sale, as well as any other cash it is holding under the deposit agreement,
for the pro rata benefit of the HSBC ADS holders that have not surrendered their
HSBC ADSs. The Bank of New York will not invest the money and will have no
liability for interest. The Bank of New York's only obligations will be to
account for the money and other cash. After termination, HSBC's only obligations
will be with respect to indemnification and to pay specified amounts to The Bank
of New York.
127
CHARGES OF DEPOSITARY
HSBC will pay specified fees, charges and expenses of The Bank of New York
as agreed between The Bank of New York and HSBC. Fees for which the holders of
the HSBC ADSs will be responsible include:
<Table>
For: HSBC ADS holders must pay:
Each issuance of an HSBC ADS, including U.S.$5.00 (or less) per 100 HSBC ADSs
as a result of a distribution of shares
(through stock dividend or stock split or
rights or other property). This fee will
not be payable with respect to HSBC ADSs
issued to a Household common stockholder
who elects to receive HSBC ADSs in the
merger or to holders of converted stock
options who elect to receive HSBC ADSs
Each cancellation of an HSBC ADS, U.S.$5.00 (or less) per 100 HSBC ADSs
including if the deposit agreement
terminates
Transfer and registration of shares on Registration or transfer fees (of which
HSBC share register from the holder's there currently are none)
name to the name of The Bank of New York
or its agent when the holder deposits or
withdraws shares
Conversion of non-U.S. currency to U.S. Reasonable charges and expenses incurred
dollars by The Bank of New York with respect to
the conversion
Cable, telex and facsimile transmission Reasonable charges and expenses incurred
expenses by The Bank of New York
Transfers or issues of HSBC ordinary Subject to the exceptions described in
shares to the depositary in exchange for "-- Liability of Holder for Taxes", stamp
HSBC ADSs duty or stamp duty reserve tax equal to
1.5% (rounded up, in the case of stamp
duty, to the nearest L5) of the amount of
the consideration given for the transfer,
or the value of the shares if there is no
such consideration, or their issue price.
Transfers of underlying HSBC ordinary Subject to the exceptions described in
shares from the depository to an HSBC ADS "- Liability of Holder for Taxes", stamp
holder duty at the fixed rate of L5 per
transfer.
</Table>
LIABILITY OF HOLDER FOR TAXES
The Bank of New York may deduct the amount of any taxes owed from any
payments to the holder. It may also restrict the transfer of the holder's HSBC
ADSs or restrict the withdrawal of the holder's underlying deposited securities
until the holder pays any taxes owed on his HSBC ADSs or underlying securities.
It may also sell deposited securities, by public or private sale, to pay any
taxes owed. The holder will remain liable if the proceeds of the sale are not
enough to pay the taxes. If The Bank of New York sells deposited securities, it
will, if appropriate, reduce the number of HSBC ADSs to reflect the sale and pay
to the holder any proceeds, or send to the holder any property, remaining after
it has paid. The merger agreement provides that holders of Household common
stock and stock options will generally not be required to pay any fee or other
charge or expense to The Bank of New York, or any stamp duties, stamp duty
reserve tax or other similar charges of a taxing authority relating to the
issuance of HSBC ordinary shares or HSBC ADSs in the merger or on the exercise
of options that have been converted to HSBC options under the merger agreement.
128
LIMITATIONS ON OBLIGATIONS AND LIABILITY TO HSBC ADS HOLDERS
The deposit agreement expressly limits HSBC's obligations and the
obligations of The Bank of New York. It also limits HSBC's liability and the
liability of The Bank of New York. HSBC and The Bank of New York:
- are only obligated to take the actions specifically set forth in the
deposit agreement without negligence or bad faith;
- are not liable if either of them is prevented or delayed by law, any
provision of HSBC's Memorandum and Articles of Association or
circumstances beyond their control from performing their obligations
under the agreement;
- are not liable if either of them exercises, or fails to exercise,
discretion permitted under the agreement;
- have no obligation to become involved in a lawsuit or other proceeding
related to the HSBC ADSs or the agreement on a holder's behalf or on
behalf of any other party unless they are indemnified to their
satisfaction; and
- may rely upon any advice of or information from any legal counsel,
accountants, any person depositing HSBC ordinary shares, any HSBC ADS
holder or any other person whom they believe in good faith is competent
to give them that advice or information.
In the deposit agreement, HSBC and The Bank of New York agree to indemnify
each other under specified circumstances.
HOLDER'S RIGHT TO RECEIVE THE HSBC ORDINARY SHARES UNDERLYING HSBC ADSS
The holder of HSBC ADSs has the right to cancel his HSBC ADSs and withdraw
the underlying shares at any time, except (i) when The Bank of New York or HSBC
has closed its transfer books (for example, to permit voting at a shareholders'
meeting or when HSBC is paying a dividend on the HSBC ordinary shares); (ii)
when the holder seeking to withdraw HSBC ordinary shares owes money to pay fees,
taxes and similar charges; or (iii) when it is necessary to prohibit withdrawals
in order to comply with any laws or governmental regulations that apply to HSBC
ADSs or to the withdrawal of HSBC ordinary shares or other deposited securities.
This right of withdrawal may not be limited by any other provision of the
deposit agreement.
The Bank of New York will keep books at its transfer office in New York
City for the registration and transfer of HSBC ADSs which will be open for
inspection by the holders of HSBC ADSs and HSBC at all reasonable times. Any
reports and communications that HSBC sends to The Bank of New York or the
custodian or otherwise makes available to shareholders are available for
inspection by the holders of HSBC ADSs and HSBC at The Bank of New York's New
York City transfer office.
PRE-RELEASE OF HSBC ADSS
The Bank of New York may issue HSBC ADSs before deposit of the underlying
HSBC ordinary shares. This is called a pre-release of HSBC ADSs. The Bank of New
York may also deliver HSBC ordinary shares prior to the receipt and cancellation
of pre-released HSBC ADSs even if the HSBC ADSs are cancelled before the
pre-release transaction has been closed out. A pre-release is closed out as soon
as the underlying HSBC ordinary shares are delivered to The Bank of New York.
The Bank of New York may receive HSBC ADSs instead of HSBC ordinary shares to
close out a pre-release. The Bank of New York may pre-release HSBC ADSs only
under the following conditions: (1) before or at the time of the pre-release,
the person to whom the pre-release is being made must represent to The Bank of
New York in writing that it or its customer, as the case may be, owns the HSBC
ordinary shares or HSBC ADSs to be remitted; (2) the pre-release must be fully
collateralized with cash or other collateral that The Bank of New York considers
appropriate; (3) The Bank of New York must be able to close out the pre-release
on not more than three business days' notice. The pre-release will be subject to
whatever indemnities and credit regulations that The
129
Bank of New York considers appropriate. In addition, The Bank of New York will
limit the number of HSBC ADSs that may be outstanding at any time as a result of
pre-release.
ACTIONS BY HOLDERS
The Bank of New York, or its nominee, will take limited actions as the
holder may reasonably request in writing, to enable him to exercise the rights
to which shareholders of HSBC will be entitled. These actions will be taken to
the extent practicable and subject to any applicable law or regulation and at
the holder's expense. The Bank of New York, or its nominee, may require the
holder to indemnify it with respect to these actions.
REQUIREMENTS FOR DEPOSITARY ACTIONS
Before The Bank of New York will issue or register the transfer of an HSBC
ADS, make a distribution on an HSBC ADS or permit withdrawal of HSBC ordinary
shares, HSBC or The Bank of New York may require:
- payment of stock transfer or other taxes or governmental charges and
transfer or registration fees charged by third parties for the transfer
of any HSBC ordinary shares or other deposited securities, as well as the
fees of The Bank of New York;
- production of satisfactory proof of the identity of the person presenting
HSBC ordinary shares for deposit or HSBC ADSs upon withdrawal, and of the
authenticity of any signature or other information they deem necessary;
and
- compliance with regulations The Bank of New York may establish consistent
with the deposit agreement, including presentation of transfer documents.
130
COMPARISON OF RIGHTS OF HOUSEHOLD COMMON STOCKHOLDERS
AND HSBC ORDINARY SHAREHOLDERS
As a result of the merger, holders of Household common stock will receive
either, at their election, HSBC ordinary shares or HSBC ADSs. The following is a
summary comparison of material differences between the rights of a Household
common stockholder and an HSBC ordinary shareholder arising from the differences
between the corporate laws of Delaware and of England and Wales, the governing
instruments of the two companies, and the securities laws and regulations
governing the two companies. As HSBC has dual primary listings on the Official
List of the UKLA and on the SEHK, HSBC is also subject to various Hong Kong SAR
securities laws and regulations and some of these are referred to in this
comparison. This summary is not a complete description of the laws of Delaware,
England and Wales or Hong Kong SAR, the other rules, regulations or laws
referred to in this summary, Household's Certificate of Incorporation,
Household's by-laws or HSBC's Memorandum and Articles of Association. For
information as to where the governing instruments of Household and HSBC may be
obtained, please refer to "Where You Can Find More Information." You are
encouraged to obtain and read these documents.
For a description of the HSBC ordinary shares and HSBC ADSs and a
discussion of the ways in which the rights of holders of HSBC ADSs may differ
from those of holders of HSBC ordinary shares, please refer to "Description of
HSBC Ordinary Shares" and "Description of HSBC American Depositary Shares."
131
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
- -------------------------------------- ---------------------------------------------
VOTING RIGHTS
- -------------------------------------------------------------------------------------------
- - Under Delaware law, each stockholder is - Under English law, a shareholder entitled
entitled to one vote for each share of to vote at a shareholders' meeting is
capital stock held by the stockholder entitled to one vote on a show of hands
unless the certificate of incorporation regardless of the number of shares he or
provides otherwise. Household's she holds. However, any group of five
Certificate of Incorporation does not ordinary shareholders (or a lower number
alter the voting rights of holders of if provided in the articles of
Household common stock, except that the association) and any shareholder or
board of directors, as it has done in the shareholders representing at least 10% of
case of the 5% cumulative preferred stock, the ordinary shares has the statutory
$4.50 cumulative preferred stock and $4.30 right to demand a vote by a poll, which
cumulative preferred stock, may grant means that each ordinary shareholder would
voting rights to holders of preferred be entitled to one vote for each ordinary
stock, including the right to vote with share held by the shareholder.
the common stock on matters submitted to a
vote thereof. - HSBC's Memorandum and Articles of
Association provide that
- - The Household by-laws provide that the
presence of the holders of a majority of (1) resolutions will be conducted on a
the outstanding shares entitled to vote show of hands, unless a poll is
constitutes a quorum for the transaction demanded by
of business at a stockholders' meeting.
(a) the chairman of the meeting,
- - Under Delaware law, a certificate of
incorporation may provide that in (b) at least five members present in
elections of directors and other specified person or by proxy and entitled
circumstances, stockholders are entitled to vote at the meeting,
to cumulate votes. Household's Certificate
of Incorporation does not provide for any (c) a member or members present in
such cumulative vote. person or by proxy representing
at least 10% of the voting
rights of all members that have
the right to vote at the
meeting, or
(d) any member or members present in
person or by proxy holding
shares conferring a right to
vote at the meeting on which the
aggregate sum paid up is equal
to at least 10% of the total sum
paid up on all the shares
conferring that right; and
(2) proxies of members will be entitled
(a) to attend shareholders' meetings
and (b) to vote on a poll (but not to
speak, except to demand a poll).
- Under English law, ordinary resolutions
are decided on a show of hands and must be
approved by at least a majority of the
shareholders present in person and voting
at a
</Table>
132
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
----------------------------- --------------------------
meeting. If a poll is demanded, the
resolution conducted on a poll must be
approved by holders of at least a majority
of the votes cast at the meeting. Both
special and extraordinary resolutions
require the affirmative vote of at least
75% of the votes cast at the meeting to be
approved.
- HSBC's Memorandum and Articles of
Association specify that three persons who
are each entitled to attend and to vote
constitute a quorum for purposes of a
general meeting. With respect to
adjournments of general meetings where a
quorum is not present within 15 minutes of
the appointed meeting time, one person
entitled to attend and vote constitutes a
quorum.
- Cumulative voting is not recognized under
English law.
- ------------------------------------------------------------------------------------------------
ACTION BY WRITTEN CONSENT
- ------------------------------------------------------------------------------------------------
- - Under Delaware law, unless otherwise - Under English law, shareholders of a
provided in the certificate of public company such as HSBC are not
incorporation, stockholders may take any permitted to pass resolutions by written
action required or permitted to be taken consent.
at a stockholders' meeting without a
meeting if consented to in writing by the
holders of the same number of shares that
would be required if the action were to be
taken at a meeting at which all shares are
present and voted. Household's Certificate
of Incorporation does not alter the right
of stockholders to act by written consent.
SHAREHOLDER PROPOSALS AND SHAREHOLDER NOMINATIONS OF DIRECTORS
- ------------------------------------------------------------------------------------------------
- - Under the Household by-laws, any - Under English law, shareholders may demand
stockholder may bring business before an that a resolution be voted on at an annual
annual meeting, including nominations to general meeting if the demand is made
the board of directors, if the stockholder
gives timely notice in writing of the (1) by shareholders holding at least 5% of
stockholder's intention to bring the the voting power of shares having a
business before the meeting. To be timely, right to vote on the resolution, or
a stockholder's notice must be delivered
to the Secretary at the principal (2) by at least 100 shareholders holding
executive offices of Household not less shares on which there has been paid
than 120 days nor more than 150 days prior up an average sum, per shareholder,
to the first anniversary of the preceding of at least L100.
year's annual meeting. If, however, the
date of the annual meeting is advanced by - The shareholders must deposit the demand
more than 30 days or delayed by more than at the company's registered office at
60 days from such anniversary date, to be least six weeks
timely notice must be delivered not
earlier
</Table>
133
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
- ----------------------------------------- ---------------------------------------------
than the 150th day prior to such annual before the annual general meeting to which
meeting and not later than the close of it relates.
business on the later of the 120th day
prior to such annual meeting or the 10th - In general, resolutions to appoint
day following the day on which public directors must be put to shareholders on
announcement of the date of such meeting the basis of one resolution for each
is first made. nominated director. A resolution including
more than one director may be presented to
- - In addition, SEC rules allow resolutions be voted upon at a general meeting only if
to be included in the company's proxy the shareholders have first unanimously
statement for annual meetings of approved so doing.
stockholders if, among other conditions
required to be met, advance notice is
given to the corporation.
- - Under the Household by-laws, only such
business shall be conducted at a special
meeting of stockholders as shall have been
brought before the meeting pursuant to
Household's proxy statement or notice of
meeting. Nominations for elections to
Household's board of directors at a
special meeting at which directors are to
be elected may be made by or at the
direction of Household's board of
directors pursuant to Household's proxy
statement or notice of meeting or at the
meeting, or at the meeting by any
Household stockholder who is entitled to
vote at the meeting and complies with the
notice requirements included in
Household's by-laws.
- ---------------------------------------------------------------------------------------------
SOURCES AND PAYMENT OF DIVIDENDS
- ---------------------------------------------------------------------------------------------
- - Under Delaware law, the board of - Subject to the prior rights of holders of
directors, subject to any restrictions in preferred shares, an English company may
the corporation's certificate of pay dividends on its ordinary shares only
incorporation, may declare and pay out of its distributable profits, defined
dividends out of as accumulated, realized profits less
accumulated, realized losses, and not out
(1) surplus of the corporation, which is of share capital, which includes share
defined as net assets less statutory premiums, which are equal to the excess of
capital, or the consideration for the issue of shares
over the aggregate nominal amount of such
(2) if no surplus exists, out of the net shares. Amounts credited to the share
profits of the corporation for the premium account, however, may be used to
fiscal year in which the dividend is pay up unissued shares that may then be
declared and/or the preceding fiscal distributed to shareholders in proportion
year. to their holdings.
However, if the capital of the corporation - In addition, under English law, HSBC will
has been diminished to an amount less than not be permitted to make a distribution
the aggregate amount of capital if, at the time, the amount of its net
represented by the issued and outstanding assets is less than the aggregate of its
stock of all classes having preference issued and paid-up share capital and
upon the distribution of assets, the board undistributable reserves or to make a
may not declare and pay dividends out of distribution which brings its net assets
the corporation's net profits until the to
deficiency
</Table>
134
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
- -------------------------------------------- ----------------------------------------------
in the capital has been repaired. below that aggregate. Subject to these
limitations, HSBC's board has the power
- - Household's Certificate of Incorporation under HSBC's Memorandum and Articles of
contains no provisions restricting Association to pay interim cash dividends
dividends on Household common stock, or, subject to subsequent shareholder
except that the Household preferred stock approval, to recommend payment of final
has preferences over the Household common dividends.
stock with respect to dividends.
- ----------------------------------------------------------------------------------------------
RIGHTS OF PURCHASE AND REDEMPTION
- ----------------------------------------------------------------------------------------------
- - Under Delaware law, any corporation may - Under English law, a company may issue
purchase, redeem and dispose of its own redeemable shares if authorized by its
stock, except that generally it may not memorandum and articles of association,
purchase or redeem stock if the capital of subject to any conditions stated therein.
the corporation is impaired at the time or HSBC's Memorandum and Articles of
would become impaired as a result of the Association permit the issuance of
redemption. redeemable shares.
However, at any time, a corporation may - A company may purchase its own shares,
purchase or redeem any of its stock which including any redeemable shares, if the
is entitled upon any distribution of purchase
assets to a preference over another class
of its stock if this stock will be retired (1) is authorized by its memorandum and
upon acquisition or redemption, and the articles of association, and
capital of the corporation will be reduced
in accordance with specified statutory (2) (a) in the case of an open-market
limitations. purchase, authority to make the
market purchase has been given
by an ordinary resolution of its
shareholders, or
(b) in all other cases, has been
approved by a special resolution
(requiring 75% of the votes cast
at a general meeting).
- A company may redeem or repurchase shares
only if the shares are fully paid and, in
the case of public companies, only out of
(1) distributable profits, or
(2) the proceeds of a new issue of shares
made for the purpose of the
repurchase or redemption.
- The UKLA requires that where a company has
issued shares which are listed on the
Official List and are convertible into a
class of shares to be repurchased, the
holders of the convertible shares must
first pass an extraordinary
</Table>
135
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
- -------------------------------------------- ----------------------------------------------
resolution approving any repurchase at a
separate class meeting.
- The UKLA requires that purchases within a
12-month period of 15% or more of a
company's share capital must be made
through either a tender or partial offer
to all shareholders, at a stated maximum
or fixed price.
- Purchases within a 12-month period below
the 15% threshold may be made through
(1) the open market, provided that the
price is not more than 5% above the
average of the middle market
quotations taken from the Daily
Official List of the LSE for the five
trading days before the purchase
date, or
(2) an off-market transaction negotiated
with one or more shareholders.
- The Hong Kong Code on Share Repurchases,
or the Repurchase Code, requires share
repurchases to be by way of a general
offer unless falling within an exemption.
Repurchases by general offer must be
approved by a majority of disinterested
shareholders of the company. Such a
general offer will be subject to various
provisions of the Hong Kong Takeover Code.
- The Hong Kong Takeover Code and Repurchase
Code apply to public companies in Hong
Kong SAR and companies with a primary
listing in Hong Kong SAR and are
non-statutory.
- An off-market share repurchase can be made
under the Repurchase Code if approved by
the Securities and Futures Commission of
Hong Kong SAR and approval is generally
subject to, among other things, the share
repurchase being approved by at least
three-quarters of the disinterested
shareholders of the company by way of a
poll.
- Some exempt share repurchases are
permissible under the Repurchase Code.
These consist of employee share
repurchases, repurchases in accordance
with the terms and conditions
</Table>
136
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
- -------------------------------------------- ----------------------------------------------
attached to shares and repurchases required
by the jurisdiction of incorporation of
the company.
- There are restrictions in the City Code
and the Hong Kong Takeover Code on the
repurchase of securities during the course
of an offer (or even before an offer if
the board of the offeree company believes
that an offer may be imminent). Please
refer to "-- Provisions Relating to Share
Acquisitions."
- On-market repurchases (either on the SEHK
or another recognized exchange, such as
the LSE) are required by the SEHK to be
approved by ordinary resolution of
shareholders either by specific approval
or general mandate. This approval or
mandate must not cover more than 10% of
the existing issued share capital of the
company.
- In any one calendar month a company may
not repurchase shares in an amount greater
than 25% of the total number of its shares
traded on the SEHK in the course of the
previous month.
- ----------------------------------------------------------------------------------------------
GENERAL MEETINGS OF SHAREHOLDERS AND STOCKHOLDERS
- ----------------------------------------------------------------------------------------------
- - The Household by-laws provide that all - Under HSBC's Memorandum and Articles of
annual meetings of stockholders are to be Association, all general meetings of
held on such date and at such time as is shareholders are held at the time and
fixed by the Household board. place determined by the directors.
- ----------------------------------------------------------------------------------------------
SPECIAL MEETINGS OF SHAREHOLDERS AND STOCKHOLDERS
- ----------------------------------------------------------------------------------------------
- - Delaware law provides that special - Under English law, an extraordinary
meetings of stockholders may be called by general meeting of shareholders may be
called by
(1) the board of directors, or
(1) the board of directors, or
(2) any person or persons authorized by
the corporation's certificate of (2) shareholders holding at least
incorporation or by-laws. one-tenth of the paid-up capital of
the company carrying voting rights at
- - The Household by-laws provide that special general meetings.
meetings of stockholders may be called
only by The notice requirements for an ordinary
resolution, an extraordinary resolution
(1) the president of Household, and a special resolution are as follows:
(2) the chief executive officer of (1) Ordinary resolution -- 14 clear days'
Household, or notice,
(3) a majority of the Household board. (2) Extraordinary resolution -- l4 clear
days' notice,
</Table>
137
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
- -------------------------------------------- ----------------------------------------------
- - The Household by-laws provide that written (3) Special resolution -- 21 clear days'
notice of a special meeting must be mailed notice.
to each stockholder entitled to vote at
the meeting not less than 10 nor more - In addition, general meetings may be
than 60 days prior to the special meeting. called upon shorter notice if
(1) in the case of an annual general
meeting, all the shareholders who are
permitted to attend and vote agree to
the shorter notice, or
(2) in the case of an extraordinary
general meeting, a majority of the
shareholders holding at least 95% by
nominal value of the shares which can
be voted at this meeting so agree.
"Clear days' notice" means calendar days
and excludes
(1) the date of mailing,
(2) the date of receipt of the notice, and
(3) the date of the meeting itself.
- "Extraordinary resolutions" are relatively
unusual and are confined to matters out of
the ordinary course of business, such as a
proposal to wind up the affairs of the
company. "Special resolutions" generally
involve proposals to
(1) change the name of the company,
(2) alter its capital structure,
(3) change or amend the rights of
shareholders,
(4) permit the company to issue new shares
for cash without applying the
shareholders' pre-emptive rights,
(5) amend the company's objects, or
purpose, clause in its memorandum of
association,
(6) amend the company's articles of
association, or
(7) carry out other matters for which the
company's articles of association or
the Companies Act prescribe that a
"special resolution" is required.
</Table>
138
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
- -------------------------------------------- ----------------------------------------------
- All other proposals relating to the
ordinary course of the company's business,
such as the election of directors and
transactions, such as mergers, acquisitions
and dispositions, are the subject of an
"ordinary resolution."
- HSBC's Memorandum and Articles of
Association provide that all business
transacted at a general meeting is deemed
"special," except the following action at
an annual general meeting:
(1) declaration of dividends,
(2) receipt and consideration of annual
accounts,
(3) election of directors, and
(4) re-appointment of retiring auditors
(unless not last appointed at a
general meeting) and fixing of the
auditors' remuneration.
- ----------------------------------------------------------------------------------------------
APPRAISAL RIGHTS
- ----------------------------------------------------------------------------------------------
- - Delaware law provides stockholders of a - While English law does not generally
corporation involved in a merger the right provide for appraisal rights, a
to a judicial appraisal of their shares shareholder may apply to a court and the
and to receive payment of the fair value court may specify terms for the
of their stock so appraised in some acquisition that it considers appropriate
mergers. However, appraisal rights are not as described under "-- Shareholders' Votes
available to holders of stock on Some Transactions."
(1) listed on a national securities
exchange,
(2) designated as a national market system
security on an interdealer quotation
system operated by the National
Association of Securities Dealers,
Inc., or
(3) held of record by more than 2,000
stockholders,
unless holders of such stock are required
to accept in the merger anything other
than any combination of
(A) shares of stock or depositary receipts
of the surviving corporation in the
merger,
(B) shares of stock or depositary receipts
of
</Table>
139
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
- -------------------------------------------- ----------------------------------------------
another corporation that, at the
effective date of the merger, will be
either
(a) listed on a national securities
exchange,
(b) designated as a national market
system security on an
interdealer quotation system
operated by the National
Association of Securities
Dealers, Inc., or
(c) held of record by more than 2,000
holders, or
(C) cash in lieu of fractional shares of
the stock or depositary receipts
received.
- - In addition, appraisal rights are not
available to the holders of stock of the
surviving corporation in the merger, if
the merger does not require the approval
of the stockholders of that corporation.
- ----------------------------------------------------------------------------------------------
PRE-EMPTIVE RIGHTS
- ----------------------------------------------------------------------------------------------
- - Under Delaware law, a stockholder is not - Under English law, the issuance for cash
entitled to pre-emptive rights to of
subscribe for additional issuances of
shares of stock or any security (1) equity securities, being those which,
convertible into shares of stock unless with respect to dividends or capital,
they are specifically granted in the carry a right to participate beyond a
certificate of incorporation. specified amount, or
- - Household's Certificate of Incorporation (2) rights to subscribe for or convert
does not provide for pre-emptive rights. into equity securities
must be offered first to the existing
equity shareholders in proportion to the
respective nominal values of their
holdings, unless a special resolution to
the contrary has been passed by
shareholders in a general meeting.
- ----------------------------------------------------------------------------------------------
AMENDMENT OF GOVERNING INSTRUMENTS
- ----------------------------------------------------------------------------------------------
- - Under Delaware law, unless the certificate - Under English law, shareholders have the
of incorporation requires a greater vote, power to amend
an amendment to the certificate of
incorporation requires (1) the objects, or purpose, clause in a
company's memorandum of association
(1) the approval of the board of and
directors,
(2) any provisions of the company's
(2) the affirmative vote of a majority of articles of association
the
</Table>
140
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
- -------------------------------------------- ----------------------------------------------
outstanding stock entitled to by special resolution, subject to, in the
vote thereon, and case of amendments to the objects clause
of the memorandum of association, the
(3) the affirmative vote of a majority of right of dissenting shareholders to apply
the outstanding stock of each class to the courts to cancel the amendments.
entitled to vote thereon as a class.
- Under English law, the board of directors
Household's Certificate of Incorporation is not authorized to change the memorandum
does not require any greater vote for an of association or the articles of
amendment to the certificate of association.
incorporation.
- Amendments affecting the rights of the
- - Under Delaware law, stockholders have the holders of any class of shares may,
power to adopt, amend or repeal by-laws, depending on the rights attached to the
and the board of directors has concurrent class and the nature of the amendments,
power to do so if the certificate of also require approval by extraordinary
incorporation gives those powers to the resolution of the classes affected in
directors of the corporation. separate class meetings. Please refer to
"-- Stock Class Rights."
- - Household's Certificate of Incorporation
and by-laws each provide that the board of
directors is authorized to make, alter,
amend or rescind the by-laws of Household.
- ----------------------------------------------------------------------------------------------
PREFERRED STOCK
- ----------------------------------------------------------------------------------------------
- - Household's Certificate of Incorporation - Subject to the rights of any existing
authorizes Household's board of directors shareholders, HSBC's Memorandum and
Articles of Association permit HSBC to
(1) to issue up to 8,155,004 shares of issue new shares with any rights granted
preferred stock in such designations to holders of such shares, including
and with such rights as it deems rights of priority over the HSBC ordinary
appropriate (including voting shares.
rights),
(2) to provide for the issuance of one or
more series of preferred stock,
(3) to fix the designation and number of
the shares to be issued, and
(4) to determine or alter for each series
its designations, powers, preferred
and relative, participating, optional
or other special rights and
qualifications, and limitations or
restrictions thereon.
- - To date, the Household board has
authorized the issuance of nine series of
preferred stock, and Household has issued
eight series of preferred stock.
</Table>
141
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
STOCK CLASS RIGHTS
- - Under Delaware law, except as may - HSBC's Memorandum and Articles of
otherwise be effected through a merger, Association provides that
any alteration of the rights, powers or (1) the rights of any class of shares may
preferences of holders of the Household only be changed by an extraordinary
common stock or any series of preferred resolution passed at a separate class
stock would require an amendment to meeting of the holders of the
Household's Certificate of Incorporation. relevant class of shares or by
written consent of holders of
- - Delaware law provides that the holders of three-quarters in nominal value of
shares of a class or series of stock shall the relevant class of shares; an
be entitled to vote as a class upon a extraordinary resolution requires the
proposed amendment if the amendment will: approval of three-quarters of the
(1) increase or decrease the authorized holders voting in person or by proxy
shares of the class or series of at the meeting;
stock;
(2) the quorum required for the separate
(2) increase or decrease the par value of class meetings is at least two people
the shares of the class or series of who hold, or act as proxies for, at
stock; or least one-third of the total nominal
value of the existing shares of the
(3) alter or change the powers, class, except at any adjournment of a
preferences or special rights of the class meeting, where one shareholder
shares of the class or series of or his proxy shall constitute a
stock so as to affect them adversely. quorum, regardless of the number of
shares that person holds; and
(3) a poll may be demanded at a separate
class meeting by any person present
in person or by proxy and entitled to
vote.
SHAREHOLDERS' VOTES ON SOME TRANSACTIONS
- - Generally, under Delaware law, unless the - The Companies Act provides for schemes of
certificate of incorporation provides for arrangement, which are arrangements or
the vote of a larger portion of the stock, compromises between a company and any
completion of a merger, consolidation, class of shareholders or creditors, and
sale, lease or exchange of all or are used in some types of reconstructions,
substantially all of a corporation's amalgamations, capital reorganizations or
assets or dissolution requires: takeovers. These arrangements require the
approval of:
(1) the approval of the board of
directors, and (1) a majority in number of shareholders
or creditors representing 75% in
(2) approval by the vote of the holders of value of the capital held by or debt
a majority of the outstanding stock owed to the class of shareholders or
entitled to vote thereon or, if the creditors or class thereof present
certificate of incorporation provides and voting, either in person or by
for more or less than one vote per proxy at a special meeting convened
share, a majority of the votes of the by order of the court, and
outstanding stock entitled to vote
thereon. (2) the court.
- - Household's Certificate of Incorporation - Once approved and sanctioned, all
does not provide for the vote of a larger shareholders and creditors of the relevant
portion of the stock for a merger or class are bound by the terms of the
consolidation. scheme, and a dissenting
</Table>
142
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
- - Under the rules of the NYSE, acquisitions shareholder would have no rights
involving comparable to appraisal rights provided
under Delaware law.
(1) substantial security holders, or
- Under the rules of the UKLA, shareholder
(2) the issuance of additional shares of approval
common stock of a listed company
totaling 20% or more of the (1) is usually required for an acquisition
outstanding common stock or disposal by a listed company or
one of its subsidiaries if,
require the approval of the holders of a generally, the size of the company,
majority of the stock voting on the business or assets to be acquired or
acquisition. Other transactions do not disposed of represents 25% or more of
require stockholder approval under the the size of the listed company, and
NYSE rules.
(2) may also be required for an
acquisition or disposal of assets
between a listed company or one of
its subsidiaries and related parties,
including
(a) directors of the company or its
subsidiaries,
(b) holders of 10% of the nominal
value of any class of the
company's or any holding
company's or its subsidiary's
shares having the right to vote,
or
(c) any of their affiliates
- There are similar requirements under the
listing rules of the SEHK. However, the
SEHK tests of the size of the transaction
differ from the UKLA and this can produce
different results. Under the listing rules
of the SEHK, shareholder approval is not
required unless the relevant percentage
arising from any of the tests of the size
of the transaction is 50% or more.
- In addition, there are SEHK rules relating
to transactions between a company (or any
of its subsidiaries) and:
(1) connected persons (being directors, chief
executives or shareholders who control
10% or more of the voting power of the
company or any of its subsidiaries, or an
associate (as defined in the listing
rules of the SEHK) of any of them); and
(2) an acquisition or realization of an
interest in a company where a shareholder
who
</Table>
143
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
- ------------------------------------------
controls 10% or more of the voting
power is an associate of, or is
proposed to be, a director, chief
executive or controlling shareholder
of the listed company (or any of its
subsidiaries).
- Generally, unless covered by an exemption,
such transactions must be subject to
shareholder approval in a general meeting
with the abstention of the relevant
connected person.
- The Companies Act also provides that
(1) where a takeover offer is made for the
shares of a U.K. company, and
(2) within four months of the date of the
offer, the offeror has acquired or
contracted to acquire at least
nine-tenths in value of the shares of
any class to which the offer relates,
the offeror may, within two months of
reaching the nine-tenths level, require
shareholders who do not accept the offer
to transfer their shares on the terms of
the offer. A dissenting shareholder may
object to the transfer or its proposed
terms by applying to the court within six
weeks of the date on which notice of the
transfer was given. In the absence of
fraud or oppression, the court is unlikely
to order that the acquisition should not
take effect, but it may specify terms of
the transfer that it finds appropriate. A
minority shareholder is also entitled in
these circumstances, in the alternative,
to require the offeror to acquire his
shares on the terms of the offer.
RIGHTS OF INSPECTION
- - Delaware law allows any stockholder to - Except when closed under the provisions of
inspect the Companies Act, the register and index
of names of shareholders of an English
(1) the corporation's stock ledger, company may be inspected during business
hours
(2) a list of its stockholders, and
(1) for free, by its shareholders,
(3) its other books and records, including, in the case of HSBC,
and to make copies or extracts of those holders of HSBC ordinary shares, and
materials during normal business hours,
provided that (2) for a fee by another person.
(A) the stockholder makes a written
request
</Table>
144
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
under oath stating the purpose of his In both cases, the documents may be copied
inspection, and for a fee.
(B) the inspection is for a purpose - The shareholders of an English public
reasonably related to the person's company may also inspect, without charge,
interest as a stockholder. during business hours
(1) minutes of meetings of the
shareholders and obtain copies of the
minutes for a fee, and
(2) service contracts of the company's
directors, if the contracts have more
than 12 months unexpired or require
more than 12 months' notice to
terminate.
In addition, the published annual accounts
of a public company are required to be
available for shareholders at a general
meeting and a shareholder is entitled to a
copy of these accounts. The shareholders of
HSBC do not have the right to inspect the
accounting records of HSBC unless authorized
by statute, by order of the court, by the
board or by ordinary resolution.
STANDARD OF CONDUCT FOR DIRECTORS
- - None of Delaware law, Household's - Under English law, a director has a
Certificate of Incorporation or the fiduciary duty to act in a company's best
Household by-laws contains any specific interest. This duty includes obligations
provision setting forth the standard of
conduct of a director. The scope of the (1) not to create an actual or potential
fiduciary duties of the Household board is conflict between his duty to the
thus determined by the courts of the State company and duties to any other
of Delaware. In general, directors have a person or his personal interests, and
duty to act on an informed basis, in good
faith and in a manner they reasonably (2) to exercise his powers only in
believe to be in the best interests of the accordance with the memorandum and
stockholders. articles of association of the
company.
- In addition, a director must exercise
reasonable care and skill. The precise
scope of this duty is unclear, but the
test appears to be both subjective (i.e.,
was the director's conduct that of a
reasonably diligent person who has the
knowledge and experience of the director)
and objective (i.e., was the director's
conduct that of a reasonably diligent
person having the knowledge and experience
that a director should have).
