Exhibit 4.1
$300,000,000
HSB CAPITAL II
Convertible Capital Securities
(liquidation amount $1,000 per Capital Security)
fully and unconditionally guaranteed to the extent set forth in
the Guarantee by
HSB Group, Inc.
Purchase Agreement
December 31, 1997
ERC Life Reinsurance Corporation
Employers Reinsurance Corporation
5200 Metcalf
P.O. Box 2991
Overland Park, Kansas 66201-1391
Ladies and Gentlemen:
HSB Capital II (the "Trust"), a statutory business trust created under
the Business Trust Act of the State of Delaware (the "Delaware Business Trust
Act"), and HSB Group, Inc., a Connecticut corporation, as depositor of the Trust
and as Guarantor (the "Guarantor"), propose, subject to the terms and conditions
stated herein (including the attached term sheet (the "Term Sheet")), that the
Trust issue and sell to the Purchasers named in Schedule I hereto (the
"Purchasers"), an aggregate liquidation amount of $300,000,000 of Convertible
Capital Securities (liquidation amount $1,000 per Capital Security) (the
"Securities") representing undivided beneficial interests in the assets of the
Trust, guaranteed by the Guarantor as to the payment of distributions, and as to
payments on liquidation or redemption, to the extent set forth in a guarantee
agreement (the "Guarantee") between the Guarantor and The First National Bank of
Chicago, as Trustee (the "Guarantee Trustee"). The proceeds of the sale of the
Securities and an aggregate liquidation amount of $9,300,000 of its Common
Securities (liquidation amount $1,000 per common security) (the "Common
Securities") are to be invested by the Trust in 7.0% Convertible Subordinated
Deferrable Interest Debentures (the "Subordinated Debentures") of the Guarantor,
to be issued pursuant to an Indenture (the "Indenture") between the Guarantor
and The First National Bank of Chicago, as Trustee (the "Debenture Trustee").
The Common Stock of Guarantor issuable upon conversion of the Securities (the
"Guarantor Common Stock") will be subject to a registration rights agreement
("Registration Rights Agreement") between the Guarantor and the Purchasers. The
Guarantor is the holding company of The Hartford Steam Boiler Insurance and
Inspection Company (the "Principal Subsidiary") and certain of its subsidiaries.
1. The Guarantor and the Trust jointly and severally represent and
warrant to, and agree with, the Purchasers that:
(a) The Principal Subsidiary's Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1996 and the Guarantor's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997 have been
made available to the Purchasers in connection with the offering of the
Securities. All documents of the Guarantor or of the Principal
Subsidiary subsequently filed with the United States Securities and
Exchange Commission (the "Commission") pursuant to Section 13(a), 13(c)
or 15(d) of the United States Securities Exchange Act of 1934, as
amended (the "Exchange Act"), on or prior to the date hereof and any
reference to the documents prepared or distributed in connection with
the offering of the Securities shall be deemed to include any documents
filed with the Commission pursuant to Section 13(a), 13(c) or 15(d) of
the Exchange Act after the date hereof and prior to such specified
date; all documents filed under the Exchange Act by the Guarantor or
the Principal Subsidiary and so deemed to be included, or any amendment
or supplement thereto, are hereinafter called the "Exchange Act
Reports". The Exchange Act Reports, when they were or are filed with
the Commission, conformed or will conform in all material respects to
the applicable requirements of the Exchange Act and the applicable
rules and regulations of the Commission thereunder. The Exchange Act
Reports did not and will not, as of their respective dates, contain an
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(b) There has not been any material adverse change in, or any
adverse development which materially affects, the business, properties
or financial condition or results of operations of the Guarantor and
its subsidiaries taken as a whole since September 30, 1997 otherwise
than as set forth or contemplated herein; and, since September 30, 1997
and except as otherwise set forth herein, there has not been any
material change in the capital stock or long-term debt of the Guarantor
or any of its subsidiaries or any material adverse change or any
development involving a prospective material adverse change, in or
affecting the general affairs, management, financial position,
shareholders' equity or results of operations of the Guarantor and its
subsidiaries taken as a whole, otherwise than as set forth or
contemplated herein;
(c) The Guarantor has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the state
of Connecticut, with power and authority (corporate and other) to own
its properties and conduct its business as described in the Exchange
Act Reports, and has been duly qualified as a foreign corporation for
the transaction of business and is in good standing under the laws of
each other jurisdiction in which it owns or leases properties, or
conducts any business, so as to require such qualification, or is
subject to no material liability or disability by reason of the failure
to be so qualified in any such jurisdiction; and each significant
subsidiary (as defined in Regulation S-X of the Commission, each a
"Significant Subsidiary") of the Guarantor has been duly incorporated
and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation;
(d) The Guarantor has an authorized capitalization as set forth
in the Exchange Act Reports, and all of the issued shares of capital
stock of the Guarantor have been duly and validly authorized and issued
and are fully paid and non-assessable; and all of the issued shares of
capital stock of each Significant Subsidiary of the Guarantor have been
duly and validly authorized and issued, are fully paid and
non-assessable and (except for directors' qualifying shares) are owned
directly or indirectly by the Guarantor, free and clear of all liens,
encumbrances, equities or claims;
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(e) The Trust has been duly created and is validly existing as a
statutory business trust in good standing under the Delaware Business
Trust Act with the power and authority to own its properties and
conduct its business as described in the Trust Agreement, and the Trust
has conducted no business to date other than as contemplated by this
Agreement, and it will conduct no business in the future that would be
