Safeco Corp · PREM14A · For 5/16/08
Filed On 5/23/08 5:27pm ET · SEC File 1-06563 · Accession Number 1341004-8-1026
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
5/23/08 Safeco Corp PREM14A 5/16/08 1:371 Skadden/FA
Preliminary Proxy Solicitation Material -- Merger or Acquisition · Schedule 14A
Filing Table of Contents
Document/Exhibit Description Pages Size
1: PREM14A PREM14A Proxy Statement HTML 1,705K
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SECURITIES
AND EXCHANGE COMMISSION
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Washington,
D.C. 20549
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______________________
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SCHEDULE
14A INFORMATION
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Proxy
Statement Pursuant to Section 14(a) of the
Securities
Exchange Act of 1934
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Check
the appropriate box:
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x
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Preliminary
Proxy Statement
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¨
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Confidential,
for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
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¨
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Definitive
Proxy Statement
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Definitive
Additional Materials
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¨
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Soliciting
Material Under Rule 14a-12
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SAFECO
CORPORATION
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(Name
of Registrant as Specified In Its Charter)
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(Name
of Person(s) Filing Proxy Statement, if other than the
Registrant)
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Payment
of Filing Fee (Check the appropriate box):
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¨
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x
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Fee computed on table
below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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(1)
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Title of each class of securities to which transaction
applies:
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Common Stock, no par
value, of Safeco Corporation ("Safeco common stock").
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(2)
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Aggregate
number of securities to which transaction applies:
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92,153,331 shares of Safeco common stock (Including 2,222,839 shares of
Safeco common stock reserved for issuance upon exercise or payment of
outstanding stock options or restricted stock rights).
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Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
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In
accordance with Section 14(g) of the Securities Exchange Act of 1934, as
amended, the filing fee was calculated by multiplying 0.0000393 by the sum
of: (a) the product of 89,930,492 shares of Safeco common stock and
the per share amount of $68.25 in cash per share of Safeco common stock,
(b) the product of 1,209,201 shares of Safeco common stock underlying
options and $20.86 (the difference between $68.25 and $47.39, the weighted
average exercise price per share of Safeco common stock underlying the
options), and (c) the product of 1,013,638 restricted stock rights
and $68.25.
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(4)
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Proposed maximum aggregate value of transaction:
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$6,232,160,805.36
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(5)
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Total fee paid:
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$244,923.92
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Fee
paid previously with preliminary
materials.
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Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its
filing.
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(1)
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Amount Previously Paid:
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(2)
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Form, Schedule or Registration Statement No.:
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(3)
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Filing Party:
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(4)
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Date Filed:
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2008
PROXY STATEMENT
ANNUAL
MEETING OF SHAREHOLDERS
_________________
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Seattle,
Washington
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Dear
Shareholder:
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[●],
2008
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You
are invited to attend the annual meeting of the shareholders of Safeco
Corporation. The annual meeting will be held on [●], [●], 2008 at [●]
Pacific Time, at: the Safeco Center, Magnolia Room, 1st Floor. The
street address for Safeco Center is 1191 Second Avenue, Seattle, Washington
98101. The annual meeting was postponed from its originally scheduled
date of Wednesday, May 7, 2008 and the record date for the annual meeting was
changed to [●],
2008.
At
the annual meeting, you will be asked to approve an agreement and plan of merger
that Safeco entered into on April 23, 2008, providing for the merger of a wholly
owned subsidiary of Liberty Mutual Insurance Company with and into Safeco, with
Safeco continuing as the surviving corporation and a subsidiary of Liberty
Mutual. Liberty Mutual is a diversified global insurer and the sixth
largest property and casualty insurance company in the United States based on
2007 direct written premium. If the merger is completed, each share
of Safeco common stock issued and outstanding immediately prior to the merger
(other than shares owned by Safeco and its subsidiaries and Liberty Mutual and
its subsidiaries, other than shares held in investment portfolios, and shares
for which dissenters' rights have been properly exercised under Washington law)
will be converted into the right to receive $68.25 in cash, without interest and
less any applicable withholding taxes, as more fully described in the
accompanying proxy statement. The $68.25 per share being paid in the
merger represents a premium of approximately 53% over the average closing price
of Safeco shares for the 30-day trading period prior to the announcement of the
merger.
Safeco
cannot complete the merger unless the conditions to closing are satisfied,
including obtaining the approval of our shareholders and the receipt of
specified governmental and regulatory approvals.
At
the annual meeting, you will also be asked to consider and vote on the following
matters, which are described in more detail in this proxy
statement:
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Election
of five directors, four to serve a term of three years and one to serve a
term of two years.
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Ratification
of Ernst & Young LLP's appointment as our independent registered
public accounting firm.
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Adjournment
or postponement of the annual meeting, if necessary or appropriate, to
solicit additional proxies to approve the merger
agreement.
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Any
other business that may properly come before the annual
meeting.
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Our
board of directors has unanimously determined that the merger agreement and the
merger are advisable and in the best interests of Safeco and its shareholders,
and has unanimously adopted the merger agreement and approved the transactions
contemplated by the merger agreement. The Safeco board of directors
unanimously recommends that Safeco shareholders vote "FOR" the proposal to
approve the merger agreement.