</Table>
145
<Table>
<Caption>
CLASSIFICATION OF THE BOARD OF DIRECTORS
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
- - Delaware law permits the certificate of - English law permits a company to provide
incorporation or a stockholder-adopted for the classification of the board of
by-law to provide that directors be directors with respect to the term of
divided into one, two or three classes, office that any director may hold.
with the term of office of one class of
directors to expire each year. Household's - HSBC's Memorandum and Articles of
Certificate of Incorporation does not Association do not provide for a
provide for classification of Household's classified board.
board.
REMOVAL OF DIRECTORS
- - Delaware law provides that a director may - Under the Companies Act, shareholders may
be removed with or without cause by the remove a director without cause by
holders of a majority in voting power of ordinary resolution, irrespective of any
the outstanding stock entitled to vote at provisions of the company's articles of
an election of directors, except that association or service contract the
director has with the company, provided
(1) members of a classified board of that 28 clear days' notice of the
directors may be removed only for resolution is given to the company.
cause, unless the certificate of Compensation may be payable by the company
incorporation provides otherwise, and pursuant to such service contract.
(2) directors may not be removed in some - HSBC's Memorandum and Articles of
situations in the case of a Association provide that one-third of the
corporation having cumulative voting. directors shall retire at each annual
general meeting. Those directors wishing
Neither the Household certificate of to retire have first priority and second
incorporation nor the Household by-laws priority is given to those directors who
address the issue of removal of directors or have served the longest since their last
permit cumulative voting. Accordingly, under appointment. Retiring directors may submit
Delaware law any director of Household may themselves for re-election, if eligible.
be removed with or without cause by the
affirmative vote of holders of a majority of - In addition to the directors required to
the outstanding shares entitled to vote for retire by rotation as described above, a
the election of directors. director is also required to retire at an
annual general meeting if he has been a
director at each of the preceding two
annual general meetings and was not
elected or re-elected at either such
annual general meeting and has not ceased
to be a director (either by resignation,
retirement, removal or otherwise) and been
re-elected by general meeting at or since
such annual general meeting.
VACANCIES ON THE BOARD OF DIRECTORS
- - Under Delaware law, unless otherwise - Under English law, shareholders may by
provided in the certificate of ordinary resolution, at a meeting at which
incorporation or the by-laws, any director retires, appoint a person to
be a director
(1) vacancies on a board of directors, and
(1) to fill a vacancy, or
(2) newly created directorships resulting
from
</Table>
146
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
an increase in the number of directors (2) to become an additional director,
may be filled by a majority of the subject to any maximum provided in
directors in office. However, if the the company's articles of
holders of any specific class of stock are association.
entitled to elect directors, vacancies and
newly created directorships of the class
may be filled by a majority of the
directors in office elected by the class.
In the case of a classified board,
directors elected to fill vacancies or
newly created directorships will hold
office until the next election of the
class for which the directors have been
chosen.
- - The Household certificate of incorporation - The board of directors has the power to
provides that, subject to the rights of appoint a director to serve until the next
any class of preferred stockholders, general meeting of the company, whereupon
the director concerned is required to
(1) any vacancies on the Household board, retire but will be eligible for election.
or Any director so retiring is not taken into
account in calculating the one-third of
(2) newly created directorships the directors required to retire at the
may be filled by a majority of the annual general meeting. Please refer to
directors then in office, even if "-- Removal of Directors".
less than a quorum.
LIABILITIES OF DIRECTORS AND OFFICERS
- - Delaware law permits a corporation's - English law does not permit a company to
certificate of incorporation to include a exempt any director or officer of the
provision eliminating or limiting the company or any person employed by the
personal liability of a director to the company as an auditor from any liability
corporation and its stockholders for arising from negligence, default, breach
monetary damages arising from a breach of of duty or breach of trust against the
fiduciary duty as a director. However, no company.
provision can limit the liability of a
director for
(1) any breach of his duty of loyalty to
the corporation or its stockholders,
(2) acts or omissions not in good faith or
that involve intentional misconduct
or a knowing violation of law,
(3) intentional or negligent payment of
unlawful dividends or stock purchases
or redemptions, or
(4) any transaction from which he or she
derives an improper personal benefit.
- - The Household certificate of incorporation
provides that a director will not be
personally liable to Household or its
stockholders for
</Table>
147
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
monetary damages for breach of fiduciary
duty as a director, except for liability
arising as a result of items (1) through
(4) above.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
- - Delaware law provides that a corporation - English law does not permit a company to
may indemnify any officer or director who indemnify
is made a party to any third party suit or
proceeding on account of being a director, (1) a director or officer of the company,
officer or employee of the corporation or
against expenses, including attorneys'
fees, judgments, fines and amounts paid in (2) any person employed by the company as
settlement reasonably incurred by him in an auditor
connection with the action, through, among
other things, a vote of a majority of the against any liability arising from
directors who were not parties to the suit negligence, default, breach of duty or
or proceeding, if the officer or director breach of trust against the company.
However, indemnification is allowed for
(1) acted in good faith and in a manner he liabilities incurred in proceedings in
reasonably believed to be in or not which
opposed to the best interests of the
corporation, and (1) judgment is entered in favor of the
director or officer or the director
(2) in a criminal proceeding, had no or officer is acquitted, or
reasonable cause to believe his
conduct was unlawful. (2) the director or officer is held
liable, but the court finds that he
- - The Household certificate of incorporation acted honestly and reasonably and
provides that that relief should be granted.
(1) Household will indemnify its current - HSBC's Memorandum and Articles of
and former directors and officers to Association provide for indemnification of
the fullest extent authorized by its directors and officers.
Delaware law, and
- The Companies Act enables companies to
(2) the indemnification will include the purchase and maintain insurance for
right to receive payment of any directors, officers and auditors against
expenses incurred in connection with any liability arising from negligence,
any proceeding in advance of its default, breach of duty or breach of trust
final disposition upon delivery to against the company.
Household of an undertaking to repay
all amounts advanced if it is - HSBC maintains directors' and officers'
ultimately determined that such insurance.
officer or director is not entitled
to be indemnified.
- - The Household certificate of incorporation
also provides that Household will be
required to indemnify a person in
connection with a proceeding initiated by
the person only if the proceeding was
authorized by the board of directors.
- - Household maintains directors' and
officers' insurance.
</Table>
148
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
SHAREHOLDERS' SUITS
- - Under Delaware law, a stockholder may - While English law permits a shareholder to
initiate a derivative action to enforce a initiate a lawsuit on behalf of the
right of a corporation if the corporation company only in limited circumstances, the
fails to enforce the right itself. The Companies Act permits a shareholder whose
complaint must state that the plaintiff name is on the register of shareholders of
was a stockholder at the time of the the company to apply for a court order
transaction of which the plaintiff
complains or that the plaintiff's shares (1) when the company's affairs are being
thereafter devolved on the plaintiff by or have been conducted in a manner
operation of law, and either unfairly prejudicial to the interests
of all or some shareholders,
(1) allege with particularity the efforts including the shareholder making the
made by the plaintiff to obtain the claim, or
action the plaintiff desires from the
directors, or (2) when any act or omission of the
company is or would be so
(2) state the reasons for the plaintiff's prejudicial.
failure to obtain the action or for
not making the effort. - A court has wide discretion in granting
relief, and may authorize civil
- - Additionally, the plaintiff must remain a proceedings to be brought in the name of
stockholder through the duration of the the company by a shareholder on terms that
derivative suit. The action will not be the court directs. Except in these limited
dismissed or compromised without the circumstances, English law does not
approval of the Delaware Court of generally permit class action lawsuits by
Chancery. shareholders on behalf of the company or
on behalf of other shareholders.
PROVISIONS RELATING TO SHARE ACQUISITIONS
- - Section 203 of the Delaware General - In the case of a company listed on the
Corporation Law prohibits "business Official List of the UKLA or on the SEHK,
combinations," including mergers, sales shareholder approval must be obtained for
and leases of assets, issuances of acquisitions or disposals of assets
securities and similar transactions by a involving directors or substantial
corporation or a subsidiary with an shareholders or their associates. In
"interested stockholder" who beneficially addition, takeovers of public companies,
owns 15% or more of a corporation's voting i.e., generally those listed on the
stock, within three years after the person Official List of the UKLA are regulated by
or entity becomes an interested the City Code, which is
stockholder, unless
(1) comprised of non-statutory rules
(1) the business combination or the unenforceable at law, and
transaction that caused the person to
become an interested stockholder was (2) administered by the Takeover Panel, a
approved by the board of directors of body consisting of representatives of
the target prior to such person City of London financial and
becoming an interested person, professional institutions which
oversees the conduct of takeovers.
(2) upon completion of the transaction in
which the person becomes an - The City Code provides that when
interested stockholder, the
interested stockholder holds at least (1) any person acquires, whether by a
85% of the voting stock of the series of transactions over a period
corporation not including (a) shares of time or not,
held by persons who are both officers
and
</Table>
149
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
directors of the corporation and shares which, together with shares
(b) shares held by specified employee held or acquired by persons acting in
benefit plans, or concert with him or her, represent
30% or more of the voting rights of a
(3) after the person becomes an interested public company, or
stockholder, the business combination
is approved by the board and holders (2) any person, together with persons
of at least 66 2/3% of the acting in concert with him or her,
outstanding voting stock, excluding holds at least 30% but not more than
shares held by the interested 50% of the voting rights and that
stockholder. person, or any person acting in
concert with him or her, acquires any
- - The merger of HSBC and Household is not additional shares,
governed by the limitations set forth in
Section 203. The Household board has the person must generally make an offer
unanimously approved and adopted the for all of the equity shares of the
merger agreement and each of the company, whether voting or non-voting, and
transactions contemplated thereby. any class of voting non-equity shares of
the company held by that person or any
person acting in concert with him or her,
for cash, or accompanied by a cash
alternative, at not less than the highest
price paid by the person or these persons
for the relevant shares during the 12
months preceding the date of the offer.
- The Hong Kong Takeover Code contains
provisions broadly equivalent to those of
the City Code, as discussed above.
ANTI-TAKEOVER MEASURES
- - Under Delaware law, directors generally - Under English law, directors of a company
have a duty to act, on an informed basis, have a fiduciary duty to take only those
in good faith and in a manner they actions which are in the interests of the
reasonably believe to be in the best company. Generally, anti-takeover measures
interests of the stockholders. are not actions which fall within this
Nevertheless, a Delaware court will category.
generally apply a policy of judicial
deference to board of director decisions - Under the City Code, a company is
to adopt anti-takeover measures in the prohibited from taking any action without
face of a potential takeover where the the approval of its shareholders at a
directors are able to show that general meeting after
(1) they had reasonable grounds for (1) a bona fide offer has been
believing that there was a danger to communicated to its board of
corporate policy and effectiveness directors, or
from an acquisition proposal, and
(2) its board of directors has reason to
(2) the board action taken was reasonable believe that a bona fide offer might
in relation to the threat posed. be imminent,
where such action could effectively result
in the offer being frustrated or in the
shareholders being denied an opportunity to
decide on its merits.
- The Hong Kong Takeover Code has an
</Table>
150
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
equivalent provision.
DISCLOSURE OF INTERESTS
- - Acquirors of Household common stock are - The Companies Act provides that anyone who
subject to disclosure requirements under acquires a material interest or becomes
Section 13(d)(1) of the Exchange Act and aware that he has acquired a material
Rule 13d-1 thereunder, which provide that, interest in 3% or more of any class of
with limited exceptions, any person who shares of a public company's issued share
becomes the beneficial owner of more than capital carrying rights to vote at general
5% of the outstanding Household common shareholder meetings must notify that
stock must, within 10 days after such company in writing of his or her interest
acquisition within two days. Thereafter, any increase
or decrease of a whole percentage or
(1) file a Schedule 13D with the SEC decrease which reduces the interest to
disclosing specified information, and below 3% must be notified in writing to
the company. This requirement applies to
(2) send a copy of the Schedule 13D to holders of HSBC ordinary shares or HSBC
Household and to each securities ADSs.
exchange on which the security is
traded. - In addition, the Companies Act provides
that a public company may, by notice in
writing, require a person whom the company
knows or reasonably believes to be or to
have been within the three preceding
years, interested in the company's issued
voting share capital to
(1) confirm whether this is or is not the
case, and
(2) if this is the case, to give further
information that the company requires
relating to his or her interest and
any other interest in the company's
shares of which he is aware.
- The disclosure must be made within a
reasonable period as specified in the
relevant notice. This may be as short as
one or two days.
- When the notice is served by a company on
a person who is or was interested in
shares of the company and that person
fails to give the company any information
required by the notice within the time
specified in the notice, the company may
apply to the court for an order directing
that the shares in question be subject to
restrictions prohibiting, among other
things:
(1) any transfer of the shares,
(2) the exercise of voting rights,
</Table>
151
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
(3) the issue of further shares, and
(4) other than in a liquidation, dividends
and other payments.
These restrictions may also void any
agreement to transfer the shares.
- The Securities (Disclosure of Interests)
Ordinance Chapter 396 of the Laws of Hong
Kong SAR applies to companies listed on
the SEHK and has broadly similar
provisions, although the initial
disclosure threshold is 10%. The initial
disclosure threshold will be reduced to 5%
and some short positions will also require
disclosure when the new Securities and
Futures Ordinance comes into force, which
is expected to be in early 2003.
- In addition, after the merger, holders of
HSBC ADSs are also required to file
Schedules 13D with respect to their
beneficial ownership of the underlying
HSBC ordinary shares if they beneficially
hold more than 5% of the HSBC ordinary
shares outstanding.
- In addition, if the City Code applies to a
takeover transaction where HSBC is either
the offeror or offeree, and if a person
owns or controls, directly or indirectly
(such as through a holding of HSBC ADSs),
1% or more of the HSBC ordinary shares (or
as a result of any transaction, will own
or control 1% or more of such shares), any
dealings in the HSBC ordinary shares or
HSBC ADSs by such person must be publicly
disclosed.
LIMITATION ON ENFORCEABILITY OF CIVIL LIABILITIES UNDER U.S. FEDERAL SECURITIES LAWS
Ability to Bring Suits, Enforce Judgments and Enforce U.S. Law
- - Household is a U.S. company incorporated - HSBC is incorporated and registered in
under the laws of Delaware. Substantially England and Wales with its head office in
all of its directors and officers are London. Many of the directors and officers
residents of the U.S., and Household has of HSBC are residents of the U.K. and not
substantial assets located in the U.S. As the U.S. In addition, although HSBC has
a result, U.S. investors generally can substantial assets in the U.S., a large
initiate lawsuits in the U.S. against portion of its assets are located outside
Household and its directors and officers the U.S. As a result, U.S. investors may
and can enforce lawsuits based on U.S. find it difficult in a lawsuit based on
federal securities laws in U.S. courts. the civil liability provisions of the U.S.
</Table>
152
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
federal securities laws
(1) to effect service within the U.S. upon
HSBC and the directors and officers
of HSBC located outside the U.S.,
(2) to enforce in U.S. courts or outside
the U.S. judgments obtained against
those persons in U.S. courts,
(3) to enforce in U.S. courts judgments
obtained against those persons in
courts in jurisdictions outside the
U.S., and
(4) to enforce against those persons in
the U.K., whether in original actions
or in actions for the enforcement of
judgments of U.S. courts, civil
liabilities based solely upon the
U.S. federal securities laws.
SHORT SWING PROFITS
- - Directors and officers of Household are - Directors and officers of HSBC are not
governed by rules under the Exchange Act subject to the Exchange Act's "short
that may require directors and officers to swing" profit rules because HSBC is a
forfeit to Household any "short swing" foreign private issuer under the Exchange
profits realized from purchases and sales, Act and is not subject to these rules.
as determined under the Exchange Act and
the rules thereunder, of Household equity - However, directors of HSBC are subject to
securities. applicable U.K. and Hong Kong SAR
legislation prohibiting insider dealing.
In addition, the directors have to comply
with the Model Code of the UKLA, which
provides that the considerations taken
into account by directors when deciding
whether or not to deal in shares of the
company of which they are a director must
not be of a short-term nature. The Model
Code also places additional restrictions
on trading during periods prior to
announcement of a company's results or
when in possession of unpublished
price-sensitive information.
- Provisions in the SEHK Model Code for
Securities Transactions by Directors of
Listed Companies require directors to
refrain from dealing in securities of the
company in some circumstances, including
when they are aware of, or privy to,
notifiable transaction negotiations or
price-sensitive information. There are
also
</Table>
153
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
PROXY STATEMENTS AND REPORTS
Notices and Reports to Stockholders
restrictions on dealings during periods
prior to results announcements.
- - Under the Exchange Act proxy rules, - As a foreign private issuer, HSBC is not
Household must comply with notice and governed by the Exchange Act proxy rules.
disclosure requirements relating to the However, HSBC is governed by the Companies
solicitation of proxies for stockholder Act and the listing rules of the UKLA and
meetings. the SEHK regulating notices of shareholder
meetings, which provide that notice of a
shareholder meeting must be accompanied by
(1) a shareholder circular containing an
explanation of the purpose of the
meeting, and
(2) the recommendations of the board with
respect to actions to be taken.
- In addition, HSBC sends HSBC ordinary
shareholders and HSBC ADS holders a copy
of its annual report and accounts or a
summary thereof.
- In addition, under the listing rules of
the UKLA and the SEHK, HSBC is (depending
on the size and importance of the
transaction) required to send to
shareholders details relating to
acquisitions, disposals, takeovers,
mergers and offers either made by or in
respect of the company.
</Table>
154
<Table>
<Caption>
PROVISIONS APPLICABLE TO PROVISIONS APPLICABLE TO
HOUSEHOLD COMMON STOCKHOLDERS HSBC ORDINARY SHAREHOLDERS
Reporting Requirements
- - As a U.S. public company, Household must - As a foreign private issuer with
file with the SEC, among other reports and securities listed on the NYSE and
notices: registered under Section 12 of the
Exchange Act, HSBC is required to file
(1) an annual report on Form 10-K within publicly with the SEC and the NYSE annual
90 days (scheduled to be reduced to reports on Form 20-F within six months
60 days by December 15, 2004 under after the end of each fiscal year and to
recently adopted SEC rules) after the furnish reports on Form 6-K in other
end of each fiscal year, circumstances.
(2) quarterly reports on Form 10-Q within - HSBC is also required to notify the UKLA
45 days (scheduled to be reduced to and the SEHK of, among other things,
35 days by December 15, 2005 under
recently adopted SEC rules) after the (1) any major new developments relating to
end of each fiscal quarter, and its business which are not public
knowledge and may lead to a
(3) current reports on Form 8-K upon the substantial movement in its stock
occurrence of important corporate price,
events.
(2) notifications received by it from
persons holding an interest in 3% or
more of any class of the company's
share capital (in Hong Kong SAR, the
disclosure threshold is 10% and such
shareholders must notify the SEHK
before the company),
(3) any changes in its board of directors,
(4) any purchase or redemption by it of
its own equity securities,
(5) interests of directors in its shares
or debentures,
(6) changes in its capital structure,
(7) any decision to (or not to, where
expected to) declare, recommend or
pay any dividend
(8) any preliminary announcement of
profits or losses for any year,
(9) any decision to change the general
character or nature of the business
of the company or its group.
</Table>
155
VALIDITY OF SECURITIES
Norton Rose, London, England, will pass upon the validity under English law
of the HSBC ordinary shares to be issued pursuant to the merger.
EXPERTS
The consolidated financial statements of HSBC as of December 31, 2000 and
2001 and for each of the years in the three-year period ended December 31, 2001
have been audited and reported upon by KPMG Audit Plc, Chartered Accountants and
Registered Auditors. Such financial statements have been incorporated by
reference herein and in the registration statement in reliance upon the report
with respect thereto of KPMG Audit Plc, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
With respect to the unaudited interim financial information of HSBC as of
June 30, 2002, and for the six months then ended, incorporated by reference
herein, KPMG Audit Plc has reported that they applied limited procedures in
accordance with professional standards in both the United Kingdom and the United
States for a review of such information. However, their separate report included
in HSBC's interim report as furnished on Form 6-K containing interim results for
the six-month period ended June 30, 2002, and incorporated by reference herein,
states that they did not audit and they do not express an opinion on that
interim financial information. Accordingly, the degree of reliance on their
report on such information should be restricted in light of the limited nature
of the review procedures applied. KPMG Audit Plc is not subject to the liability
provisions of Section 11 of the Securities Act of 1933 for their report on the
unaudited interim financial information of HSBC because that report is not a
report or a part of the registration statement prepared or certified by KPMG
Audit Plc within the meaning of Sections 7 and 11 of the Securities Act of 1933.
The financial information in respect of HSBC contained in this document
(and in any information incorporated by reference into this document other than
HSBC's annual report on Form 20-F/A) does not constitute statutory accounts
within the meaning of Section 240 of the Companies Act 1985. Full audited
accounts for HSBC Holdings plc for the years ended December 31, 2001, 2000 and
1999 have been delivered to the Registrar of Companies in England and Wales and
KPMG Audit Plc has given reports under Section 235 of the Companies Act on such
accounts, which were unqualified reports within the meaning of Section 237(2) or
(3).
The consolidated financial statements and schedule of Household as of
December 31, 2000 and 2001 and for each of the years in the three-year period
ended December 31, 2001 have been audited and reported upon by KPMG LLP,
independent accountants. Such financial statements and schedule have been
incorporated by reference herein and in the registration statement in reliance
upon the report with respect thereto of KPMG LLP, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing.
With respect to the unaudited interim financial information of Household as
of June 30, 2002, and for the six months then ended, incorporated by reference
herein, KPMG LLP has reported that they applied limited procedures in accordance
with professional standards in the United States for a review of such
information. However, their report with respect thereto, incorporated by
reference herein, states that they did not audit and they do not express an
opinion on that interim financial information. Accordingly, the degree of
reliance on their report on such information should be restricted in light of
the limited nature of the review procedures applied. KPMG LLP is not subject to
the liability provisions of Section 11 of the Securities Act of 1933 for their
report on the unaudited interim financial information of Household because that
report is not a report or a part of the registration statement prepared or
certified by KPMG LLP within the meaning of Sections 7 and 11 of the Securities
Act of 1933.
156
CIRCULAR AND U.K. LISTING PARTICULARS
HSBC is convening an extraordinary general meeting of its ordinary
shareholders, and distributing to those shareholders a circular in accordance
with the listing rules of the UKLA and the SEHK relating to the merger. HSBC
will also deliver a copy of a document comprising the U.K. listing particulars
relating to the merger in accordance with the listing rules of the UKLA to the
Registrar of Companies in England and Wales for registration. Each of these
documents will be available for inspection at the offices of Norton Rose,
Kempson House, Camomile Street, London, EC3A 7AN, England, HSBC Holdings plc, 8
Canada Square, London E14 5HQ, England and The Hongkong and Shanghai Banking
Corporation Limited, Level 37, 1 Queen's Road, Central, Hong Kong SAR until the
date on which the merger becomes effective. Summary particulars are attached as
Annex E to this document. Neither the circular, the listing particulars nor the
documents listed in the summary particulars as available for inspection form
part of, or are incorporated into, this document, except to the extent
specifically provided herein.
FUTURE STOCKHOLDER PROPOSALS
Household intends to hold an annual meeting in 2003 only if the merger is
not completed. To be eligible for inclusion, stockholder proposals were required
to be received by Household's Corporate Secretary no later than December 5,
2002. Stockholders wishing to present a proposal from the floor of the 2003
annual meeting (if it is held), were required to submit such proposals to
Household's Corporate Secretary no earlier than December 14, 2002 or later than
January 14, 2003. If Household does not receive notice by the deadline of any
other matter which a shareholder desires to bring before the 2003 annual meeting
which is not the subject of a proposal timely submitted for inclusion in the
proxy statement, then the proxies designated by the Household board for that
meeting may vote in their discretion on any such matter without mention of the
matter in Household's proxy statement or proxy card for that annual meeting.
WHERE YOU CAN FIND MORE INFORMATION
HSBC files annual and special reports and other information and Household
files annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or other
information on file at the SEC's public reference room located at 450 Fifth
Street, NW, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0300 for
further information on the availability of the public reference room.
Household's and HSBC's SEC filings are available to the public from commercial
document retrieval services and at the Internet world wide web site maintained
by the SEC at www.sec.gov.
HSBC has filed a registration statement on Form F-4 to register with the
SEC the HSBC ordinary shares that Household stockholders will receive in the
merger. This document is a part of the registration statement on Form F-4 and
constitutes a prospectus of HSBC, as well as being a proxy statement for
Household for its special meeting.
The SEC permits HSBC and Household to "incorporate by reference"
information into this document. This means that the companies can disclose
important information to you by referring to another document filed separately
with the SEC. The information incorporated by reference is deemed to be part of
this document, except for any information superseded by information contained
directly in this document.
This document incorporates by reference the documents set forth below that
have been previously filed with or furnished to the SEC. These documents contain
important information about HSBC and Household and their respective financial
conditions.
157
<Table>
<Caption>
HSBC SEC FILINGS (COMMISSION FILE NO. 1-14930;
CIK NO. 0001089113) PERIOD
- ---------------------------------------------- ------
Annual Reports on Form 20-F and Form 20-F/A Year ended December 31, 2001, filed on March 4, 2002
and March 13, 2002
Reports on Form 6-K Furnished on February 25, 2002, April 5, 2002, April
8, 2002, April 10, 2002, May 10, 2002, June 20,
2002, August 5, 2002, August 9, 2002, August 19,
2002, September 3, 2002, September 4, 2002,
September 10, 2002, September 13, 2002, October 8,
2002, November 1, 2002 (two reports), November 4,
2002, November 7, 2002 (two reports), November 20,
2002, November 25, 2002, December 11, 2002, December
12, 2002, December 13, 2002, December 17, 2002 (two
reports), December 20, 2002 (two reports), December
23, 2002, December 24, 2002, January 21, 2003,
February 3, 2003 (two reports), February 6, 2003,
February 12, 2003, February 13, 2003 and February
14, 2003
</Table>
<Table>
<Caption>
HOUSEHOLD SEC FILINGS (COMMISSION
FILE NO. 1-8198; CIK NO. 0000354964) PERIOD
- ---------------------------------------------- ------
Annual Report on Form 10-K/A Year ended December 31, 2001, filed on August 27,
2002
Quarterly Reports on Form 10-Q and 10-Q/A Quarter ended March 31, 2002, filed on August 14,
2002 and August 15, 2002
Quarter ended June 30, 2002, filed on August 14,
2002 and August 15, 2002
Quarter ended September 30, 2002, filed on October
4, 2002
Current Reports on Form 8-K Filed on January 16, 2002, January 28, 2002, March
13, 2002, March 21, 2002, April 8, 2002, April 9,
2002, April 17, 2002, July 17, 2002, August 14,
2002, September 16, 2002, October 15, 2002, October
16, 2002, October 29, 2002, October 30, 2002,
November 6, 2002, November 18, 2002, January 16,
2003 and January 21, 2003
</Table>
HSBC and Household also incorporate by reference into this document
additional documents that they may file with the SEC from the date of this
document to the date of the Household special meeting. These include reports
such as annual reports on Form 10-K of Household and Form 20-F of HSBC,
quarterly reports on Form 10-Q of Household, current reports on Form 8-K of
Household, any reports on Form 6-K of HSBC specifically identified as being
incorporated by reference into this document and proxy statements of Household.
The HSBC ordinary shares to be issued in the merger (including the HSBC
ordinary shares underlying the HSBC ADSs to be issued in the merger) will be
admitted to the Official List of the U.K. Listing Authority and to trading on
the LSE and will be listed on the SEHK, Euronext Paris and the NYSE. The HSBC
ADSs to be issued in the merger will be listed on the NYSE.
If you are an HSBC or Household shareholder, you may have been sent some of
the documents incorporated by reference, but you can obtain any of them through
HSBC, Household or the SEC as described above. Documents incorporated by
reference are available without charge, excluding all exhibits unless an exhibit
has been specifically incorporated by reference into this document. Stockholders
may obtain
158
documents incorporated by reference into this document by requesting them in
writing, by telephone, by e-mail or on the Internet from the appropriate company
at the following addresses:
<Table>
Household International, Inc. HSBC Holdings plc
2700 Sanders Road 8 Canada Square
Prospect Heights, Illinois London E14 5HQ
60070 England
USA Tel. No.: (011-44-20) 7991-8888
Tel. No. (847) 564-5000 Website: www.hsbc.com
Website: www.household.com e-mail:
e-mail: shareholder@hsbc.com
investorrelations@household.com
</Table>
If you would like to request documents from HSBC or Household, please do so
by in order to receive them before the Household special meeting.
159
ANNEX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
HSBC HOLDINGS PLC,
HOUSEHOLD INTERNATIONAL, INC.
AND
H2 ACQUISITION CORPORATION
DATED AS OF
NOVEMBER 14, 2002
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
ARTICLE I
DEFINITIONS
ARTICLE II
THE MERGER
2.1 The Merger.................................................. A-7
2.2 Closing..................................................... A-7
2.3 Effective Time.............................................. A-8
2.4 Change in Structure......................................... A-8
2.5 Certificate of Incorporation................................ A-8
2.6 Bylaws...................................................... A-8
2.7 Directors................................................... A-8
2.8 Officers.................................................... A-8
ARTICLE III
EFFECT OF THE MERGER ON STOCK;
EXCHANGE OF CERTIFICATES
3.1 Effect on Capital Stock..................................... A-8
3.2 Exchange of Certificates.................................... A-10
3.3 Adjustments to Prevent Dilution............................. A-13
3.4 Options..................................................... A-13
3.5 Shares of Dissenting Shareholders........................... A-15
ARTICLE IV
DISCLOSURE SCHEDULES; STANDARDS FOR
REPRESENTATIONS AND WARRANTIES
4.1 Disclosure Schedules........................................ A-16
4.2 Standards................................................... A-16
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
5.1 Organization and Qualification; Subsidiaries................ A-16
5.2 Certificate of Incorporation and By-Laws.................... A-17
5.3 Capitalization.............................................. A-17
5.4 Authority Relative to this Agreement........................ A-18
5.5 No Conflicts; Required Filings and Consents................. A-19
5.6 Certain Contracts........................................... A-19
5.7 SEC Filings; Financial Statements; SAP Statements; RAP A-20
Statements; Other Filings...................................
5.8 Undisclosed Liabilities; Certain Assets..................... A-21
5.9 Information Supplied........................................ A-22
5.10 Absence of Certain Changes or Events........................ A-22
5.11 Compliance with Applicable Laws; Permits.................... A-23
5.12 Absence of Litigation....................................... A-24
5.13 Regulatory Agreements....................................... A-24
5.14 Properties.................................................. A-25
5.15 Loans....................................................... A-25
5.16 Servicing................................................... A-25
5.17 Securitization Matters...................................... A-26
</Table>
A-i
<Table>
<Caption>
PAGE
----
5.18 Employee Benefit Plans; ERISA............................... A-26
5.19 Labor Matters............................................... A-28
5.20 Taxes....................................................... A-29
5.21 Tax Status.................................................. A-29
5.22 Intellectual Property....................................... A-29
5.23 Environmental Liability..................................... A-31
5.24 Company Insurance Policies.................................. A-31
5.25 Voting Matters.............................................. A-31
5.26 Rights Agreement............................................ A-32
5.27 Interested Party Transactions............................... A-32
5.28 Risk Management; Derivatives................................ A-32
5.29 State Takeover Statutes..................................... A-32
5.30 Opinion of Financial Advisor................................ A-32
5.31 Brokers..................................................... A-32
5.32 Nature of Business.......................................... A-33
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE PARENT
6.1 Organization and Qualification; Subsidiaries................ A-33
6.2 Capitalization.............................................. A-33
6.3 Authority Relative to this Agreement........................ A-34
6.4 No Conflicts; Required Filings and Consents................. A-34
6.5 SEC Filings; Financial Statements........................... A-34
6.6 Undisclosed Liabilities..................................... A-35
6.7 Information Supplied........................................ A-35
6.8 Absence of Certain Changes or Events........................ A-35
6.9 Compliance with Applicable Laws............................. A-35
6.10 Absence of Litigation....................................... A-35
6.11 Taxes....................................................... A-36
6.12 Tax Status.................................................. A-36
6.13 Voting Matters.............................................. A-36
6.14 Brokers..................................................... A-36
ARTICLE VII
COVENANTS RELATING TO THE CONDUCT OF BUSINESS
7.1 Conduct of Business by the Company Pending the Merger....... A-36
7.2 No Solicitation............................................. A-39
7.3 Conduct of Business by Parent Pending the Merger............ A-40
ARTICLE VIII
ADDITIONAL AGREEMENTS
8.1 Registration Statement; Parent Documents.................... A-40
8.2 Shareholder Meetings........................................ A-41
8.3 Access to Information; Confidentiality...................... A-42
8.4 Filings; Other Actions; Notification........................ A-42
8.5 Accountants' Letters........................................ A-43
8.6 Listing Applications........................................ A-43
</Table>
A-ii
<Table>
<Caption>
PAGE
----
8.7 Tax Opinions................................................ A-43
8.8 Affiliates.................................................. A-44
8.9 Indemnification, Exculpation and Insurance.................. A-44
8.10 Employee Matters............................................ A-45
8.11 Section 16 Matters.......................................... A-46
8.12 Public Announcements........................................ A-46
8.13 Conveyance Taxes............................................ A-46
8.14 Tax Free Merger............................................. A-46
8.15 Redemption of Certain Designations of Preferred Stock....... A-46
8.16 Retirement of Treasury Stock................................ A-47
ARTICLE IX
CONDITIONS PRECEDENT TO CLOSING
9.1 Conditions to the Obligation of Each Party to Effect the A-47
Merger......................................................
9.2 Conditions to the Obligation of Parent to Effect the A-48
Merger......................................................
9.3 Conditions to the Obligation of the Company to Effect the A-48
Merger......................................................
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
10.1 Termination................................................. A-49
10.2 Effect of Termination....................................... A-50
10.3 Fees and Expenses........................................... A-50
ARTICLE XI
MISCELLANEOUS AND GENERAL
11.1 Survival.................................................... A-51
11.2 Modification or Amendment................................... A-51
11.3 Waiver...................................................... A-51
11.4 Counterparts................................................ A-51
11.5 Governing Law and Venue; Waiver of Jury Trial............... A-51
11.6 Notices..................................................... A-52
11.7 Entire Agreement............................................ A-53
11.8 No Third Party Beneficiaries................................ A-53
11.9 Severability................................................ A-53
11.10 Interpretation.............................................. A-53
11.11 Assignment.................................................. A-54
</Table>
A-iii
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of November 14,
2002, among HSBC Holdings plc, a public limited company incorporated in England
and Wales ("Parent"), Household International, Inc., a Delaware corporation (the
"Company") and H2 Acquisition Corporation, a Delaware corporation and a
wholly-owned subsidiary of Parent ("Merger Sub").
RECITALS
WHEREAS, the boards of directors of Parent, Merger Sub and the Company have
each determined that it is in furtherance of and consistent with their
respective long-term business strategies and is advisable and in the best
interests of their respective companies and shareholders for the Company to
merge with and into Merger Sub upon the terms and subject to the conditions set
forth herein;
WHEREAS, in furtherance of such combination, the boards of directors of
Parent, Merger Sub and the Company have each approved the merger (the "Merger")
of the Company with and into Merger Sub in accordance with the applicable
provisions of the Delaware General Corporation Law (the "DGCL"), and upon the
terms and subject to the conditions set forth herein;
WHEREAS, it is intended that, for United States federal income tax
purposes, the Merger shall qualify (i) as a reorganization under the provisions
of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
and (ii) for an exception to the general rule of Section 367(a)(1) of the Code,
and that this Agreement be, and hereby is, adopted as a plan of reorganization
for purposes of Sections 354 and 361 of the Code;
WHEREAS, following the Merger, Parent intends to contribute the capital
stock of the Surviving Corporation to an indirect U.S. subsidiary of Parent (the
"Parent Intermediate Holding Subsidiary") which will serve as the principal
holding company of Parent's U.S. operations through successive transfers in
which each transferee is "controlled" by the respective transferor within the
meaning of Section 368(c) of the Code; and
WHEREAS, the Company, Parent and Merger Sub desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and the other transactions contemplated hereby.