inconsistent with the Trust Agreement (as defined below); the Trust is
not a party to or bound by any agreement or instrument other than this
Agreement, the Trust Agreement (the "Trust Agreement") among the
Guarantor, the Administrative Trustees named therein, and The First
National Bank of Chicago, as Property Trustee (the "Property Trustee"),
and First Chicago Delaware Inc., as Delaware Trustee (the "Delaware
Trustee" and, together with the Administrative Trustees, and the
Property Trustee, the "Issuer Trustees") and the holders of the
Securities issued thereunder, and the agreements and instruments
contemplated by the Trust Agreement; the Trust has no liabilities or
obligations other than those arising out of the transactions
contemplated by this Agreement and the Trust Agreement; based on
current law, the Trust is not and will not be classified as an
association taxable as a corporation for United States federal income
tax purposes; and the Trust is not a party to or subject to any action,
suit or proceeding of any nature;
(f) The Securities have been duly and validly authorized by the
Trust, and, when issued and delivered against payment therefor as
provided herein, will be duly and validly issued and fully paid and
non-assessable undivided beneficial interests in the assets of the
Trust; the issuance of the Securities is not subject to preemptive or
other similar rights; the Securities will have the rights set forth in
the Trust Agreement, and the terms of the Securities are valid and
binding on the Trust; the holders of the Securities (the
"Securityholders") will be entitled to the same limitation of personal
liability extended to stockholders of private corporations for profit
organized under the General Corporation Law of the State of Delaware;
(g) The Common Securities of the Trust have been duly and
validly authorized by the Trust and upon delivery by the Trust to the
Guarantor against payment therefor, will be duly and validly issued
undivided beneficial interests in the assets of the Trust; the issuance
of the Common Securities is not subject to preemptive or other similar
rights; and at the Time of Delivery (as defined in Section 4(a) below),
all of the issued and outstanding Common Securities of the Trust will
be directly owned by the Guarantor free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity;
(h) The Guarantee, the Subordinated Debentures, the Trust
Agreement, the Indenture and the Registration Rights Agreement (the
Guarantee, the Subordinated Debentures, the Trust Agreement, and the
Indenture being collectively referred to as the "Guarantor Agreements")
have been duly and validly authorized by the Guarantor and, when
validly executed and delivered by the Guarantor and, in the case of the
Guarantee, by the Guarantee Trustee, in the case of the Trust
Agreement, by the Trustees and, in the case of the Indenture, by the
Debenture Trustee, will constitute valid and legally binding
obligations of the Guarantor, enforceable in accordance with their
respective terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization, moratorium and similar laws of general
applicability relating to or affecting creditors' rights and to general
equity principles; and the Subordinated Debentures are entitled to the
benefits of the Indenture;
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(i) The execution and delivery of this Agreement and the
Guarantor Agreements and the consummation of the transactions
contemplated herein and therein, have been duly authorized by all
necessary corporate action on the part of the Guarantor, and when
executed by the Guarantor and the other parties thereto will not
conflict with or result in any breach or violation of any of the terms
or provisions of, or constitute a default under, or result in the
creation or imposition of any security interest, lien, charge or
encumbrance upon any property or assets of the Guarantor or its
Significant Subsidiaries pursuant to any indenture, mortgage, deed of
trust, loan agreement, contract or other agreement or instrument to
which the Guarantor or any of its Significant Subsidiaries is a party
or by which the Guarantor or any of its Significant Subsidiaries may be
bound or to which any of the property or assets of the Guarantor or any
of its Significant Subsidiaries is subject, nor will such action result
in any violation of the provisions of the Certificate of Incorporation
or the By-laws of the Guarantor or the Certificate of Incorporation or
By-laws of any of its Significant Subsidiaries or any statute or any
order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Guarantor or any of its Significant
Subsidiaries or any of their properties; and no consent, approval,
authorization, order, registration or qualification of or with any such
court or governmental agency or body is required for the issue and sale
of the Securities or the consummation by the Guarantor of the
transactions contemplated by this Agreement or the Guarantor
Agreements, except such as have been, or will have been obtained or
received prior to the Time of Delivery;
(j) The Trust is not, and after giving effect to the offering
and sale of the Securities will not be, an "investment company", or an
entity "controlled" by an "investment company", as such terms are
defined in the United States Investment Company Act of 1940, as amended
(the "Investment Company Act");
(k) Neither the Guarantor nor any of its Significant
Subsidiaries is in violation of its Certificate of Incorporation or
By-laws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which it is a party or by which it or any of
its properties may be bound;
(l) There are no legal or governmental proceedings pending to
which the Guarantor or any of its Significant Subsidiaries is a party
or of which any property of the Guarantor or any of its Significant
Subsidiaries is the subject which, if determined adversely to the
Guarantor or any of its Significant Subsidiaries, would individually or
in the aggregate have a material adverse effect on the current or
future financial position, shareholders' equity or results of
operations of the Guarantor and its subsidiaries taken as a whole; and,
to the best of the Guarantor's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by
others.
2. Subject to the terms and conditions herein set forth, the Trust and
the Guarantor agree that the Trust shall issue and sell to the Purchasers, and
the Purchasers agree to purchase from the Trust, at a purchase price of $1,000
per Security, the Securities.