The
attached notice of the annual meeting and proxy statement explain the proposed
merger and provide specific information concerning the annual
meeting. Please read this proxy statement (including the
annexes)
carefully
to learn more about these and related matters. Our annual report for
2007 is also available online to give you more information about our
progress.
Your vote is
important. Whether or not you plan to attend the annual meeting, you
should read the proxy statement (including the annexes) and follow the
instructions on your proxy card to vote by Internet, telephone or mail to ensure
that your shares will be represented at the annual meeting. If
your shares are held in an account at a brokerage firm, bank or other nominee,
you should instruct your broker, bank or other nominee how to vote your shares
using the separate voting instruction form furnished by your broker, bank or
other nominee. If
you previously submitted a proxy for the annual meeting of Safeco shareholders
originally scheduled to be held on May 7, 2008, Safeco will not vote such proxy
at the annual meeting of Safeco shareholders, as rescheduled to be held on [●],
2008. Therefore, if you previously submitted a proxy for the annual
meeting to be held on May 7, 2008, and you desire to vote your shares of Safeco
common stock with respect to any or all of the proposals to be considered at the
[●], 2008 annual meeting, we urge you to vote your shares again by marking,
signing, dating and returning the attached proxy card or through the Internet or
by telephone. The enclosed proxy card contains instructions
regarding voting. Please vote your shares before the meeting, even if
you plan to attend. Thank you.
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Sincerely,
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Paula
Rosput Reynolds
Chair,
President and Chief Executive
Officer
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This
proxy statement is dated [●], 2008 and is first being mailed, along with the
attached proxy card,
to
Safeco shareholders on or about [●], 2008.
This
transaction has not been approved or disapproved by the Securities and Exchange
Commission, nor has the Securities and Exchange Commission passed upon the
fairness or merits of this transaction or the accuracy or adequacy of the
information contained in this proxy statement. Any representation to
the contrary is unlawful.
SAFECO
CORPORATION
Notice
of Annual Meeting of Shareholders
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When:
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[●],
Pacific Time, [●], 2008
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Where:
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Safeco
Center
Magnolia
Room, 1st Floor
1191
Second Avenue
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Record
Date: [●], 2008
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Purposes:
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1.
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To
consider and vote upon a proposal to approve the Agreement and Plan of
Merger, dated as of April 23, 2008, by and among Liberty Mutual Insurance
Company, Big Apple Merger Corporation and Safeco
Corporation.
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2.
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To
elect five directors, four to serve a term of three years and one to serve
a term of two years.
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3.
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To
ratify Ernst & Young LLP's appointment as Safeco's independent
registered public accounting firm.
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4.
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To
adjourn or postpone the annual meeting, if necessary or appropriate, to
solicit additional proxies for the approval of the merger
agreement.
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5.
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To
transact any other business that may properly come before the annual
meeting or at any adjournment or postponement of the annual
meeting.
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The
Safeco board of directors has unanimously determined that the merger agreement
and the merger are advisable and in the best interests of Safeco and its
shareholders, and has unanimously adopted the merger agreement and approved the
transactions contemplated by the merger agreement. The Safeco board of directors
unanimously recommends that Safeco shareholders vote "FOR" the proposal to
approve the merger agreement.
In
addition, the Safeco Board of Directors urges you to vote "FOR" items 2, 3, and
4 above.
Holders
of Safeco common stock are entitled to assert dissenters' rights if they comply
with the procedures and requirements under chapter 23B.13 of the Washington
Business Corporation Act, a copy of which is attached to the accompanying proxy
statement as Annex C.
More
information on all of these matters is included in the accompanying proxy
statement. You are entitled to vote on these matters and to attend
the annual meeting if you held Safeco shares as of the close of business on our
record date, [●], 2008.
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By
Order of the Safeco Board of Directors
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Arthur
Chong
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Executive
Vice President and Chief Legal
Officer
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_____________________________________________________________________________
Voting
Instructions – YOUR VOTE IS IMPORTANT!
Whether
or not you plan to attend the annual meeting, you should read the proxy
statement (including the annexes) and follow the instructions on your proxy card
to vote by Internet, telephone or mail to ensure that your shares will be
represented at the annual meeting. This helps ensure the presence of
a quorum at our meeting so we can transact business. When you vote your shares
promptly, you also help save costs we might otherwise incur for additional proxy
solicitation.
If
you previously submitted a proxy for the annual meeting of Safeco shareholders
originally scheduled to be held on May 7, 2008, Safeco will not vote such proxy
at the annual meeting of Safeco shareholders, as rescheduled to be held on [●],
2008. Therefore, if you previously submitted a proxy for the annual
meeting to be held on May 7, 2008, and you desire to vote your shares of Safeco
common stock with respect to any or all of the proposals to be considered at the
[●], 2008 annual meeting, we urge you to vote your shares again by marking,
signing, dating and returning the attached proxy card or through the Internet or
by telephone.
A
list of the Safeco shareholders eligible to vote at the annual meeting will be
made available for inspection in accordance with section 23B.07.200 of the
Washington Business Corporation Act beginning [●], 2008, ten days before the
scheduled date for the annual meeting.