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements contained herein, and
intending to be legally bound, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
"Acquisition Proposal" has the meaning set forth in Section 7.2(a).
"Affiliate Letters" has the meaning set forth in Section 8.8.
"Agreement" has the meaning set forth in the preamble.
"Alternative Transaction" means any of (i) a transaction pursuant to which
any Person (or group of Persons) other than Parent or its affiliates, directly
or indirectly, acquires or would acquire more than 25% of the outstanding Common
Shares or outstanding voting power or of any new series or class of preferred
stock that would be entitled to a class or series vote with respect to the
Merger, whether from the Company or pursuant to a tender offer or exchange offer
or otherwise, (ii) a merger or other business combination involving the Company
(other than the Merger), (iii) any transaction pursuant to which any Person (or
group of Persons) other than Parent or its affiliates acquires or would acquire
control of assets (including for this purpose the outstanding equity securities
of subsidiaries of the Company and securities of the entity surviving any merger
or business combination including any of the Company's subsidiaries) of the
Company, or any of its subsidiaries representing (as determined by the Board of
Directors of the Company in good faith) more than 25% of the fair market value
of all the assets, net revenues or net income of the Company and its
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subsidiaries, taken as a whole, immediately prior to such transaction, or (iv)
any other consolidation, business combination, recapitalization or similar
transaction involving the Company or any of its subsidiaries, other than the
transactions contemplated by this Agreement, as a result of which the holders of
Common Shares immediately prior to such transaction do not, in the aggregate,
own at least 75% of each of the outstanding common stock and the outstanding
voting power of the surviving or resulting entity in such transaction
immediately after the consummation thereof in substantially the same proportion
as such holders held the Common Shares immediately prior to the consummation
thereof.
"Assumed Stock Option" has the meaning set forth in Section 3.4(a).
"Burdensome Condition" has the meaning set forth in Section 8.4(a).
"Business Day" means any day other than a Saturday, Sunday or one on which
banks are authorized by law to close in New York, New York or London, England
or, for the purposes of Section 2.2 only, Hong Kong.
"Bylaws" has the meaning set forth in Section 2.6.
"Certificate" has the meaning set forth in Section 3.1(c).
"Certificate of Incorporation" has the meaning set forth in Section 2.5.
"Certificate of Merger" has the meaning set forth in Section 2.3.
"Change in Company Recommendation" has the meaning set forth in Section
7.2(c).
"Closing" has the meaning set forth in Section 2.2.
"Closing Date" has the meaning set forth in Section 2.2.
"Code" has the meaning set forth in the recitals.
"Common Exchange Ratio" has the meaning set forth in Section 3.1(a).
"Common Merger Consideration" has the meaning set forth in Section 3.1(a).
"Common Share" has the meaning set forth in Section 3.1(a).
"Company" has the meaning set forth in the preamble.
"Company $4.30 Preferred Stock" has the meaning set forth in Section
5.3(a).
"Company $4.50 Preferred Stock" has the meaning set forth in Section
5.3(a).
"Company 5% Preferred Stock" has the meaning set forth in Section 5.3(a).
"Company 7 5/8% Preferred Stock" has the meaning set forth in Section
5.3(a).
"Company 7.35% Preferred Stock" has the meaning set forth in Section
5.3(a).
"Company 7.5% Preferred Stock" has the meaning set forth in Section 5.3(a).
"Company 7.60% Preferred Stock" has the meaning set forth in Section
5.3(a).
"Company 8.25% Preferred Stock" has the meaning set forth in Section
5.3(a).
"Company Acquisition Agreement" has the meaning set forth in Section
10.3(b)(i).
"Company Benefit Plan" shall mean any material employment, consulting,
severance pay, termination pay, retirement, deferred compensation, retention or
change in control plan, program, arrangement, agreement or commitment, or an
executive compensation, incentive bonus or other bonus, pension, stock option,
restricted stock or equity-based, profit sharing, savings, life, health,
disability, accident, medical, insurance, vacation, or other employee benefit
plan, program, arrangement, agreement, fund or commitment, including any
"employee benefit plan" as defined in Section 3(3) of ERISA, providing benefits
to any current or former employee, consultant or director of the Company or any
of its subsidiaries (including any entity with respect to which the Company or
its subsidiaries is a successor) and entered into, maintained or contributed to
by the
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Company or any of its subsidiaries or to which the Company or any of its
subsidiaries has any obligation to contribute.
"Company Charter Documents" has the meaning set forth in Section 5.2.
"Company Counsel Tax Opinion" has the meaning set forth in Section 8.7.
"Company Disclosure Schedule" has the meaning set forth in Section 4.1.
"Company DRIP" has the meaning set forth in Section 3.4(f).
"Company Employees" has the meaning set forth in Section 8.10(b).
"Company ESPP" has the meaning set forth in Section 3.4(f).
"Company Financial Statements" has the meaning set forth in Section 5.7(a).
"Company IP" means, as of a specified date, all Intellectual Property that
is used or held for use in connection with the business of the Company and its
subsidiaries as of such date.
"Company Loans" has the meaning set forth in Section 5.15.
"Company Material Contract" has the meaning set forth in Section 5.6(a).
"Company Option Plans" has the meaning set forth in Section 3.4(a).
"Company Permits" has the meaning set forth in Section 5.11(e).
"Company RAP Statements" has the meaning set forth in Section 5.7(c).
"Company Regulatory Agreement" has the meaning set forth in Section 5.13.
"Company SAP Statements" has the meaning set forth in Section 5.7(b).
"Company SEC Documents" has the meaning set forth in Section 5.7(a).
"Company Servicing Rights" means, with respect to any loan, any and all of
the following: (a) all rights to service such loan; (b) all rights to receive
servicing fees, additional servicing compensation (including without limitation
any late fees, assumption fees, penalties or similar payments with respect to
such loan, and any interest income on any payments or other receipts on or with
respect to such loan), reimbursements or indemnification for servicing such
loan, and any payments received in respect of the foregoing and proceeds
thereof; (c) the right to collect, hold and disburse escrow payments or other
similar payments with respect to such loans and any amounts actually collected
with respect thereto (in accordance with any applicable Servicing Agreement),
and to receive interest income on such amounts to the extent permitted by
applicable law; (d) all accounts and other rights to payment related to any of
the property described in this paragraph; (e) possession and use of any and all
servicing files pertaining to such loans or pertaining to the past, present or
prospective servicing of such loans; (f) all rights and benefits relating to the
direct solicitation of the related borrowers for refinance or modification of
such loans and attendant right, title and interest in and to the list of
borrowers and data relating to their respective loans; (g) all rights, powers
and privileges incident to any of the foregoing; and (h) all agreements or
documents creating, defining or evidencing any of the foregoing rights to the
extent they relate to such rights and all rights of the Company or any of its
subsidiaries thereunder.
"Company Shareholder Approval" has the meaning set forth in Section 5.25.
"Company Shareholder Meeting" has the meaning set forth in Section 8.2(a).
"Company Sponsored Asset Securitization Transaction" means any loan or
other asset securitization transaction in which the Company or any of its
subsidiaries was an issuer, sponsor or depositor.
"Company Stock Option" has the meaning set forth in Section 3.4(a).
"Company Stock Purchase Plans" has the meaning set forth in Section 3.4(f).
"Confidentiality Agreement" has the meaning set forth in Section 8.3.
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"Continuation Period" has the meaning set forth in Section 8.10(a).
"Copyrights" means writings and other works of authorship.
"Depositary" has the meaning set forth in Section 3.1(a).
"Deposit Agreement" has the meaning set forth in Section 3.1(a).
"DGCL" has the meaning set forth in the recitals.
"Dissenting Shares" has the meaning set forth in Section 3.5.
"Effective Date" has the meaning set forth in Section 2.3.
"Effective Time" has the meaning set forth in Section 2.3.
"Environmental Claims" has the meaning set forth in Section 5.23.
"Environmental Laws" has the meaning set forth in Section 5.23.
"ERISA" mean the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Shares" has the meaning set forth in Section 3.2(d)(i).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" has the meaning set forth in Section 3.2(a)(i).
"Excluded Shares" has the meaning set forth in Section 3.1(a).
"Federal Reserve Board" means the Board of Governors of the Federal Reserve
System.
"Fee" has the meaning set forth in Section 10.3(b).
"Final Dividend" has the meaning set forth in Section 7.1(a).
"Form F-4" has the meaning set forth in Section 8.1(a).
"FSA" means the U.K. Financial Services Authority.
"Governmental Consents" has the meaning set forth in Section 9.1(d).
"Governmental Entity" means any federal, state, local or foreign
government, any court, administrative, regulatory or other governmental agency,
commission or authority or any non-governmental self-regulatory agency,
commission or authority, in each such case in any part of the world, including,
without limitation, the NYSE, the UKLA, the LSE, the HKSE, the FSA, the Federal
Reserve Board and the Hong Kong Monetary Authority.
"HKSE" means The Stock Exchange of Hong Kong Ltd.
"HKSE Listing Rules" means The Rules Governing The Listing of Securities on
the HKSE.
"Hong Kong" means the Hong Kong Special Administrative Region of the
People's Republic of China.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"Intellectual Property" means all intellectual property and other similar
proprietary rights in any jurisdiction, whether owned or held for use under
license, whether registered or unregistered, including without limitation such
rights in and to: (i) Trademarks; (ii) Patents, inventions, invention
disclosures, discoveries and improvements, whether or not patentable; (iii)
Copyrights; (iv) Trade Secrets; (v) Software; (vi) domain names and uniform
resource locators; (vii) mask works; (viii) moral rights; and (ix) claims,
causes of action and defenses relating to the enforcement of any of the
foregoing; in each case, including any registrations of, applications to
register, and renewals and extensions of, any of the foregoing with or by any
governmental authority in any jurisdiction.
"IRS" means the United States Internal Revenue Service.
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"Licensed Company IP" means all Company IP other than the Owned Company IP.
"LSE" means the London Stock Exchange plc.
"Material Adverse Effect" means, with respect to Parent or the Company, as
the case may be, a material adverse effect on (i) the business, assets,
liabilities, results of operations or financial condition of such party and its
subsidiaries taken as a whole; provided, however, that with respect to this
clause (i), Material Adverse Effect shall not be deemed to include the impact of
(v) the public disclosure of the transactions contemplated hereby, (w) changes
in laws, rules or regulations of general applicability or interpretations
thereof by courts or Governmental Entities, in each case after the date hereof,
(x) changes, after the date hereof, in applicable generally accepted accounting
principles or regulatory accounting requirements generally applicable to
comparable companies, (y) actions or omissions of a party to this Agreement
taken with the prior written consent of the other parties to this Agreement and
(z) changes, after the date hereof, in general economic and market conditions
except, in the case of clauses (w), (x) and (z), to the extent that such changes
have a disproportionately adverse effect on the relevant party and its
subsidiaries relative to comparable businesses, or (ii) the ability of such
party to perform its material obligations under this Agreement and to consummate
the transactions contemplated hereby.
"Merger" has the meaning set forth in the recitals.
"Merger Sub" has the meaning set forth in the preamble.
"Merger Sub Common Stock" has the meaning set forth in Section 3.1(d).
"Month End Date" has the meaning set forth in Section 2.2.
"Multi-State Settlement Agreement" has the meaning set forth in Section
5.11(c).
"1996 Plan" has the meaning set forth in Section 3.4(a).
"NYSE" means the New York Stock Exchange, Inc.
"OCC" means the Office of the Comptroller of Currency.
"OFT" means the U.K. Office of Fair Trading.
"Option Holder" has the meaning set forth in Section 3.4(a).
"Order" has the meaning set forth in Section 9.1(e).
"Other Company Documents" has the meaning set forth in Section 5.7(e).
"Owned Company IP" means that portion of the Company IP that is owned by
the Company and its subsidiaries.
"Parent" has the meaning set forth in the preamble.
"Parent ADRs" has the meaning set forth in Section 3.1(a).
"Parent Circular" has the meaning set forth in Section 8.1(c).
"Parent Counsel Tax Opinion" has the meaning set forth in Section 8.7.
"Parent Depositary Shares" has the meaning set forth in Section 3.1(a).
"Parent Disclosure Schedule" has the meaning set forth in Section 4.1.
"Parent Documents" has the meaning set forth in Section 8.1(c).
"Parent Financial Statements" has the meaning set forth in Section 6.5.
"Parent Intermediate Holding Subsidiary" has the meaning set forth in the
recitals.
"Parent Listing Particulars" has the meaning set forth in Section 8.1(c).
"Parent Ordinary Shares" has the meaning set forth in Section 3.1(a).
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"Parent Plans" has the meaning set forth in Section 8.10(b).
"Parent SEC Documents" has the meaning set forth in Section 6.5.
"Parent Shareholder Approval" has the meaning set forth in Section 6.13.
"Parent Shareholder Meeting" has the meaning set forth in Section 8.2(a).
"Patents" means patents and patent applications, and any and all divisions,
continuations, continuations-in-part, reissues, continuing patent applications,
reexaminations, and extensions thereof, any counterparts claiming priority
therefrom, utility models, patents of importation/confirmation, certificates of
invention, certificates of registration and like rights.
"PBGC" has the meaning set forth in Section 5.18(a).
"Person" means any individual, corporation (including not-for-profit),
general or limited partnership, limited liability company, joint venture,
estate, trust, association, organization, Governmental Entity or other entity of
any kind or nature.
"Preferred Merger Consideration" means, with respect to any series of
Preferred Shares not redeemed pursuant to Section 8.15 and outstanding
immediately prior to the Effective Time, the cash consideration into which such
series of Preferred Shares will be converted in the Merger pursuant to Section
3.1(b).
"Preferred Shares" has the meaning set forth in Section 5.3(a).
"Press Announcements" means any press announcements issued in accordance
with the UKLA Listing Rules or the HKSE Listing Rules.
"Previously Filed Company SEC Documents" has the meaning set forth in
Section 5.7(a).
"Previously Filed Parent SEC Documents" has the meaning set forth in
Section 6.6.
"Proposed Closing Date" has the meaning set forth in Section 2.2.
"Prospectus" has the meaning set forth in Section 8.1(a).
"Proxy Statement" has the meaning set forth in Section 8.1(a).
"RAP" has the meaning set forth in Section 5.7(c).
"Required States" has the meaning set forth in Section 5.11(c).
"Rights Agreement" means the Rights Agreement, dated July 9, 1996, between
the Company and Harris Trust and Savings Bank, as Rights Agent.
"SAP" has the meaning set forth in Section 5.7(b).
"Sarbanes-Oxley Act" means the Sarbanes-Oxley Act of 2002.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securitization Disclosure Documents" has the meaning set forth in Section
5.17(a).
"Servicing Agreement" means all contracts and agreements pursuant to which
the Company or any of its subsidiaries has Company Servicing Rights.
"Software" means software, including without limitation data files, source
code, object code, application programming interfaces, databases and other
software-related specifications and documentation.
"Subsidiary Charter Documents" has the meaning set forth in Section 5.2.
"Superior Proposal" means any proposal made by a third party to acquire,
directly or indirectly (including through a merger, consolidation or similar
transaction), for consideration consisting of cash and/or securities, all of the
Company Common Stock entitled to vote generally in the election of directors or
all or
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substantially all of the assets of the Company, on terms which the Board of
Directors of the Company reasonably believes (after consultation with a
financial advisor of nationally recognized reputation and outside legal counsel)
to be reasonably capable of completion and, if completed, more favorable from a
financial point of view to its shareholders than the Merger and the transactions
contemplated by this Agreement taking into account at the time of determination
any changes to the financial terms of this Agreement proposed by Parent.
"Surviving Corporation" has the meaning set forth in Section 2.1.
"Tax" shall mean, with respect to any Person, any tax, domestic or
non-U.S., including without limitation any income (net, gross or other,
including recapture of any tax items such as investment tax credits),
alternative or add-on minimum tax, gross income, gross receipts, gains, sales,
use, leasing, lease, user, ad valorem, transfer, recording, franchise, profits,
property (real or personal, tangible or intangible), fuel, license, withholding
on amounts paid to or by such Person, payroll, employment, unemployment, social
security, excise, severance, stamp, occupation, premium, environmental or
windfall profit tax, custom, duty, value added or other tax, or other like
assessment or charge of any kind whatsoever, together with any interest, levies,
assessments, charges, penalties, additions to tax or additional amounts imposed
by any Taxing Authority.
"Tax Return(s)" shall mean all returns, consolidated or otherwise, reports
or statements (including without limitation informational returns), required to
be filed with any Taxing Authority.
"Taxing Authority" shall mean any Governmental Entity responsible for the
imposition of any Tax.
"Third-Party Asset Investor" means, with respect to any asset serviced by
the Company or any of its subsidiaries for any third party, any owner, purchaser
or beneficiary of such asset.
"Trade Secrets" means trade secrets (including, those trade secrets defined
in the Uniform Trade Secrets Act and under corresponding foreign statutory and
common law), business, technical and know-how information, non-public
information, and confidential information and rights to limit the use or
disclosure thereof by any Person.
"Trademarks" means trademarks, trade dress, service marks, certification
marks, logos, and trade names, and the goodwill associated with the foregoing.
"UKLA" means the FSA, acting in its capacity as the competent authority for
the purpose of Part VI of the Financial Services and Markets Act 2000.
"Units" has the meaning set forth in Section 5.3(a).
"U.S. GAAP" means United States generally accepted accounting principles.
ARTICLE II
THE MERGER
2.1 The Merger. Upon the terms and subject to the conditions set forth in
this Agreement, at the Effective Time and in accordance with the DGCL, the
Company shall be merged with and into Merger Sub and the separate corporate
existence of the Company shall thereupon cease. Merger Sub shall be the
surviving corporation in the Merger (sometimes hereinafter referred to as the
"Surviving Corporation"), and the separate corporate existence of Merger Sub
with all its rights, privileges, immunities, powers and franchises shall
continue unaffected by the Merger. At the Effective Time, the effect of the
Merger shall be as provided in this Agreement, and the applicable provisions of
the DGCL. Without limiting the generality of the foregoing, and subject thereto,
at the Effective Time all the property, rights, privileges, powers and
franchises of the Company and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation.
2.2 Closing. The closing of the Merger (the "Closing") shall take place
(i) at the offices of Cleary, Gottlieb, Steen & Hamilton, One Liberty Plaza, New
York, New York at 9:00 a.m. New York City time on the fifth Business Day after
all of the conditions set forth in Article IX have been fulfilled or waived
(other
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than those conditions that by their nature are to be satisfied at the Closing,
but subject to the fulfillment or waiver of those conditions) in accordance with
this Agreement (the "Proposed Closing Date"); provided, however, that if the
Proposed Closing Date occurs within five Business Days before the last day of a
calendar month, Parent may elect, at its option, to defer the Closing until such
month-end date (the "Month End Date") by giving written notice to such effect to
the Company accompanied by a written irrevocable waiver of all conditions other
than the conditions contained in Sections 9.1(e), 9.1(f) and 9.2(f), to the
extent permissible under applicable law, of all conditions to Closing as of the
Month End Date or (ii) at such other place and time and/or on such other date as
the Company and Parent may agree in writing (the date upon which the Closing
occurs, the "Closing Date").
2.3 Effective Time. Subject to the provisions of this Agreement, as soon
as practicable following the Closing on the Closing Date, the parties hereto
shall file a certificate of merger as contemplated by the DGCL (the "Certificate
of Merger"), together with any required related certificates, with the Secretary
of State of the State of Delaware, in such form as required by, and executed in
accordance with the relevant provisions of, the DGCL. The Merger shall become
effective upon the filing of the Certificate of Merger or at such later date and
time as Parent and the Company shall agree and specify in such Certificate of
Merger (such time, the "Effective Time" and the date on which the Effective Time
occurs, the "Effective Date").
2.4 Change in Structure. Parent may at any time prior to the Effective
Time change the structural method of effecting the combination with the Company
(including, without limitation, the provisions of this Article II and of Article
III) if and to the extent Parent deems such change to be desirable; provided,
however, that no such change shall (i) alter or change in any way (including as
to the amount or kind) the consideration to be issued to holders of capital
stock of the Company, or the holders of any Company Stock Options as provided
for in this Agreement, (ii) adversely affect the tax treatment of holders of
Common Shares as a result of the transactions contemplated by this Agreement,
(iii) materially impede or materially delay, or be reasonably likely to
materially impede or materially delay, consummation of the transactions
contemplated by this Agreement or (iv) adversely affect any party's ability to
satisfy any of the closing conditions set forth in Article IX.
2.5 Certificate of Incorporation. The certificate of incorporation of
Merger Sub as in effect immediately prior to the Effective Time shall be the
certificate of incorporation of the Surviving Corporation (the "Certificate of
Incorporation"), until thereafter duly amended as provided therein or by
applicable law.
2.6 Bylaws. The bylaws of Merger Sub in effect immediately prior to the
Effective Time shall be the bylaws of the Surviving Corporation (the "Bylaws"),
until thereafter amended as provided therein or by applicable law.
2.7 Directors. The directors of Merger Sub immediately prior to the
Effective Time shall, from and after the Effective Time, be the directors of the
Surviving Corporation until their successors have been duly elected or appointed
and qualified or until their earlier death, resignation or removal in accordance
with the Certificate of Incorporation and the Bylaws of the Surviving
Corporation.
2.8 Officers. The officers of the Company immediately prior to the
Effective Time shall, from and after the Effective Time, be the officers of the
Surviving Corporation until their successors have been duly elected or appointed
and qualified or until their earlier death, resignation or removal in accordance
with the Certificate of Incorporation and the Bylaws of the Surviving
Corporation.
ARTICLE III
Effect of the Merger on Stock;
Exchange of Certificates
3.1 Effect on Capital Stock. At the Effective Time, as a result of the
Merger and without any action on the part of the holder of any stock of the
Company or Merger Sub:
(a) Common Merger Consideration. Each share of Company Common Stock,
$1.00 par value per share (each, a "Common Share"), issued and outstanding
immediately prior to the Effective Time (other
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than shares (i) owned by Parent or any subsidiary of the Company or Parent,
unless held for the account or benefit of any customer, client or other Person,
or (ii) held in treasury by the Company (collectively, "Excluded Shares")),
shall be converted into the right to receive, in accordance with this Article
III, 2.675 (the "Common Exchange Ratio") ordinary shares of Parent, of nominal
value U.S. $0.50 each ("Parent Ordinary Shares"). Each holder of converted and
cancelled Common Shares (other than Excluded Shares) shall have the right to
elect (in respect of each separate beneficial owner) to receive, in lieu of each
of the Parent Ordinary Shares such beneficial owner has the right to receive
pursuant to the prior sentence, 0.535 American depositary shares (the "Parent
Depositary Shares") per Common Share, each such Parent Depositary Share
representing the right to receive five Parent Ordinary Shares (such Parent
Ordinary Shares or Parent Depositary Shares to be issued to holders of Common
Shares, the "Common Merger Consideration"). The Parent Depositary Shares may be
evidenced by one or more American depositary receipts ("Parent ADRs") issued in
accordance with the Deposit Agreement among Parent, The Bank of New York, as
depositary (the "Depositary"), and holders and beneficial owners from time to
time of Parent ADRs issued thereunder (as amended from time to time, the
"Deposit Agreement").
(b) Preferred Merger Consideration.
(i) Each share of Company 7 5/8% Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than Excluded
Shares and Dissenting Shares) shall be converted into the right to receive,
in accordance with this Article III, cash in the amount of $1,000 ($25 per
depositary share) plus all accumulated and unpaid dividends to but
excluding the Closing Date, without interest.
(ii) Each share of Company 7.50% Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than Excluded
Shares and Dissenting Shares) shall be converted into the right to receive,
in accordance with this Article III, cash in the amount of $1,000 ($25 per
depositary share) plus all accumulated and unpaid dividends to but
excluding the Closing Date, without interest.
(iii) Each share of Company 7.60% Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than Excluded
Shares and Dissenting Shares) shall be converted into the right to receive,
in accordance with this Article III, cash in the amount of $1,000 ($25 per
depositary share) plus all accumulated and unpaid dividends to but
excluding the Closing Date, without interest.
(iv) Each share of Company 8 1/4% Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than Excluded
Shares and Dissenting Shares) shall be converted into the right to receive,
in accordance with this Article III, cash in the amount of $1,000 ($25 per
depositary share) plus all accumulated and unpaid dividends to but
excluding the Closing Date, without interest.
(c) Cancellation of Shares. All Common Shares and Preferred Shares
(which term, for purposes of this Article III, shall mean only those Preferred
Shares referenced in Section 3.1(b)(i)-(iv) above) shall no longer be
outstanding and shall be cancelled and retired and shall cease to exist, and
each certificate (a "Certificate") formerly representing any of such Common
Shares or Preferred Shares (other than Excluded Shares), shall thereafter
represent only the right to the Common Merger Consideration (and the right, if
any, to receive pursuant to Section 3.2(d) cash in lieu of a fractional Parent
Ordinary Share or Parent Depositary Share and any distribution or dividend
pursuant to Section 3.2(b)) or the Preferred Merger Consideration, respectively,
in each case without interest. The Parent Ordinary Shares and the Parent
Depositary Shares issued in accordance with this Article III shall be of the
same class and shall have the same rights as the currently outstanding Parent
Ordinary Shares and the currently outstanding Parent Depositary Shares,
respectively. The Surviving Corporation shall be liable for all stamp duties,
stamp duty reserve tax and other similar Taxes imposed in connection with the
issuance or creation of Parent Ordinary Shares or Parent Depositary Shares
constituting Common Merger Consideration and any Parent ADRs in connection
therewith and any deliveries thereof by the Exchange Agent in accordance with
Section 3.2(a) or Section 3.2(b) below (including any United Kingdom stamp duty,
stamp duty reserve tax or other similar Taxing Authority charge (or any interest
or penalties thereon) that may be payable by the Surviving Corporation, the
Exchange Agent or Parent pursuant to the Deposit Agreement). Subject to Section
3.2(a)(iii) below, no holder of Common Shares or Company Stock Options shall be
obligated to pay any fee or other charge or expense to the Depositary or any
stamp duties, stamp duty reserve tax or other similar Taxing Authority charges
in
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connection with the issuance of any Parent Ordinary Shares, Parent Depositary
Shares or Parent ADRs pursuant to either the Merger or the exercise of Adjusted
Options and any deliveries thereof by the Exchange Agent in accordance with
Section 3.2(a) and Section 3.2(b) below (for avoidance of doubt, the parties
agree that the provisions of this sentence shall not apply to any subsequent
transfer of Parent Ordinary Shares, Parent Depositary Shares or Parent ADRs or
delivery or subsequent deposit pursuant to the Deposit Agreement).
(d) Merger Sub. Each share of common stock, par value $0.01 per share
("Merger Sub Common Stock"), of Merger Sub issued and outstanding
immediately prior to the Effective Time shall be cancelled.
(e) Issuance of Surviving Corporation Shares. In consideration for the
delivery, in accordance with Section 3.2(a), of the Parent Ordinary Shares
referred to in Section 3.1(f), the Surviving Corporation shall issue to
Parent at the Effective Time 50 shares of common stock of the Surviving
Corporation.
(f) Delivery of Parent Ordinary Shares and Cash. In consideration of
the cancellation of Common Shares and Preferred Shares pursuant to Section
3.1(c) and the issue to Parent by the Surviving Corporation of shares of
common stock of the Surviving Corporation pursuant to Section 3.1(e),
Parent shall deliver to the Exchange Agent (i) such number of Parent
Ordinary Shares as is equal to the number of Common Shares outstanding as
of the Effective Time (other than Excluded Shares) multiplied by the Common
Exchange Ratio for purposes of giving effect to the delivery of the Common
Merger Consideration referred to in Section 3.1(a) and (ii) cash in the
amount required to pay the Preferred Merger Consideration in accordance
with Section 3.1(b).
3.2 Exchange of Certificates.
(a) Exchange Agent and Procedures.
(i) Prior to the Effective Time, Parent shall appoint the Bank of New
York or another agent reasonably acceptable to the Company, as exchange
agent (the "Exchange Agent") for the purpose of acting solely as an agent
in exchanging Certificates for Parent Ordinary Shares, Parent Depositary
Shares or cash in accordance with this Article III. Promptly after the
Effective Time, the Surviving Corporation shall cause the Exchange Agent to
send to each holder of record of Common Shares and Preferred Shares (other
than Excluded Shares) as of the Effective Time (x) a letter of transmittal
which shall require holders of Common Shares to elect to take Common Merger
Consideration either in the form of Parent Ordinary Shares or Parent
Depositary Shares, and which shall specify that delivery shall be effected,
and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent, such letter of
transmittal to be in such form and to have such other provisions as the
Company and Parent shall reasonably specify, and (y) instructions for use
in effecting the surrender of the Certificates in exchange for (A) in the
case of Certificates representing Common Shares, (1) the Common Merger
Consideration and (2) if applicable, any cash in lieu of fractional Parent
Ordinary Shares or Parent Depositary Shares in accordance with Section
3.2(d) and unpaid dividends or other distributions in accordance with
Section 3.2(b), and (B) in the case of Certificates representing Preferred
Shares, the applicable Preferred Merger Consideration. In the case of
Common Shares, such letter of transmittal shall also permit the holder of
record as of the Effective Time of Common Shares submitting the same who
elects to receive Parent Ordinary Shares to choose to hold such Parent
Ordinary Shares in certificated or uncertificated form. The Exchange Agent
will act solely as nominee for the holders of record of Common Shares and
Preferred Shares (other than Excluded Shares) as of the Effective Time in
relation to the actions required by the Exchange Agent under this Article
III.
(ii) Each holder of any Common Shares that have been converted into a
right to receive the Common Merger Consideration set forth in Section
3.1(a) shall, upon surrender of a Certificate representing Common Shares
for cancellation to the Exchange Agent together with a properly completed
letter of transmittal, duly executed, be entitled to receive in exchange
therefor (x) that whole number of Parent Ordinary Shares or Parent
Depositary Shares that such holder is entitled to receive pursuant to this
Article III and (y) a check in the amount (after giving effect to any tax
withholdings required by
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applicable law) of (A) any cash in lieu of a fractional Parent Ordinary
Share or a fractional Parent Depositary Share in accordance with Section
3.2(d), plus (B) if applicable, any unpaid dividends or other distributions
that such holder has the right to receive in accordance with Section
3.2(b), and the Certificate so surrendered shall forthwith be cancelled. No
interest will be paid or accrued on any amount payable upon due surrender
of the Certificates. Subject to the receipt of a duly completed and validly
executed letter of transmittal with respect to Common Shares electing to
receive Parent Depositary Shares together with delivery of a Certificate in
the proper form required by the letter of transmittal, Parent shall issue
the Ordinary Shares to the Depositary (or as it may direct) as and when
required for the delivery of Parent Depositary Shares in accordance with
this Article III. Parent shall procure that the Exchange Agent requisitions
from the Depositary, from time to time, Parent ADRs representing such
number of Parent Depositary Shares, in such denominations as the Exchange
Agent shall specify, as are issuable in respect of Common Shares the
holders of which have elected to receive Parent Depositary Shares and for
which Certificates have been delivered to the Exchange Agent. Subject to
the receipt of a duly completed and validly executed letter of transmittal
with respect to Common Shares electing to receive Parent Ordinary Shares
together with delivery of a Certificate in the proper form required by the
letter of transmittal, Parent shall cause to be delivered to each Person
entitled thereto Parent Ordinary Shares pursuant to this Section
3.2(a)(ii), credited as fully paid, and will cause such Person's name to be
entered in the register of members of Parent and, except where such Person
has requested such Parent Ordinary Shares to be issued in uncertificated
form, a certificate in respect thereof shall be issued to such Person.
Where such Person has requested such Parent Ordinary Shares to be issued in
uncertificated form, Parent shall cause such Parent Ordinary Shares to be
duly delivered in accordance with the instructions given by the Person
entitled thereto and in accordance with the rules of the CREST system.
(iii) In the event of the surrender of a Certificate representing
Common Shares or Preferred Shares which are not registered in the transfer
records of the Company under the name of the Person surrendering such
Certificate, the proper number of Parent Ordinary Shares or Parent
Depositary Shares, as the case may be, and/or a check for any cash to be
paid upon due surrender of the Certificate and any other dividends or
distributions in respect thereof, shall be issued or otherwise delivered
and/or paid to such a transferee if the Certificate formerly representing
such Common Shares or Preferred Shares is presented to the Exchange Agent,
accompanied by all documents reasonably required to evidence and effect
such transfer and to evidence that any applicable stock transfer Taxes have
been paid. If any Parent Ordinary Shares, Parent Depositary Shares or cash,
as the case may be, are to be delivered to a Person whose name is other
than that in which the Certificate surrendered in exchange therefor is
registered, it shall be a condition of such delivery that the Person
requesting such delivery shall pay any transfer or other similar Taxes
required to be paid by reason of such delivery to a Person whose name is
other than that of the registered holder of the Certificate surrendered to
the extent that such Taxes are greater than those Taxes which would have
been payable by the Surviving Corporation under Section 3.1(c) had the
relevant Parent Ordinary Shares, Parent Depositary Shares or cash been
delivered to the relevant registered holder of such Certificate or shall
establish to the reasonable satisfaction of Parent that such Tax has been
paid or is not applicable.
(b) Distributions with Respect to Unexchanged Shares. Subject to the
subsequent sentences of this Section 3.2(b), all Parent Ordinary Shares issued
in respect of Common Shares pursuant to the Merger (including Parent Ordinary
Shares underlying Parent Depositary Shares) shall be entitled to all dividends
or other distributions declared by Parent in respect of the Parent Ordinary
Shares the record date for which is at or after the Effective Time; provided
that such Parent Ordinary Shares have been issued on or prior to such record
date. No dividends or other distributions in respect of the Parent Ordinary
Shares shall be paid to any holder of any unsurrendered Certificate representing
Common Shares until such Certificate is surrendered for exchange in accordance
with this Article III. Subject to the effect of applicable escheat or similar
laws, following surrender of any such Certificate representing Common Shares,
there shall be issued and/or paid to the holder of the Parent Ordinary Shares or
Parent Depositary Shares issued in exchange therefor, without interest, (i) at
the time of such issuance, the dividends or other distributions with a record
date after the Effective Time theretofore payable with respect to such Parent
Ordinary Shares or Parent Depositary Shares and not paid and/or (ii) at the
appropriate payment date, the dividends or other distributions payable with
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respect to such Parent Ordinary Shares or Parent Depositary Shares with a record
date after the Effective Time but with a payment date subsequent to the issuance
of the Parent Ordinary Shares or Parent Depositary Shares issuable with respect
to such Certificate.
(c) Closing of Transfer Books. At the Effective Time, the stock transfer
books of the Company with respect to Common Shares and Preferred Shares shall be
closed, and there shall be no further registration of transfers of the Common
Shares or the Preferred Shares outstanding immediately prior to the Effective
Time thereafter on the records of the Company.
(d) Fractional Shares.