3. (a) The Purchasers hereby acknowledge and agree with the Guarantor
and the Trust that the Securities have not been and will not be registered under
the Securities Act of 1933 (the "Securities Act") and may not be offered or sold
except pursuant to an exemption from the registration requirements of the
Securities Act and subject to the restrictions on
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transfer and redemption rights of the Guarantor under the Indenture and the
Trust Agreement. The Purchasers further agree that they have not entered and
will not enter into any contractual arrangement with respect to the distribution
or delivery of the Securities, except with the prior written consent of the
Company.
(b) The Purchasers hereby acknowledge and agree that they will
not sell, transfer, assign or otherwise dispose of any Guarantor Common Stock
other than in a broad public distribution pursuant to the Registration Rights
Agreement or Rule 144 under the Securities Act. In any such distribution, the
Purchasers will make reasonable efforts to ensure that no one purchaser or group
of related purchasers acquires more than 3.5% of the outstanding Common Stock of
Guarantor in such distribution.
4. (a) The Securities to be purchased by the Purchasers hereunder will
be represented by one or more definitive certificated Securities. The Trust will
deliver the Securities to the Purchasers, against payment by or on behalf of
such Purchasers of the purchase price therefor by wire transfer of Federal (same
day) funds to an account designated by the Trust or against payment by or on
behalf of the Purchasers of the purchase price therefor by certified or official
bank check or checks, payable to the order of the Trust in Federal (same day)
funds. The time and date of such delivery and payment shall be 11:30 a.m., New
York City time, on December 31, 1997 or such other time and date as the
Purchasers and the Trust may agree upon in writing. Such time and date are
herein called the "Time of Delivery".
(b) The documents to be delivered at the Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including any
additional documents requested by the Purchasers pursuant to Section 7(e) hereof
and the Securities will be delivered at such time and date at the offices of
Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden Arps"), 919 Third Avenue, New
York, New York 10022 (the "Closing Location"), all at the Time of Delivery. For
the purposes of this Section 4, "New York Business Day" shall mean each Monday,
Tuesday, Wednesday, Thursday and Friday which is not a day on which banking
institutions in New York are generally authorized or obligated by law or
executive order to close.
5. The Guarantor and the Trust jointly and severally agree with the
Purchasers:
(a) Not to have the Trust be or become, at any time prior to the
expiration of three years after the Time of Delivery, an open-end
investment company, unit investment trust, closed-end investment
company or face-amount certificate company that is or is required to be
registered under Section 8 of the Investment Company Act;
(b) At any time when the Guarantor is not subject to Section 13
or 15(d) of the Exchange Act and prior to two years from the Time of
Delivery, for the benefit of the holders from time to time of
Securities, to furnish at its expense, upon request, to holders of
Securities information (the "Additional Issuer Information") satisfying
the requirements of subsection (d)(4)(i) of Rule 144A under the
Securities Act;
(c) To make available to the holders of the Securities as soon
as practicable after the end of each fiscal year an annual report
(including a balance sheet and statements of income, shareholders'
equity and cash flows of the Guarantor and its consolidated
subsidiaries certified by independent public accountants) and, as soon
as practicable after the end of each of the first three quarters of
each fiscal year (beginning with the fiscal quarter ending after the
date hereof), consolidated summary financial information of the
Guarantor and its subsidiaries for such quarter in reasonable detail;
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(d) During a period of five years from the date hereof, to make
available to you copies of all reports or other communications
(financial or other) furnished to shareholders of the Guarantor, and to
make available to the Purchasers (i) as soon as they are generally
available, copies of any reports and financial statements furnished to
or filed with the Commission or any securities exchange on which the
Securities or any class of securities of the Guarantor is listed; and
(ii) such additional information concerning the business and financial
condition of the Guarantor as the Purchasers may from time to time
reasonably request (such financial statements to be on a consolidated
basis to the extent the accounts of the Guarantor and its subsidiaries
are consolidated in reports furnished to its shareholders generally or
to the Commission;
(e) During the period of two years after the Time of Delivery,
the Guarantor will not, and will not permit any of its "affiliates" (as
defined in Rule 144 under the Securities Act) to, resell any of the
Securities or Subordinated Debentures which constitute "restricted
securities" under Rule 144 that have been reacquired by any of them;
and
(f) To issue the Guarantee and the Subordinated Debentures
concurrently with the issue and sale of the Securities as contemplated
herein.
6. The Guarantor and the Trust jointly and severally covenant and agree
with the Purchasers that the Guarantor and the Trust will pay or cause to be
paid the following: (i) the cost of producing this Agreement, any Guarantor
Agreement, closing documents (including any compilations thereof) and any other
documents in connection with the offering, purchase, sale and delivery of the
Securities; (ii) the cost of preparing the certificates for the Securities and
the Subordinated Debentures; (iii) the fees and expenses of the Trustees, the
Guarantee Trustee and the Debenture Trustee and any agent of the Trustees, the
Guarantee Trustee and the Debenture Trustee and the fees and disbursements of
counsel for the Trustees in connection with the Trust Agreement and the
Securities, counsel for the Guarantee Trustee in connection with the Guarantee
and counsel for the Debenture Trustee in connection with the Indenture and the
Subordinated Debentures; and (iv) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section. It is understood, however, that, except as
provided in this Section, the Purchasers will pay all of its own costs and
expenses, including the fees of its counsel.