Voting
through the Internet or by telephone is fast and convenient and saves postage
and proxy tabulation costs. You may also vote your shares by mail, using the
printed proxy card attached to the accompanying proxy
statement. Voting now by Internet, telephone or mail will not prevent
you from changing your vote later.
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HOW TO VOTE BY
INTERNET
24 hours a day – 7 days a
week
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HOW TO VOTE BY
TELEPHONE
Toll-free, 24 hours a day
– 7 days a
week
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1.
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Read this proxy
statement.
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Read this proxy
statement.
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2.
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If you are a registered
shareholder, locate
your control number
on your proxy card. Go to the following
website: http://www.eproxy.com/saf then follow the
instructions.
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2.
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If you are a registered
shareholder, locate
your control number on your proxy card. Call toll-free 1-866-580-9477
and follow the instructions given for casting your vote.
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3.
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If you are an employee
participant in the
Safeco Stock Ownership Fund within our 401(k) Plan, locate your control
number in the e-mail you received from BNY Mellon Shareowner Services. Go to
the following website: http://www.eproxy.com/saf then follow the
instructions. If you are a non-employee participant in this
fund, just follow the instruction in Step 2 above.
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3.
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If you are an employee
participant
in the Safeco Stock
Ownership Fund within
our 401(k) Plan, locate your control number in the
e-mail you received from BNY Mellon Shareowner Services. Call
toll-free 1-866-580-9477
and follow the instructions given for casting your
vote. If
you are a non-employee participant in this fund, just follow the
instruction in Step 2 above.
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4.
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If you're a beneficial
shareholder (you hold your shares through a
bank, broker or other institution), follow the instructions on your voting
instruction
form.
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4.
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If you're a beneficial
shareholder (you hold your shares through a
bank, broker or other institution), follow the instructions on your voting
instruction form.
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PLEASE
DO NOT SUBMIT A PAPER PROXY CARD OR VOTING INSTRUCTION FORM IF YOU ARE VOTING
THROUGH THE INTERNET OR BY TELEPHONE.
SAFECO
CORPORATION
2008
PROXY STATEMENT
ANNUAL
MEETING OF SHAREHOLDERS
TABLE
OF CONTENTS
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Section
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Page
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QUESTIONS
AND ANSWERS ABOUT THE MERGER AND THE ANNUAL MEETING
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Q-1
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SUMMARY
TERM SHEET
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1
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The
Companies
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1
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Annual
Meeting of Safeco Shareholders
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1
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Purposes
and Effects of the Merger; Consideration
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3
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Effects
of the Merger Not Being Completed
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3
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What
You Will Receive in the Merger
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3
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Safeco
Stock Options and Restricted Stock Rights
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3
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Safeco
Agency Stock Purchase Plan
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4
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Material
U.S. Federal Income Tax Consequences
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4
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Recommendation
of the Safeco Board of Directors
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4
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Opinion
of Financial Advisor
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4
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Merger
Agreement
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5
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No
Solicitation
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5
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Conditions
to Completion of the Merger
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5
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Termination
of the Merger Agreement
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6
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Termination
Fee
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7
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Interests
of Safeco's Directors and Executive Officers in the Merger
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8
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Merger
Financing
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8
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Dissenters'
Rights
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8
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Market
Price Data and Dividend Information
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8
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FORWARD-LOOKING
INFORMATION
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9
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MARKET
PRICE DATA AND DIVIDEND INFORMATION
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10
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THE
ANNUAL MEETING
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11
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Date,
Time and Place of the Annual Meeting
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11
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Purpose
of the Annual Meeting
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11
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Record
Date for the Annual Meeting
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11
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Shares
Entitled to Vote
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11
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Quorum
Requirement
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11
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Adjournments
and Postponements
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12
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Required
Vote
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12
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Treatment
of Abstentions
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12
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Treatment
of Broker Non-Votes
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12
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Voting
by Safeco's Directors and Executive Officers
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13
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Voting
of Proxies
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13
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Proxies
without Instructions.