(i) Notwithstanding any other provision of this Agreement, no fraction
of a Parent Ordinary Share or Parent Depositary Share will be issued as
Common Merger Consideration and any holder of Common Shares entitled to
receive a fraction of a Parent Ordinary Share or Parent Depositary Share
but for this Section 3.2(d) shall be entitled to receive a cash payment in
lieu thereof, which payment shall (subject to paragraph (ii) below)
represent such holder's proportionate interest in the net proceeds (after
commissions, transfer taxes and other out-of-pocket transaction costs,
including customary expenses of the Exchange Agent in connection with such
sale) from the sale by the Exchange Agent on behalf of such holders of the
fractions of Parent Ordinary Shares (including Parent Ordinary Shares
underlying Parent Depositary Shares) that would otherwise be issued (the
"Excess Shares"), which sales shall be executed from time to time as
appropriate. The sales of the Excess Shares by the Exchange Agent shall be
executed on the LSE through one or more brokers nominated by the Parent
with the pounds sterling sale proceeds being converted into U.S. dollars at
the spot rate of exchange at the date of sale and remitted to the Exchange
Agent as soon as practicable thereafter. Until the net proceeds of such
sale have been distributed to the holders of Common Shares entitled
thereto, the Exchange Agent will hold such proceeds in trust for such
holders of Common Shares entitled thereto. Parent shall deliver to the
Exchange Agent (or as the Exchange Agent may request from time to time) the
Excess Shares for sale in accordance with this Section 3.2(d).
(ii) Notwithstanding the provisions of Section 3.2(d)(i), Parent may
elect at its option, exercised prior to the Effective Time, in lieu of the
issuance and sale of Excess Shares and the making of the payments
hereinabove contemplated, to pay each former holder of Common Shares an
amount in cash equal to the product obtained by multiplying (A) the
fractional share interest to which such former holder (after taking into
account all Common Shares held of record at the Effective Time by such
holder) would otherwise be entitled by (B) (x) the closing mid-market price
(disregarding extended hours) on the Effective Date of the Parent Ordinary
Shares (as reported in the Daily Official List of the UKLA) if the former
holders of such Common Shares shall have elected to receive Parent Ordinary
Shares, or (y) the closing price (disregarding extended hours) of the
Parent Depositary Shares (as reported on the NYSE Composite Transaction
Tape (as reported in the Wall Street Journal (National Edition), or, if not
reported therein, any other authoritative source)) if the holder shall have
elected to receive Parent Depositary Shares), and, in such case, all
references herein to the cash proceeds of the sale of the Excess Shares and
similar references shall be deemed to mean and refer to the payments
calculated as set forth in this Section 3.2(d)(ii).
(e) Termination of Entitlement. If any Certificates shall not have been
surrendered within twelve months following the Effective Date, to the extent
permitted by applicable law (x) the entitlement of the holder of such
Certificate to Common Merger Consideration or Preferred Merger Consideration, as
the case may be, to any cash payment in lieu of a fractional entitlement
pursuant to Section 3.2(d), and to any dividends or other distributions of
Parent pursuant to Section 3.2(b) shall be extinguished absolutely and from that
time the Exchange Agent shall no longer act as nominee for any holder of
Certificates, (y) upon demand by the Surviving Corporation, the Exchange Agent
shall sell, on behalf of the Surviving Corporation, any remaining Parent
Ordinary Shares issued to it pursuant to Section 3.1(f) and not otherwise
distributed to holders of Common Shares entitled thereto, such sales to be
executed on the LSE and (z) the proceeds thereof, together with any remaining
cash representing unpaid Preferred Merger Consideration, shall be remitted to
the Surviving Corporation as soon as practicable thereafter.
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(f) Lost, Stolen or Destroyed Certificates. In the event any Certificate
shall have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the Person claiming such Certificate to be lost, stolen or
destroyed and the posting by such Person of a bond in customary amount as
indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the Common Merger Consideration or the Preferred Merger
Consideration, as applicable, and any cash payable in lieu of a fraction of a
Parent Ordinary Share or Parent Depositary Share, as the case may be, and any
unpaid dividends or other distributions in respect thereof pursuant to Section
3.2(b) and Section 3.2(d) upon due surrender of, and deliverable in respect of
the Common Shares or Preferred Shares represented by, such Certificate pursuant
to this Agreement. Delivery of such affidavit and the posting of such bond shall
be deemed delivery of a Certificate with respect to the relevant Common Shares
or Preferred Shares for purposes of this Article III.
(g) Withholding Taxes. Subject to Section 3.1(c), Parent, the Surviving
Corporation or the Exchange Agent shall be entitled to deduct and withhold from
the Common Merger Consideration or Preferred Merger Consideration or other
amounts otherwise payable pursuant to this Agreement to any former holder of
Common Shares or Preferred Shares such amounts as Parent, the Surviving
Corporation or the Exchange Agent is required to deduct and withhold with
respect to the making of such payment under the Code, or any provision of state,
local or non-U.S. tax law. To the extent that amounts are so withheld by Parent,
the Surviving Corporation or the Exchange Agent, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid to the former
holder of the Common Shares or Preferred Shares in respect of which such
deduction and withholding was made by Parent, the Surviving Corporation or the
Exchange Agent.
3.3 Adjustments to Prevent Dilution. In the event Parent changes (or
establishes a record date for changing) the number of Parent Ordinary Shares
issued and outstanding prior to the Effective Time as a result of a stock split,
stock dividend (other than issuances of stock scrip in lieu of cash dividends
consistent with past practice), recapitalization, subdivision, reclassification,
combination, exchange of shares or similar transaction with respect to the
outstanding Parent Ordinary Shares then (a) if the record and payment or
effective dates, as the case may be, therefor shall be at or prior to the
Effective Time, the Common Exchange Ratio shall be proportionately adjusted to
reflect such stock split, stock dividend, recapitalization, subdivision,
reclassification, combination, exchange of shares or similar transaction; and
(b) if the record date therefor shall be prior to the Effective Time but the
payment or effective date, as the case may be, therefor shall be subsequent to
the Effective Time, Parent shall take such action as shall be required so that
on such payment or effective date, as the case may be, any former holder of
Common Shares who shall have received or become entitled to receive Common
Merger Consideration pursuant to this Article III shall be entitled to receive
such additional Parent Ordinary Shares or Parent Depositary Shares, as the case
may be, as such holder would have received as a result of such event if the
record date therefor had been immediately after the Effective Time. Appropriate
adjustments shall also be made in the event the number of Parent Ordinary Shares
represented by each Parent Depositary Share is changed. In the event that,
notwithstanding Section 7.1(a) hereof, the Company changes (or establishes a
record date for changing) the number of Common Shares or Preferred Shares of any
series issued and outstanding prior to the Effective Time as a result of a stock
split, stock dividend, recapitalization, subdivision, reclassification,
combination, exchange of shares or similar transaction with respect to the
outstanding Common Shares or such series of Preferred Shares, then the Common
Exchange Ratio or the Preferred Merger Consideration, as applicable, shall be
appropriately adjusted, taking into account the record and payment or effective
dates, as the case may be, for such transaction.
3.4 Options and Other Equity-Based Awards.
(a) As soon as practicable following the date of this Agreement, Parent
and the Company (or, if appropriate, the Board of Directors of the Company or
Parent or any committee of the Board of Directors of the Company administering
the Company's 1996 Long Term Executive Incentive Compensation Plan (the "1996
Plan"), the Company's Long Term Executive Incentive Compensation Plan and
Beneficial Corporation 1990 Non-Qualified Stock Option Plan, the Beneficial
Corporation Benshares Equity Participation Plan and the Renaissance Amended and
Restated 1997 Incentive Plan, each as amended (collectively, the "Company Option
Plans")) shall take such action as may be required or desirable (including
obtaining all applicable
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consents) to effect the following provisions of this Section 3.4(a). Effective
as of the Effective Time, each then outstanding option to purchase Common Shares
(each a "Company Stock Option") granted pursuant to the Company Option Plans or
otherwise granted by the Company to any current or former employee or director
of, or consultant to, the Company or any of its subsidiaries (each, an "Option
Holder") shall be assumed by Parent and shall be converted into an option (an
"Assumed Stock Option") to purchase a number of Parent Ordinary Shares (rounded
to the nearest whole share) equal to (x) the number of Common Shares subject to
such Company Stock Option immediately prior to the Effective Time multiplied by
(y) the Common Exchange Ratio; and the per share exercise price for Parent
Ordinary Shares issuable upon exercise of such Assumed Stock Option shall be
equal to (1) the exercise price per Common Share at which such Company Stock
Option was exercisable immediately prior to the Effective Time divided by (2)
the Common Exchange Ratio (rounded to the nearest whole cent); provided,
however, that in the case of any Company Stock Option to which Section 421 of
the Code applies by reason of its qualification under Section 422 of the Code,
the conversion formula shall be adjusted, if necessary, to comply with Section
424(a) of the Code. Except as otherwise provided herein, the Assumed Stock
Option shall be subject to the same terms and conditions (including expiration
date, vesting and exercise provisions) as were applicable to the corresponding
Company Stock Options immediately prior to the Effective Time; provided,
further, that the Board of Directors of Parent or a committee thereof shall
succeed to the authority and responsibility of the Board of Directors of the
Company or any committee thereof. At or prior to the time an option holder
exercises his or her Assumed Stock Option, such option holder may elect to
receive, in lieu of the Parent Ordinary Shares underlying such Assumed Stock
Option, a number of Parent Depositary Shares (if any) determined using the
conversion ratio of Parent Ordinary Shares to Parent Depositary Shares, as in
effect at that time pursuant to the Deposit Agreement.
(b) With respect to Company Stock Options granted under the Company Option
Plans pursuant to which consent of an Option Holder is required under the terms
of the applicable Company Option Plan, if any, as identified in Section 3.2(b)
of the Company Disclosure Schedule, no later than the Effective Time, the
Company will obtain a signed written consent from each Option Holder to the
treatment of the Company Stock Options in the manner described in Section 3.4(a)
hereof. As soon as practicable after the Effective Time, Parent shall deliver to
the Option Holders appropriate notices setting forth the number of Parent
Ordinary Shares subject to such Assumed Stock Options held by each such Option
Holder and the exercise price under each such Assumed Stock Option, each as
adjusted pursuant to Section 3.4(a) hereof, and stating that such Assumed Stock
Options shall remain subject to the original terms and conditions applicable to
the corresponding Company Stock Option as in effect immediately prior to the
Effective Time (subject to the adjustments required by Section 3.4(a)).
(c) At the Effective Time, each right of any kind, contingent or accrued,
to receive Common Shares or benefits measured by the value of a number of Common
Shares, and each award of any kind consisting of shares of Common Shares,
granted under the Company Option Plans or any other Company Benefit Plan
(including restricted stock, restricted stock units, deferred stock units and
dividend equivalents), other than Company Stock Options (each, a "Company
Stock-Based Award"), whether vested or unvested, which is outstanding
immediately prior to the Effective Time, shall cease to represent a right or
award with respect to Common Shares and shall be converted, at the Effective
Time, into a right or award with respect to Parent Ordinary Shares (an "Assumed
Stock-Based Award"), on the same terms and conditions as were applicable under
the Company Stock-Based Awards (but taking into account any changes thereto,
including the acceleration thereof, provided for in the Company Option Plans or
other Company Benefit Plan or in any award agreement thereunder by reason of
this Agreement or the transactions contemplated hereby). The number of shares of
Parent Ordinary Shares subject to each such Assumed Stock-Based Award shall be
equal to the number of Common Shares subject to the Company Stock-Based Award,
multiplied by the Common Exchange Ratio (rounded to the nearest whole Parent
Ordinary Share). All dividend equivalents credited to the account of each holder
of a Company Stock-Based Award as of the Effective Time shall remain credited to
such holder's account immediately following the Effective Time, subject to
adjustment in accordance with the foregoing. At or prior to the time a holder of
an Assumed Stock-Based Award is entitled to distribution of Parent Ordinary
Shares in respect of such Award, such holder may elect to receive, in lieu of
the Parent Ordinary Shares underlying such Assumed Stock-Based Award, a number
of Parent Depositary Shares (if
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any) determined using the conversion ratio of Parent Ordinary Shares to Parent
Depositary Shares, as in effect at that time pursuant to the Deposit Agreement.
(d) Within 10 Business Days after the Effective Time, (i) Parent shall take
such actions as are reasonably necessary to reserve for issuance or procure the
purchase of a sufficient number of Parent Ordinary Shares and Parent Depositary
Shares upon the exercise of the Assumed Stock Options and settlement or
distribution of the Assumed Stock-Based Awards and (ii) Parent shall use its
best efforts to prepare and file with the SEC a registration statement on an
appropriate form or a post-effective amendment to a previously filed
registration statement under the Securities Act with respect to the issuance of
the Parent Ordinary Shares and Parent Depositary Shares subject to the Assumed
Stock Options and Assumed Stock-Based Awards.
(e) Prior to the Effective Time, the Company shall take all necessary or
appropriate action (including amending any of the Company Option Plans or other
Company Benefit Plans and related award agreements or making adjustments as
permitted thereby) to effectuate the assumption and conversion of the Company
Stock Options and Company-Stock-Based Awards by Parent in accordance with the
terms hereof and the assignment to Parent of the authorities and
responsibilities of the Board of Directors of the Company or any committee
thereof under the Company Option Plans or other Company Benefit Plans.
(f) The Company shall take such action as is necessary to (i) cause the
exercise (as of a date that is no later than three Business Days prior to the
Effective Date) of each outstanding purchase right under the Company Employee
Stock Purchase Plan (the "Company ESPP"); and (ii) provide that no further
purchase period shall commence under the Company ESPP following such date;
provided, however, that such exercise and cessation of further purchase periods
shall be conditioned upon the consummation of the Merger. On such new exercise
date, the Company shall apply the funds credited as of such date under the
Company ESPP within each participant's payroll withholding account to the
purchase of whole shares of Common Shares in accordance with the terms of the
Company ESPP. In addition, the Company shall take such action as is necessary to
provide that (as of a date that is no later than three Business Days prior to
the Effective Date) no further Common Shares will be purchased under the Company
Dividend Reinvestment and Common Stock Purchase Plan (the "Company DRIP" and,
together with the Company ESPP, the "Company Stock Purchase Plans"); provided,
however, that such cessation of further purchases shall be conditioned upon the
consummation of the Merger. At the Effective Time, a holder of Common Shares
received under the Company Stock Purchase Plans shall, by virtue of the Merger
and without any action on the part of such holder, be entitled to receive the
Common Merger Consideration (subject to any applicable withholding tax as
specified in Section 3.2(g) hereof or as may apply to payments made in
connection with the performance of services), upon the surrender of the
certificate representing such Common Shares as provided in Section 3.2.
Immediately prior to and effective as of the Effective Time and subject to the
consummation of the Merger, the Company shall terminate the Company Stock
Purchase Plans.
3.5 Shares of Dissenting Shareholders. Any holder of Preferred Shares who
perfects such holder's dissenters' rights of appraisal in accordance with and as
contemplated by Section 262 of the DGCL (such shares, "Dissenting Shares") shall
be entitled to receive from the Surviving Corporation the value of such shares
in cash as determined pursuant to such statute; provided, however, that no such
payment shall be made to any dissenting stockholder unless and until such
dissenting stockholder has complied with the applicable provisions of the DGCL
and surrendered to the Surviving Corporation the certificate or certificates
representing the Preferred Shares for which payment is being made. In the event
that after the Effective Time a dissenting holder of Preferred Shares fails to
perfect, or effectively withdraws or loses, such holder's right to appraisal of
and payment for such holder's shares, the Surviving Corporation shall issue and
deliver the Preferred Merger Consideration to which such holder of Preferred
Shares is entitled under this Article III (without interest) upon surrender by
such holder of the Certificate or Certificates representing Preferred Shares
held by such holder.
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ARTICLE IV
DISCLOSURE SCHEDULES; STANDARDS FOR
REPRESENTATIONS AND WARRANTIES
4.1 Disclosure Schedules. Prior to the execution and delivery of this
Agreement, the Company has delivered to Parent, and Parent has delivered to the
Company, a schedule (in the case of the Company, the "Company Disclosure
Schedule," and, in the case of Parent, the "Parent Disclosure Schedule") setting
forth, among other things, items the disclosure of which is necessary or
appropriate either in response to an express disclosure requirement contained in
a provision hereof or as an exception to one or more specified representations
or warranties contained in Article V, in the case of the Company, or Article VI,
in the case of Parent, or to one or more of such party's covenants contained in
Article VII; provided, however, that, notwithstanding anything in this Agreement
to the contrary, (i) no such item is required to be set forth in the relevant
Disclosure Schedule as an exception to a representation or warranty if its
absence would not result in the related representation or warranty being deemed
untrue or incorrect under the standard established by Section 4.2, and (ii) the
mere inclusion of an item in either the Company Disclosure Schedule or the
Parent Disclosure Schedule as an exception to a representation or warranty shall
not be deemed an admission by the disclosing party that such item represents a
material exception or material fact, event or circumstance or that such item has
had or would reasonably be expected to have a Material Adverse Effect with
respect to either the Company or Parent, as the case may be.
4.2 Standards. No representation or warranty of the Company contained in
Article V (other than (i) Section 5.3(a), which shall be deemed untrue and
incorrect if not true and correct in all but de minimis respects and (ii)
Section 5.3(b), 5.3(c), 5.6(c) and 5.11(c), which shall be deemed untrue and
incorrect if not true and correct in all material respects) or of Parent
contained in Article VI (other than Sections 6.2(a) and 6.2(b), which shall be
deemed untrue or incorrect if not true and correct in all material respects)
shall be deemed untrue or incorrect for any purpose under this Agreement, and no
party hereto shall be deemed to have breached a representation or warranty for
any purpose under this Agreement, in any case as a consequence of the existence
or absence of any fact, circumstance or event unless such fact, circumstance or
event, individually or when taken together with all other facts, circumstances
or events inconsistent with any representations or warranties contained in
Article V, in the case of the Company, or Article VI, in the case of Parent, has
had or would be reasonably likely to have a Material Adverse Effect with respect
to the Company or Parent, respectively (disregarding for purposes of this
Section 4.2 any materiality qualification contained in any representations or
warranties).
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth in a correspondingly numbered section of the Company
Disclosure Schedule (it being understood that the listing or setting forth of an
item in one section of the Company Disclosure Schedule shall be deemed to be a
listing or setting forth in another section or sections of the Company
Disclosure Schedule if and only to the extent that such information is
reasonably apparent to be so applicable to such other section or sections), the
Company hereby represents and warrants to Parent that:
5.1 Organization and Qualification; Subsidiaries. (a) The Company and each
of its subsidiaries is a corporation or other legal entity duly organized,
validly existing and (in the jurisdictions recognizing the concept) in good
standing under the laws of the jurisdiction in which it is organized and has the
corporate or other power and authority and all necessary governmental approvals
to own, lease and operate its properties and to carry on its business as it is
now being conducted. The Company and each of its subsidiaries is duly qualified
or licensed to do business and is in good standing in each jurisdiction in which
the nature of its business or the ownership, leasing or operation of its
properties makes such qualification or licensing necessary.
(b) Section 5.1(b) of the Company Disclosure Schedule includes a
complete list of all of the Company's subsidiaries, together with the
jurisdiction of organization of each such subsidiary and the percentage of each
such subsidiary's outstanding capital stock owned by the Company or another
wholly-
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owned subsidiary of the Company. All the outstanding shares of capital stock, or
other equity interests, set forth in Section 5.1(b) of the Company Disclosure
Schedule (i) have been validly issued and are fully paid and nonassessable, (ii)
are owned directly or indirectly by the Company, free and clear of all pledges,
claims, liens, charges, encumbrances and security interests of any kind or
nature whatsoever, and (iii) are free of any other restriction (including any
restriction on the right to vote, sell or otherwise dispose of such capital
stock or other ownership interests). Except as set forth in Section 5.1(b) of
the Company Disclosure Schedule, neither the Company nor any of its subsidiaries
directly or indirectly owns any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for, any equity or similar
interest in any corporation, partnership, joint venture or other business
association or entity.
(c) Except as set forth in Section 5.1(c) of the Company Disclosure
Schedule, (i) there are not issued, reserved for issuance or outstanding (A) any
shares of capital stock or voting securities or other ownership interests of any
of the Company's subsidiaries other than those owned by the Company or a wholly-
owned subsidiary of the Company, (B) any securities of the Company or any of its
subsidiaries convertible into or exchangeable or exercisable for shares of
capital stock or voting securities or other ownership interests in any of the
Company's subsidiaries, or (C) any warrants, calls, options or other rights to
acquire from the Company or any of its subsidiaries, or any obligation of the
Company or any of its subsidiary to issue, any capital stock, voting securities
or other ownership interests in, or securities convertible into or exchangeable
or exercisable for, capital stock or voting securities or other ownership
interests in, any of the Company's subsidiaries, and (ii) there are no
outstanding obligations of the Company or any of its subsidiaries to repurchase,
redeem or otherwise acquire any such securities or to issue, deliver or sell, or
cause to be issued, delivered or sold, any such securities, or to make any
payments based on the market price or value of any such securities. Neither the
Company nor any of its subsidiaries has any outstanding bonds, debentures, notes
or other obligations the holders of which have the right to vote (or convertible
into or exchangeable for securities having the right to vote) with the
shareholders of any of the Company's subsidiaries on any matter. To the
knowledge of the Company, neither the Company nor any of its subsidiaries is a
party to any agreement restricting the transfer of, relating to the voting of,
requiring registration of, or granting any preemptive or antidilutive rights
with respect to, any securities of the type referred to in the preceding
sentence.
5.2 Certificate of Incorporation and By-Laws. Prior to the date hereof,
the Company has provided to Parent a complete and correct copy of the
certificate of incorporation and by-laws (or equivalent organizational
documents) of the Company and each of its material subsidiaries (the
organizational documents of the Company being referred to herein as the "Company
Charter Documents", and the organizational documents of the Company's material
subsidiaries being referred to herein, collectively, as the "Subsidiary Charter
Documents"). Each of the Company Charter Documents and the Subsidiary Charter
Documents is in full force and effect. Neither the Company nor any of its
subsidiaries is in violation of any of the provisions of the Company Charter
Documents or the Subsidiary Charter Documents, respectively.
5.3 Capitalization. (a) The authorized capital stock of the Company
consists solely of (i) 750,000,000 Common Shares, of which 474,116,132 were
issued and outstanding as of the date hereof, and (ii) 8,155,004 shares of
preferred stock, without par value, of which (A) 407,718 shares have been
designated 5% Cumulative Preferred Stock (the "Company 5% Preferred Stock"), all
of which are issued and outstanding as of the date hereof, (B) 100,000 shares
have been designated 7.35% Cumulative Preferred Stock, Series 1993-A (the
"Company 7.35% Preferred Stock"), none of which is issued and outstanding as of
the date hereof, (C) 103,976 shares have been designated $4.50 Cumulative
Preferred Stock (the "Company $4.50 Preferred Stock"), all of which are issued
and outstanding as of the date hereof, (D) 836,585 shares have been designated
$4.30 Cumulative Preferred Stock (the "Company $4.30 Preferred Stock"), all of
which are issued and outstanding as of the date hereof, (E) 50,000 shares have
been designated 8.25% Cumulative Preferred Stock, Series 1992-A (the "Company
8.25% Preferred Stock"), all of which are issued and outstanding as of the date
hereof, (F) 300,000 shares have been designated 7.5% Cumulative Preferred Stock,
Series 2001-A (the "Company 7.5% Preferred Stock"), all of which are issued and
outstanding as of the date hereof, (G) 350,000 shares have been designated
7 5/8% Cumulative Preferred Stock, Series 2002-B (the "Company 7 5/8% Preferred
Stock"), all of which are issued and outstanding as of the date hereof, (H)
400,000 shares have been designated 7.60% Cumulative Preferred Stock, Series
2002-A (the "Company 7.60% Preferred
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Stock"), all of which are issued and outstanding as of the date hereof (the
outstanding preferred shares referenced in clauses ((A) through (H) above;
collectively, the "Preferred Shares"), and (i) 150,000 shares have been
designated Series A Junior Participating Preferred Stock, none of which have
been issued as of the date hereof. The Company has 21,663,000 issued and
outstanding 8.875% Adjustable Conversion-Rate Equity Security Units of the
Company (the "Units"). Between 21,088,930 and 25,306,717 Common Shares are
issuable upon conversion of the Units, and 17,114,338 Common Shares are issuable
upon the exercise of Company Stock Options and 4,252,032 Common Shares are
issuable upon the vesting of restricted stock rights. As of the date hereof,
77,693,123 Common Shares were held by the Company in its treasury and no Common
Shares or Preferred Shares were held by subsidiaries of the Company.
(b) Section 5.3(b) of the Company Disclosure Schedule sets forth a true and
correct list as of the date hereof of all holders of Company Stock Options, the
number of Common Shares issuable pursuant to each Company Stock Options held by
each such holder, the date each Company Stock Option was granted, the expiration
date with respect to each such Company Stock Option, the vesting schedule of
each such Company Stock Option, the Company Option Plan pursuant to which each
such Company Stock Option was granted and the price per share of Common Stock at
which each such Company Stock Option may be exercised.
(c) All outstanding Common Shares and Preferred Shares are, and all shares
thereof which may be issued will, when issued, be, duly authorized, validly
issued, fully paid and nonassessable and not subject to any preemptive rights.
Except as required pursuant to Section 8.15 and as set forth in Section 5.3(a)
and Section 5.3(b) of the Company Disclosure Schedule, (i) there are not issued,
reserved for issuance or outstanding (A) any shares of capital stock or voting
securities or other ownership interests of the Company, (B) any securities of
the Company or any of its subsidiaries convertible into or exchangeable or
exercisable for shares of capital stock or voting securities or other ownership
interests of the Company, or (C) any warrants, calls, options or other rights to
acquire from the Company or any of its subsidiaries, or any obligation of the
Company or any of its subsidiaries to issue, any capital stock, voting
securities or other ownership interests in, or securities convertible into or
exchangeable or exercisable for, capital stock or voting securities or other
ownership interests in the Company, and (ii) there are no outstanding
obligations of the Company or any of its subsidiaries to repurchase, redeem or
otherwise acquire any such securities or to issue, deliver or sell, or cause to
be issued, delivered or sold, any such securities, or to make any payments based
on the market price or value of any such securities. Neither the Company nor any
of its subsidiaries has any outstanding bonds, debentures, notes or other
obligations the holders of which have the right to vote (or convertible into or
exchangeable for securities having the right to vote) with the shareholders of
the Company on any matter. To the knowledge of the Company, neither the Company
nor any of its subsidiaries is a party to any agreement restricting the transfer
of, relating to the voting of, requiring registration of, or granting any
preemptive or antidilutive rights with respect to, any securities of the type
referred to in the preceding sentence.
5.4 Authority Relative to this Agreement. (a) The Company has full
corporate power and authority to enter into this Agreement and, subject, in the
case of the Merger, to the Company Shareholder Approval, to consummate the
transactions contemplated by this Agreement. The execution and delivery of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated by this Agreement have been duly and validly authorized by all
necessary corporate action (other than, in the case of the Merger, the Company
Shareholder Approval) on the part of the Company, and such authorization is in
full force and effect.
(b) As of the date hereof, the Board of Directors of the Company has
unanimously (i) determined that it is advisable and in the best interest of the
Company's shareholders for the Company to enter into this Agreement, to
consummate the Merger upon the terms and subject to the conditions of this
Agreement, (ii) adopted a resolution approving the "agreement of merger" (as
that term is used in Section 251 of the DGCL) contained in this Agreement in
accordance with the applicable provisions of the DGCL and the Company Charter
Documents and (iii) recommended the adoption of such "agreement of merger" by
the Company's shareholders and directed that such "agreement of merger" be
submitted for consideration by the Company's shareholders at the Company
Shareholder Meeting. This Agreement has been duly executed and delivered by the
Company and, assuming the due authorization, execution and delivery by Parent
and Merger
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Sub, constitutes a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
5.5 No Conflicts; Required Filings and Consents. (a) The execution and
delivery of this Agreement by the Company do not, and the consummation by the
Company of the transactions contemplated hereby and compliance with the
provisions of this Agreement will not, (i) conflict with or violate any of the
Company Charter Documents or the Subsidiary Charter Documents, (ii) assuming
compliance with the matters referred to in Section 5.5(b), conflict with or
violate any law, rule, regulation, order, judgment or decree applicable to the
Company or any of its subsidiaries or by which its or any of their properties is
bound or affected, or (iii) result in any breach of or constitute a default (or
an event that, with notice or lapse of time or both, would become a default)
under, or impair the Company's or any of its subsidiaries' rights or alter the
rights or obligations of any third party under, or give to others any rights of,
or cause any, termination, amendment, redemption, acceleration or cancellation
of, or result in the creation of a lien or encumbrance (including a right to
purchase) on any of the properties or assets of the Company or any of its
subsidiaries pursuant to any note, bond, mortgage, indenture, credit facility,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries or its or any of their properties
is bound or affected.
(b) No material notices, reports or other filings are required to be
made by the Company or its subsidiaries with, nor are any consents,
registrations, approvals, permits applications, expiry of waiting periods or
authorizations required to be obtained by the Company or its subsidiaries from,
any Governmental Entity in connection with the execution and delivery of this
Agreement and the transactions contemplated hereby, other than the reports,
filings, registrations, consents, approvals, permits, authorizations,
applications, expiry of waiting periods and/or notices (i) pursuant to Section
2.3 hereof, (ii) under the HSR Act, (iii) with or required by the OFT and the
U.K. Secretary of State for Trade and Industry and under the Competition Act
(Canada), (iv) under the Exchange Act (including, without limitation, the filing
of the Proxy Statement), (v) with or required by the NYSE, the LSE, the UKLA,
the HKSE or Euronext Paris, (vi) with or required by the FSA or the Hong Kong
Monetary Authority, (vii) with or required by the OCC, (viii) under the
Investment Canada Act and the Trust and Loan Companies Act (Canada), (ix) with
or required by the Federal Reserve Board, (x) under state securities or "Blue
Sky" laws, (xi) under Section 765 of the Income and Corporation Taxes Act of
1988 or (xii) with or required by any other Governmental Entity or under any
applicable law, in each case as expressly set forth in Section 5.5(b) of the
Company Disclosure Schedule.
5.6 Certain Contracts. (a) Section 5.6(a) of the Company Disclosure
Schedule includes, as of the date hereof, a list of (i) any agreement relating
to the incurring of indebtedness by the Company or any of its subsidiaries
(including sale and leaseback transactions and including capitalized lease
transactions and other similar financial transactions) including, without
limitation, any such agreement which contains provisions which in any non-de
minimis manner restrict, or may restrict, the conduct of business of the issuer
thereof as currently conducted, (ii) any "material contracts" (as such term is
defined in Item 601(b)(10) of Regulation S-K of the SEC), (iii) any
non-competition agreement or any other agreement or obligation which purports to
limit in any respect (A) the ability of the Company or any of its affiliates
(including Parent and its subsidiaries following the Merger) to solicit
customers or (B) the manner in which, or the localities in which, all or any
substantial portion of the business of the Company and its subsidiaries, taken
as a whole, or, following consummation of the transactions contemplated hereby,
Parent and its subsidiaries, is or would be conducted, (iv) any agreement
providing for the indemnification by the Company or any of its subsidiaries of
any Person, other than customary agreements relating to the indemnity of
directors, officers and employees of the Company and its subsidiaries, (v) any
joint venture or partnership agreement, (vi) any agreement that grants any right
of first refusal or right of first offer or similar right or that limits or
purports to limit the ability of the Company or any of its subsidiaries to own,
operate, sell, transfer, pledge or otherwise dispose of any material amount of
assets or business (other than in connection with securitizations or financing
transactions or contracts entered into in the ordinary course of business that
require that the particular transactions that are the subject thereof to be
conducted with the counterparty or counterparties to the contract), (vii) any
contract or agreement providing for any material future payments that are
conditioned, in whole or in part, on a change of control of the Company or any
of its subsidiaries, (viii) all collective bargaining agreements, (ix) any
A-19
employment agreement or any agreement or arrangement that contains any material
severance pay or post-employment liabilities or obligations to any current or
former employee of the Company or its subsidiaries, other than as required under
applicable law, (x) any agreement regarding any agent bank or other similar
relationship with respect to lines of business, (xi) any material agreement that
contains a "most favored nation" clause, (xii) any material agreement set forth
in Section 5.22(a) of the Company Disclosure Schedule, (xiii) any Servicing
Agreement, and (xiv) any other contract or other agreement not made in the
ordinary course of business which is material to the Company and its
subsidiaries, taken as a whole, or which would reasonably be expected to
materially delay the consummation of the Merger or any of the transactions
contemplated by this Agreement (each a "Company Material Contract").
(b) Each Company Material Contract is valid and binding on the Company (or,
to the extent a subsidiary of the Company is a party, such subsidiary) and, to
the knowledge of the Company, any other party thereto, and is in full force and
effect. Neither the Company nor any of its subsidiaries, nor, to the knowledge
of the Company, any other party to any Company Material Contract, is in default
in any material respect as to any provision thereof, and no such Company
Material Contract contains any provision providing that the other party thereto
may terminate such Company Material Contract, or alter the terms thereof, by
reason of the transactions contemplated by this Agreement. As of the date
hereof, neither the Company nor any of its subsidiaries has received any notice
to the effect that the financial condition of any other party to any Company
Material Contract is impaired so that a default thereunder or other failure to
comply with the terms thereof may reasonably be anticipated, whether or not such
default or non-compliance may be cured by the operation of any offset clause in
such Company Material Contract.
(c) No consents with respect to any Company Material Contracts are required
to be obtained in connection with the consummation of the Merger and the
transactions contemplated hereby that, as of the Closing, will have not been
obtained, except where the failure to obtain such consents would not be material
to the Company.
5.7 SEC Filings; Financial Statements; SAP Statements; RAP Statements;
Other Filings. (a) Since December 31, 1998, the Company has filed all required
reports, schedules, forms, statements and other documents (including exhibits
and all other information incorporated therein) with the SEC (collectively, the
"Company SEC Documents"). As of their respective dates and except as otherwise
disclosed in Company SEC Documents filed and publicly available at least two
Business Days prior to the date hereof (the "Previously Filed Company SEC
Documents"), the Company SEC Documents complied in all material respects with
the requirements of the Securities Act, the Exchange Act and the Sarbanes-Oxley
Act, as applicable, and the rules and regulations of the SEC promulgated
thereunder applicable to such Company SEC Documents, and no Company SEC Document
when filed (as amended and/or restated and as supplemented by a Previously Filed
Company SEC Document) contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. Except as otherwise disclosed in Previously
Filed Company SEC Documents, the financial statements of the Company and its
subsidiaries included in the Company SEC Documents (collectively, the "Company
Financial Statements") complied as to form, as of their respective dates of
filing with the SEC, in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with U.S. GAAP applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and fairly present in all material respects the consolidated financial
position of the Company and its subsidiaries, as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended. None of the Company's subsidiaries is required to file any reports,
schedules, forms, statements or other documents with the SEC.
(b) Since December 31, 1998, the Company has filed all required annual
and quarterly statements and other documents (including exhibits and all other
information incorporated therein) required to be filed with applicable insurance
regulatory authorities (collectively, the "Company SAP Statements"). The Company
SAP Statements were prepared in conformity with statutory accounting practices
prescribed or permitted by the applicable insurance regulatory authorities
("SAP") consistently applied, for the periods covered thereby and (as may have
been amended and restated or supplemented by Company SAP statements
A-20
filed subsequently but prior to the date hereof) fairly present in all material
respects the statutory financial position of the Company or its subsidiaries, as
the case may be, as at the respective dates thereof and the results of
operations of such subsidiaries for the respective periods then ended. The
Company SAP Statements complied with all applicable laws when filed, and, to the
knowledge of the Company, no material deficiency has been asserted with respect
to any Company SAP Statements by the applicable insurance regulatory body or any
other Governmental Entity. The annual statutory balance sheets and income
statements included in the Company SAP Statements have been audited, and the
Company has provided to Parent true and complete copies of all audit opinions
related thereto. The Company has provided to Parent true and complete copies of
(i) all Company SAP Statements for the years ended December 31, 2000 and
December 31, 2001 and the quarterly periods ended March 31, 2002, June 30, 2002
and September 30, 2002, and (ii) all examination reports of any insurance
departments and insurance regulatory agencies conducted since December 31, 1999
and relating to the Company or any of its subsidiaries.