7. The obligations of the Purchasers to purchase the Securities shall
be subject to the accuracy of the representations and warranties on the part of
the Guarantor and the Trust contained herein as of the date hereof and the Time
of Delivery, to the accuracy of the statements of the Guarantor and the Trust
made in any certificates pursuant to the provisions hereof, to the performance
by each of the Guarantor and the Trust of its obligations hereunder and (unless
delivery is not required until a subsequent date) to the following additional
conditions:
(a) Robert C. Walker, Senior Vice President and General Counsel
of the Guarantor and the Trust, shall have furnished to you his written
opinion, dated on a date not more than five New York Business Days
after the Time of Delivery, in form and substance satisfactory to you,
to the effect that:
(i) Each of the Guarantor and the Principal Subsidiary has
been duly incorporated and is validly existing as a corporation
in good standing under the laws of the State of Connecticut,
with corporate power and authority to own its properties and
conduct its business as described in the Exchange Act Reports;
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(ii) The Guarantor has an authorized capitalization as set
forth in the Exchange Act Reports; and all of the issued shares
of capital stock of the Principal Subsidiary have been duly and
validly authorized and issued and are fully paid and
non-assessable and (except for directors' qualifying shares) are
owned, to the best of such counsel's knowledge, directly or
indirectly by the Guarantor, free and clear of all liens,
encumbrances, equities or claims;
(iii) To the best of such counsel's knowledge and other than
as set forth in Exchange Act Reports, there are no legal or
governmental proceedings pending to which the Guarantor or any
of its Significant Subsidiaries is a party or of which any
property of the Guarantor or any of its Significant Subsidiaries
is the subject which, if determined adversely to the Guarantor
or any of its Significant Subsidiaries, could individually or in
the aggregate have a material adverse effect on the current or
future consolidated financial position, shareholders' equity or
results of operations of the Guarantor and its subsidiaries
taken as a whole; and, to the best of such counsel's knowledge,
no such proceedings are threatened or contemplated by
governmental authorities or threatened by others;
(iv) This Agreement has been duly authorized, executed and
delivered by the Guarantor and the Trust;
(v) The Guarantee, the Trust Agreement, the Indenture and
the Registration Rights Agreement have each been duly
authorized, executed and delivered by the Guarantor, and, when
validly authorized, executed and delivered by the Guarantee
Trustee in the case of the Guarantee, when validly authorized,
executed, and delivered by the Debenture Trustee in the case of
the Indenture, and when validly authorized, executed and
delivered by the Issuer Trustees in the case of the Trust
Agreement, will constitute valid and legally binding instruments
and obligations of the Guarantor enforceable against the
Guarantor, in accordance with their respective terms, subject,
as to enforcement, to bankruptcy, insolvency, reorganization and
other laws of general applicability relating to or affecting
creditors' rights and to general equity principles;
(vi) The Subordinated Debentures, when duly executed,
authenticated and issued in accordance with the Indenture and
delivered and paid for in accordance with this Agreement, will
be valid and legally binding obligations of the Guarantor,
enforceable in accordance with their terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization,
moratorium and other laws of general applicability relating to
or affecting creditors' rights and to general equity
principles (regardless of whether such enforceability is
considered in a proceeding in equity or at law) and entitled
to the benefits provided by the Indenture;
(vii) The issuance by the Guarantor of the Guarantee and the
Subordinated Debentures, the compliance by the Guarantor with
all of the provisions of this Agreement and the Guarantor
Agreements, the execution, delivery and performance by the
Guarantor of this Agreement and the Guarantor Agreements and the
consummation of the transactions herein and therein contemplated
will not conflict with or result in a breach or violation of any
of the material terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument known to such counsel to which the
Guarantor or any of its Significant Subsidiaries is a party or
by
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which the Guarantor or any of its Significant Subsidiaries is
bound or to which any of the property or assets of the Guarantor
or any of its Significant Subsidiaries is subject, nor will such
actions result in any violation of the provisions of the
Articles of Incorporation or By-Laws of the Guarantor or any
statute or any order, rule or regulation known to such counsel
of any court or governmental agency or body having jurisdiction
over the Guarantor or any of its Significant Subsidiaries or any
of their properties;
(viii) No consent, approval, authorization, order,
registration or qualification of or with any court or
governmental agency or body is required of the Guarantor for the
consummation by the Guarantor of the transactions contemplated
by this Agreement or the Guarantor Agreements;
(ix) Neither the Guarantor nor any of its Significant
Subsidiaries is in violation of its Certificate of Incorporation
or By-laws or in default in the performance or observance of any
material obligation, agreement, covenant or condition contained
in any contract, indenture, mortgage, loan agreement, note,
lease or other instrument to which it is a party or by which it
or any of its properties may be bound;
(x) The Exchange Act Reports (other than the financial
statements and related schedules and other financial data
therein, as to which such counsel need express no opinion), when
they were filed with the Commission, complied as to form in all
material respects with the requirements of the Exchange Act, and
the rules and regulations of the Commission thereunder; and such
counsel has no reason to believe that any of such documents,
when they were so filed, contained an untrue statement of a
material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made when such documents
were so filed, not misleading;
(xi) The offer, sale and delivery of the Securities and the
Subordinated Debentures in the manner contemplated by this
Agreement do not require registration under the Securities Act;
and the Trust Agreement, the Guarantee and the Indenture do not
require qualification under the Trust Indenture Act of 1939, as
amended; and
(xii) The Trust is not, and after giving effect to the
offering and sale of the Securities will not be, an "investment
company" or an entity "controlled" by an "investment company",
as such terms are defined in the Investment Company Act.