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13
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Revocability
of Proxies
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14
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Solicitation
of Proxies
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14
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Other
Business
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14
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THE
COMPANIES
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Safeco
Corporation
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Liberty
Mutual Insurance Company
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15
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Big
Apple Merger Corporation
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THE
MERGER
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16
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Background
of the Merger
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16
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Purposes
and Effects of the Merger; Consideration
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29
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Effects
of the Merger Not Being Completed
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30
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Recommendation
of the Safeco Board of Directors and Its Reasons for the
Merger
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30
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Opinion
of Financial Advisor
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33
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Interests
of Safeco's Directors and Executive Officers in the Merger
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41
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Directors'
and Officers' Indemnification and Insurance
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45
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Employee
Matters
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46
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Safeco
Agency Stock Purchase Plan
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46
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Delisting
and Deregistration of Safeco Common Stock
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46
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Certain
Relationships Between Safeco and Liberty Mutual
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47
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Dissenters'
Rights
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47
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Merger
Financing; Sources of Funds
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51
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Material
U.S. Federal Income Tax Consequences
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51
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Regulatory
Matters
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53
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Litigation
Relating to the Merger
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54
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THE
MERGER AGREEMENT
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55
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Structure
of the Merger
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55
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Completion
and Effectiveness of the Merger
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55
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Merger
Consideration
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56
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Treatment
of Stock Options and Restricted Stock Rights
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56
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Exchange
of Stock Certificates
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56
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Corporate
Governance Matters
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57
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Representations
and Warranties
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58
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Covenants
Relating to Conduct of Business
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61
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Reasonable
Best Efforts
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64
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No
Solicitation by Safeco
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65
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Recommendation
of the Safeco Board of Directors
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66
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Safeco
Shareholders Meeting
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67
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Employee
Matters
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68
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Indemnification
and Insurance
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69
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Charitable
Contributions
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70
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"Safeco"
Trademark and Branding
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70
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Principal
Executive Offices of the Surviving Corporation
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70
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Other
Covenants and Agreements
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71
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Conditions
to the Completion of the Merger
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71
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Expenses
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72
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Termination
of the Merger Agreement
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72
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Termination
Fee
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74
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Governing
Law
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75
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Amendments,
Extensions and Waivers of the Merger Agreement; No Third Party
Beneficiaries
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75
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SECURITIES
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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76
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Directors
and Executive Officers
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76
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Principal
Holders of Safeco Common Stock
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77
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OTHER
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
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78
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PROPOSAL
2: ELECTION OF DIRECTORS
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78
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2008
Nominees for Director
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78
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Continuing
Directors
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79
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BOARD
ATTENDANCE AND BOARD COMMITTEES
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81
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CORPORATE
GOVERNANCE PRACTICES
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82
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NOMINATING/GOVERNANCE
COMMITTEE AND DIRECTOR NOMINATIONS
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86
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AUDIT
COMMITTEE REPORT
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88
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INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM'S FEES AND SERVICES
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91
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COMPENSATION
COMMITTEE REPORT
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92
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COMPENSATION
OF DIRECTORS
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124
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COMPENSATION
COMMITTEE
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127
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PROPOSAL
3: RATIFICATION OF APPOINTMENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
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131
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PROPOSAL
4: ADJOURNMENT OR POSTPONEMENT OF THE ANNUAL MEETING FOR THE
PURPOSE OF OBTAINING ADDITIONAL VOTES
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132
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MULTIPLE
SHAREHOLDERS SHARING THE SAME ADDRESS
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133
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SUBMISSION
OF SHAREHOLDERS PROPOSALS
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133
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SECTION 16(A)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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133
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WHERE
YOU CAN FIND MORE INFORMATION
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133
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LIST
OF SAFECO SHAREHOLDERS
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135
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DIRECTIONS
TO THE ANNUAL MEETING
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136
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A-1
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ANNEX
B – Opinion of Morgan Stanley & Co. Incorporated
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B-1
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ANNEX
C – Chapter 23B.13 of the Washington Business Corporation
Act
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C-1
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QUESTIONS
AND ANSWERS ABOUT THE MERGER AND THE ANNUAL MEETING
The
following are some questions that you may have regarding the proposed merger and
the other matters being considered at the annual meeting and brief answers to
those questions. Safeco Corporation urges you to carefully read the
remainder of this proxy statement because the information in this section does
not provide all the information that might be important to you with respect to
the proposed merger and the other matters being considered at the annual
meeting. Additional important information is also contained in the
annexes to, and the documents incorporated by reference in, this proxy
statement. Unless stated otherwise or unless the context otherwise
requires, all references in this proxy statement to Safeco, we, our, ours and us
are to Safeco Corporation, a Washington corporation, all references to Liberty
Mutual are to Liberty Mutual Insurance Company, a Massachusetts stock insurance
company, all references to Merger Sub are to Big Apple Merger Corporation, a
Washington corporation and a wholly owned subsidiary of Liberty Mutual, and all
references to the merger agreement are to the Agreement and Plan of Merger,
dated as of April 23, 2008, by and among Liberty Mutual, Merger Sub and Safeco,
a copy of which is attached as Annex A to this proxy statement.
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Q:
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Why
was the 2008 annual meeting of Safeco shareholders postponed from May 7,
2008?
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A:
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In
light of Safeco's entering into a merger agreement, by and among Liberty
Mutual, Merger Sub and Safeco, the Safeco board of directors determined to
postpone the 2008 annual meeting of Safeco shareholders originally
scheduled to be held on May 7, 2008 to [●], 2008, which meeting, both as
of its original date and its rescheduled date, is referred to in this
proxy statement as the annual meeting.
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Q:
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What
matters will be considered at the annual meeting?
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A:
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At
the annual meeting, Safeco shareholders will be asked to approve the
merger agreement pursuant to which Merger Sub will merge with and into
Safeco, with Safeco continuing as the surviving corporation and a
subsidiary of Liberty Mutual. At the annual meeting, Safeco
shareholders will also be asked to consider and vote upon the election of
five directors, four to serve a term of three years and one to serve a
term of two years, the ratification of Ernst & Young LLP's appointment
as Safeco's independent registered public accounting firm, the adjournment
or postponement of the annual meeting, if necessary or appropriate, to
solicit additional proxies for the approval of the merger agreement and
the transaction of any other business that may properly come before the
annual meeting or at any adjournment or postponement of the annual
meeting. Each of the proposals is independent, and is not
contingent on approval by Safeco shareholders of any of the other
proposals.