(c) Since December 31, 1998, the Company and its depositary institution
subsidiaries have filed all required annual and quarterly statements and other
documents (including exhibits and all other information incorporated therein)
required to be filed with applicable bank regulatory authorities (collectively,
the "Company RAP Statements"). The Company RAP Statements were prepared in
conformity with regulatory accounting practices prescribed or permitted by the
applicable bank regulatory authorities ("RAP") consistently applied, for the
periods covered thereby and (as may have been amended and restated or
supplemented by Company RAP statements filed subsequently but prior to the date
hereof) fairly present in all material respects the statutory financial position
of the Company or its subsidiaries, as the case may be, as at the respective
dates thereof and the results of operations of such subsidiaries for the
respective periods then ended. The Company RAP Statements complied in all
material respects with all applicable laws when filed, and, to the knowledge of
the Company, no material deficiency has been asserted with respect to any
Company RAP Statements by the applicable bank regulatory body or any other
Governmental Entity. The annual statutory balance sheets and income statements
included in the Company RAP Statements have been audited, and the Company has
made available to Parent true and complete copies of all audit opinions related
thereto. The Company has made available to Parent true and complete copies of
(i) all Company RAP Statements for the years ended December 31, 2000 and
December 31, 2001 and the quarterly periods ended March 31, 2002, June 30, 2002
and September 30, 2002, and (ii) all examination reports of any bank regulatory
agencies conducted since December 31, 1999 and relating to the Company or any of
its subsidiaries.
(d) To the knowledge of the Company, except for matters disclosed in
Previously Filed Company SEC Documents, neither the Company's independent public
accountants nor any employee of the Company or its subsidiaries has alleged that
any of the Company Financial Statements, Company SAP Statements or Company RAP
Statements contains any misstatement or other defect which, if true, would cause
the representations and warranties contained in Sections 5.7(a), 5.7(b) and
5.7(c) to be untrue.
(e) Except for filings with the SEC, the Company and each of its
subsidiaries have timely filed all regulatory reports, schedules, forms,
registrations and other material documents, together with any amendments
required to be made with respect thereto, that they were required to file since
December 31, 1998 with any Governmental Entity (the "Other Company Documents"),
and have paid all material taxes, fees and assessments due and payable in
connection therewith. There is no material unresolved violation or exception by
any of such Governmental Entities with respect to any report or statement
relating to any examination of the Company or any of its subsidiaries. No Other
Company Documents, as of their respective dates, except as amended or
supplemented by an Other Company Document filed prior to the date hereof,
contained, and no Other Company Documents filed subsequent to the date hereof
will contain as of their respective dates, any untrue statement of a material
fact or omitted (or will omit) to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Company has
delivered or provided to Parent a true and complete copy of each material Other
Company Document.
5.8 Undisclosed Liabilities; Certain Assets. (a) Except as set forth in
Section 5.8(a) of the Company Disclosure Schedule or in the Company Financial
Statements included in the Previously Filed Company SEC Documents, neither the
Company nor any of its subsidiaries has any liabilities (absolute, accrued,
contingent
A-21
or otherwise), except liabilities incurred (A) since September 30, 2002 in the
ordinary course of business, or incurred (B) in connection with this Agreement
or the transactions contemplated hereby.
(b) The reserves, allowances and other liabilities established or
reflected on the Company Financial Statements, the Company SAP Statements and
the Company RAP Statements were, as of the respective dates of such Company
Financial Statements, Company SAP Statements and Company RAP Statements, (i)
determined in accordance with U.S. GAAP, SAP and/or RAP, consistently applied
and (ii) established based on the good business judgment and industry practice
and with past practices and experiences of the Company and its subsidiaries.
5.9 Information Supplied. (a) None of the information supplied or to be
supplied by the Company specifically for inclusion or incorporation by reference
in the Form F-4 will, at the time the Form F-4 becomes effective under the
Securities Act (and taking into account any amending or superseding disclosures
filed with respect to any such information prior to such time), contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that no representation or warranty is made by the Company
with respect to statements made or incorporated by reference therein based on
information supplied by Parent specifically for inclusion or incorporation by
reference in the Form F-4.
(b) None of the information supplied or to be supplied by the Company
specifically for inclusion or incorporation by reference in the Proxy Statement
will, at the date the Proxy Statement is first mailed to the Company's
shareholders or at the time of the Company Shareholder Meeting (and taking into
account any amending or superceding disclosures filed with respect to any such
information prior to such time), contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading; provided, however, that no representation or
warranty is made by the Company with respect to statements made or incorporated
by reference therein based on information supplied by Parent specifically for
inclusion or incorporation by reference in the Proxy Statement. The Proxy
Statement will comply as to form in all material respects with the requirements
of the Exchange Act and the rules and regulations thereunder.
(c) All of the information supplied or to be supplied by the Company
specifically for inclusion in the Parent Documents and any supplements thereto
and any other circulars or documents issued to shareholders, employees or
debentureholders of Parent, will, at the date each such document is mailed to
Parent's shareholders (and, with respect to the Parent Circular, at the time of
the Parent Shareholder Meeting), be in accordance with the facts and will not
omit anything likely to affect the import of such information or which would
make any statement therein misleading; provided, however, that no representation
or warranty is made by the Company with respect to statements attributable to
information supplied by Parent in writing specifically for inclusion in the
Parent Documents and for which Parent takes responsibility for in such Parent
Documents.
5.10 Absence of Certain Changes or Events. Except for liabilities incurred
in connection with this Agreement or the transactions contemplated hereby and
except as permitted, after the date hereof, by Section 7.1, or as disclosed in
any Previously-Filed Company SEC Document, since December 31, 2001 (and, in the
case of items (b) through (m) below, to the date hereof), the Company and its
subsidiaries have conducted their business only in the ordinary course, and
there has not been:
(a) any events, occurrences or circumstances that have had, or would be
reasonably expected to have, a Material Adverse Effect with respect to the
Company;
(b) any amendments or changes in the Company Charter Documents or the
Subsidiary Charter Documents;
(c) any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to any of the
Company's capital stock other than regular quarterly dividends in respect of the
Common Shares not exceeding $0.25 per share per quarter, with record dates and
payment dates consistent with past practice, and regular cash dividends in
respect of the Preferred Shares, in accordance with the terms thereof;
A-22
(d) any split, combination or reclassification of any of the Company's
capital stock or any issuance or the authorization of any issuance of any other
securities in respect of, in lieu of or in substitution for shares of, the
Company's capital stock;
(e) other than in the ordinary course of business consistent with past
practice or as required by law, regulation or existing contractual commitments,
any (i) grant of any severance or termination payment, (ii) entering into of any
employment, deferred compensation, consulting, severance, indemnification,
change in control, retention or other similar agreement or arrangement, (iii)
increase in any compensation or benefits payable or to become payable under any
existing severance or termination pay policy or employment, deferred
compensation, consulting, severance, change in control, retention or other
similar agreement or arrangement or (iv) increase in compensation, bonus or
other benefits payable to (or to become payable to) former or current directors,
officers, employees or consultants of the Company or any of its subsidiaries,
other than an increase in annual salary or hourly wage rates granted to current
employees (other than officers) in the ordinary course of business, consistent
with past practice;
(f) other than in the ordinary course of business, any sale or transfer
of any of the assets of the Company or its subsidiaries;
(g) any material change in accounting methods (or underlying
assumptions), principles or practices affecting the Company's or its
subsidiaries' assets, liabilities or business, including without limitation, any
reserving, renewal or residual method, practice or policy except as required by
changes in applicable generally accepted accounting principles, law or
regulation, or any material change in methods of reporting income and deductions
for federal income tax purposes from those employed in preparation of the
federal income tax returns of the Company for the taxable year ended December
31, 2001;
(h) except as required by changes in applicable generally accepted
accounting principles, law or regulation, any material change in (i) any
material practice or policy of the Company relating to the pricing of
residential mortgage and consumer loan products, loan credit policy, loan
monitoring and loan collection procedures, or (ii) any material method of
calculating allowances for losses or reserves for accounting, financial
reporting or Tax purposes, as applicable;
(i) any material Tax election by the Company or its subsidiaries or any
settlement or compromise of any material income Tax liability by the Company or
its subsidiaries;
(j) any material change in investment or risk management or other
similar policies of the Company or any of its subsidiaries;
(k) any material insurance transaction other than in the ordinary course
of business consistent with past practice;
(l) any downgrade by any rating agency, or the receipt by the Company or
any of its subsidiaries on any notice (written or oral) that a rating agency is
considering a downgrade, of any securities (including any loan securitizations)
issued by the Company or any of its subsidiaries; or
(m) any agreement or commitment (contingent or otherwise) to do any of
the foregoing.
5.11 Compliance with Applicable Laws; Permits. (a) Except as set forth in
Section 5.11(a) of the Company Disclosure Schedule or in the Previously Filed
Company SEC Documents, neither the Company nor any of its subsidiaries is in
conflict with, is in default or violation of, or has since December 31, 1998
been charged by any Governmental Entity with a violation of, (i) any law, rule,
regulation, order, judgment or decree applicable to the Company or any of its
subsidiaries or by which its or any of their respective properties is bound or
affected, including state usury, consumer lending and insurance laws, the Truth
in Lending Act, the Real Estate Settlement Procedures Act, the Consumer Credit
Protection Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act,
the Homeowners Ownership and Equity Protection Act, the Fair Debt Collection
Practices Act and other federal, state, local and foreign laws regulating
lending, servicing loans or the selling of credit or other insurance or (ii) any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries or
its or any of their respective
A-23
properties is bound or affected. Except as specified in Section 5.11(a) of the
Company Disclosure Schedule, no such conflicts, defaults or violations have had,
or would be reasonably expected to have, a Material Adverse Effect with respect
to the Company.
(b) Except as set forth in Section 5.11(b) of the Company Disclosure
Schedule or in the Previously Filed Company SEC Documents, no investigation by
any Governmental Entity with respect to the Company or its subsidiaries is
pending or, to the knowledge of the Company, threatened.
(c) The Company has furnished to Parent a true, correct and complete
copy of the agreement in principle between the Company and a working group of
state attorneys general and regulatory agencies (the "Multi-State Settlement
Agreement"). The Multi-State Settlement Agreement has been duly authorized,
executed and delivered by the Company, is enforceable in accordance with its
terms, and has not been amended, modified or waived in any material respect.
Pursuant to the Multi-State Settlement Agreement, its operative terms will
become effective upon its approval and adoption by the relevant agencies
representing states in which at least 80% (by dollar volume) of the Company's
retail branch real estate secured loans were originated from January 1, 1999
through September 30, 2002 (the "Required States"). As of the date hereof, the
Attorneys-General of 30 states (representing 80% of the aforementioned dollar
volume) have issued press releases indicating their intent to join in the
Multi-State Settlement Agreement. The Multi-State Settlement Agreement will be
approved and adopted by the relevant agencies representing the Required States,
and the related consent decrees will be entered into, prior to the Effective
Time. The impact of the Multi-State Settlement Agreement on the business,
assets, liabilities, results of operations or financial condition of the Company
and its subsidiaries, taken as a whole, will not be materially more adverse than
as described in Section 5.11(c) of the Company Disclosure Schedule.
(d) Except as set forth in Section 5.11(d) of the Company Disclosure
Schedule, each of the Company's depository institution subsidiaries subject to
regulation by U.S. bank regulatory authorities is "well-capitalized" (as that
term is defined at 12 C.F.R. 225.2(r)(2)(i)) and "well managed" (as that term is
defined at 12 C.F.R. 225.2(s)), and each institution's examination rating under
the Community Reinvestment Act of 1977 is satisfactory or outstanding. Each
other subsidiary of the Company that is a depositary institution meets
comparable standards under applicable law.
(e) The Company, its subsidiaries and their respective employees hold
all permits, licenses, variances, exemptions, orders, registrations and
approvals of all Governmental Entities which are required for the operation of
the businesses of the Company and its subsidiaries (the "Company Permits"). Each
of the Company and its subsidiaries is, and for the past five years has been, in
compliance in all material respects with the terms of the Company Permits, all
of the Company Permits are in full force and effect and no suspension,
modification or revocation of any of them is pending or, to the knowledge of the
Company, threatened, nor, to the knowledge of the Company, do grounds exist for
any such action.
5.12 Absence of Litigation. Section 5.12 of the Company Disclosure
Schedule sets forth as of the date hereof all claims, actions, suits,
proceedings or investigations pending or, to the knowledge of the Company,
threatened against the Company or any of its subsidiaries, or any properties or
rights of the Company or any of its subsidiaries, before any court, arbitrator
or Governmental Entity. Expect as specified in Section 5.12 of the Company
Disclosure Schedule, no such claims, actions, suits, proceedings or
investigations have had, or would be reasonably expected to have, a Material
Adverse Effect with respect to the Company.
5.13 Regulatory Agreements. Except as set forth in Section 5.13 of the
Company Disclosure Schedule, neither the Company nor any of its subsidiaries (i)
is subject to any outstanding order, injunction or decree or is a party to any
written agreement, consent agreement or memorandum of understanding with, or is
a party to any commitment letter or similar undertaking to, or is subject to any
order or directive by, or is a recipient of any supervisory letter from or has
adopted any resolutions at the request of any Governmental Entity that restricts
in any respect the conduct of its business or that in any manner relates to its
capital adequacy, its policies, its management or its business (each, a "Company
Regulatory Agreement"), (ii) have, since December 31, 1999, been advised by any
Governmental Entity that it is considering issuing or requesting any such
Company Regulatory Agreement or (iii) have knowledge of any pending or
threatened regulatory investigation.
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5.14 Properties. Except as set forth in Section 5.14 of the Company
Disclosure Schedule (or as disclosed pursuant to Section 5.22 hereof), the
Company and each of its subsidiaries have good title to all of their owned real
properties and other owned assets used in their current operations, free and
clear of all liens, charges and encumbrances, except liens for taxes not yet due
and payable. All leases pursuant to which the Company or any of its subsidiaries
lease from others material amounts of real or Personal property, are in good
standing, valid and effective in accordance with their respective terms, and
there is not, to the knowledge of the Company, under any of such leases, any
existing default or event of default (or event which with notice or lapse of
time, or both, would constitute a default).
5.15 Loans. All currently outstanding secured or unsecured loans,
advances, credit lines or credit card receivables originated by the Company or
any of its subsidiaries (whether or not currently held by the Company or its
subsidiaries) or acquired by the Company or any of its subsidiaries from third
parties (collectively, the "Company Loans") were originated, solicited and
acquired, as the case may be, in accordance with the Company's written policies
regarding such matters as in effect at the time of such origination,
solicitation or acquisition, true and correct copies of which policies have been
provided to Parent. Each note, credit agreement, security instrument, automobile
installment contract or retail installment contract related to the Company Loans
constitutes a valid, legal and binding obligation of the obligor thereunder,
enforceable against such obligor in accordance with the terms thereof (except as
enforcement may be limited by general principles of equity whether applied in a
court of law or a court of equity and by bankruptcy, insolvency and similar laws
affecting creditors' rights and remedies generally). The Company has kept
complete and accurate books and records in connection with the Company Loans,
and there are no oral modifications or amendments related to the Company Loans
that are not reflected in the Company's records, no defenses as to the
enforcement of any Company Loan have been asserted, and there have been no acts
or omissions which would give rise to any claim or right of rescission, set-off,
counterclaim or defense. None of the Company Loans is presently serviced by
third parties and there is no obligation which could result in any Company Loan
becoming subject to any third party servicing.
5.16 Servicing. Except as set forth in Section 5.16 of the Company
Disclosure Schedule:
(a) The Company and its subsidiaries are the sole owners and holders of
the Company Servicing Rights. The Company Servicing Rights have not been
assigned or pledged, and the Company and its subsidiaries have good and
marketable interest in and to the Company Servicing Rights.
(b) No Servicing Agreement contains any provisions providing for
servicing under which any party has recourse against the Company or any
subsidiary for losses relating to such servicing or the performance of the loans
being serviced (other than losses caused by the Company's or the applicable
subsidiary's negligence), except to the extent the Company or the applicable
subsidiary (i) is obligated to make reimbursable temporary advances of
delinquent mortgage interest or (ii) holds a residual or subordinate interest in
any securitization that may experience reduced payments as a result of such
losses (which advance obligations and interests as of the date hereof have been
disclosed to Parent in Section 5.16(a) of the Company Disclosure Schedule).
(c) The Company and each of its subsidiaries have complied with all
obligations under all applicable insurance contracts, including any mortgage
policy, and any pool insurance with respect to, and have not taken or failed to
take any action which might materially and adversely affect, the Company Loans
or any of the Company Servicing Rights.
(d) During the five-year period prior to the date hereof, with respect
to any loan that is serviced by any of the Company or any of its subsidiary, if
the applicable Servicing Agreement obligated the Company or such subsidiary, as
the case may be, to maintain escrow funds for the payment of taxes, insurance or
similar items with respect to the loan, all required escrow accounts maintained
by the Company or such subsidiary, as the case may be, have been created and
administered in all material respects in accordance with the related mortgage
loan documents, applicable law and the applicable Servicing Agreement and all
escrow balances paid to the Company or any of its subsidiaries are on deposit in
the appropriate escrow accounts.
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(e) No Servicing Agreement pertains to servicing of loans owned by FNMA,
FHLMC, SBA, SLMA or other governmental agency.
5.17 Securitization Matters. Except as set forth in Section 5.17 of the
Company Disclosure Schedule:
(a) No registration statement, prospectus, private placement memorandum
or other offering document, or any amendments or supplements to any of the
foregoing, utilized in connection with the offering of securities in any Company
Sponsored Asset Securitization Transaction (collectively, "Securitization
Disclosure Documents"), true and correct copies of representative examples of
which have been provided to Parent and true and correct copies of which will,
after the date hereof, be made available to Parent, as of its effective date (in
the case of a registration statement) or its issue date (in the case of any
other such document), contained any untrue statement of any material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which they were
made, not misleading.
(b) Section 5.17(b) of the Company Disclosure Schedule sets forth a true
and correct list as of the date hereof of all outstanding Company Sponsored
Asset Securitization Transactions, and for each such transaction a list of all
outstanding securities issued therein, including securities retained by the
Company and its subsidiaries, and includes the original and current rating and
the principal amount as of the most current reporting date for each security
listed thereon.
(c) Neither the Company nor any of its subsidiaries nor, to the
knowledge of the Company, any trustee, master servicer, servicer or issuer with
respect to Company Sponsored Asset Securitization Transaction, has taken or
failed to take any action which would reasonably be expected to adversely affect
the intended tax characterization or tax treatment for federal, state or local
income or franchise tax purposes of the issuer or any securities issued in any
such Company Sponsored Asset Securitization Transaction. All federal, state and
local income or franchise tax and information returns and reports required to be
filed by the issuer, master servicer, servicer or trustee relating to any
Company Sponsored Asset Securitization Transactions, and all tax elections
required to be made in connection therewith, have been properly filed or made.
5.18 Employee Benefit Plans; ERISA. (a) Section 5.18(a) of the Company
Disclosure Schedule sets forth a complete and correct list of each Company
Benefit Plan. True and complete copies of each Company Benefit Plan, including,
but not limited to, any trust instruments and/or insurance contracts, if any,
forming a part thereof, all amendments thereto and the most recent determination
letters issued by the IRS, all government and regulatory approvals received from
any foreign regulatory agency, the most recent summary plan descriptions
(including any material modifications) and the most recent audited financial
reports for any funded Company Benefit Plan (to the extent that such Company
Benefit Plan is required by law or regulation to prepare audited financial
reports) have been provided to Parent. Except as disclosed in Section 5.18(a) of
the Company Disclosure Schedule: (i) neither the Company nor any of its
subsidiaries has made any plan or commitment, whether legally binding or not, to
create any additional Company Benefit Plan or modify or change any existing
Company Benefit Plan in a manner that would increase the benefits provided to
any employee or former employee, consultant or director of the Company or any
subsidiary thereof; and (ii) to the extent that any Company Benefit Plan is
required by law or regulation to prepare audited financial statements, since the
most recent audit date with respect to each Company Benefit Plan, there has been
no material change, amendment, modification to such Company Benefit Plan.
Neither the Company, its subsidiaries, nor any Person that would be considered a
single employer with the Company or any of its subsidiaries pursuant to Section
414(b), (c), (m) or (o) of the Code has incurred or, to the knowledge of the
Company, is reasonably expected to incur, any liability, whether contingent or
absolute, under Title IV of ERISA or Section 412 or 4971 of the Code, other than
liabilities under the Company Benefit Plans and premium payments to the Pension
Benefit Guarantee Corporation (the "PBGC").
(b) Except as set forth on Section 5.18(b) of the Company Disclosure
Schedule, with respect to each Company Benefit Plan: (i) if intended to qualify
under Section 401(a), 401(k) or 403(a) of the Code or under any law or
regulation of any foreign jurisdiction or Regulatory Agency, such plan and the
related trust has received a favorable determination letter from the IRS or
required approval of a Regulatory Agency of a foreign jurisdiction that has not
been revoked and (A) the consummation of the transaction contemplated
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hereby will not adversely affect such qualification or exemption and (B) to the
knowledge of the Company, no event or circumstance exists that has or is likely
to adversely affect such qualification or exemption or is likely to result in a
filing under Rev. Proc. 2002-47 or any predecessor or successor thereto; (ii) it
has been operated and administered in compliance with its terms and all
applicable laws and regulations in all material respects; (iii) there are no
pending or, to the knowledge of the Company, threatened claims against, by or on
behalf of any Company Benefit Plans (other than routine claims for benefits);
(iv) no breaches of fiduciary duty have occurred; (v) no non-exempt prohibited
transaction within the meaning of Section 406 of ERISA or Section 4975 of the
Code has occurred; (vi) no lien imposed under the Code, ERISA or any foreign law
exists; and (vii) all contributions, premiums and expenses to or in respect of
such Company Benefit Plan have been timely paid in full or, to the extent not
yet due, have been adequately accrued on the Company's consolidated financial
statements to the extent required by U.S. GAAP.
(c) Except as set forth on Section 5.18(c) of the Company Disclosure
Schedule, with respect to each Company Benefit Plan, neither the Company nor any
of its subsidiaries has incurred or reasonably expects to incur, either directly
or indirectly (including as a result of an indemnification obligation), any
liability under Title I of ERISA or penalty, excise tax or joint and several
liability provisions of the Code or any foreign law or regulation, in each case,
relating to employee benefit plans (including, without limitation, Section 406,
409, 502(i) or 502(l) of ERISA, or Section 4971, 4975 or 4976 of the Code, or
under any agreement, instrument, statute, rule or legal requirement, pursuant to
or under which the Company or any subsidiary or any Company Benefit Plan has
agreed to indemnify or is required to indemnify any Person against liability
incurred under, or for a violation or failure to satisfy the requirements of,
any such legal requirement), and, to the knowledge of the Company, no event,
transaction or condition has occurred, exists or is expected to occur which
would reasonably be expected to result in any such liability to the Company, any
of its subsidiaries or, after the Effective Time, to Parent.
(d) With respect to each Company Benefit Plan that is an "employee
pension benefit plan" (within the meaning of Section 3(2) of ERISA) as to which
either the Company or any subsidiary of the Company may incur any liability
under, or which is subject to, Section 302 or Title IV of ERISA or Section 412
of the Code: (i) no such plan is a "multiemployer plan" (within the meaning of
Section 3(37) of ERISA) or a "multiple employer plan" (within the meaning of
Section 413(c) of the Code); (ii) no liability has been incurred and, to the
knowledge of the Company, no condition or event currently exists or currently is
expected to occur that would result, directly or indirectly, in any liability of
the Company or any subsidiary of the Company under Title IV of ERISA, whether to
the PBGC or otherwise; (iii) no "reportable event" (as defined in Section 4043
of ERISA) has occurred with respect to any such plan, for which the 30-day
notice requirement has no been waived; (iv) no such plan has incurred any
"accumulated funding deficiency" (as defined in Section 302 of ERISA and Section
412 of the Code, respectively), whether or not waived; and (v) as of the last
day of the most recent plan year ended prior to the date hereof, the actuarially
determined present value of all "benefit liabilities", within the meaning of
Section 4001(a)(16) of ERISA or, with respect to any foreign plan (to the extent
such plan is required to be funded under applicable law or regulation), as
determined under any equivalent law or practice (in each case as determined on
the basis of the actuarial assumptions contained in the Company Benefit Plan's
most recent actuarial valuation), did not exceed the then current value of the
assets of such Company Benefit Plan, and, to the knowledge of the Company, there
has been no material adverse change in the financial condition of such Company
Benefit Plan (with respect to either assets or benefits) since the last day of
the most recent plan year.
(e) Except as set forth in Section 5.18(e) of the Company Disclosure
Schedule or in the Previously-Filed Company SEC Documents, with respect to each
Company Benefit Plan that is a "welfare plan" (as defined in Section 3(1) of
ERISA), neither the Company nor any subsidiary has any obligations to provide
health, life insurance, or death benefits with respect to current or former
employees, consultants or directors of the Company or any of its subsidiaries
beyond their termination of employment or service, other than as required under
Section 4980B of the Code or other applicable law or regulation, and the terms
of each such Company Benefit Plan do not prohibit the Company from amending or
terminating such plan at any time without incurring liability thereunder. Except
as set forth in Section 5.18(e) of the Company Disclosure Schedule or as
required by applicable law or regulation, there has been no written
communication from the
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Company to any employee, consultant or director of the Company or any subsidiary
that would reasonably be expected to promise or guarantee any such retiree
health or life insurance or other retiree death benefits on a permanent basis.
(f) Except as set forth in Section 5.18(f) of the Company Disclosure
Schedule or as specifically provided in this Agreement, neither the execution
and delivery of this Agreement, nor the consummation of the transactions
contemplated hereby, either alone or in combination with another event (whether
contingent or otherwise) will (i) entitle any current or former employee,
consultant or director of the Company or any subsidiary or any group of such
employees, consultants or directors to any payment; (ii) increase the amount of
compensation due to any such employee, consultant or director; (iii) accelerate
the vesting or funding of any compensation, stock incentive or other benefit;
(iv) result in any "parachute payment" under Section 280G of the Code (whether
or not such payment is considered to be reasonable compensation for services
rendered); or (v) cause any compensation to fail to be deductible under Section
162(m), or any other provision of the Code.
(g) Section 5.18(g) of the Company Disclosure Schedule sets forth any
and all indebtedness in excess of $50,000 owed by any current or former
employee, consultant or director to the Company or any subsidiary. Section
5.18(g) of the Company Disclosure Schedule sets forth any and all extensions of
credit, any arrangements for the extension of credit or any renewals of an
extension of credit made by the Company (either directly or indirectly,
including through a subsidiary), in the form of a Personal loan, to or for any
director or executive officer (or equivalent thereof) of the Company, and all
such extensions, arrangements or renewals are in compliance with the provisions
of the Sarbanes-Oxley Act.
(h) Except as set forth in Section 5.18(h) of the Company Disclosure
Schedule, no Company Benefit Plan, nor the Company or any of its subsidiaries
with respect to such Company Benefit Plan, is under audit, or has received
written notice that it is the subject of an investigation, by the IRS, the U.S.
Department of Labor, the PBGC or any other federal or state governmental agency,
nor, to the Company's knowledge, is any such audit or investigation pending or
threatened.
(i) Section 5.18(i) of the Company Disclosure Schedule sets forth a
complete list of all agreements and other arrangements, true and correct copies
of which have been provided to Parent, whereby the Company has any
indemnification, guarantee, hold harmless or similar liability or obligation in
respect of current or former directors, officers or employees of the Company or
any of its subsidiaries. All material liabilities with respect to any current or
former employee, consultant or director of the Company or any subsidiary or any
affiliate thereof, whether contingent or otherwise, that the Parent will assume
by reason of this Agreement or by operation of law are accurately reflected on
the Company's latest audited financial statements, to the extent required by
U.S. GAAP.
(j) With respect to each Company Benefit Plan and with respect to each
state workers' compensation arrangement that is funded wholly or partially
through an insurance policy or public or private fund, there has been no
material liability to the Company or its subsidiaries under any such insurance
policy, fund or ancillary agreement with respect to such insurance policy as the
result of a retroactive rate adjustment or loss sharing arrangement.
5.19 Labor Matters. (a) There are no labor or collective bargaining
agreements which pertain to employees of the Company or any of its subsidiaries.
Since December 31, 1998 (i) there has not occurred or, to the Company's
knowledge, been threatened any strike, slow down, picketing, work stoppage,
concerted refusal to work or other similar labor activities with respect to
employees employed by the Company or any of its subsidiaries and (ii) no
material grievance or arbitration or other proceeding relating to the Company or
any of its subsidiaries is pending or, to the Company's knowledge, threatened.
(b) There are no material complaints, charges or claims against the
Company or, to the knowledge of the Company, threatened to be brought or filed,
with any Governmental Entity in connection with the employment by the Company or
any of its subsidiaries of any individual, including any claim relating to
employment discrimination, equal pay, sexual harassment, employee safety and
health, wages and hours or workers' compensation.
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5.20 Taxes. (a) The Company and each of its subsidiaries (i) have
prepared in good faith and duly and timely filed (taking into account any
extension of time within which to file) all material Tax Returns required to be
filed by any of them and all such filed Tax Returns are complete and accurate in
all material respects; (ii) have paid in full all Taxes due, whether or not
assessed, or set up reserves in accordance with U.S. GAAP in respect of all
Taxes for all periods through the date hereof; (iii) have paid all other written
charges, claims and assessments received to date in respect of Taxes other than
those being contested in good faith for which provision has been made in
accordance with U.S. GAAP on the most recent balance sheet included in the
Company Financial Statements; (iv) have withheld from amounts owing to any
employee, creditor or other Person all Taxes required by law to be withheld and
have paid over to the proper governmental authority in a timely manner all such
withheld amounts to the extent due and payable, except for immaterial failures
to withhold or pay over; (v) have neither extended nor waived any applicable
statute of limitations with respect to Taxes and have not otherwise agreed to
any extension of time with respect to a Tax assessment or deficiency; (vi) have
never been members of any consolidated group for income tax purposes for any
taxable year with respect to which the statute of limitations had not expired,
other than the consolidated group of which the Company is the common parent;
(vii) are not parties to any tax sharing agreement or arrangement other than
with each other; (viii) have not constituted either a "distributing corporation"
or a "controlled corporation" in a distribution of stock qualifying for tax-free
treatment under Section 355 of the Code (A) in the two years prior to the date
of this Agreement or (B) in a distribution which could otherwise constitute part
of a "plan" or "series of related transactions" (within the meaning of Section
355(e) of the Code) in conjunction with the Merger; (ix) are not "United States
real property holding corporations" within the meaning of Section 897(c)(2) of
the Code; and (x) have never participated in a "reportable transaction" within
the meaning of U.S. Treasury Regulation Section 1.6011-4T(b), or any successor
or predecessor thereto.
(b) There are no pending or, to the knowledge of the Company, threatened
audits, examinations, investigations, litigation, or other proceedings in
respect of Taxes of the Company or any of its subsidiaries and during the past
three years neither the Company nor any of its subsidiaries have received any
written notice of the commencement of any audit, examination, deficiency or
refund litigation, with respect to any Taxes that remains unresolved as of the
date hereof.
(c) There are no unresolved questions or claims that have been raised by
a Taxing Authority in writing concerning the Company's or any of its
subsidiaries' Tax liability.
(d) No material liens for Taxes exist with respect to any of the assets
or properties of the Company or any of its subsidiaries, except for statutory
liens for Taxes not yet due or payable or that are being contested in good
faith.
(e) The Company has provided to Parent true and correct copies of the
United States federal income Tax Returns filed by the Company and its
subsidiaries for each of the fiscal years ended December 31, 2001, 2000 and
1999.
5.21 Tax Status. Neither the Company nor any of its subsidiaries has
taken any action or knows of any fact that is reasonably likely to (i)
jeopardize the qualification of the Merger as a reorganization within the
meaning of Section 368(a) of the Code or (ii) cause the shareholders of Company,
other than any such shareholder that would be a "five-percent transferee
shareholder" of Parent (within the meaning of U.S. Treasury Regulations Section
1.367(a)-3(c)(5)) following the Merger, to recognize gain pursuant to Section
367(a) of the Code. The Company is not aware of any facts or circumstances
relating to the Company or any of its subsidiaries, including any covenants or
undertakings of the Company pursuant to this Agreement that would prevent
Cleary, Gottlieb, Steen & Hamilton from delivering the Parent Counsel Tax
Opinion, or prevent Wachtell, Lipton, Rosen & Katz from delivering the Company
Counsel Tax Opinion.
5.22 Intellectual Property. (a) The Company has provided to Parent (and
will, after the date hereof, make available to Parent) to the extent requested
by Parent information concerning the following categories of Company IP and all
other material Company IP: (i) all registered Trademarks and material
unregistered Trademarks; (ii) all domain names and uniform resource locators,
(iii) all Patents; (iv) all registered Copyrights and mask works; and (v) all
Software, and in each case, as applicable, information concerning the
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name of the applicant/registrant and current owner, the jurisdiction where the
application/registration is located, the application or registration number, and
the status of the application or registration, including deadlines for any
renewals or other required filings.
(b) Section 5.22(b) of the Company Disclosure Schedule sets forth a
complete and correct list of: (i) all agreements under which the Company or any
of its subsidiaries uses or has the right to use any material Licensed Company
IP (other than "shrink wrap" licenses), (ii) agreements under which the Company
or any of its subsidiaries has licensed to others the right to use any of
material Company IP (specifying, in the case of clause (i) and (ii), the parties
to the agreement, a complete description of the Company IP that is licensed, any
royalty payments owed thereunder, and whether the license is exclusive or
non-exclusive) and (iii) all options and other agreements of any kind by which
the Company or any of its subsidiaries is bound, including for marketing or
distribution, related to material Company IP.
(c) The Owned Company IP, together with the Intellectual Property held
under license by the Company and its subsidiaries, constitutes all of the
Company IP, and such Intellectual Property is sufficient for the conduct of the
business of the Company and its subsidiaries as currently conducted.
(d) Except as set forth in Section 5.22(b) of the Company Disclosure
Schedule, the Company and its subsidiaries own the Owned Company IP, free and
clear of conditions, adverse claims and liens that would materially interfere
with the use of the Owned Company IP.
(e) The Company and each of its subsidiaries has taken all reasonable
and appropriate steps to protect and maintain the Company IP, and where the
Company or any of its subsidiaries has registered any Company IP, all such
registrations are valid and subsisting. Without limiting the foregoing, the
Company and each of its subsidiaries has taken all reasonable and appropriate
steps to protect and preserve the confidentiality of all of the Trade Secrets
that comprise any part of the Company IP and, to the knowledge of the Company,
there are no unauthorized uses, disclosures or infringements of any such Trade
Secrets by any Person. All use and disclosure by the Company or any of its
subsidiaries of Trade Secrets owned by another Person have been pursuant to the
terms of a written agreement with such Person or was otherwise lawful.
(f) The Company has provided to Parent (and will, after the date hereof,
make available to Parent) to the extent requested by Parent information
concerning all Persons who have created any material portion of the Company
Owned IP other than employees of the Company or its subsidiaries whose work
product was created by them entirely within the scope of their employment and
constitutes work made for hire owned by the Company or its subsidiaries. The
Company and each of its subsidiaries has secured and has a policy to secure
valid written assignments from all consultants, contractors and employees who
contribute or have contributed to the creation or development of any of the
Company Owned IP, of the rights to such contributions that the Company or its
subsidiaries do not already own by operation of law and each the Company and
each of its subsidiaries has provided true and complete copies of such
assignments to Parent.