Such opinion of Robert C. Walker may be limited to New York,
Connecticut, Delaware and Federal law. To the extent such opinions
involve matters governed by New York law, such counsel may assume that
there are no differences between New York Law and Connecticut law. In
giving such opinions, such counsel may also rely, as to all matters
governed by the laws of jurisdictions in which such counsel is not
qualified, upon opinions of other counsel, who shall be counsel
satisfactory to counsel for the Purchasers, in which case the opinion
shall state that he believes you and they are entitled to rely on such
opinions.
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(b) You shall receive not later than five New York Business Days
from the Time of Delivery the opinion of Skadden Arps, special Delaware
Counsel for the Trust and the Guarantor, to the effect that:
(i) The Trust has been duly created and is validly existing
as a business trust in good standing under the Delaware Business
Trust Act and, under the Trust Agreement and the Delaware
Business Trust Act, has the trust power and authority to own its
properties and conduct its business, all as described in the
Trust Agreement, and all filings required under the laws of the
State of Delaware with respect to the creation and valid
existence of the Trust as a business trust have been made;
(ii) The Trust Agreement, when duly authorized, executed and
delivered by the Guarantor, the Property Trustee, and the
Delaware Trustee and when duly executed and delivered by the
Administrative Trustee, will constitute a valid and binding
obligation of the Guarantor and the Administrative Trustees, and
is enforceable against the Guarantor and the Trustees, in
accordance with its terms, and the terms of the Securities as
set forth in the Trust Agreement, to the extent they are
obligations of the Trust, are valid and binding obligations of
the Trust in accordance with the terms of the Trust Agreement,
all subject to the effect upon the Trust Agreement of (a)
bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors'
rights generally, and (b) general principles of equity
(regardless of whether enforcement is considered in a proceeding
in equity or at law) and except to the extent that the rights to
indemnity and contribution contained therein may be limited by
state securities laws or the public policy underlying such laws;
(iii) Under the Trust Agreement and the Delaware Business
Trust Act, the Trust has the trust power and authority to (a)
execute and deliver this Agreement and to perform its
obligations under this Agreement, and (b) issue and perform its
obligations under the Securities and the Common Securities;
(iv) Under the Trust Agreement and the Delaware Business
Trust Act, the execution and delivery by the Trust of this
Agreement and the performance by the Trust of its obligations
thereunder have been duly authorized by all necessary trust
action on the part of the Trust;
(v) The Securities have been duly and validly authorized by
the Trust Agreement, and, when issued and delivered against
payment therefor as provided herein, will be duly and validly
issued and, subject to the qualifications set forth herein,
fully paid and non-assessable undivided beneficial interests in
the assets of the Trust; under the Trust Agreement and the
Delaware Business Trust Act, the issuance of the Securities is
not subject to preemptive or other similar rights; the
Securities will have the rights set forth in the Trust
Agreement; the Securityholders, as beneficial owners of the
Trust, will be entitled to the same limitation of personal
liability extended to stockholders of private corporations for
profit organized under the General Corporation Law of the State
of Delaware; provided that such counsel may note that the
Securityholders may be obligated, pursuant to the Trust
Agreement, to (a) provide indemnity and/or security in
connection with and pay taxes or governmental charges arising
from transfers or exchanges of Capital Securities Certificates
(as defined in the Trust Agreement) and the issuance of
replacement Capital Securities Certificates and (b) provide
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security and indemnity in connection with requests of or
directions to the Property Trustee (as defined in the Trust
Agreement) to exercise its rights and remedies under the Trust
Agreement;
(vi) The Common Securities have been duly and validly
authorized by the Trust Agreement; under the Trust Agreement and
the Delaware Business Trust Act, the issuance of the Common
Securities is not subject to preemptive or other similar rights;
(vii) This Agreement has been duly authorized, executed and
delivered by the Trust;
(viii) The issue and sale of the Securities and the Common
Securities by the Trust, the execution and delivery of this
Agreement by the Trust, the compliance by the Trust with all of
the provisions of the Securities, and this Agreement, the
purchase by the Trust of the Subordinated Debentures and the
consummation of the transactions herein and therein contemplated
do not violate (a) the Trust Agreement or the Certificate of
Trust of the Trust, or (b) any Applicable Delaware Law;
(ix) Based on such counsel's review of Applicable Delaware
Laws, no Governmental Delaware Approval which has not been
obtained or taken and is not in full force and effect is
required to authorize or is required in connection with the
execution or delivery by the Trust of the Purchase Agreement or
the performance by the Trust of the transactions contemplated
thereby except that such counsel need not express any opinion in
this paragraph, however, as to any Governmental Approvals which
may be required under state securities of "blue sky" laws.