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If
the merger is completed, the Safeco board of directors following the
completion of the merger will be composed of the directors of Merger Sub
at the effective time of the merger and all directors of Safeco
immediately prior to the completion of the merger will cease to be Safeco
directors as of the time of the completion of the
merger.
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Q:
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Why
am I receiving these materials?
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A:
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You
are a Safeco shareholder and as such, the Safeco board of directors wants
you to vote at our [●], 2008
annual meeting.
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In
order to complete the merger, Safeco shareholders must approve the merger
agreement. The Safeco board of directors has unanimously
determined that the merger agreement and the merger are advisable and in
the best interests of Safeco and its shareholders, and has unanimously
adopted the merger agreement and approved the transactions contemplated by
the merger agreement. The Safeco board of directors
unanimously recommends that Safeco shareholders vote "FOR" the proposal to
approve the merger agreement. See "The Merger –
Recommendation of the Safeco Board of Directors and Its Reasons for the
Merger."
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This
proxy statement contains important information about the proposed merger,
the merger agreement and the annual meeting, which you should read
carefully. The enclosed voting materials allow you to vote your
shares without attending the annual meeting.
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For
a more complete description of the annual meeting, see "The Annual
Meeting."
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Your
vote is very important. You are encouraged to vote as soon as
possible.
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Q:
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What
will Safeco shareholders receive in the merger?
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A:
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If
the proposed merger is completed, at the effective time of the merger,
Safeco shareholders will be entitled to receive $68.25 in cash, which is
referred to in this proxy statement as the per share amount, without
interest and less any applicable withholding taxes, for each share of
Safeco common stock they own.
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For
a more complete description of what Safeco shareholders will receive in
the merger, see "The Merger Agreement – Merger
Consideration."
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Q:
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Will
I still receive quarterly dividends between now and the completion of the
merger?
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A:
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Q:
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After
the merger is completed, how will I receive the cash for my
shares?
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A.
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Promptly
(and in any event no later than three business days) after the merger is
completed, the exchange agent appointed by Liberty Mutual will mail
written instructions on how to exchange your Safeco common stock
certificates for the per share amount of $68.25 in cash. You
will receive cash for your shares from the exchange agent after you comply
with these instructions.
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If
you hold your shares in book-entry form – that is, without a stock
certificate – unless you do not vote in favor of the merger and you
properly perfect your dissenters' rights under Washington law, the
exchange agent will automatically send you the per share amount of $68.25
in cash in exchange for the cancellation of your shares of Safeco common
stock after completion of the merger, provided that you comply with
applicable tax certification requirements.
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If
your shares of Safeco common stock are held in "street name" by your
broker, bank or other nominee, you will receive instructions from your
broker, bank or other nominee on how to surrender your "street name"
shares and receive cash for those shares.
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Q:
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Should
Safeco shareholders send in their Safeco common stock certificates
now?
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A:
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No. After
the merger is completed, you will receive written instructions from the
exchange agent on how to exchange your Safeco common stock certificates
for the per share amount of $68.25 in cash, without interest and less any
applicable withholding taxes.
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Please
do not send in your Safeco common stock certificates with your proxy
card.
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Q:
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What
vote is required to approve the merger agreement?
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A:
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Under
the Washington Business Corporation Act, which is referred to in this
proxy statement as the WBCA, in order for the merger agreement to be
approved, shares of Safeco common stock representing at least two-thirds
of the votes entitled to be cast by all Safeco shareholders at the annual
meeting must vote "FOR"
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the
approval of the merger agreement, provided that a quorum is
present. As of the close of business on [●], 2008, the record
date for the annual meeting, there were [●] shares of Safeco common stock
issued and outstanding and such shares were held by approximately [●]
holders of record.
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Q:
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What
is the vote required to pass the other proposals?
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A:
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In
accordance with our Bylaws and the WBCA, in order for each director
candidate to be elected, such director candidate must receive more votes
"FOR" than "WITHHELD," provided that a quorum is present. For
the ratification of Ernst & Young LLP as Safeco's independent
registered public accounting firm for 2008 to be approved, the WBCA
requires that the proposal must receive more votes "FOR" than "AGAINST,"
provided that a quorum is present. For the proposal to adjourn
or postpone the annual meeting, if necessary or appropriate, to solicit
additional proxies to approve the merger agreement to be approved, the
WBCA requires that the proposal must receive more votes "FOR" than
"AGAINST," provided that a quorum is present.
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Q:
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What
quorum is required for the annual meeting?
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A:
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Under
the WBCA, no proposal may be acted on at the annual meeting unless a
quorum is present. In order for a quorum to exist, at least a
majority of the votes entitled to be cast at the annual meeting must be
present in person or by proxy.
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Q:
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What
governmental and regulatory approvals are required?
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A:
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State
insurance laws generally require that, prior to the acquisition of an
insurance company, the acquiring party must obtain approval from the
insurance commissioner of the insurance company's state of domicile and
any state in which an insurance company is commercially
domiciled. Accordingly, Liberty Mutual has made the necessary
applications with the insurance commissioners of California, Illinois,
Indiana, Missouri, Oregon, Texas and Washington, the states of domicile or
commercial domicile of Safeco's insurance company
subsidiaries.