(g) None of the use or exploitation of any Company IP or the conduct and
operations of the business of the Company and its subsidiaries in the manner
currently conducted or proposed to be conducted, or the provision of good and
services therein, infringes upon, misappropriates, violates or conflicts in any
way with any Person's rights in Intellectual Property. There is no pending or
threatened assertion or claim and there has been no such assertion or claim in
the last six years asserting that the Company's or any of its subsidiaries' use
or exploitation of any Company IP or that the conduct of the business of the
Company and its subsidiaries infringes upon, misappropriates, violates or
conflicts in any way with any Person's rights in Intellectual Property. Neither
the Company nor any of its subsidiaries is a party to any action or proceeding
that involves a claim of infringement or misappropriation of any Intellectual
Property of any Person.
(h) The Company IP and each of the Company's and each of its
subsidiaries' rights with respect thereto, including each of their respective
rights to use any of the Company IP, are valid and enforceable. There is no
pending or threatened assertion or claim, and there has been no such assertion
or claim, in the last six years challenging the validity or enforceability of,
or contesting the Company's or any of its subsidiaries' rights with respect to,
any of the Company IP or any agreement relating to the Company IP.
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(i) Neither the Company nor any of its subsidiaries has given or
received any notice of default or any event which with the lapse of time would
constitute a default under any agreement relating to the Company IP. Neither the
Company nor any of its subsidiaries, nor, to the knowledge of the Company, any
other Person, currently is in default with regard to any agreement relating to
the Company IP, and there exists no condition or event (including the execution,
delivery and performance of this Agreement) which, with the giving of notice or
the lapse of time or both, would constitute a default by the Company or any of
its subsidiaries under any such agreement, or would give any Person any right of
termination, cancellation or acceleration of any performance under any such
agreement or result in the creation or imposition of any lien, in each case.
(j) To the knowledge of the Company, there are no unauthorized uses,
disclosures, infringements, or misappropriations by any Person of any Owned
Company IP or any breaches by any Person of any licenses or other agreements
involving Company IP.
(k) The Company and each of its subsidiaries has obtained any and all
necessary consents from its customers with regard to the collection and
dissemination by such Person of personal customer information in connection with
the business of the Company and its subsidiaries, in accordance with any
applicable privacy policy published or otherwise communicated by the company or
any of its subsidiaries and any applicable law. The Company's and each of its
subsidiaries' practices regarding the collection and use of personal customer
information in connection with the business of the Company and its subsidiaries
are and have been in accordance with such privacy policies and with all
applicable law. Each of the Company and each of its subsidiaries has obtained
all necessary agreements and assurances from its third party service providers
used in connection with the business of the Company and its subsidiaries that
such service providers are in compliance with any applicable privacy statute or
regulation. Without limiting the foregoing, the Company and each of its
subsidiaries is in compliance with the privacy provisions of the U.S.
Gramm-Leach-Bliley Act (P.L. 106-102, 113 Stat. 1338 (1999)) and the relevant
rules and regulations of each Governmental Entity empowered thereunder.
5.23 Environmental Liability. Except as set forth in Section 5.24 of the
Company Disclosure Schedule: (i) the Company, its subsidiaries, and their
activities and operations are in compliance with all applicable common law
standards relating to pollution or protection of the environment and human
health or safety and any local, state or federal environmental statute,
regulation, requirement, ordinance, decree, judgment or order relating to
pollution or protection of the environment and human health or safety,
including, without limitation, the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended (collectively, the
"Environmental Laws"); (ii) there are no legal, administrative, arbitral or
other proceedings, claims, actions, causes of action, private environmental
investigations or remediation activities or governmental investigations of any
nature (collectively, "Environmental Claims") pending or, to the knowledge of
the Company, threatened against the Company or its subsidiaries; (iii) to the
knowledge of the Company, there are no conditions or circumstances that could
form the basis of any Environmental Claim seeking to impose on the Company or
any of its subsidiaries, or that reasonably could be expected to result in the
imposition on the Company or any of its subsidiaries of, any liability or
obligation under Environmental Laws; and (iv) to the knowledge of the Company,
there has not been any release, discharge or disposal of any hazardous or toxic
materials or wastes at, on or under the facilities of the Company or its
subsidiaries that require notification, investigation or remediation pursuant
to, or that are reasonably anticipated to give rise to liabilities or costs
under, applicable Environmental Laws.
5.24 Company Insurance Policies. Section 5.24 of the Company Disclosure
Schedule sets forth a list of all material fire and casualty, general liability,
business interruption, product liability and sprinkler and water damage
insurance policies maintained by the Company or any of its subsidiaries. All
such policies are with reputable insurance carriers and provide coverage amounts
which the Company reasonably believes are both adequate for all normal risks
incident to the current business of the Company and its subsidiaries and their
respective properties and assets, and appropriate for the businesses currently
conducted by the Company.
5.25 Voting Matters. After giving effect to the redemption of the Company
5% Preferred Stock, the Company $4.30 Preferred Stock and the Company $4.50
Preferred Stock pursuant to Section 8.15, the
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affirmative vote (the "Company Shareholder Approval") at the Company Shareholder
Meeting of a majority of the number of outstanding Common Shares to approve and
adopt the agreement of merger (within the meaning of the DGCL) contained in this
Agreement is the only vote of the holders of any class or series of the
Company's capital stock necessary to approve and adopt the transactions
contemplated hereby, including the Merger.
5.26 Rights Agreement. As of the date of this Agreement, the Company or
the Board of Directors of the Company, as the case may be, has (i) taken all
necessary actions so that the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not result in a
"Distribution Date" (as defined in the Rights Agreement) or result in Parent
being an "Acquiring Person" (as defined in the Rights Agreement) and (ii)
amended the Rights Agreement to (A) render it inapplicable to this Agreement and
the transactions contemplated hereby and (B) provide that the Final Expiration
Date shall occur immediately prior to the Effective Time.
5.27 Interested Party Transactions. Except as set forth in the Previously
Filed Company SEC Documents or Section 5.27 of the Company Disclosure Schedule,
no event has occurred since December 31, 1999 that would be required to be
reported by the Company as a "Certain Relationship" or "Related Transaction"
pursuant to Item 404 of Regulation S-K promulgated by the SEC.
5.28 Risk Management; Derivatives. (a) The Company and its subsidiaries
have in place written risk management policies and procedures, true and correct
copies of which have been provided to Parent prior to the date hereof,
sufficient in scope and operation to protect against risks of the type and in
amounts reasonably expected to be incurred by Persons of similar size and in
similar lines of business as the Company and its subsidiaries.
(b) All material derivative instruments, including, without limitation,
swaps, caps, floors and option agreements, whether entered into for the
Company's own account, or for the account of one or more of its subsidiaries or
their customers, were entered into (i) only for purposes of mitigating
identified risk or as a means of managing the Company's and its subsidiaries'
long-term debt objectives, (ii) in accordance with the Company's written
policies and procedures, and (iii) with counterparties believed by the Company
to be financially responsible at the time; and each of them constitutes the
valid and legally binding obligation of the Company or one of its subsidiaries,
enforceable in accordance with its terms (except that enforcement thereof may be
subject to or limited by bankruptcy, insolvency or other similar laws, now or
hereafter in effect, affecting creditors' rights generally, and the effect of
general principles of equity (regardless of whether enforceability is considered
in a proceeding at law or in equity)), and are in full force and effect. Neither
the Company nor its subsidiaries, nor to the knowledge of the Company, any other
party thereto, is in breach of any of its material obligations under any such
agreement or arrangement.
5.29 State Takeover Statutes. The Board of Directors of the Company has
approved, for purposes of making the restrictions on "business combinations" set
forth in Section 203 of the DGCL inapplicable to this Agreement and the
transactions contemplated hereby, this Agreement. To the extent that the any
"moratorium", "control share", "fair price", "affiliate transaction", "business
combination" or other antitakeover laws of any state other than the State of
Delaware purport to apply to this Agreement or the transactions contemplated
hereby, and to the fullest extent of its powers, the Board of Directors of the
Company has passed a resolution, and the Company has taken all necessary steps,
to exempt this Agreement and the transactions contemplated hereby from such
takeover statutes.
5.30 Opinion of Financial Advisor. The Company has received (i) the
opinion of Goldman, Sachs & Co., dated the date hereof, a copy of which opinion
has been provided to Parent, to the effect that, as of such date, the Common
Exchange Ratio is fair, from a financial point of view, to the holders of Common
Shares and (ii) the opinion of Keefe, Bruyette & Woods, Inc., dated the date
hereof, a copy of which opinion has been provided to Parent, to the effect that,
as of such date, the Preferred Merger Consideration is fair, from a financial
point of view, to the holders of Preferred Shares.
5.31 Brokers. No broker, investment banker, financial advisor or other
Person (other than Goldman, Sachs & Co. and Keefe, Bruyette & Woods, Inc., the
terms of whose engagement have been disclosed to
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Parent) is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of the Company.
5.32 Nature of Business. As of December 31, 2001, at least 85% of the
Company's consolidated total annual gross revenues is derived from, and at least
85% of the Company's consolidated total assets is attributable to, the conduct
of activities that are financial in nature, incidental to a financial activity
or otherwise permissible for a financial company under Section 4 of the Bank
Holding Company Act of 1956, as amended (12 U.S.C. Section 1843).
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE PARENT
Except as set forth in a correspondingly numbered section of the Parent
Disclosure Schedule (it being understood that the listing or setting forth of an
item in one section of the Parent Disclosure Schedule shall be deemed to be a
listing or setting forth in another section or sections of the Parent Disclosure
Schedule if and only to the extent that such information is reasonably apparent
to be so applicable to such other section or sections), Parent hereby represents
and warrants to the Company that:
6.1 Organization and Qualification; Subsidiaries. Parent and each of its
subsidiaries is a corporation or other legal entity duly organized, validly
existing and (in the jurisdictions recognizing the concept) in good standing
under the laws of the jurisdiction in which it is organized and has the
corporate or other power and authority and all necessary governmental approvals
to own, lease and operate its properties and to carry on its business as it is
now being conducted. The Company and each of its subsidiaries is duly qualified
or licensed to do business and is in good standing in each jurisdiction in which
the nature of its business or the ownership, leasing or operation of its
properties makes such qualification or licensing necessary.
6.2 Capitalization. (a) The share capital of Parent is (i) $7,500,000,000,
divided into 15,000,000,000 Parent Ordinary Shares, of which 9,479,729,046 were
issued and outstanding as of the date hereof and (ii) L301,500, divided into
301,500 non-voting deferred shares of L1, all of which are currently issued and
held by a subsidiary of Parent. The authorized preference share capital of
Parent is 10,000,000 non-cumulative preference shares of L0.01 each, 10,000,000
non-cumulative preference shares of U.S.$0.01 each, and 10 million
non-cumulative preference shares of E0.01 each, none of which are issued. As of
the date hereof, Parent has options outstanding to subscribe for 316,939,132
Parent Ordinary Shares.
(b) All outstanding shares of the capital stock of Parent to be
delivered as Common Merger Consideration have been or will be prior to the
Effective Time duly authorized and, when issued and delivered in accordance with
the terms of this Agreement, will have been validly issued, fully paid and
nonassessable and not subject to any preemptive rights. Except as set forth in
this Section 6.2, and except for preferred shares issued by Jersey limited
partnerships established by Parent in April, 2000 in the aggregate nominal
amount of U.S.$2,250,000,000, L500,000,000 and E600,000,000 which pursuant to
the terms thereof may require preference shares of Parent to be issued in
substitution therefor, (i) there are not issued, reserved for issuance or
outstanding (A) any shares of capital stock or voting securities or other
ownership interests of Parent, (B) any securities of Parent or any of its
subsidiaries convertible into or exchangeable or exercisable for shares of
capital stock or voting securities or other ownership interests of Parent, or
(C) any warrants, calls, options or other rights to acquire from Parent or any
of its subsidiaries, or any obligation of Parent or any of its subsidiaries to
issue, any capital stock, voting securities or other ownership interests in, or
securities convertible into or exchangeable or exercisable for, capital stock or
voting securities or other ownership interests in Parent, and (ii) there are no
outstanding obligations of Parent or any of its subsidiaries to repurchase,
redeem or otherwise acquire any such securities or to issue, deliver or sell, or
cause to be issued, delivered or sold, any such securities. To the knowledge of
the Parent, neither Parent nor any of its subsidiaries is a party to any
agreement restricting the transfer of, relating to the voting of, requiring
registration of, or granting any preemptive or antidilutive rights with respect
to, any securities of the type referred to in the preceding sentence.
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(c) The authorized capital stock of Merger Sub consists of 100 shares of
common stock, of which 10 are issued and outstanding and owned by Parent as of
the date hereof.
6.3 Authority Relative to this Agreement. (a) Parent and Merger Sub have
full corporate power and authority to enter into this Agreement and, subject to
the Parent Shareholder Approval, to consummate the transactions contemplated by
this Agreement. The execution and delivery of this Agreement by Parent and
Merger Sub and the consummation by Parent and Merger Sub of the transactions
contemplated by this Agreement have been duly and validly authorized by all
necessary corporate action (other than the Parent Shareholder Approval) on the
part of Parent and Merger Sub, and such authorization is in full force and
effect.
(b) As of the date hereof, the Board of Directors of Parent has (i)
determined that it is advisable and in the best interest of Parent for the
Parent to enter into this Agreement and to consummate the Merger upon the terms
and subject to the conditions of this Agreement, and (ii) approved this
Agreement in accordance with applicable provisions of English law and Parent's
memorandum and articles of association and (iii) determined that it will
recommend that Parent's shareholders give the Parent Shareholder Approval at the
Parent Shareholder Meeting. This Agreement has been duly executed and delivered
by Parent and Merger Sub and, assuming the due authorization, execution and
delivery by the Company, constitutes a legal, valid and binding obligation of
both Parent and Merger Sub, enforceable against Parent and Merger Sub in
accordance with its terms.
6.4 No Conflicts; Required Filings and Consents. (a) The execution and
delivery of this Agreement by Parent and Merger Sub does not, and the
consummation of the transactions contemplated by this Agreement by Parent and
Merger Sub will not, (i) conflict with or violate their respective
constitutional documents, (ii) assuming compliance with the matters referred to
in Section 6.4(b), contravene, conflict with or result in a violation or breach
of any provision of any law, rule, regulation, judgment, injunction, order or
decree applicable to Parent or any of its subsidiaries or by which any of its or
their properties is bound or affected, (iii) require any consent or other action
by any Person under, constitute a default under, or cause or permit the
termination, cancellation, acceleration or other change of any right or
obligation or the loss of any benefit to which Parent or any of its subsidiaries
is entitled under any provision of any material agreement or instrument binding
upon Parent or any of its subsidiaries or any material license, franchise,
permit, certificate, approval or other similar authorization affecting, or
relating in any way to, the assets or business of Parent and its subsidiaries or
(iv) result in the creation or imposition of any encumbrance on any material
asset of Parent or any of its subsidiaries.
(b) No material notices, reports or other filings are required to be
made by Parent or its subsidiaries with, nor are any consents, registrations,
approvals, permits applications, expiry of waiting periods or authorizations
required to be obtained by Parent or its subsidiaries from, any Governmental
Entity in connection with the execution and delivery of this Agreement and the
transactions contemplated hereby, other than the reports, filings,
registrations, consents, approvals, permits, authorizations, applications,
expiry of waiting periods and/or notices (i) pursuant to Section 2.3 hereof,
(ii) under the HSR Act, (iii) with or required by the OFT and the U.K. Secretary
of State for Trade and Industry and under the Competition Act (Canada), (iv)
under the Exchange Act (including, without limitation, the filing of the Form
F-4), (v) with or required by the NYSE, the LSE, the UKLA, the HKSE or Euronext
Paris, (vi) with or required by the FSA or the Hong Kong Monetary Authority,
(vii) with or required by the OCC, (viii) under the Investment Canada Act and
the Trust and Loan Companies Act (Canada), (ix) with or required by the Federal
Reserve Board, (x) under state securities or "Blue Sky" laws, (xi) under Section
765 of the Income and Corporation Taxes Act 1988, or (xii) with or required by
any other Governmental Entity or under any applicable law, in each case as
expressly set forth in Section 6.4(b) of the Parent Disclosure Schedule.
6.5 SEC Filings; Financial Statements. Since December 31, 1998, Parent and
its subsidiaries have filed all required reports, schedules, forms, statements
and other documents (including exhibits and all other information incorporated
therein) with the SEC (the "Parent SEC Documents"). As of their respective
dates, the Parent SEC Documents complied in all material respects with the
requirements of the Securities Act, the Exchange Act, the Sarbanes-Oxley Act or,
as the case may be, and the rules and regulations of the
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SEC promulgated thereunder applicable to such Parent SEC Documents, and no
Parent SEC Documents when filed (as amended and restated and as supplemented by
subsequently filed Parent SEC Documents) contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Parent and its subsidiaries included in the Parent SEC
Documents (collectively, the "Parent Financial Statements") complied as to form,
as of their respective dates of filing with the SEC, in all material respects
with applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles in the U.K., as permitted by applicable rules of
the SEC, consistently applied and, to the extent applicable and required by the
Securities Act or the Exchange Act, reconciled to U.S. GAAP as noted therein
during the periods involved (except as may be indicated in the notes thereto)
and fairly present in all material respects the consolidated financial position
of the Parent and its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended.
6.6 Undisclosed Liabilities. Except as set forth in Section 6.6(a) of the
Parent Disclosure Schedule or in the Parent Financial Statements contained in
the Parent SEC Documents filed and publicly available at least two Business Days
prior to the date hereof (the "Previously Filed Parent SEC Documents"), neither
Parent nor any of its subsidiaries has any liabilities (absolute, accrued,
contingent or otherwise), except liabilities (i) incurred since June 30, 2002 in
the ordinary course of business, or (ii) incurred in connection with this
Agreement or the Merger or the other transactions contemplated hereby.
6.7 Information Supplied. None of the information supplied or to be
supplied by the Parent or Merger Sub specifically for inclusion or incorporation
by reference in the Form F-4 or the Proxy Statement will, at the time the Form
F-4 becomes effective under the Securities Act, or at the date the Proxy
Statement is first mailed to the Company's shareholders or at the date of the
Company Shareholder Meeting, as applicable, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading; provided, however,
that no representation or warranty is made by the Parent with respect to
statements made or incorporated by reference therein based on information
supplied by the Company specifically for inclusion or incorporation by reference
in the Form F-4 or the Proxy Statement, as applicable.
6.8 Absence of Certain Changes or Events. Except for liabilities incurred
in connection with this Agreement or the transactions contemplated hereby or as
disclosed in any Previously-Filed Parent SEC Document, since December 31, 2001,
there has not been any Material Adverse Effect with respect to Parent.
6.9 Compliance with Applicable Laws. (a) Except as set forth in Section
6.9(a) of the Parent Disclosure Schedule or in the Previously Filed Parent SEC
Documents, neither the Parent nor any of its subsidiaries is in conflict with,
or in default or violation of, (i) any law, rule, regulation, order, judgment or
decree applicable to Parent or any of its subsidiaries or by which its or any of
their respective properties is bound or affected or (ii) any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which Parent or any of its subsidiaries is a
party or by which Parent or any of its subsidiaries or its or any of their
respective properties is bound or affected. No such conflicts, defaults or
violations (whether or not disclosed in Section 6.9(a) of the Parent Disclosure
Schedule) have had, or would reasonably be expected to have, a Material Adverse
Effect on Parent.
(b) Except as set forth in Section 6.9(b) of the Parent Disclosure
Schedule or in the Parent SEC Documents, no investigation by any Governmental
Entity with respect to Parent or any of its subsidiaries is pending or, to the
knowledge of Parent, threatened.
6.10 Absence of Litigation. There are no claims, actions, suits,
proceedings or investigations pending or, to the knowledge of Parent, threatened
against Parent or any of its subsidiaries, or any properties or rights of Parent
or any of its subsidiaries, before any court, arbitrator or Governmental Entity
that have had, or would reasonably be expected to have, a Material Adverse
Effect on Parent.
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6.11 Taxes. (a) Parent and each of its subsidiaries (i) have prepared in
good faith and duly and timely filed (taking into account any extension of time
within which to file) all material Tax Returns required to be filed by any of
them and all such filed Tax Returns are complete and accurate in all material
respects; (ii) have paid in full all Taxes due, whether or not assessed, or set
up reserves in accordance with generally accepted accounting principles in the
U.K. in respect of all Taxes for all periods through the date hereof; (iii) have
paid all other written charges, claims and assessments received to date in
respect of Taxes other than those being contested in good faith for which
provision has been made in accordance with generally accepted accounting
principles in the U.K. on the most recent balance sheet included in the Parent
Financial Statements; and (iv) have withheld from amounts owing to any employee,
creditor or other Person all Taxes required by law to be withheld and have paid
over to the proper governmental authority in a timely manner all such withheld
amounts to the extent due and payable, except for immaterial failures to
withhold or pay over.
(b) No material liens for Taxes exist with respect to any of the assets
or properties of Parent any of its subsidiaries, except for statutory liens for
Taxes not yet due or payable or that are being contested in good faith.
6.12 Tax Status. Neither Parent nor any of its subsidiaries has taken any
action or knows of any fact that is reasonably likely to (i) jeopardize the
qualification of the Merger as a reorganization within the meaning of Section
368 of the Code or (ii) cause the shareholders of the Company, other than any
such shareholder that would be a "five-percent transferee shareholder" of Parent
(within the meaning of U.S. Treasury Regulations Section 1.367(a)-3(c)(5))
following the Merger, to recognize gain pursuant to Section 367(a) of the Code.
Parent is not aware of any facts or circumstances relating to Parent or any of
its subsidiaries, including any covenants or undertakings of Parent pursuant to
this Agreement, that would prevent Cleary, Gottlieb, Steen & Hamilton from
delivering the Parent Counsel Tax Opinion, or prevent Wachtell, Lipton, Rosen &
Katz from delivering the Company Counsel Tax Opinion.
6.13 Voting Matters. The approval (the "Parent Shareholder Approval") of
the resolutions set forth in Section 8.2, on a show of hands, or, on a poll by
not less than the holders of a majority of the outstanding Parent Ordinary
Shares who vote in Person or by proxy at the Parent Shareholder Meeting, is the
only vote of the holders of any class or series of the Parent's capital stock
necessary to approve and adopt this Agreement and the transactions contemplated
hereby, including the Merger.
6.14 Brokers. Other than Morgan Stanley & Co. Limited, Rohatyn Associates
and HSBC Investment Bank plc, no broker, investment banker, financial advisor or
other Person is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Parent and/or
Merger Sub.
ARTICLE VII
COVENANTS RELATING TO THE CONDUCT OF BUSINESS
7.1 Conduct of Business by the Company Pending the Merger. Except as (i)
set forth in Section 7.1 of the Company Disclosure Schedule, (ii) otherwise
expressly contemplated by this Agreement or (iii) expressly consented to by
Parent in writing, during the period from the date of this Agreement to the
Effective Time, the Company shall, and shall cause its subsidiaries to, carry on
their respective businesses in the ordinary course consistent with past practice
and in compliance in all material respects with all applicable laws and
regulations and, to the extent consistent therewith, use reasonable best efforts
to preserve intact their current business organizations, to keep available the
services of their current officers and other key employees and preserve their
relationships with those Persons having business dealings with them to the end
that their goodwill and ongoing businesses shall be unimpaired at the Effective
Time. Without limiting the generality of the foregoing, except as (i) set forth
in Section 7.1 of the Company Disclosure Schedule, (ii) otherwise expressly
provided for in this Agreement or (iii) expressly consented to by Parent in
writing, during the period from the date of this Agreement to the Effective
Time, the Company shall not, and shall not permit any of its subsidiaries to:
(a) other than (x) dividends and distributions by a direct or indirect
wholly owned subsidiary of the Company to its parent, (y) the regular quarterly
cash dividend declared in respect of the Common Shares in
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the fourth quarter of 2002 and paid in January 2003, not to exceed $0.25 per
share, and, if the Effective Time does not occur until after the record date for
the second interim dividend in lieu of final dividend for 2002 in respect of the
Parent Ordinary Shares, which is expected to be declared in March 2003 and paid
in May 2003 (the "Final Dividend"), and Parent shall not have taken alternative
steps reasonably acceptable to the Company to provide the economic benefits of
the Final Dividend to holders of Common Shares, the Company shall be entitled to
take appropriate steps such that holders of Common Shares receive, prior to the
Effective Time, per share dividends in respect of the Common Shares not to
exceed, in the aggregate, an amount equal to the amount of the Final Dividend
multiplied by the Exchange Ratio and (z) regular cash dividends in respect of
the Preferred Shares, in accordance with the terms thereof, (i) declare, set
aside or pay any dividends on, make any other distributions (whether in cash,
stock, property or any combination thereof) in respect of, or enter into any
agreement with respect to the voting of, any of the capital stock of the Company
or its subsidiaries, (ii) split, combine or reclassify any of the capital stock
of the Company or its subsidiaries, or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of, or in substitution
for, shares of the capital stock of the Company or its subsidiaries, (iii) amend
the terms or change the period of exercisability of, purchase, repurchase,
redeem or otherwise acquire, any securities of the Company or its subsidiaries,
or any option, warrant or right, directly or indirectly, to acquire any such
securities, or propose to do any of the foregoing, or (iv) settle, pay or
discharge any material claim, suit or other action brought or threatened against
the Company with respect to or arising out of a shareholder's equity interest in
the Company;
(b) purchase, redeem or otherwise repay, or modify any of the terms of,
any of the Company's or its subsidiaries' indebtedness;
(c) other than the issuance of Common Shares pursuant to Company
Stock-Based Awards or the exercise of Company Stock Options outstanding as of
the date hereof, issue, sell, pledge, dispose of or encumber, or authorize the
issuance, sale, pledge, disposition or encumbrance of, any shares of capital
stock of any class, or any options, warrants, convertible securities or other
rights of any kind to acquire any shares of capital stock, or any other
ownership interest (including, without limitation, any phantom interest) in the
Company or any of its subsidiaries;
(d) amend or otherwise change any of the Company Charter Documents or
Subsidiary Charter Documents;
(e) acquire or agree to acquire (by merger, consolidation, acquisition
of assets, acquisition of stock or by any other manner) any corporation,
partnership or other business organization or any division thereof, other than
acquisitions in the ordinary course of business consistent with past practice of
consumer finance receivables; provided that any such acquisitions shall be for
cash consideration;
(f) sell, dispose of, pledge, lease, license, mortgage or otherwise
encumber or subject to any lien any of the material properties or assets
(including pursuant to securitizations) of the Company or any of its
subsidiaries, or cancel, release or assign any material indebtedness or claims
of the Company or any of its subsidiaries, in each case other than in the
ordinary course of business;
(g) except for borrowings under existing credit facilities or lines of
credit or refinancing of indebtedness outstanding on the date hereof, incur any
indebtedness for borrowed money or issue any debt securities or assume,
guarantee or endorse, or otherwise become responsible for the obligations of any
Person, or make any loans, advances or capital contributions to, or investments
in, any Person other than its wholly owned subsidiaries, except in each case in
the ordinary course of business consistent with past practice;
(h) change its accounting methods (or underlying assumptions),
principles or practices affecting its assets, liabilities or business, including
without limitation, any underwriting, reserving, renewal or residual method,
practice or policy, except as required by changes in applicable generally
accepted accounting principles, law or regulation, or materially change any of
its methods of reporting income and deductions for federal income tax purposes
from those employed in the preparation of the federal income tax returns of the
Company for the taxable year ended December 31, 2001, except as required by
changes in applicable law;
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(i) except as required by changes in applicable generally
accepted accounting principles, law or regulation, make any material change
in (i) any material practice or policy of the Company relating to the
pricing of residential mortgage and consumer loan products, loan credit
policy, loan monitoring and loan collection procedures, (ii) any material
practice or policy of the Company in connection with its securitization
transactions or (iii) any material method of calculating allowances for
losses or reserves for accounting, financial reporting or Tax purposes, as
applicable;.
(j) restructure or materially change its investment securities
portfolio or its gap position, through purchases, sales or otherwise, or
the manner in which the portfolio is classified or reported;
(k) except as required by changes in applicable generally
accepted accounting principles, law or regulation, change in any material
respects its credit, reserving, charge-off, servicing, classification or
similar policies relating to the consumer finance business, or its
actuarial, reserving, investment or risk management or other similar
policies;
(l) (i) amend or otherwise modify, except in the ordinary course
of business, or knowingly violate in any material respect the terms of, any
of the Company Material Contracts, or (ii) create, renew or amend any
agreement or contract or other binding obligation of the Company or its
subsidiaries containing (A) any restriction on the ability of the Company
or its subsidiaries to conduct its business as it is presently being
conducted in any material respect or (B) any material restriction on the
Company or its subsidiaries engaging in any type or activity or business;
(m) with respect to any of the Company's or its subsidiaries'
current, former or prospective directors, officers, employees or
consultants, except as required by applicable law, regulation or existing
contractual commitment, (i) enter into, adopt, amend, extend or terminate
any Company Benefit Plan, including any bonus, profit sharing, pension,
retirement, compensation, employment, consulting, severance, retention,
change in control, stock option, stock appreciation right or other
equity-based, deferred or incentive compensation, labor, collective
bargaining, indemnification or other employee benefit agreement, trust,
plan, fund, award or other arrangement, (ii) grant any salary, wage or
other compensation increase (except for an increase in annual salary or
hourly wage rates granted to current employees (other than officers) in the
ordinary course of business, consistent with past practice), (iii) make any
award or grant under any Company Benefit Plan or otherwise (including,
without limitation, the grant of any stock options, stock appreciation
rights, restricted stock units or other awards), (iv) grant or increase any
severance or termination payment (except to make payments required to be
made under obligations existing on the date hereof in accordance with the
terms of such obligations or to current employees (other than officers) in
the ordinary course of business consistent with past practice) or (v)
increase the benefits under, or modify in a manner that increases costs to
the Company of, any employee benefit (including any incentive or bonus
payments or perquisites);
(n) except pursuant to agreements or arrangements in effect on
the date hereof and previously provided to the Parent or disclosed in
Previously Filed Company SEC Documents, pay, loan or advance any amount to,
or sell, transfer or lease any material properties or assets (real,
personal or mixed, tangible or intangible) to, or enter into any agreement
or arrangement with, any of its officers or directors or any affiliate or
the immediate family members or associates of any of its officers or
directors other than compensation in the ordinary course of business
consistent with past practice;
(o) make any material Tax elections, or settle or compromise any
material income Tax liability of the Company or any of its subsidiaries;
(p) agree or consent to any material agreements or material
modifications of existing agreements with any Governmental Entity in
respect of the operations of its business, except (i) any consent decrees
contemplated by the Multi-State Settlement Agreement, (ii) as required by
law to renew Company Permits or agreements in the ordinary course
consistent with past practice, or (iii) to effect the consummation of the
transactions contemplated hereby;
(q) pay, discharge, settle, compromise or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), including taking any action to settle or
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compromise any litigation, in each case having a value in excess of
$1,000,000 or otherwise material to the Company and its subsidiaries taken
as a whole, other than the payment, discharge, settlement, compromise or
satisfaction, in the ordinary course of business consistent with past
practice or in accordance with their terms, of liabilities reflected or
reserved against in, or contemplated by, the most recent consolidated
financial statements (or the notes thereto) of the Company Previously Filed
SEC Documents, or incurred since September 30, 2002 in the ordinary course
of business consistent with past practice; or
(r) authorize, or commit or agree to take, any of the foregoing
actions.
7.2 No Solicitation. (a) None of the Company, its subsidiaries or any
officer, director, employee, agent or representative (including any investment
banker, financial advisor, attorney, accountant or other retained
representative) of the Company or any of its subsidiaries shall directly or
indirectly (i) solicit, initiate or encourage or facilitate (including by way of
furnishing information) or take any other action designed to facilitate any
inquiries or proposals regarding any merger, share exchange, consolidation, sale
of assets, sale of shares of capital stock (including, without limitation, by
way of a tender offer) or similar transactions involving the Company or any of
its subsidiaries that, if consummated, would constitute an Alternative
Transaction (any of the foregoing inquiries or proposals being referred to
herein as an "Acquisition Proposal"), (ii) participate in any discussions or
negotiations regarding an Alternative Transaction or (iii) enter into any
agreement regarding any Alternative Transaction. Notwithstanding the foregoing,
the Board of Directors of the Company shall be permitted, prior to the Company
Shareholder Meeting and subject to compliance with the other terms of this
Section 7.2, to consider and participate in discussions and negotiations with
respect to a bona fide Acquisition Proposal received by the Company that the
Board of Directors of the Company concludes in good faith (after consulting with
a nationally recognized investment banking firm) would, if accepted, be
reasonably capable of being consummated and would, if consummated, constitute a
Superior Proposal not solicited in violation of this Agreement, if and only to
the extent that the Board of Directors of the Company reasonably determines in
good faith (after consultation with outside legal counsel) that failure to do so
would be inconsistent with its fiduciary duties.
(b) The Company shall notify Parent promptly (but in no event later
than 24 hours) after receipt of any Acquisition Proposal, or any material
modification of or material amendment to any Acquisition Proposal, or any
request for nonpublic information relating to the Company or any of its
subsidiaries or for access to the properties, books or records of the Company or
any subsidiary by any Person or entity that informs the Board of Directors of
the Company or any subsidiary that it is considering making, or has made, an
Acquisition Proposal. Such notice to Parent shall be made orally and in writing,
and shall indicate the identity of the Person making the Acquisition Proposal or
intending to make or considering making an Acquisition Proposal or requesting
non-public information or access to the books and records of the Company or any
subsidiary, and the material terms of any such Acquisition Proposal or
modification or amendment to an Acquisition Proposal. The Company shall keep
Parent fully informed, on a current basis, of any material changes in the status
and any material changes or modifications in the terms of any such Acquisition
Proposal, indication or request. The Company shall also promptly, and in any
event within twenty-four hours, notify Parent, orally and in writing, if it
enters into discussions or negotiations concerning any Acquisition Proposal in
accordance with Section 7.2(a).
(c) Neither the Company nor the Board of Directors of the Company
(nor any committee thereof) shall, in a manner adverse to Parent, (i) withdraw,
modify or qualify, or propose to withdraw, modify or qualify, the recommendation
by such Board of Directors of this Agreement and/or the Merger to the Company's
shareholders, (ii) take any action or make any statement in connection with the
Company Shareholder Meeting inconsistent with such approval (any action referred
to in clause (i)or (ii) being a "Change in Company Recommendation") or (iii)
recommend any Acquisition Proposal. Notwithstanding the forgoing, the Board of
Directors of the Company shall be permitted to take the actions described in
clauses (i) through (iii) above if the Company has complied in all material
respects with Sections 7.2(a), 7.2(b) and 7.2(e), if and to the extent the Board
of Directors of the Company reasonably determines in good faith (after due
consultation with outside legal counsel) that failure to do so would be
inconsistent with its fiduciary duties; provided, however, that the Company
shall have provided Parent three Business Days' prior written
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notice to the effect that the Board of Directors of the Company intends to take
such action and the reasons therefor.
(d) Nothing contained in this Section 7.2 shall prohibit the Company or
its subsidiaries from taking and disclosing to its shareholders a position
required by Rule 14e-2(a) or Rule 14d-9 promulgated under the Exchange Act.