In giving such opinion, Skadden Arps may state that (a) the term
"Applicable Delaware Laws" means only the Delaware Trust Act, the
General Corporation Law of the State of Delaware and those laws, rules
and regulations of the State of Delaware which, in its experience, are
ordinarily applicable to transactions of the type contemplated by the
Purchase Agreement (excluding those laws, rules and regulations
relating specifically to insurance holding companies); (b) the term
"Delaware Governmental Authorities" means any Delaware legislative,
judicial, administrative or regulatory body under Applicable Laws; (c)
the term "Delaware Governmental Approval" means any consent, approval,
license, authorization or validation of, or filing, qualification or
registration with, any Delaware Governmental Authority pursuant to
Applicable Laws. In giving such opinion, Skadden Arps may rely, as to
all matters governed by the laws of jurisdictions in which such counsel
is not qualified, upon opinions of other counsel, who shall be counsel
satisfactory to counsel for the Purchasers, in which case the opinion
shall state that they believe you and they are entitled to rely on such
opinions.
(c) Skadden Arps, special tax counsel for the Guarantor and the
Trust, shall furnish to you their written opinion, dated not later than
five New York Business Days after the Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) The Trust will be classified as a grantor trust and not
as an association taxable as a corporation for United States
federal income tax purposes.
10
(ii) The Subordinated Debentures will be classified for
United States federal income tax purposes as indebtedness of the
Company.
(d) Prior to the Time of Delivery, the Guarantor and the Trust
shall have furnished to you such further information, certificates and
documents as you may reasonably request.
(e) (i) There has not been any material adverse change in, or
any adverse development which materially affects, the business,
properties or financial condition or results of operations of the
Guarantor and its subsidiaries taken as a whole since the date hereof
otherwise than as set forth or contemplated herein, and (ii) since the
date hereof there shall not have been any change in the capital stock
or long-term debt of the Guarantor or any of its Significant
Subsidiaries or any change, or any development involving a prospective
change, in or affecting the general affairs, management, financial
position, shareholders' equity or results of operations of the
Guarantor and its subsidiaries taken as a whole, otherwise than as set
forth or contemplated herein, the effect of which, in any such case
described in Clause (i) or (ii), is in the judgment of the Purchasers
so material and adverse as to make it impracticable or inadvisable to
proceed with the offering or the delivery of the Securities on the
terms and in the manner contemplated herein;
(f) On or after the date hereof and prior to the Time of
Delivery, there shall not have occurred any of the following: (i) a
suspension or material limitation in trading in securities generally on
the New York Stock Exchange; (ii) a suspension or material limitation
in trading in the Guarantor's securities on the New York Stock
Exchange, (iii) a general moratorium on commercial banking activities
declared by either Federal, New York State or Connecticut authorities;
or (iv) the outbreak or escalation of hostilities involving the United
States or the declaration by the United States of a national emergency
or war, if the effect of any such event specified in this clause (iv)
in the judgment of the Purchasers makes it impracticable or inadvisable
to proceed with the offering or the delivery of the Securities on the
terms and in the manner contemplated herein;
(g) The Guarantor and the Trust shall have furnished to you
certificates of the Guarantor and the Trust, signed, in the case of the
Guarantor, by the Chief Executive Officer, the President or a Senior
Executive Vice President of the Guarantor and by the principal
accounting or financial officer of the Guarantor, and in the case of
the Trust, by an Administrative Trustee, dated the Time of Delivery, as
to the accuracy of the representations and warranties of the Guarantor
and the Trust herein at and as of such Time of Delivery, as to the
performance by the Guarantor and the Trust of all of their respective
obligations hereunder to be performed at or prior to such Time of
Delivery, and as to such other matters as the you may reasonably
request.
8. (a) As of the Closing, the Purchasers and their Affiliates (as
defined in the Exchange Act) will have no beneficial ownership (as defined in
Rule 13d-3 promulgated under the Exchange Act) of any securities of Guarantor
other than as a result of the Purchasers' acquisition of the Securities.