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In
addition, the insurance laws and regulations of certain states in the
United States require that, prior to an acquisition of an insurance
company doing business in that state or licensed by that state (or the
acquisition of its holding company), a notice filing disclosing certain
market share data in the applicable jurisdiction must be made and an
applicable waiting period must expire or be terminated. These
notice filings have been made in the applicable
jurisdictions.
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The
merger is also subject to U.S. antitrust laws. Safeco filed the
required notification under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, which is referred to in this proxy statement as
the HSR Act, on April 30, 2008 with both the Antitrust Division of the
Department of Justice and the Federal Trade Commission, which are referred
to in this proxy statement as the Antitrust Division and the FTC,
respectively. Liberty Mutual separately filed the required
notification under the HSR Act on May 1, 2008 with both the Antitrust
Division and the FTC. Both Safeco and Liberty Mutual have
requested early termination of the statutory waiting period under the HSR
Act. The statutory waiting period under the HSR Act is
scheduled to expire at 11:59 p.m. on June 2, 2008. The
Antitrust Division or the FTC, as well as any state attorney general or
private person, may challenge the merger at any time before or after its
completion.
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For
more information on the governmental and regulatory approvals required for
completion of the merger, see "The Merger – Regulatory
Matters."
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Q:
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When
do Safeco and Liberty Mutual expect the merger to be
completed?
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A:
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Safeco
and Liberty Mutual are working to complete the merger as expeditiously as
practicable. However, they cannot predict the exact timing of
the completion of the merger because it is subject to governmental and
regulatory approvals and other conditions. See "The Merger
Agreement – Conditions to Completion of the
Merger."
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Q:
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When
and where will the annual meeting be held?
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A:
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The
annual meeting will be held on [●], 2008, at [●], Pacific Time, at the
Safeco Center, Magnolia Room, 1st Floor, 1191 Second Avenue, Seattle,
Washington 98101.
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Q:
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Who
is entitled to vote at the annual meeting?
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A:
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Only
holders of Safeco common stock as of the close of business on [●], 2008,
are entitled to vote the shares of Safeco common stock that they held at
that time at the annual meeting, or at any
adjournment or postponement of the annual meeting.
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Q:
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If
my shares are held in "street name" by my broker, bank or other nominee,
will my broker, bank or nominee vote my shares for me?
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A:
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Your
broker, bank or other nominee may have discretionary authority to vote
your shares for you on certain proposals that are considered routine
matters. The proposal for the approval of the merger agreement
is not a routine matter and your broker, bank or other nominee will only
vote your shares on the proposal to approve the merger agreement if you
provide specific instructions on how to vote. The election of
directors and the ratification of Ernst & Young LLP's appointment as
Safeco's independent registered public accounting firm are considered
routine matters and your broker, bank or other nominee may vote for these
matters, unless you direct otherwise. You should follow the
directions provided by your broker, bank or other nominee regarding how to
instruct your broker, bank or other nominee to vote your
shares. Without instructions, your shares will not be voted for
the merger agreement and will effectively be votes against the merger
agreement.
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Q:
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What
if I am a Safeco Stock Ownership Fund participant?
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A:
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If
you participate in the Safeco 401(k) Plan's Safeco Stock Ownership Fund,
you may instruct Wells Fargo, the plan administrator and named fiduciary
for voting purposes, how to vote the shares allocated to your
account. Unless you are a current employee of Safeco, you have
access to voting instructions from BNY Mellon Shareowner Services,
Safeco's tabulator of proxy votes. The voting instructions will
show the number of units held in your plan account and will permit you to
give instructions for voting the allocable shares those units
represent. Please follow the instructions provided in the
Notice of Annual Meeting of Shareholders. Current employees
will receive an e-mail from BNY Mellon Shareowner Services with
instructions for voting through the Internet or by
telephone. As explained in your voting instructions, your
Internet, telephone or written instructions will serve to inform Wells
Fargo how to cast your vote. If you do not give timely voting
instructions, Wells Fargo will vote your shares in the same proportion as
the other Safeco Stock Ownership Fund shares were voted. For
example, suppose 70% of the shares in the fund that voted were voted in
favor of a proposal, and 30% of the shares were voted against
it. If you held 100 shares through the fund and didn't vote,
your shares would be voted 70 in favor and 30 against the
proposal.
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Q:
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What
happens if I sell my shares of Safeco common stock before the annual
meeting?
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A:
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The
record date for the annual meeting is earlier than the date of the
annual meeting and the
date that the merger is expected to be completed. If you
transfer your shares of Safeco common stock after the record date but
before the annual meeting, you will retain your right to vote at the
annual meeting, but will transfer the right to receive the per share
amount of $68.25 in cash, without interest and less any applicable
withholding taxes, to the person to whom you transfer your shares, so long
as such person owns the shares of Safeco common stock when the merger is
completed. In
such case, your vote is still very important and you are encouraged to
vote.
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Q:
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How
will I know the merger has occurred?
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A:
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If
the merger occurs, Safeco and/or Liberty Mutual will promptly make a
public announcement of this fact.
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Q:
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What
should Safeco shareholders do now in order to vote on the matters being
considered at the annual meeting?