(e) The Company and its subsidiaries shall immediately cease and cause
to be terminated any existing discussions or negotiations with any Persons
(other than Parent) conducted heretofore with respect to any of the foregoing,
and shall use reasonable best efforts to cause all Persons other than Parent who
have been furnished confidential information regarding the Company in connection
with the solicitation of or discussions regarding an Acquisition Proposal within
the 12 months prior to the date hereof promptly to return or destroy such
information. The Company agrees not to, and to cause its subsidiaries not to,
release any third party from the confidentiality and standstill provisions of
any agreement to which the Company or its subsidiaries is a party, and shall
immediately take all steps necessary to terminate any approval which may have
been heretofore given under any such provisions authorizing any person to make
an Acquisition Proposal.
(f) The Company shall ensure that the officers, directors and all
employees, agents and representatives (including any investment bankers,
financial advisors, attorneys, accountants or other retained representatives) of
the Company or its subsidiaries are aware of the restrictions described in this
Section 7.2 as reasonably necessary to avoid violations thereof. It is
understood that any violation of the restrictions set forth in this Section 7.2
by any officer, director, employee, agent or representative (including any
investment banker, financial advisor, attorney, accountant or other retained
representative) of the Company or its subsidiaries, at the direction or with the
consent of the Company or its subsidiaries shall be deemed to be a breach of
this Section 7.2 by the Company.
7.3 Conduct of Business by Parent Pending the Merger. Except as (i) set
forth in Section 7.3 of the Parent Disclosure Schedule, (ii) otherwise expressly
contemplated by this Agreement or (iii) consented to by the Company in writing,
during the period from the date of this Agreement to the Effective Time, Parent
covenants and agrees that Parent shall not, and shall not permit any of its
subsidiaries to:
(a) other than Parent's Final Dividend payable on dates consistent with
past practice (including as to payment of scrip dividend), (i) declare, set
aside or pay any dividends on, make any other distributions (whether in cash,
stock, property or any combination thereof) in respect of the capital stock of
Parent or (ii) split, combine or reclassify any of the capital stock of Parent
or issue or authorize or propose the issuance of any other securities in respect
of, in lieu of, or in substitution for, shares of the capital stock of Parent;
(b) acquire or agree to acquire (by merger, consolidation, acquisition
of assets, acquisition of stock or by any other manner) any corporation,
partnership or other business organization or any division thereof, unless such
action would not reasonably be expected to delay or impede the consummation of
the Merger; or
(c) amend or otherwise change the memorandum of association or articles
of association (or equivalent organizational documents) of Parent or any
subsidiary of Parent in a manner that would materially delay or impede the
transactions contemplated hereby or be adverse to the holders of the Company's
capital stock, giving effect to the Merger.
ARTICLE VIII
ADDITIONAL AGREEMENTS
8.1 Registration Statement; Parent Documents. (a) Each of Parent and the
Company, as applicable, shall as promptly as practicable prepare (i) a
Registration Statement on Form F-4 (the "Form F-4") under the Securities Act,
with respect to the issuance of the Parent Depositary Shares and the Parent ADRs
and Parent Ordinary Shares in the Merger, a portion of which Form F-4 shall also
serve as the Company's proxy statement (the "Proxy Statement") and the
prospectus (the "Prospectus") with respect to the Parent Ordinary Shares and
Parent Depositary Shares issuable in the Merger, and (ii) the Parent Documents.
Parent shall file with the SEC as soon as reasonably practicable after the date
hereof the Form F-4. The parties will
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cause the Form F-4 and the Proxy Statement to comply as to form in all material
respects with the applicable provisions of the Securities Act and the Exchange
Act. Parent shall use its respective reasonable best efforts to have the Form
F-4 declared effective by the SEC as promptly as reasonably practicable after
such filing. Parent shall use its reasonable best efforts to obtain, prior to
the effective date of the Form F-4, all necessary state securities law or "Blue
Sky" permits or approvals required to carry out the transactions contemplated by
this Agreement (but in no event shall Parent in connection with its obligations
pursuant to this Section 8.1(a) be obligated to qualify to do business in any
state or other jurisdiction or to file a general consent to service of process
or consent to jurisdiction in any state or other jurisdiction). No filing of, or
amendment or supplement to, the Form F-4 or the Proxy Statement will be made by
Parent or the Company without providing the other with a reasonable opportunity
to review and comment thereon. Parent will advise the Company, promptly after it
receives notice thereof, of the time when the Form F-4 has become effective or
any supplement or amendment has been filed, the issuance of any stop order, the
suspension of the qualification of the Parent Depositary Shares or Parent
Ordinary Shares issuable in connection with the Merger for offering or sale in
any jurisdiction, or any request by the SEC for amendment of the Form F-4 or
comments thereon and responses thereto or requests by the SEC for additional
information. The Company will advise Parent, promptly after it receives notice
thereof, of any request by the SEC for amendment of the Proxy Statement or
comments thereon and responses thereto or requests by the SEC for additional
information.
(b) Parent will use reasonable best efforts to cause the Parent Circular
to be mailed to its shareholders as soon as possible following the effectiveness
of the Form F-4. The Company will use reasonable best efforts to cause the
Company Proxy Statement and, to the extent required, a summary of the Parent
Listing Particulars to be mailed to its shareholders as soon as possible
following the effectiveness of the Form F-4.
(c) The Company and Parent shall cooperate and Parent shall reasonably
promptly prepare and file with the UKLA, the HKSE and Euronext Paris, a circular
to be sent to Parent shareholders in connection with the Parent Shareholder
Meeting (the "Parent Circular"), containing (i) a notice convening the Parent
Shareholder Meeting, (ii) such other information (if any) as may be required by
the UKLA, the HKSE or Euronext Paris, and (iii) such other information as Parent
reasonably determines to include therein. The Company and Parent shall cooperate
and Parent shall also prepare and file with the UKLA listing particulars and, if
required, supplementary listing particulars, or, if required, prepare and file
with the HKSE and/or Euronext Paris any listing document required by the HKSE
and/or Euronext Paris, relating to Parent and its subsidiaries and the Parent
Ordinary Shares (the "Parent Listing Particulars" and, together with the Parent
Circular, the "Parent Documents"). Each of the Company (solely to the extent
such information is provided by the Company for inclusion therein) and Parent
agrees that the Parent Documents and any supplements thereto and any other
circulars or documents issued to shareholders, employees or debentureholders of
Parent, will contain all particulars required to comply in all respects with all
applicable United Kingdom and Hong Kong statutory and other legal and regulatory
provisions (including, without limitation, the Companies Act 1985, the Financial
Services and Markets Act 2000, the Companies Ordinance (Chapter 32 of the Laws
of Hong Kong) and the rules and regulations made thereunder, and the rules and
requirements of the UKLA and the HKSE) and all other applicable legal and
regulatory provisions and all such information contained in such documents will
be in accordance with the facts and will not omit anything material likely to
affect the import of such information or would make any statement therein
misleading. The Company shall notify Parent as promptly as practicable of any
alterations in the information provided by it for the purposes of this Section
8.1(c) resulting in any statement in the Parent Documents containing an untrue
statement of a material fact or omitting a material fact which renders such
statement misleading and the Company shall cooperate with Parent in the
provision of new information relating to it and in the preparation of resulting
supplementary documents required by the UKLA or the HKSE.
8.2 Shareholder Meetings. (a) The Company will take all action reasonably
necessary to convene a meeting of the holders of Company Common Stock (the
"Company Shareholder Meeting"), at which such holders shall consider of the
approval of the agreement of merger contained herein as promptly as reasonably
practicable (subject to applicable law and to this Section 8.2) after the Form
F-4 has been declared effective by the SEC. Parent will take all action
reasonably necessary to convene an extraordinary general meeting of
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Parent's shareholders (the "Parent Shareholder Meeting"), as promptly as
reasonably practicable (subject to applicable law and to this Section 8.2) after
the Parent Circular has been approved by the UKLA and HKSE, at which such
holders shall consider one or more resolutions to, inter alia, (A) approve the
agreement of merger and the other transactions contemplated hereby, (B)
authorize the issue of Parent Ordinary Shares and allotment of relevant
securities, including in connection with the continued operation of the Company
Stock Plans and the exercise of rights pursuant to the Units and other
derivative instruments of the Company. The Company's obligations under this
Section 8.2(a) shall not be affected by any determination of the Company's Board
of Directors not to recommend the Merger or to no longer deem it advisable.
(b) Parent and the Company shall each use reasonable best efforts such
that, to the extent reasonably practicable, the Company Shareholder Meeting and
the Parent Shareholder Meeting shall be held on the same day and as promptly as
reasonably practicable (subject to applicable law) after the conditions
precedent to holding such meetings have been fulfilled. Subject to the
requirements of applicable law and the terms of this Agreement (including, in
the case of Parent, the fiduciary duties of its board of directors under
applicable law and, in the case of the Company, the provisions of Section 7.2),
the board of directors of each of Parent and the Company shall recommend to its
respective shareholders the approval of the Merger and the other transactions
contemplated hereby and shall use reasonable best efforts to solicit such
approval.
8.3 Access to Information; Confidentiality. Subject to the Confidentiality
Agreement, dated October 11, 2002 between Parent and the Company (the
"Confidentiality Agreement"), and subject to the restrictions contained in
confidentiality agreements to which the Company and its subsidiaries are subject
(which restrictions the Company and its subsidiaries will use its reasonable
best efforts to have waived) and applicable law, Company shall, and shall cause
each of its subsidiaries to, afford to Parent and to the officers, employees,
accountants, counsel, financial advisors and other representatives of Parent,
reasonable access during normal business hours during the period prior to the
Effective Time to all their respective properties, books, contracts,
commitments, personnel and records and, during such period, the Company shall,
and shall cause each of its subsidiaries to, furnish promptly to Parent (i) a
copy of each report, schedule, registration statement and other document filed
by it during such period pursuant to the requirements of federal or state
securities laws and (ii) all other information concerning its business,
properties and personnel as such other party may reasonably request. In
addition, the Company will deliver, or cause to be delivered, to Parent the
internal or external reports reasonably required by Parent promptly after such
reports are made available to the Company's personnel. Parent will hold, and
will cause its respective officers, employees, accountants, counsel, financial
advisors and other representatives and affiliates to hold, any nonpublic
information in accordance with the terms of the Confidentiality Agreement.
8.4 Filings; Other Actions; Notification. (a) Subject to the other
provisions of this Agreement, the Company and Parent shall cooperate with each
other and use (and shall cause their respective subsidiaries to use) reasonable
best efforts to take or cause to be taken all actions, and do or cause to be
done all things, necessary, proper or advisable on its part under this Agreement
and applicable laws to consummate and make effective the Merger and the other
transactions contemplated by this Agreement as soon as reasonably practicable,
including preparing and filing as promptly as reasonably practicable all
documentation to effect all necessary notices, reports, applications and other
filings and to obtain as promptly as reasonably practicable all consents,
registrations, approvals, permits and authorizations necessary or advisable to
be obtained from any third party and/or any Governmental Entity in order to
consummate the Merger or any of the other transactions contemplated by this
Agreement (including, without limitation, the Government Consents); provided,
however, that nothing in this Section 8.4 shall require, or be construed to
require, Parent, in connection with the receipt of any regulatory approval, to
proffer to, or agree (or for Parent to permit the Company to proffer to or to
agree) to (i) sell or hold separate or agree to sell, divest, discontinue or
limit, before or after the Effective Time, any assets, businesses, or interest
in any assets or businesses of Parent, the Company or any of their respective
affiliates (or to consent to any discontinuance or limitation by Parent or the
Company, as the case may be, of any of its assets or businesses) or (ii) agree
to any conditions relating to, or changes or restriction in, the operations of
any such asset or businesses which, in the case of either clause (i) or (ii), is
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect on Parent or the Company or a material adverse effect on the Parent
Intermediate Holding Subsidiary (consolidated with
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its subsidiaries) (any such requirement, a "Burdensome Condition"). Subject to
applicable laws relating to the exchange of information, Parent shall have the
right to review in advance any material filing made with, or written materials
submitted by the Company to, any third party and/or any Governmental Entity in
connection with the Merger and the other transactions contemplated by this
Agreement. In exercising the foregoing right, Parent shall act reasonably and as
promptly as reasonably practicable.
(b) The Company and Parent each shall, upon reasonable request by the
other and subject to applicable law, furnish the other with all information
concerning itself, its subsidiaries, directors, officers and shareholders and
such other matters as may be reasonably necessary or advisable in connection
with the Company Proxy Statement, the Form F-4, the Parent Documents, the Press
Announcements or any other statement, filing, notice or application made by or
on behalf of Parent, the Company or any of their respective subsidiaries to any
third party and/or any Governmental Entity in connection with the Merger and the
transactions contemplated by this Agreement. The Company shall procure that
William F. Aldinger, as a proposed director of Parent, will take responsibility
for the Parent Documents to the extent required by the UKLA, the HKSE and
Euronext Paris.
(c) To the fullest extent permitted by applicable law, the Company and
Parent each shall keep the other apprised of the status of matters relating to
completion of the Merger and the other transactions contemplated hereby,
including promptly furnishing the other with copies of material notices or other
communications received by Parent or the Company, as the case may be, or any of
its subsidiaries, from any third party and/or any Governmental Entity with
respect to the Merger and the other transactions contemplated by this Agreement.
The Company and Parent each shall give prompt notice to the other of any change
that, individually or in the aggregate, is reasonably likely to result in a
Material Adverse Effect with respect to it or to cause the non-satisfaction of
any condition to the Merger.
(d) In the event any claim, action, suit, investigation or other
proceeding by any Governmental Entity or other Person or other legal or
administrative proceeding is commenced that questions the validity or legality
of this Agreement, or the Merger or the other transactions contemplated by this
Agreement or claims damages in connection therewith, the Company and Parent each
agree to cooperate and use their reasonable best efforts, subject to the
limitations set forth in Section 8.4(a), to defend against and respond thereto.
8.5 Accountants' Letters. Each of the Company and Parent shall use
reasonable best efforts to cause to be delivered to the other party, (i) a
letter of KPMG LLP and KPMG Audit plc, respectively, independent auditors, dated
(A) the date on which the Form F-4 shall become effective and (B) a date shortly
prior to the Effective Date, and addressed to such other party, in form and
substance customary for "comfort" letters delivered by independent accountants
in accordance with Statement of Accounting Standards No. 72 and (ii) letters of
KPMG LLP and KPMG Audit plc dated (A) the date on which the Parent Documents are
sent to shareholders or, in the case of the Parent Listing Particulars, approved
by the UKLA and (B) (if the parties so determine) a date shortly prior to the
Effective Date and addressed to the other party and, in the case of Parent, to
its sponsor pursuant to the Listing Rules of the UKLA, in relation to the
financial and other information to be included in the Parent Documents, in form
and substance customary for comfort letters in relation to such documents.
8.6 Listing Applications. Parent shall promptly prepare and submit to the
UKLA, the HKSE and Euronext Paris a listing application and to the LSE an
application for admission to trading with respect to the Parent Ordinary Shares,
and to the NYSE a listing application in respect of the Parent Ordinary Shares
and Parent Depositary Shares issuable in the Merger or, as necessary, upon
exercise of Assumed Options, and shall use its reasonable best efforts to
obtain, prior to the Effective Time, approval for the listing of such Parent
Ordinary Shares, in the case of the UKLA, the HKSE, Euronext Paris and the LSE,
and such Parent Ordinary Shares and Parent Depositary Shares in the case of the
NYSE, subject to official notice of issuance. The Surviving Corporation shall
use its reasonable best efforts to cause the Common Shares to be de-listed from
the NYSE and de-registered under the Exchange Act as soon as practicable
following the Effective Time.
8.7 Tax Opinions. Each of the Company and Parent shall cooperate with each
other in obtaining the opinions of Cleary, Gottlieb, Steen & Hamilton, counsel
to Parent (the "Parent Counsel Tax Opinion"), and
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Wachtell, Lipton, Rosen & Katz, counsel to the Company (the "Company Counsel Tax
Opinion"), each dated the Closing Date, to the effect that (i) the Merger will
be treated for U.S. federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code and (ii) each transfer of property to
Parent by a shareholder of the Company pursuant to the Merger will not be
subject to Section 367(a)(1) of the Code. In rendering the Parent Counsel Tax
Opinion and the Company Counsel Tax Opinion, Cleary, Gottlieb, Steen & Hamilton
and Wachtell, Lipton, Rosen & Katz, respectively, may rely upon and require such
certificates of the Company and Parent and/or their officers or principal
shareholders as are customary for such opinions. Each opinion may assume that
any shareholder who is a "five-percent transferee shareholder" with respect to
Parent within the meaning of U.S. Treasury Regulations Section 1.367(a)-
3(c)(5)(ii) will file the agreement described in U.S. Treasury Regulations
Section 1.367(a)-3(c)(1)(iii)(B).
8.8 Affiliates. Not later than the fifteenth day prior to the mailing of
the Proxy Statement, the Company shall deliver to Parent a list of names and
addresses of those Persons who are or are expected to be, to the knowledge of
the Company, as of the time of the Company Shareholder Meeting, "affiliates" of
the Company within the meaning of Rule 145 under the Securities Act. There shall
be added to such lists the names and addresses of any other Person subsequently
identified by the Company as a Person who may be deemed to be such an affiliate;
provided, however, that no such Person identified by the Company shall remain on
such list of affiliates if Parent shall receive from the Company, on or before
the date of the Company Shareholder Meeting, an opinion of counsel reasonably
satisfactory to Parent to the effect that such Person is not such an affiliate.
The Company shall exercise its reasonable best efforts to deliver or cause to be
delivered to Parent, prior to the date of the Company Shareholder Meeting, from
each such affiliate identified in the list delivered pursuant to the first
sentence of this Section 8.8 (as the same may be supplemented as aforesaid) a
letter dated as of the Company Shareholder Meeting in a form to be mutually
agreed by Parent and the Company (the "Affiliate Letters"). Parent shall not be
required to maintain the effectiveness of the Form F-4 or any other registration
statement under the Securities Act for the purposes of resale of Parent Ordinary
Shares or Parent Depositary Shares received in the Merger by such affiliates and
the Parent ADRs representing Parent Depositary Shares received by such
affiliates shall bear a customary legend regarding applicable Securities Act
restrictions and the provisions of this Section 8.8.
8.9 Indemnification, Exculpation and Insurance. (a) Parent agrees that all
rights to indemnification, expense advancement and exculpation from liabilities
for acts or omissions occurring at or prior to the Effective Time now existing
in favor of the current or former directors or officers of the Company and its
subsidiaries as provided in their respective certificates of incorporation or
by-laws (or comparable organizational documents) and any indemnification
agreements or arrangements of the Company listed in Section 5.18 of the Company
Disclosure Schedule shall survive the Merger and shall continue in full force
and effect in accordance with their terms. The Surviving Corporation shall
cooperate in the defense of any such matter. From and after the Effective Time,
Parent shall cause the Surviving Corporation to indemnify, defend and hold
harmless, to the fullest extent permitted by the DGCL and other applicable laws,
the present and former officers and directors of the Company or any of its
subsidiaries in their capacities as such against all losses, expenses, claims,
damages or liabilities arising out of actions or omissions occurring on or prior
to the Effective Time (including, without limitation, actions or omissions
relating to the transactions contemplated hereby).
(b) In the event that the Surviving Corporation or any of its successors
or assigns (i) consolidates with or merges into any other Person and is not the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers or conveys all or substantially all of its properties and assets
to any Person, then, and in each such case, proper provision will be made so
that the successors and assigns of the Surviving Corporation will assume the
obligations thereof set forth in this Section 8.9.
(c) The provisions of this Section 8.9 are intended to be for the
benefit of, and will be enforceable by, each indemnified party, his or her heirs
and his or her representatives and are in addition to, and not in substitution
for, any other rights to indemnification or contribution that any such Person
may have by contract or otherwise.
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(d) For six years after the Effective Time, the Surviving Corporation
shall maintain in effect the Company's current directors' and officers'
liability insurance covering acts or omissions occurring prior to the Effective
Time with respect to those Persons who are currently covered by the Company's
directors' and officers' liability insurance policy on terms with respect to
such coverage and amount no less favorable to the Company's directors and
officers currently covered by such insurance than those of such policy in effect
on the date hereof; provided, however, that the Surviving Corporation may
substitute therefor policies of Parent or its subsidiaries containing terms with
respect to coverage and amount no less favorable to such directors or officers;
provided, further, that in no event shall the Surviving Corporation be required
to pay aggregate premiums for insurance under this Section 8.9(d) in excess of
250% of the aggregate premiums paid by the Company as of the date hereof on an
annualized basis for such purpose; provided, further, that in the event the
Surviving Corporation is unable to obtain such insurance it shall use its
reasonable best efforts to obtain as much comparable insurance coverage as is
available for the maximum premium indicated above.
(e) Parent shall cause the Surviving Corporation or any successor
thereto to comply with its obligations under this Section 8.9.
8.10 Employee Matters. (a) For the one year period ending on the first
anniversary of the Effective Date (the "Continuation Period"), Parent shall, or
shall cause the Surviving Corporation or its subsidiaries to, (i) pay to the
employees of the Surviving Corporation or its subsidiaries, during any portion
of the Continuation Period that such employee is employed by the Surviving
Corporation or any such subsidiary, an annual salary or hourly wage rate and
bonus and annual incentives (other than equity-based awards), as applicable,
that are no less than the annual salary or hourly wage rate and bonus and annual
incentives (other than equity-based awards) payable to such employee immediately
prior to the Effective Time and (ii) provide such employees in the aggregate
with employee benefits, during any portion of the Continuation Period that such
employees are employed by the Surviving Corporation or any such subsidiary, that
are substantially similar in the aggregate to the employee benefits provided to
such employees pursuant to the Company Benefit Plans (other than equity-based
benefits) immediately prior to the Effective Time, except with regard to
employees covered by employment agreement with the Company, effective as of the
Effective Time. Notwithstanding any other provision herein, none of the Parent,
the Surviving Corporation nor any of its subsidiaries will have any obligation
to continue the employment of any such employee for any period following the
Effective Time.
(b) With respect to employee benefit plans, if any, of Parent or its
subsidiaries in which employees of the Surviving Corporation or its subsidiaries
("Company Employees") become eligible to participate after the Effective Time
(the "Parent Plans"), Parent shall, or shall cause the Surviving Corporation or
its subsidiaries to: (i) with respect to each Parent Plan that is a medical or
health plan, (x) waive any exclusions for pre-existing conditions under such
Parent Plan that would result in a lack of coverage for any condition for which
the applicable Company Employee would have been entitled to coverage under the
corresponding Company Benefit Plan in which such Company Employee was an active
participant immediately prior to his or her transfer to the Parent Plan; (y)
waive any waiting period under such Parent Plan, to the extent that such period
exceeds the corresponding waiting period under the corresponding Company Benefit
Plan in which such Company Employee was an active participant immediately prior
to his or her transfer to the Parent Plan (after taking into account the service
credit provided for herein for purposes of satisfying such waiting period); and
(z) provide each Company Employee with credit for any co-payments and
deductibles paid by such Company Employee prior to his or her transfer to the
Parent Plan (to the same extent such credit was given under the analogous
Company Benefit Plan prior to such transfer) in satisfying any applicable
deductible or out-of-pocket requirements under such Parent Plan for the plan
year that includes such transfer; and (ii) recognize service of the Company
Employees with the Company or any of its subsidiaries (or their respective
predecessors) for purposes of eligibility to participate and vesting credit,
and, solely with respect to vacation and severance benefits, benefit accrual in
any Parent Plan in which the Company Employees are eligible to participate after
the Effective Time, to the extent that such service was recognized for that
purpose under the analogous Company Benefit Plan prior to such transfer;
provided, however, that the foregoing shall not apply to the extent it would
result in duplication of benefits. Nothing in this paragraph shall be
interpreted to require Parent to provide for the participation of any Company
Employee in any Parent Plan.
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(c) Parent shall cause the Surviving Corporation to honor the Employment
Agreements, Employment Protection Agreements and Severance Plans (subject to the
right of the Surviving Corporation to amend and/or terminate such plan pursuant
to the terms thereof) set forth in Section 8.10(c) of the Company Disclosure
Schedule.
(d) Parent shall cause the Surviving Corporation to honor the accrued
benefits under each of the Company's non-qualified deferred compensation and
retirement plans. The Company shall take such action as may be necessary so that
it will not be required to fund or otherwise set aside any cash or other assets
to provide for any employee benefits as a result of this Agreement or the
consummation of the transactions contemplated herein.
(e) The Company and Parent agree to the terms and conditions set forth
on Exhibit 8.10(e) with respect to certain employee benefits matters.
8.11 Section 16 Matters. Prior to the Effective Time, Parent and the
Company shall take all such steps as may be required to cause any dispositions
of Common Shares (including derivative securities with respect to Common Shares)
resulting from the transactions contemplated by this Agreement by each
individual who is subject to the reporting requirements of Section 16(a) of the
Exchange Act with respect to the Company, to be exempt under Rule 16b-3
promulgated under the Exchange Act.
8.12 Public Announcements. Parent and the Company will consult with each
other before issuing, and provide each other the opportunity to review, comment
upon and concur with, and use reasonable efforts to agree on, any press release
or other public statements and any internal communications with respect to the
transactions contemplated by this Agreement, including the Merger, and shall not
issue any such press release or make any such public statement prior to such
consultation. Notwithstanding the foregoing, either party may issue or make,
directly or indirectly, any report, statement or release required by applicable
law, its fiduciary obligations or any listing agreement or arrangement with a
national securities exchange or national market system (including, without
limitation, the NYSE, the LSE, the HKSE and Euronext Paris) to which such party
is subject, if the other party has, to the extent practicable, been notified and
given a reasonable opportunity to review and comment on the report, statement or
release.
8.13 Conveyance Taxes. Parent and the Company shall cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding any sales, use, value added, transfer, recording,
registration and other fees or any similar taxes which become payable in
connection with the transactions contemplated by this Agreement that are
required or permitted to be filed on or before the Effective Time. Subject to
Section 3.2(a)(iii), the Company shall pay, without deduction or withholding
from any amount payable to the holders of Company Common Stock, any such taxes
or fees imposed by any Governmental Entity which become payable in connection
with Merger or the payment of the Common Merger Consideration and the Preferred
Merger Consideration for which the Company is primarily liable and in no event
shall Parent pay such amounts.
8.14 Tax Free Merger. Parent and the Company will use their respective
reasonable best efforts, and agree to cooperate with the other parties and
provide one another with such documentation, information and materials as may be
reasonably necessary, proper or advisable, to (i) cause the Merger to qualify as
a reorganization within the meaning of Section 368(a) of the Code and (ii) avoid
gain recognition to the shareholders of the Company pursuant to Section
367(a)(i) of the Code. Parent and the Surviving Corporation shall comply with
the "reporting requirements" of Treasury Regulations Section 1.367(a)-3(c)(6).
8.15 Redemption of Certain Designations of Preferred Stock. Within one
Business Day after such time as Parent and Merger Sub have certified to the
Company in writing that all conditions to the obligation of Parent to consummate
the transactions contemplated by this Agreement have been irrevocably deemed
satisfied or waived by Parent (other than the condition set forth in Sections
9.1(e) and 9.1(f)), the Company shall deposit the redemption price of each of
the Company 5% Preferred Stock, the Company $4.30 Preferred Stock and the
Company $4.50 Preferred Stock in trust for the holders thereof with a bank or
trust company as set forth in the applicable provisions of the Company's
respective certificate of designations in respect thereof,
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so as to cause each of the Company 5% Preferred Stock, the Company $4.30
Preferred Stock and the Company $4.50 Preferred Stock to be deemed not
outstanding after the making of such deposit pursuant to the certificate of
designations thereof, and shall thereafter take all other steps necessary to
redeem each of the Company 5% Preferred Stock, the Company $4.30 Preferred Stock
and the Company $4.50 Preferred Stock.
8.16 Retirement of Treasury Stock. Prior to the Effective Time, the
Company shall take all steps necessary to retire and return to the status of
authorized but unissued shares any Common Shares held by the Company as treasury
stock.
ARTICLE IX
CONDITIONS PRECEDENT TO CLOSING
9.1 Conditions to the Obligation of Each Party to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the satisfaction at or prior to the Effective Time of the following conditions:
(a) Effectiveness of Registration Statement. The Form F-4 shall have
become effective under the Securities Act. No stop order suspending the
effectiveness of the Form F-4 shall have been issued, and no proceeding for that
purposes shall have been initiated or been threatened, by the SEC.
(b) Exchange Listing. The Parent Ordinary Shares issuable to holders of
Common Shares pursuant to this Agreement shall have been approved for admission
or admitted to listing on the Official List of the UKLA, approved for admission
or admitted to trading by the LSE and approved for admission or admitted to
trading by Euronext Paris, and the listing thereof by the Main Board of the HKSE
shall have been granted by the HKSE, in accordance with the rules and
regulations of the UKLA, the LSE, Euronext Paris and the HKSE, respectively, and
such Parent Ordinary Shares and related Parent Depositary Shares shall have been
authorized for listing on the NYSE, subject to official notice of issuance.
(c) Shareholder Approvals. Each of the Company Shareholder Approval and
the Parent Shareholder Approval shall have been obtained.
(d) Governmental and Regulatory Approvals. (i) The waiting periods
applicable to the consummation of the Merger under all applicable laws,
including the HSR Act, applicable banking laws and applicable insurance laws
shall have expired or been terminated, (ii) confirmation shall have been
received by Parent from the OFT, in terms reasonably satisfactory to Parent,
that the United Kingdom Secretary of State for Trade and Industry does not
intend to refer the transactions contemplated by this Agreement, or any matters
arising therefrom, to the United Kingdom Competition Commission, (iii) the
transactions contemplated hereby (including Parent's plan to, immediately
following the Effective Time, contribute the Surviving Corporation to a newly
formed and wholly owned subsidiary of Parent) shall have been approved by the
Federal Reserve Board (or, if Parent has determined that no formal approval by
the Federal Reserve Board is required, the Federal Reserve Board or its staff
shall not have indicated that it objects to, or that it intends to impose
Burdensome Conditions as a result of, such transactions) or Parent shall have
determined that no such approval is required, (iv) the transactions contemplated
hereby shall have been approved by the OCC, (v) the transactions contemplated
hereby shall have been approved under applicable U.S. state insurance and
consumer lending laws (to the extent such approval is required to be obtained
prior to the Closing under applicable law), (vi) the transactions contemplated
hereby shall have been approved by the FSA, (vii) any special consent of H.M.
Treasury pursuant to Section 765 of the Income and Corporation Taxes Act 1988
with respect to any of the transactions contemplated by this Agreement shall
have been obtained in a form reasonably satisfactory to Parent, (viii) the
Depositary (and, as applicable, its affiliates and custodians) shall have
received any required prior approval of or any relevant waiting period shall
have expired without any objection being received from the Federal Reserve
Board, the FSA and the Hong Kong Monetary Authority to acquire the Parent
Ordinary Shares contemplated to be deposited with the Depositary in accordance
with this Agreement, and (ix) other than the filing provided for in Section 2.3,
all other notices, reports and other filings required by applicable law to be
made prior to the Effective Time by the Company or Parent or any of their
respective subsidiaries or affiliates, or the Depositary or its affiliates, or
any custodian under the Deposit
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Agreement with, and all other consents, registrations, approvals, permits and
authorizations required to be obtained prior to the Effective Time by the
Company or Parent or any of their respective subsidiaries or affiliates or the
Depositary (or, as applicable, its parent undertakings) or any custodian under
the Deposit Agreement from, any Governmental Entity ((i) through (ix)
collectively, "Governmental Consents"), in connection with the execution and
delivery of this Agreement and the consummation of the Merger and the other
transactions contemplated hereby, shall have been made or obtained.
(e) Governmental Actions. No court or Governmental Entity of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
law, statute, ordinance, rule, regulation, judgment, decree, injunction or other
order (whether temporary, preliminary or permanent) that is in effect and
restrains, enjoins or otherwise prohibits consummation of the Merger
(collectively, an "Order").
(f) Redemption of Preferred Stock. Each of the 5% Preferred Stock, the
Company $4.30 Preferred Stock and the Company $4.50 Preferred Stock shall,
pursuant to the certificate of designations thereof as a result of the action
taken by the Company pursuant to Section 8.15, be deemed not to be outstanding
for any purpose whatsoever and the rights of the holders thereof shall be
limited to the right to receive the redemption price of such shares.
9.2 Conditions to the Obligation of Parent to Effect the Merger. The
obligation of Parent to effect the Merger shall be subject to the satisfaction
at or prior to the Effective Time of the following conditions:
(a) Representations and Warranties. Subject to Section 4.2, the
representations and warranties of the Company set forth in this Agreement shall
be true and correct as of the date of this Agreement and (except to the extent
such representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date.
(c) Parent Counsel Tax Opinion. Parent shall have received from Cleary,
Gottlieb, Steen & Hamilton the Parent Counsel Tax Opinion.
(d) Governmental Consents. The Governmental Consents shall not be
conditioned upon the imposition of any requirements or conditions that,
individually or in the aggregate, would constitute a Burdensome Condition.
(e) Governmental Actions. There shall not be pending or threatened by
any Governmental Entities any suits, actions or proceedings (i) seeking to
restrain or prohibit the consummation of the Merger or any of the other
transactions contemplated by this Agreement, (ii) seeking to impose any
requirements or conditions that, if imposed prior to the Closing, would,
individually or in the aggregate, constitute a Burdensome Condition or (iii)
which otherwise would reasonably be expected to have a Material Adverse Effect
on Parent or the Company.
(f) Officer's Certificate. Parent shall have received a certificate,
duly executed on behalf of the Company, that conditions specified in Sections
9.2(a) and 9.2(b) have been satisfied.
9.3 Conditions to the Obligation of the Company to Effect the Merger. The
obligation of the Company to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) Representations and Warranties. Subject to Section 4.2, the
representations and warranties of Parent set forth in this Agreement shall be
true and correct as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the Closing
Date as though made on and as of the Closing Date.
(b) Performance of Obligations of Parent. Parent shall have performed
in all material respects all obligations required to be performed by it under
this Agreement at or prior to the Closing Date.
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(c) Company Counsel Tax Opinion. The Company shall have received from
Wachtell, Lipton, Rosen & Katz the Company Counsel Tax Opinion.
(d) Officer's Certificate. The Company shall have received a
certificate, duly executed on behalf of Parent, that conditions specified in
Sections 9.3(a) and 9.3(b) have been satisfied.