(b) The Purchasers hereby agree that, for a period of five (5)
years from the date hereof, the Purchasers and their Affiliates will
not:
11
(i) in any manner acquire, agree to acquire, make any public
or private offer or proposal to acquire or announce or disclose
any intention to make an offer or proposal to acquire, directly
or indirectly, by purchase or otherwise (except pursuant to a
stock split, stock dividend, or other pro rata distribution by
Guarantor to holders of any class of its outstanding securities
entitled to vote generally in the election of directors ("Voting
Securities") or upon conversion of the Securities), any Voting
Securities other than the Securities;
(ii) propose to enter into, or announce or disclose any
intention to propose to enter into, directly or indirectly, any
merger, business combination or similar transaction involving
Guarantor or its Affiliates or to purchase, directly or
indirectly, all or a material portion of the assets of Guarantor
or any of its Affiliates;
(iii) make, or in any way participate, directly or indirectly,
in any "solicitation" of "proxies" (as such terms are defined or
used in Regulation 14A of the Exchange Act) to vote, or seek to
advise or influence any person with respect to the voting of,
any Voting Securities, or become a "participant" in an "election
contest" (as such terms are defined or used in Regulation 14A of
the Exchange Act) relating to the election of directors of
Guarantor, or initiate, propose or solicit holders of Voting
Securities for the approval of any shareholder proposal (under
Rule 14a-8 under the Exchange Act or otherwise), provided that
the Purchasers shall not be deemed to have engaged in a
"solicitation" or to have become a "participant" in accordance
with this Agreement or by reason of participation in Guarantor's
solicitation of proxies in connection with any annual or special
meeting of shareholders of Guarantor;
(iv) form, join or in any way participate in a "group"
(within the meaning of Section 13(d)(3) of the Exchange Act) or
otherwise act in concert with any Person, (x) for the purpose of
circumventing the provisions of this Agreement or (y) for the
purpose of acquiring, holding, voting or disposing of any Voting
Securities;
(v) (x) request Guarantor (or its directors, officers,
employees or agents), directly or indirectly, to take any action
which might require Guarantor or any of its Affiliates to make a
public announcement regarding the possibility of (A) the
acquisition of Voting Securities by the Purchasers, (B) a
business combination, merger or similar transaction involving
the Purchasers, on the one hand, and Guarantor or any of its
Affiliates, on the other hand, (C) the sale to the Purchasers of
all or a material portion of the assets of Guarantor or any of
its Affiliates, or (D) the amendment or waiver of any of the
provisions hereof, or (y) make any public statement regarding
any of the foregoing or with respect to the business, management
or conduct of Guarantor or its Affiliates;
(vi) deposit any Voting Securities in a voting trust or
subject them to a voting agreement or other agreement of similar
effect;
(vii) arrange, or participate in the arranging of, financing
for the purchase of any Voting Securities by any person or
entity, provided that the Purchasers may, as part of their
normal business practices (now or as hereinafter adopted),
provide bona fide financing to a third party so long as the
effect of such financing would not otherwise violate any of the
provisions of this Agreement;
12
(viii) participate in any action by written consent of the
shareholders of Guarantor unless so requested by the management
or board of directors of the Guarantor; or
(ix) otherwise act, alone or in concert with others
(including by providing financing for another party), to seek or
offer to control or influence, in any manner, the management,
Board of Directors or policies of Guarantor, including, without
limitation, by seeking to add or remove any member of the Board
of Directors of Guarantor.
(c) Notwithstanding the provisions of clause (ii) of paragraph
(b), the Purchasers shall be permitted to make a proposal otherwise
subject thereto if another person or entity has made such a proposal
and such proposal has been publicly announced, provided (i) ten New
York Business Days have elapsed since the date of public announcement
of such other party's proposal and the Guarantor has not publicly
rejected such proposal and (ii) the Purchasers' proposal is made
privately to the Guarantor and is not publicized by the Purchasers in
any manner. Notwithstanding the provisions of clause (v)(x)(D) of
paragraph (b), the Purchasers may request an amendment or waiver of
paragraph (b), provided that (i) the Purchasers' request is made
privately to the Chief Executive Officer of the Guarantor and (ii) if
rejected, no further communication with respect thereto is made
publicly by the Purchasers to any person in any manner. It is
anticipated that the Purchasers and the Guarantor will be discussing
and entering into various business and contractual relationships.
Notwithstanding the provisions of clause (ix) of paragraph (b), the
Purchasers shall be free to (i) discuss such relationships with the
Guarantor and to fully assert and protect their rights thereunder or
(ii) meet privately with the Chief Executive Officer and/or Chairman of
the Board of Guarantor to discuss matters generally of interest to
shareholders other than matters related to control or change of control
of Guarantor.
(d) The Purchasers agree that they will, and will cause their
Affiliates to, vote any Voting Securities of Guarantor in accordance
with the recommendation of the Board of Directors of Guarantor at any
annual or special meeting or in any action by consent. If the foregoing
provision is inconsistent with any law, rule or regulation applicable
to Guarantor, such Voting Securities will be voted in proportion to the
votes of all other holders of Voting Securities.
(e) The parties hereto jointly and severally agree and covenant
that any breach of this Section 8 by any of them will cause immediate
and irreparable harm to the other, for which there is no adequate
remedy at law, and each hereby acknowledges and consents to the right
of the other to seek the entry, by a court of competent jurisdiction,
of any temporary, preliminary or permanent injunction, or other
remedial relief which would arrest or redress any such breaches of
this Section 8.
9. The respective agreements, representations, warranties and other
statements of the Guarantor and the Trust and the Purchasers, as set forth in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of the Purchasers or any controlling person of any Purchasers, or the Guarantor
and the Trust, or any officer or director or controlling person of the Guarantor
or the Trust, and shall survive delivery of and payment for the Securities.
13
10. This Agreement may be terminated by mutual agreement of the
parties, in which event, (i) the Guarantor and the Trust shall not then be under
any liability or obligation to the Purchasers with respect to the Securities
except as provided in Section 6 hereof and (ii) the Purchasers shall not then be
under any liability or obligation to the Guarantor with respect to this
Agreement except as provided in Section 6 or 8 hereof.
11. All statements, requests, notices and agreements hereunder shall be
in writing, and if to the Purchasers shall be delivered or sent by mail, telex
or facsimile transmission to: ERC Life Reinsurance Corporation and Employers
Reinsurance Corporation, 5200 Metcalf, P.O. Box 2991, Overland Park, Kansas
66201-1391, Attention: General Counsel; and if to the Guarantor or the Trust
shall be delivered or sent by mail or facsimile transmission to HSB Group, Inc.,
One State Street, Hartford, Connecticut 06102, Attention: General Counsel. Any
such statements, requests, notices or agreements shall take effect upon receipt
thereof.