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A:
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If
you are a holder of Safeco common stock, you may submit your vote on any
or all of the matters being considered at the annual meeting in person or
by proxy. You may vote by proxy in any of the following
ways:
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·
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Internet.
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You
may vote by proxy through the Internet by going to the website listed on
your proxy card. Once at the website, follow the instructions
to vote your proxy.
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·
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Telephone.
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You
may vote by proxy using the toll-free number listed on your proxy
card. Voice prompts will help you and confirm that your voting
instructions have been followed.
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·
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Mail.
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You
may vote by proxy by marking, signing, dating and returning your proxy
card in the pre-addressed postage-paid envelope
provided.
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Please
refer to your proxy card or the information forwarded by your bank, broker
or other nominee to see which options are available to
you.
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All
shares entitled to vote and represented by properly completed proxies
received prior to the annual meeting, and not revoked, will be voted at
the annual meeting as instructed on the proxies. If you do not
indicate how your shares should be voted on a matter, the shares
represented by your properly completed proxy will be voted as the Safeco
board of directors recommends and therefore "FOR" the approval of the
merger agreement and the other proposals to be considered at the annual
meeting.
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Q:
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May
I vote in person?
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A:
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Yes. If
your shares of Safeco common stock are not held in "street name" by a
broker, bank or other nominee, you may attend the annual meeting of Safeco
shareholders, and vote your shares in person, rather than by marking,
signing, dating and returning your proxy card or submitting your proxy
through the Internet or by telephone. If you wish to vote in
person and your shares are held by a broker, bank or other nominee, you
need to obtain a proxy from the broker, bank or other nominee authorizing
you to vote your shares held in the broker's, bank's or other nominee's
name.
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Q:
|
Can
I change my vote after I have delivered my proxy?
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A
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Yes. If
you are the record holder of your Safeco shares, you can revoke your proxy
or change your vote in one of these ways:
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·
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if
you voted through the Internet or by telephone, by casting a new vote by
the method you used previously no less than 48 hours before the annual
meeting;
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·
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if
you voted by delivering your proxy card, by delivering another proxy card
dated after your prior proxy card no less than 48 hours before the annual
meeting;
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·
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regardless
of the method you used to cast your previous vote, by attending the annual
meeting and voting in person; and
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·
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regardless
of the method you used to cast your previous vote, by delivering a written
notice of revocation of your vote no less than 48 hours before the annual
meeting to the Secretary of Safeco at Safeco Plaza, 1001 Fourth Avenue,
Seattle, Washington 98154.
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If
your shares are held in "street name," you should contact your broker,
bank or other nominee directly to change your
vote.
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Q:
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What
should I do if I receive more than one set of voting materials for the
annual meeting?
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A:
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You
may receive more than one set of voting materials for the annual meeting, including
multiple copies of this proxy statement and multiple proxy cards or voting
instruction cards. For example, if you hold your shares in more
than one brokerage account, you will receive a separate voting instruction
card for each brokerage account in which you hold shares. If
you are a holder of record and your shares are registered in more than one
name, you will receive more than one proxy card. Please mark,
sign, date and return each proxy card and voting instruction card that you
receive.
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Q:
|
Who
can help answer my questions?
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A:
|
If
you have any questions about the merger or how to submit your proxy, or if
you need additional copies of this proxy statement, the enclosed proxy
card or voting instructions, you should contact Georgeson Inc., which is
referred to in this proxy statement as Georgeson, at the address or
telephone number below:
|
199
Water Street, 26th Floor
Banks
and Brokers Call (212) 440-9800
All
Others Call Toll Free (866) 391-6923
SUMMARY
TERM SHEET
This
summary term sheet highlights material information regarding the merger
contained in this proxy statement, but does not contain all of the information
in this proxy statement that is important to your voting decision with respect
to the approval of the merger agreement or the other matters being considered at
the annual meeting. To understand the merger agreement fully and for
a more complete description of the terms of the merger, you should carefully
read this entire proxy statement, including the attached annexes. In
addition, Safeco encourages you to read the information incorporated by
reference into this proxy statement, which includes important business and
financial information about Safeco that has been filed with the Securities and
Exchange Commission, which is referred to in this proxy statement as the
SEC. See "Where You Can Find More Information."
Page
references are included in parentheses to direct you to more complete
descriptions of the topics presented in this summary term sheet. The merger
agreement is attached as Annex A to this proxy statement. You are
encouraged to read the merger agreement, because it is the legal document that
contains the terms and conditions of the merger.
The Companies (page 15)
Safeco. Safeco has
been in business serving the insurance needs of customers since
1923. Safeco is an insurance holding company incorporated in the
state of Washington. Safeco is licensed to provide property and
casualty insurance along with related services to individuals and small- to
mid-size businesses in all 50 states through our insurance
subsidiaries. Safeco also sells surety bonds to contractors and
businesses. Safeco's revenues are generated from the premiums earned
on the insurance policies Safeco writes and the income earned from Safeco's
investment of premium dollars. Safeco's principal executive offices
are located at Safeco Plaza, 1001 Fourth Avenue, Seattle,
Washington 98154, and its telephone number is
206-545-5000.