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
10.1 Termination. This Agreement may be terminated at any time prior to
the Effective Time, and whether before or after the Company Shareholder Approval
or the Parent Shareholder Approval:
(a) by the mutual written consent of Parent and the Company in a
written instrument;
(b) by either Parent or the Company:
(i) if the Merger shall not have been consummated by June 30, 2003;
provided, however, that the right to terminate this Agreement pursuant to
this Section 10.1(b)(i) shall not be available to any party whose failure
to perform any of its obligations under this Agreement results in the
failure of the Merger to be consummated by such time;
(ii) if the Company Shareholder Approval shall not have been obtained
at the Company Shareholder Meeting duly convened therefor or at any
adjournment or postponement thereof at which a vote on such approval was
taken;
(iii) if the Parent Shareholder Approval shall not have been obtained
at the Parent Shareholder Meeting duly convened therefor or at any
adjournment or postponement thereof at which a vote on such approval was
taken;
(iv) if a court of competent jurisdiction or governmental, regulatory
or administrative agency or commission shall have issued a nonappealable
final order, decree or ruling or taken any other nonappealable final action
having the effect of permanently restraining, enjoining or otherwise
prohibiting the consummation of the transactions contemplated by this
Agreement; or
(v) if a Governmental Entity which must grant or satisfy, as the case
may be, a regulatory approval required pursuant to Sections 9.1(b) or
9.1(d) has denied approval of the Merger (or, in the case of a termination
by Parent, if such approval is subject to a Burdensome Condition) and such
action has become final and nonappealable, or any Governmental Entity has
issued a final nonappealable injunction permanently enjoining or otherwise
prohibiting the consummation of the transactions contemplated by this
Agreement;
(c) by either Parent or the Company if there shall have been a breach of
any of the representations, warranties, covenants or agreements set forth in
this Agreement on the part of the Company (in the case of the Parent) or on the
part of the Parent (in the case of the Company), which breach is not cured
within 30 days following written notice to the party committing such breach, or
which breach, by its nature or timing, cannot reasonably be cured within such
period; provided that such breach, if occurring or continuing on the Closing
Date, would constitute, individually or in the aggregate with such other
breaches, the failure of a condition set forth in Sections 9.2(a), 9.2(b),
9.3(a) or 9.3(b), as applicable;
(d) by Parent, if the Company shall have willfully and materially
breached its obligations under Section 7.2, or if the Board of Directors of the
Company shall have failed to recommend in the Proxy Statement the adoption of
the agreement of merger set forth in this Agreement, effected a Change in
Company Recommendation or recommended any Alternative Proposal (or resolved to
take any such action), whether or not permitted by the terms hereof, or shall
have breached its obligations under this Agreement by reason of a material
failure to call or convene the Company Shareholder Meeting in compliance with
Section 8.2(a);
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(e) by Parent, if the Company or its representatives shall have engaged
in discussions with any Person in connection with an Acquisition Proposal in
accordance with the provisions of Section 7.2, and the Company and its
representatives shall not have ceased all such discussions with such Person
within 20 days of the first date of any of the foregoing actions; or
(f) by the Company, if the Board of Directors of Parent shall have
failed to recommend the Merger in the Parent Documents, whether or not permitted
by the terms hereof, or shall have breached its obligations under this Agreement
by reason of a failure to call or convene the Parent Shareholder Meeting in
accordance with Section 8.2(b).
The party desiring to terminate this Agreement pursuant to clause (b), (c),
(d), (e) or (f) of this Section 10.1 shall give written notice of such
termination to the other party in accordance with Section 11.6, specifying the
provision or provisions hereof pursuant to which such termination is effected.
10.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 10.1, this Agreement shall forthwith become void
and there shall be no liability on the part of any party hereto or any of its
affiliates, directors, officers or shareholders except that the Company shall
have such liability or obligations as set forth in Section 10.3. Notwithstanding
the foregoing, nothing herein shall relieve the Company or Parent from liability
for any willful breach hereof or willful misrepresentation herein (it being
understood that the provisions of Section 10.3 do not constitute a sole or
exclusive remedy for such willful breach or misrepresentation).
10.3 Fees and Expenses. (a) Except as provided in this Section 10.3, all
fees and expenses incurred in connection with the Merger, this Agreement, and
the transactions contemplated by this Agreement shall be paid by the party
incurring such fees or expenses, whether or not the Merger is consummated.
(b) The Company shall pay to Parent a fee of $550,000,000 (the "Fee"),
upon the occurrence of any of the following events (subject to Section 10.3(c)):
(i) the termination of this Agreement by Parent or the Company
pursuant to Section 10.1(b)(i) without the Company Shareholders Meeting and
the vote of shareholders taken thereat having occurred, if (A) an
Acquisition Proposal shall have been made known to the Company or its
shareholders prior to, and shall not have been irrevocably withdrawn at
least 15 Business Days prior to, the date specified in Section 10.1(b)(i),
and (B) any Alternative Transaction is consummated, or an agreement in
principle, letter of intent, acquisition agreement or other similar
agreement with respect to any Alternative Transaction (a "Company
Acquisition Agreement") is entered into, within 12 months after the date of
such termination;
(ii) the termination of this Agreement by Parent or the Company
pursuant to Section 10.1(b)(ii), if (A) an Acquisition Proposal shall have
been made known to the Company or its shareholders prior to the taking of
the vote at the Company Shareholder Meeting, and (B) any Alternative
Transaction is consummated, or a Company Acquisition Agreement is entered
into, within 12 months after the date of such termination;
(iii) the termination of this Agreement by Parent pursuant to Section
10.1(c) as the result of a breach by the Company of its covenants or
agreements set forth in this Agreement, if (A) an Acquisition Proposal
shall have been made known to the Company or its shareholders prior to the
occurrence of such breach and (B) any Alternative Transaction is
consummated, or a Company Acquisition Agreement is entered into, within 12
months after the date of such termination;
(iv) the termination of this Agreement by Parent pursuant to Section
10.1(d);
(v) the termination of this Agreement by Parent pursuant to Section
10.1(e), if any Alternative Transaction is consummated, or a Company
Acquisition Agreement is entered into, within 12 months after the date of
such termination.
(c) The Fee payable pursuant to this Section 10.3 shall be paid within one
Business Day after a demand for payment following the occurrence of any of the
events described in clauses (i), (ii), (iii), (iv)
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or (v) of Section 10.3(b), provided where more than one event is a condition for
the payment of such Fee pursuant to any such clause, such Fee will be paid one
Business Day after a demand for payment following the occurrence of the later to
occur of such events.
(d) The Company acknowledges that the agreements contained in this Section
10.3 are an integral part of the transactions contemplated by this Agreement,
and that, without these agreements, Parent would not have entered into this
Agreement; accordingly, if the Company fails to promptly pay any amounts due
pursuant to this Section 10.3 and, in order to obtain such payment, Parent
commences a suit which results in a judgment against the Company for the fee set
forth in this Section 10.3, the Company shall pay to Parent its reasonable costs
and expenses (including reasonable attorneys' fees and expenses of enforcement)
in connection with such suit, together with interest from the date of
termination of this Agreement on the amounts owed at the prime rate of The Bank
of New York in effect from time to time during such period plus 2 percent per
annum.
ARTICLE XI
MISCELLANEOUS AND GENERAL
11.1 Survival. The provisions of Article III, this Article XI and Sections
8.9 and 8.10 shall survive the consummation of the Merger. The provisions of
this Article XI and Section 10.2 and 10.3 and the Confidentiality Agreement
shall survive the termination of this Agreement. All other representations,
warranties, covenants and agreements in this Agreement or in any instrument
delivered pursuant to this Agreement shall not survive the consummation of the
Merger or the termination of this Agreement.
11.2 Modification or Amendment. Subject to the provisions of applicable
law, at any time prior to the Effective Time the parties hereto may modify or
amend this Agreement, by written agreement executed and delivered by duly
authorized officers of the respective parties; provided, however, that after the
approval of the agreement of merger contained herein at the Company Shareholder
Meeting, there shall not be made any amendment (including, without limitation,
pursuant to Section 2.4 or 11.11) that by law requires further approval by the
Company's shareholders without the further approval of such shareholders;
provided, further, that after the approval by Parent shareholders of the matters
to be approved at the Parent Shareholder Meeting, there shall not be made any
amendment (including, without limitation, pursuant to Section 2.4 or 11.11) that
by law requires further approval by the Parent's shareholders without the
further approval of such shareholders.
11.3 Waiver. The conditions to each of the parties' obligations to
consummate the Merger are for the sole benefit of such party and may be waived
prior to the Effective Time by such party in whole or in part to the extent
permitted by applicable law. At any time prior to the Effective Time, a party
may (i) extend the time for the performance of any of the obligations or other
acts of the other party, (ii) waive any inaccuracies in the representations and
warranties of the other party contained in this Agreement or in any document
delivered pursuant to this Agreement or (iii) subject to the provisos to Section
11.2, waive compliance by the other party with any of the agreements or
conditions contained in this Agreement. Any agreement on the part of a party to
any such extension or waiver shall be valid only if set forth in an instrument
in writing signed on behalf of such party. The failure of any party to this
Agreement to assert any of its rights under this Agreement or otherwise shall
not constitute a waiver of such rights.
11.4 Counterparts. This Agreement may be executed in any number of
counterparts, each such counterpart being deemed to be an original instrument,
and all such counterparts shall together constitute the same agreement.
11.5 Governing Law and Venue; Waiver of Jury Trial. (a) This Agreement
shall be deemed to be made in and in respects shall be interpreted, construed
and governed by and in accordance with the laws of the State of Delaware,
regardless of the laws that might otherwise govern under applicable principles
of conflicts of law thereof.
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(b) The parties hereby irrevocably submit to the jurisdiction of the
courts of the State of Delaware and the Federal courts of the United States of
America located in the State of Delaware solely in respect of the interpretation
and enforcement of the provisions of this Agreement and of the documents
referred to in this Agreement, and in respect of the transactions contemplated
hereby, and hereby waive, and agree not to assert, as a defense in any action,
suit or proceeding for the interpretation or enforcement hereof or of any such
document, that it is not subject thereto or that such action, suit or proceeding
may not be brought or is not maintainable in said courts or that the venue
thereof may not be appropriate or that this Agreement or any such document may
not be enforced in or by such courts, and the parties hereto irrevocably agree
that all claims with respect to such action or proceeding shall be heard and
determined in such a Delaware State or Federal court. The parties hereby consent
to and grant any such court jurisdiction over the person of such parties and
over the subject matter of such dispute and agree that mailing of process or
other papers in connection with any such action or proceeding in the manner
provided in Section 11.6 or in such other manner as may be permitted by law
shall be valid and sufficient service thereof.
(c) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY
ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT
ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY
WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OF INDIRECTLY ARISING OUT OF OR RELATING TO THE AGREEMENT,
OR THE TRANSACTION CONTEMPLATED BY THE AGREEMENT. Each party certifies and
acknowledges that (i) no representative, agent or attorney of any other party
has represented, expressly or otherwise, that such other party would not, in the
event of litigation, seek to enforce the forgoing waiver, (ii) each party
understand and has considered the implication of this waiver, (iii) each part
makes this waiver voluntarily and (iv) each party has been induced to enter into
this Agreement be, among other things, the mutual waivers and certifications in
this Section 11.5.
11.6 Notices. Any notice, request, instruction or other document to be
given hereunder by any party to the others shall be in writing and delivered
personally or sent by registered or certified mail, postage prepaid, or by
facsimile:
if to Parent:
HSBC Holdings plc
Registered Office and Group Head Office
8 Canada Square, Level 42
London E14 5HQ, United Kingdom
Attn: Group Company Secretary
Telefax: 44 20 7991 4639
with a copy to:
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attn: Victor I. Lewkow
Telefax: (212) 225-3999
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if to the Company:
Household International, Inc.
2700 Sanders Road
Prospect Heights, Illinois 60070
Attn: J.W. Blenke
Telefax: (847) 564-6366
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, New York 10019
Attn: Edward D. Herlihy
Telefax: (212) 403-2000
or to such other Persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
11.7 Entire Agreement. This Agreement (including any exhibits hereto), the
Company Disclosure Schedule, the Parent Disclosure Schedule and the
Confidentiality Agreement constitute the entire agreement, and supersede all
other prior agreements, understandings, representations and warranties both
written and oral, among the parties, with respect to the subject matter hereof.
11.8 No Third Party Beneficiaries. Except for the provisions of Section
8.9, this Agreement is not intended to and does not confer upon any Person other
than the parties hereto any rights or remedies hereunder.
11.9 Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability or the other provisions hereof. If any
provision of this Agreement, or the application thereof to any Person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may be
valid and enforceable, the intent and purpose of such invalid or unenforceable
provision and (b) the remainder of this Agreement and the application of such
provision to other Persons or circumstances shall not be affected by such
invalidity or unenforceability, nor shall such invalidity or unenforceability
affect the validity or enforceability of such provision, or the application
thereof, in any other jurisdiction.
11.10 Interpretation. The table of contents and headings herein are for
convenience of reference only, do not constitute part of this Agreement and
shall not be deemed to limit or otherwise affect any of the provisions hereof.
Where a reference in this Agreement is made to a Section, such reference shall
be to a Section of this Agreement unless otherwise indicated. Whenever the words
"include," "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation." The words "hereof",
"herein" and "hereunder" and words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not to any particular provision of
this Agreement. All terms defined in this Agreement shall have the defined
meanings when used in any certificate or other document made or delivered
pursuant hereto unless otherwise defined therein. The definitions contained in
this Agreement are applicable to the singular as well as the plural forms of
such terms and to the masculine as well as to the feminine and neuter genders of
such term. Unless otherwise stated, any agreement, instrument or statute defined
or referred to herein or in any agreement or instrument that is referred to
herein means such agreement, instrument or statute as from time to time amended,
modified or supplemented, including (in the case of agreements or instruments)
by waiver or consent and (in the case of statutes) by succession of comparable
successor statutes and references to all attachments thereto and instruments
incorporated therein; provided, however, that no representation made with
respect to any Previously Filed Company SEC
A-53
Document or Previously Filed Parent SEC Document shall be deemed modified by the
filing of any amendment thereto after the date hereof by operation of this
sentence. References to a Person are also to its permitted successors and
assigns.
11.11 Assignment. This Agreement shall not be assignable by operation of
law or otherwise; provided, however, that, subject to the restrictions set forth
in Section 2.4, Parent and Merger Sub may designate, by written notice to the
Company, another wholly-owned subsidiary of Parent to effect the Merger in lieu
of Merger Sub, in which event all references herein to Merger Sub shall be
deemed references to such other subsidiary, except that all representations and
warranties made herein with respect to Merger Sub as of the date of this
Agreement shall be deemed representations and warranties made with respect to
such other subsidiary as of the date of such designation.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK. SIGNATURE PAGE FOLLOWS.]
A-54
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
duly executed on its behalf as of the day and year first above written.
HSBC HOLDINGS PLC
By: /s/ YOUSSEF A. NASR
------------------------------------
Name: Youssef A. Nasr
Title: Authorised Signatory
H2 ACQUISITION CORPORATION
By: /s/ YOUSSEF A. NASR
------------------------------------
Name: Youssef A. Nasr
Title: President
HOUSEHOLD INTERNATIONAL, INC.
By: /s/ WILLIAM F. ALDINGER
------------------------------------
Name: William F. Aldinger
Title: Chairman and Chief
Executive Officer
A-55
ANNEX B
November 14, 2002
Board of Directors
Household International, Inc.
2700 Sanders Road
Prospect Heights, IL 60070
Ladies and Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of Common Stock, par value $1 per
share (the "Shares"), of Household International, Inc. (the "Company") of the
exchange ratio of 2.675 ordinary shares, nominal value US$0.50 each (the "HSBC
Ordinary Shares"), of HSBC Holdings plc ("HSBC") to be received for each Share
(the "Exchange Ratio") pursuant to the Agreement and Plan of Merger, dated as of
November 14, 2002 (the "Agreement"), by and among HSBC, the Company and H2
Acquisition Corporation. Pursuant to the Agreement, each holder of Shares shall
have the right to elect to receive, in lieu of HSBC Ordinary Shares, 0.535
American Depositary Shares of HSBC ("HSBC ADSs"), with each such HSBC ADS
representing the right to receive five HSBC Ordinary Shares and evidenced by one
or more American Depositary Receipts (the "HSBC ADRs"), for each Share.
Goldman, Sachs & Co., as part of its investment banking business, is
continually engaged in performing financial analyses with respect to businesses
and their securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities and private placements as well as for financial analyses for
estate, corporate and other purposes. We are familiar with the Company having
provided certain investment banking services to the Company from time to time,
including having acted as joint lead manager for a public offering of $300
million of preferred stock of the Company in September 2001; having acted as
sole bookrunner for a public offering of 18.7 million Shares and $534 million of
Automatically Convertible Equity Securities ("ACES") of the Company in October
2002; having acted as commercial paper dealer for the Company, commencing in
October 2002; and having acted as its financial advisor in connection with, and
having participated in certain of the negotiations leading to, the Agreement. We
also have provided certain investment banking services to HSBC from time to
time, including having acted as lead manager for a public offering of $4 billion
aggregate principal amount of Noncumulative Perpetual Preferred Stock of HSBC in
May 2000; and having acted as its financial advisor in connection with its
acquisition of Credit Commercial de France CCF (SA) in July 2000. Goldman, Sachs
& Co. provides a full range of financial advisory and securities services and,
in the course of its normal trading activities, may from time to time effect
transactions and hold securities, including derivative instruments, of the
Company or HSBC for its own account and for the accounts of customers. Goldman,
Sachs & Co. may provide investment banking services to HSBC and its subsidiaries
in the future.
In connection with this opinion, we have reviewed, among other things, the
Agreement; Annual Reports to Stockholders and Annual Reports on Form 10-K of the
Company (including its predecessor companies) and Annual Reviews to Stockholders
of HSBC for the five years ended December 31, 2001 and Annual Reports on Form
20-F of HSBC for the three years ended December 31, 2001; certain interim
reports to stockholders and Quarterly Reports on Form 10-Q of the Company;
certain interim reports to stockholders and Reports of Foreign Private Issuers
on Form 6-K of HSBC; certain other communications from the Company and HSBC to
their respective stockholders; certain internal financial analyses and forecasts
for the Company prepared by its management; and certain cost savings and
operating synergies projected by the management of the Company to result from
the transaction contemplated by the Agreement. Goldman Sachs also held
discussions with members of the senior managements of the Company and HSBC
regarding their
B-1
Board of Directors
Household International, Inc.
November 14, 2002
Page 2
assessment of the strategic rationale for, and the potential benefits of, the
transaction contemplated by the merger agreement and the past and current
business operations, financial condition and future prospects of their
respective companies, including discussions with the Company with respect to the
importance of the funding environment to the financial performance of consumer
finance companies. In addition, we have reviewed the reported price and trading
activity for the Shares and the HSBC Ordinary Shares (including price and
trading activity for the HSBC ADRs), compared certain financial and stock market
information for the Company and HSBC with similar information for certain other
companies the securities of which are publicly traded, reviewed the financial
terms of certain recent business combinations in the finance industry
specifically and in other industries generally and performed such other studies
and analyses as we considered appropriate.
We have relied upon the accuracy and completeness of all of the financial,
accounting and other information discussed with or reviewed by us and have
assumed such accuracy and completeness for purposes of rendering this opinion.
As you are aware, HSBC did not make available to us its projections of expected
future performance. Accordingly, our review of such matters was limited to
discussions with the management of HSBC of certain research analysts' estimates.
We are not experts in the evaluation of loan and lease portfolios for purposes
of assessing the adequacy of the allowances for losses with respect thereto and
have assumed, with your consent, that such allowances for HSBC are in the
aggregate adequate to cover all such losses. In addition, we have not reviewed
individual credit files nor have we made an independent evaluation or appraisal
of the assets and liabilities (including any derivative or off-balance-sheet
assets or liabilities) of the Company and HSBC or any of their subsidiaries and
we have not been furnished with any such evaluation or appraisal. We have
assumed that all material governmental, regulatory, or other consents and
approvals necessary for the consummation of the transaction contemplated by the
Agreement will be obtained without any adverse effect on the Company or HSBC or
their respective subsidiaries or on the expected benefits of the transaction
contemplated by the Agreement. Our advisory services and the opinion expressed
herein are provided for the information and assistance of the Board of Directors
of the Company in connection with its consideration of the transaction
contemplated by the Agreement and such opinion does not constitute a
recommendation as to how any holder of Shares should vote with respect to such
transaction.
Based upon and subject to the foregoing and based upon such other matters
as we consider relevant, it is our opinion that, as of the date hereof, the
Exchange Ratio pursuant to the Agreement is fair from a financial point of view
to the holders of Shares.
Very truly yours,
B-2
ANNEX C
[LETTERHEAD OF KEEFE, BRUYETTE & WOODS, INC.]
November 14, 2002
The Board of Directors
Household International, Inc.
2700 Sanders Road
Prospect Heights, Illinois 60070
Members of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, to the holders of certain series of Household
International, Inc. (the "Company") preferred stock, as described below (the
"Company Preferred Stock"), of the cash consideration to be received as set
forth in the Agreement and Plan of Merger (the "Merger Agreement"), dated as of
November 14, 2002, entered into among HSBC Holdings plc (the "Parent"),
Household International, Inc. (the "Company"), and H2 Acquisition Corporation
(the "Merger Sub"). Our opinion does not address the fairness of the
consideration to be received by holders of the Company's common stock, or the
consideration to be received by holders of the Company's shares of preferred
stock not specifically addressed by this opinion.
The Merger Agreement provides for the merger of the Company with and into
the Merger Sub (the "Merger") pursuant to which each outstanding share of the
following classes of Company Preferred Stock:
7.500% Cumulative Preferred Stock, Series 2001-A
7.600% Cumulative Preferred Stock, Series 2002-A
7.625% Cumulative Preferred Stock, Series 2002-B
that is issued and outstanding immediately prior to the Effective Time (other
than Excluded Shares and Dissenting Shares) shall be converted into the right to
receive cash in the amount of $1,000 ($25 per depository share) plus all
accumulated and unpaid dividends to but excluding the closing date (the
"Preferred Merger Consideration").
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company and the Parent, as
well as the Merger Agreement and the certificate of incorporation of Household
and the certificates of designations of the Company Preferred Stock. We have
also reviewed certain other information, including the terms, call provisions,
and conditions of the Company Preferred Stock, the ratings of the Company
Preferred Stock, and certain financial and market data of the Company Preferred
Stock. In addition, we have compared certain financial, rating, and market
information for selected other issues of preferred securities, trust preferred
securities, and debt securities we deemed similar to the Company Preferred
Stock. We also considered such other information, financial studies, analyses
and investigations and financial, economic and market criteria which we deemed
relevant.
Keefe, Bruyette & Woods, Inc., as part of its investment banking business,
is continually engaged in the valuation of banking and financial service company
securities in connection with acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for various other purposes. As specialists in the securities of
banking and financial service companies, we have experience in, and knowledge of
the valuation of banking and financial service enterprises. In the ordinary
course of our business as a broker-dealer, we may, from time to time purchase
securities from, and sell securities to, the Company and the Parent, and as a
market maker in securities, we may from time to time have a long or short
position in, and buy or sell, debt or equity securities of the Company and the
Parent for our own account and for the accounts of our customers. We have acted
exclusively for the Board of Directors of the Company in rendering this fairness
opinion and will receive a fee from the Company for our services.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. In addition, we have
not been requested to make, and have not made, an independent evaluation or
appraisal of
C-1
Keefe, Bruyette & Woods, Inc.
Page 2
the assets or liabilities (contingent or otherwise) of the Company or the
Parent, nor have we reviewed any loan or credit files of the Company or been
furnished with any such evaluations, appraisals or reviews. We have also assumed
that the Company has adequately reserved against losses that may be incurred as
a result of non-performing or defaulting loans. We are not expressing any
opinion as to the prices at which the Company Preferred Stock will trade at any
time, and are assuming that the Merger will be completed in accordance with the
terms and conditions outlined in the Merger Agreement. Further, our opinion does
not address the Company's underlying business decision to engage in the Merger.
Our opinion is necessarily based upon available information and financial,
economic, market and other conditions as they exist and can be evaluated on the
date hereof.
It is understood that this letter is for the information of the Board of
Directors of the Company in connection with its consideration of the Merger and
does not constitute a recommendation to any stockholder of the Company as to how
such stockholder should vote or act on any matter relating to the proposed
Merger.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Preferred Merger Consideration offered in connection with the
Merger is fair, from a financial point of view, to holders of the Company
Preferred Stock.
Very truly yours,
/s/ KEEFE, BRUYETTE & WOODS, INC.
--------------------------------------
Keefe, Bruyette & Woods, Inc.
C-2
ANNEX D
SECTION 262 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
SEC. 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to sec.
251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or sec.
264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
Sections 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
D-1
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, then either a constituent corporation before the
effective date of the merger or consolidation or the surviving or resulting
corporation within 10 days thereafter shall notify each of the holders of
any class or series of stock of such constituent corporation who are
entitled to appraisal rights of the approval of the merger or consolidation
and that appraisal rights are available for any or all shares of such class
or series of stock of such constituent corporation, and shall include in
such notice a copy of this section. Such notice may, and, if given on or
after the effective date of the merger or consolidation, shall, also notify
such stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date
of mailing of such notice, demand in writing from the surviving or
resulting corporation the appraisal of such holder's shares. Such demand
will be sufficient if it reasonably informs the corporation of the identity
of the stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided that,
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise
D-2
entitled to appraisal rights, may file a petition in the Court of Chancery
demanding a determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that such
stockholder is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
D-3
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded such stockholder's appraisal rights as provided in
subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the stock
(except dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal of
such stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(1) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
D-4
ANNEX E
SUMMARY PARTICULARS
[This Annex, which is described on page 157, does not constitute a part of,
and is not incorporated by reference into, the proxy statement/prospectus. This
Annex will contain summary particulars prepared in accordance with the U.K.
Listing Authority's listing rules.]
E-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 168.1 of the Registrant's Articles of Association provides:
"Subject to the provisions of the Companies Act of 1985, but without
prejudice to any indemnity to which he may be otherwise entitled, every
Director, alternate Director, Secretary or other officer of the Company shall be
entitled to be indemnified out of the assets of the Company against all costs,
charges, losses, damages and liabilities incurred by him in the actual or
purported execution and/or discharge of his duties or exercise of his powers or
otherwise in relation thereto, including (without prejudice to the generality of
the foregoing) any liability incurred defending any proceedings (whether civil
or criminal) which relate to anything done or omitted or alleged to have been
done or omitted by him as an officer or employee of the Company and in which
judgment is given in his favour or in which he is acquitted or which are
otherwise disposed of without any finding or admission of any material breach of
duty on his part or in connection with any application in which relief is
granted to him by any court of competent jurisdiction from liability for
negligence, default, breach of duty or breach or trust in relation to the
affairs of the Company".
The relevant provisions of the Companies Act 1985 are sections 310 and 727.
Section 310 provides:
"(1) This section applies to any provision, whether contained in a
company's articles or in any contract with the company or otherwise, for
exempting any officer of the company or any person (whether an officer or
not) employed by the company as auditor from, or indemnifying him against,
any liability which by virtue of any rule of law would otherwise attach to
him in respect of any negligence, default, breach of duty or breach of
trust of which he may be guilty in relation to the company.
(2) Except as provided by the following subsection, any such provision
is void.
(3) This section does not prevent a company:
(a) from purchasing and maintaining for any such officer or auditor
insurance against any such liability, or
(b) from indemnifying any such officer or auditor against any
liability incurred by him:
(i) in defending any proceedings (whether civil or criminal) in
which judgment is given in his favour or he is acquitted, or
(ii) in connection with any application under section 144(3) or
(4) (acquisition of shares by innocent nominee) or section 727
(general power to grant relief in case of honest and reasonable
conduct) in which relief is granted to him by the court."
Section 727 provides:
"(1) If in any proceedings for negligence, default, breach of duty or
breach of trust against an officer of a company or a person employed by a
company as auditor (whether he is or is not an officer of the company) it
appears to the court hearing the case that that officer or person is or may
be liable in respect of the negligence, default, breach of duty or breach
of trust, but that he has acted honestly and reasonably, and that having
regard to all the circumstances of the case (including those connected with
his appointment) he ought fairly to be excused for the negligence, default,
breach of duty or breach of trust, that court may relieve him, either
wholly or partly, from his liability on such terms at it thinks fit.
(2) If any such officer or person as above-mentioned has reason to
apprehend that any claim will or might be made against him in respect of
any negligence, default, breach of duty or breach of trust, he may apply to
the court for relief; and the court on the application has the same power
to relieve him as under this section it would have had if it had been a
court before which proceedings against that person for negligence, default,
breach of duty or breach of trust had been brought.
II-1
(3) Where a case to which subsection (1) applies is being tried by a
judge with a jury, the judge, after hearing the evidence, may, if he is
satisfied that the defendant or defender ought in pursuance of that
subsection to be relieved either in whole or in part from the liability
sought to be enforced against him, withdraw the case in whole or in part
from the jury and forthwith direct judgment to be entered for the defendant
or defender on such terms as to costs or otherwise as the judge may think
proper."
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) Exhibits
<Table>
<Caption>
NUMBER
- ------
2 Agreement and Plan of Merger among HSBC, Household and H2
Acquisition Corporation, dated as of November 14, 2002
(included as Annex A to the proxy statement/prospectus which
is a part of this Registration Statement).
3(i) Memorandum and Articles of Association of HSBC (incorporated
herein by reference to Exhibit 3 to HSBC's Registration
Statement on Form F-3/A (No. 333-92024)).
4.1 Form of Deposit Agreement among HSBC, The Bank of New York,
as depositary, and holders and beneficial owners from time
to time of ADRs issued thereunder, including the form of ADR
(incorporated herein by reference to Exhibit A-2 to HSBC's
Registration Statement on Form F-6 (No. 333-13296)).
5 Opinion of Norton Rose, English solicitors to HSBC, as to
the validity of the shares.
8.1 Form of opinion of Cleary, Gottlieb, Steen & Hamilton, U.S.
counsel to HSBC, as to certain U.S. federal tax matters.
8.2 Form of opinion of Wachtell, Lipton, Rosen & Katz, U.S.
counsel to Household, as to certain U.S. federal tax
matters.
15.1 Letter re: unaudited interim financials from KPMG Audit Plc.
15.2 Letter re: unaudited interim financials from KPMG LLP.
21 Subsidiaries of HSBC (incorporated herein by reference to
Exhibit 8 to HSBC's Annual Report on Form 20-F/A for the
year ended December 31, 2001).
23.1 Consent of Cleary, Gottlieb, Steen & Hamilton (included in
Exhibit 8.1 above).
23.2 Consent of Wachtell, Lipton, Rosen & Katz (included in
Exhibit 8.2 above).
23.3 Consent of KPMG Audit Plc.
23.4 Consent of KPMG LLP.
23.5 Consent of Norton Rose (included in Exhibit 5 above).
24 Powers of Attorney (set forth on the signature page to this
Registration Statement on Form F-4 (No. 333-102027) as filed
on December 20, 2002).
99.1 Opinion of Goldman, Sachs & Co. (included as Annex B to the
proxy statement/prospectus which is part of this
Registration Statement).
99.2 Opinion of Keefe, Bruyette & Woods, Inc. (included as Annex
C to the proxy statement/prospectus which is part of this
Registration Statement).
99.3 Consent of Goldman, Sachs & Co.
99.4 Consent of Keefe, Bruyette & Woods, Inc.
99.5* Consent of William F. Aldinger
99.6* Form of Household proxy card.
</Table>
- ---------------
* Previously filed.
(b) Financial Statement Schedules
Not Applicable.
II-2
(c) Reports, Opinions and Appraisals
Opinion of Goldman, Sachs & Co. (included as Annex B to the proxy
statement/prospectus which is a part of this registration statement).
Opinion of Keefe, Bruyette & Woods, Inc. (included as Annex C to the proxy
statement/prospectus which is a part of this registration statement).
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes of
determining liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) (i) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is part of this registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(ii) The registrant undertakes that every prospectus: (A) that is filed
pursuant to paragraph (i) immediately preceding, or (B) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
the issue.
(d) The undersigned registrant hereby undertakes: (i) to respond to
requests for information that is incorporated by reference into this prospectus
pursuant to Items 4, 10(b),11, or 13 of this Form, within one business day of
receipt of such requests, and to send the incorporated documents by first class
mail or other equally prompt means; and (ii) to arrange or provide for a
facility in the U.S. for the purpose of responding to such requests. The
undertakings in subparagraph (i) above include information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, HSBC HOLDINGS
PLC HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED THEREUNTO DULY AUTHORIZED, IN LONDON, ENGLAND, ON FEBRUARY 20,
2003.
HSBC HOLDINGS PLC
By: /s/ D J FLINT
------------------------------------
Name: D J Flint
Title: Group Finance Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON FEBRUARY 20, 2003.
By: *
------------------------------------
Name: Sir John Bond
Title: Group Chairman and Director
By: *
------------------------------------
Name: The Baroness Dunn, DBE
Title: Deputy Chairman and
senior non-executive
Director
By: *
------------------------------------
Name: Sir Brian Moffat, OBE
Title: Deputy Chairman and senior
independent non-executive
Director
By: *
------------------------------------
Name: Sir Keith Whitson
Title: Group Chief Executive and
Director
II-4
By: *
----------------------------------
Name: D J Flint
Title: Group Finance Director and
Director
By: *
------------------------------------
Name: The Lord Butler, GCB, CVO
Title: Director
By: *
------------------------------------
Name: R K F Ch'ien, CBE
Title: Director
By: *
------------------------------------
Name: C F W de Croisset
Title: Director
By: *
------------------------------------
Name: W R P Dalton
Title: Director
By: *
------------------------------------
Name: D G Eldon
Title: Director
By: *
------------------------------------
Name: W K L Fung, OBE
Title: Director
II-5
By: *
----------------------------------
Name: S K Green
Title: Director
By: *
------------------------------------
Name: S Hintze
Title: Director
By: *
------------------------------------
Name: A W Jebson
Title: Director
By: *
------------------------------------
Name: Sir John Kemp-Welch
Title: Director
By: *
------------------------------------
Name: The Lord Marshall
Title: Director
By: *
------------------------------------
Name: Sir Mark Moody-Stuart, KCMG
Title: Director
By: *
------------------------------------
Name: S W Newton
Title: Director
II-6
By: *
----------------------------------
Name: H Sohmen, OBE
Title: Director
By: *
------------------------------------
Name: C S Taylor
Title: Director
By: *
------------------------------------
Name: Sir Brian Williamson, CBE
Title: Director
By: /s/ D J FLINT
--------------------------------------------------------
Name: D J Flint
Title: Attorney-in-fact
II-7
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2 Agreement and Plan of Merger among HSBC, Household and H2
Acquisition Corporation, dated as of November 14, 2002
(included as Annex A to the proxy statement/prospectus which
is a part of this Registration Statement).
3(i) Memorandum and Articles of Association of HSBC (incorporated
herein by reference to Exhibit 3 to HSBC's Registration
Statement on Form F-3/A (No. 333-92024)).
4.1 Form of Deposit Agreement among HSBC, The Bank of New York,
as depositary, and holders and beneficial owners from time
to time of ADRs issued thereunder, including the form of ADR
(incorporated herein by reference to Exhibit A-2 to HSBC's
Registration Statement on Form F-6 (No. 333-13296)).
5 Opinion of Norton Rose, English solicitors to HSBC, as to
the validity of the shares.
8.1 Form of opinion of Cleary, Gottlieb, Steen & Hamilton, U.S.
counsel to HSBC, as to certain U.S. federal tax matters.
8.2 Form of opinion of Wachtell, Lipton, Rosen & Katz, U.S.
counsel to Household, as to certain U.S. federal tax
matters.
15.1 Letter re: unaudited interim financials from KPMG Audit Plc.
15.2 Letter re: unaudited interim financials from KPMG LLP.
21 Subsidiaries of HSBC (incorporated herein by reference to
Exhibit 8 to HSBC's Annual Report on Form 20-F/A for the
year ended December 31, 2001.)
23.1 Consent of Cleary, Gottlieb, Steen & Hamilton (included in
Exhibit 8.1 above).
23.2 Consent of Wachtell, Lipton, Rosen & Katz (included in
Exhibit 8.2 above).
23.3 Consent of KPMG Audit Plc.
23.4 Consent of KPMG LLP.
23.5 Consent of Norton Rose (included in Exhibit 5 above).
24 Powers of Attorney (set forth on the signature page to the
Registration Statement on Form F-4 (No. 333-102027) as filed
on December 20, 2002).
99.1 Opinion of Goldman, Sachs & Co. (included as Annex B to the
proxy statement/prospectus which is part of this
Registration Statement).
99.2 Opinion of Keefe, Bruyette & Woods, Inc. (included as Annex
C to the proxy statement/prospectus which is part of this
Registration Statement).
99.3 Consent of Goldman, Sachs & Co.
99.4 Consent of Keefe, Bruyette & Woods, Inc.
99.5* Consent of William F. Aldinger
99.6* Form of Household proxy card.
</Table>
- ---------------
* Previously filed.