12. This Agreement shall be binding upon, and inure solely to the
benefit of, the Purchasers, the Guarantor and the Trust and their respective
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. No purchaser of any of the Securities from
the Purchasers shall be deemed a successor or assign by reason merely of such
purchase.
13. Time shall be of the essence of this Agreement.
14. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
15. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such respective counterparts shall together constitute one and
the same instrument.
14
If the foregoing is in accordance with your understanding, please sign
and return to us six counterparts hereof, and upon the acceptance hereof by you,
this letter and such acceptance hereof shall constitute a binding agreement
between the Purchasers and the Guarantor and the Trust.
Very truly yours,
HSB CAPITAL II
By: HSB GROUP, INC.,
as Depositor
By: /s/ Saul L. Basch
Name: Saul L. Basch
Title: Senior Vice President, Treasurer and Chief Financial Officer
HSB GROUP, INC.
By: /s/ Saul L. Basch_
Name: Saul L. Basch
Title: Senior Vice President, Treasurer and Chief Financial Officer
Accepted as of the date hereof:
EMPLOYERS REINSURANCE CORPORATION
By:/s/ John M. Connelly
ERC LIFE REINSURANCE CORPORATION
By:/s/ John M. Connelly
SCHEDULE I
Liquidation
Number of Amount of
Securities Securities
to be to be
Purchasers Purchased Purchased
---------- ----------- ------------
Employers Reinsurance Corporation......... 180,000 $180,000,000
ERC Life Reinsurance Corporation.......... 120,000 120,000,000
=========== ============
Total.......................... 300,000 $300,000,000
=========== ============
16
December 30, 1997
TERMS OF $300 MILLION CONVERTIBLE SECURITY
A. Preliminary financial terms
Issuer : newly created HSB Delaware business trust
Maturity: 20 years
Ranking: Pari passu with HSB Group Global Floating Rate Junior
Subordinated Debentures, Series B (subordinate to senior
indebtedness)
Rate: 7.0% coupon, payable semi-annually
Extension periods: Interest may be deferred for up to 10 consecutive interest
periods, provided that during such period HSB cannot pay
dividends on its common stock or repay debt that ranks pari
passu or junior provided that no extension period may extend
beyond the stated maturity date.
Redemption: Upon maturity
At option of ERC (non-transferable right), (i) upon change
in control of HSB Group occurring within five years of
issuance, redemption at par plus redemption premium, if any,
calculated in accordance with Schedule A; (ii) if ERC's
purchase of IRI does not close before March 31, 1998; (iii)
if after good-faith negotiations and revisions (if any) to
the documentation in accordance with this Term Sheet, ERC
determines that the Securities do not conform to the
fundamental economic terms set forth herein or contain
provisions that impose material legal or tax consequences or
risks on ERC that could not have been reasonably
anticipated.
Callable: Upon change in control of purchaser, at par
"Tax event" (loss of tax deductibility)
After 7 years at par under any circumstances
If ERC's purchase of IRI does not close before March 31,
1998
In the event that HSB vetos a purchaser of the convertible
securities
Convertibility: HSB Group common stock at any time, subject to regulatory
approval, at conversion price of $85
B. Standstill Agreement
Term: 5 year term; subject to earlier termination as mutually
agreed by the parties
Voting: Agreement to vote its shares in accordance with
recommendation of Board, or if unenforceable in accordance
with NYSE policy, then proportionate to voting of
non-affiliated shareholders
Prohibited
activities: Acquiring additional shares beyond current ownership (need
representation on this) and conversion
Participating in proxy solicitation/consent solicitation
Making shareholder proposal
Public or private proposal with respect to a business
combination, except for private proposal to HSB following
a public proposal for business combination which has not
been rejected within 10 business days thereafter by Board of
Directors
Seeking to add/remove director from board
Forming 13D group with other stockholders
Making public statements on business management or conduct
of HSB
Requesting amendment of standstill agreement, other than a
non-public request to CEO which, if rejected, may not be
followed by a public request
Dispositions of
Convertible: Rule 144A placement where purchaser agrees to be bound by
agreement, subject to HSB right to call at par and to veto
the purchaser(s); limit on number of purchasers
No registration rights
Disposition of
Common: Demand registration rights; limits on frequency and number
of shares that can be covered; must be in broad public
distribution with limit on blocks that can be purchased by
third parties; subject to customary hold-backs and
black-outs
Schedule A
(assuming 7% coupon)
In the event of a change in control of HSB Group within five years of the
closing, if the per share price paid in the acquisition comprising the
change in control is below the per share price specified below for the year
within which the change in control occurs, HSB Group must redeem the note
at the redemption value specified in the following table.
Minimum Minimum
Per share Premium Redemption Redemption ERC
Redemption Price to Par Par Value Premium Value IRR*
- ---------- ------- ------- --------- ---------- ---------- -------
Year 1 $92.65 9.00% $300 M $ 27,000,000 $327,000,000 16.00%
Year 2 90.95 7.00% 300 M 21,000,000 321,000,000 10.33%
Year 3 89.25 5.00% 300 M 15,000,000 315,000,000 8.53 %
Year 4 87.55 3.00% 300 M 9,000,000 309,000,000 7.67%
Year 5 85.85 1.00% 300 M 3,000,000 303,000,000 7.17%
*assuming payments at year-end