Liberty Mutual Insurance
Company. Liberty Mutual, a Massachusetts stock insurance
company, was formed in 1912. Liberty Mutual is a member of the
Liberty Mutual Group of Companies, which is referred to in this proxy statement
as the Liberty Mutual Group. The Liberty Mutual Group, headed by
Liberty Mutual Holding Company Inc., which is referred to in this proxy
statement as Liberty Mutual Holding, constitutes a diversified global group of
insurance companies and the sixth largest property and casualty insurance group
in the United States based on 2007 direct written premium. Liberty
Mutual's executive offices are located at 175 Berkeley Street, Boston,
Massachusetts 02117, and its telephone number is (617)
357-9500.
Big Apple Merger
Corporation. Big Apple Merger Corporation is a Washington
corporation that was formed solely for the purpose of entering into the merger
agreement and consummating the transactions contemplated by the merger
agreement. It has not conducted any activities to date other than
activities incidental to its formation and in connection with the transactions
contemplated by the merger agreement. Big Apple Merger Corporation's
executive offices are located at c/o Liberty Mutual, 175 Berkeley Street,
Boston, Massachusetts 02117, and its telephone number is (617)
357-9500.
Annual
Meeting of Safeco Shareholders (page 11)
Date, Time and
Place. The annual meeting of Safeco shareholders will be held
on [●], 2008, at [●], Pacific Time, at the Safeco Center, Magnolia Room, 1st
Floor, 1191 Second Avenue, Seattle, Washington 98101 for the
following purposes:
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·
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Consideration
and approval of the merger
agreement;
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·
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Election
of five directors, four to serve a three year term and one to serve a two
year term on the Safeco board of directors. Safeco's nominees
for these positions are, respectively, Joseph W. Brown, Kerry Killinger,
Gary F. Locke, Charles R. Rinehart and Gerardo I. Lopez, each of whom is
currently a Safeco director;
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·
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Ratification
of the appointment of Ernst & Young LLP as Safeco's independent
registered public accounting firm for
2008;
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·
|
Adjournment
or postponement of the annual meeting, if necessary or appropriate, to
solicit additional proxies for the approval of the merger agreement;
and
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·
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Transaction
of any other business that may properly come before the annual meeting or
at any adjournment or postponement of the annual
meeting.
|
Record Date and Shares Entitled to
Vote. Only holders of record of shares of Safeco common stock
as of the close of business on the record date, [●], 2008, are entitled to vote
at the annual meeting. Each record holder will have one vote at the
annual meeting for each share of Safeco common stock as of the close of business
on the record date. On the record date, [●] shares of Safeco common
stock were issued and outstanding and such shares were held by approximately [●]
holders of record.
Quorum
Requirement. No proposal may be acted on at the annual meeting
unless a quorum is present. In order for a quorum to exist, at least
a majority of the votes entitled to be cast at the annual meeting must be
present in person or by proxy.
Treatment of
Abstentions. Affirmative abstentions will be treated as
present at the annual meeting for purposes of determining whether a quorum is
present, but will not be counted as votes cast for purposes of determining the
approval of any matter submitted to Safeco's common shareholders for a vote at
the annual meeting.
Treatment of Broker
Non-Votes. Brokers, banks or other nominees who hold shares of
Safeco common stock in "street name" for customers who are the beneficial owners
of such shares may give a proxy to vote those customers' shares on routine
matters in the absence of specific instructions from those
customers. The election of directors and the ratification of Ernst
and Young LLP as Safeco's independent registered public accounting firm are
considered routine matters. Brokers, banks or other nominees may not
give a proxy to vote those customers' shares on the proposals to approve the
merger agreement or adjourn or postpone the special meeting to solicit
additional proxies approving the merger agreement, which are not considered to
be routine matters, in the absence of specific instructions from those
customers. When brokers, banks or other nominees vote a customers'
shares on some but not all of the proposals, the missing votes are referred to
in this proxy statement as broker non-votes and will be treated as present at
the meeting for purposes of determining whether a quorum is
present.
Previously Submitted
Proxies. If you previously submitted a proxy for the annual
meeting of Safeco shareholders originally scheduled to be held on May 7, 2008,
Safeco will not vote such proxy at the annual meeting of Safeco shareholders, as
rescheduled to be held on [●], 2008. Therefore, if you previously
submitted a proxy for the annual meeting to be held on May 7, 2008, and you
desire to vote your shares of Safeco common stock with respect to any or all of
the proposals to be considered at the [●], 2008 annual meeting, we urge you to
vote your shares again by marking, signing, dating and returning the attached
proxy card or through the Internet or by telephone.
Proxies without
Instructions. Signed proxy cards returned by shareholders of
record that do not contain voting instructions will be voted:
· "FOR"
the proposal to approve the merger agreement;
· "FOR"
the proposal to elect the directors named in the director proposal;
· "FOR"
the proposal to ratify the selection of Ernst & Young LLP as Safeco's
independent registered public accounting firm for 2008; and
· "FOR"
the proposal to adjourn or postpone the annual meeting, if necessary or
appropriate, to solicit additional proxies for the approval of the merger
agreement.
Voting by Safeco's Directors and
Executive Officers. On the record date for the annual meeting,
the directors and executive officers of Safeco and their controlled affiliates
beneficially owned and were entitled to vote [●] outstanding shares of Safeco
common stock, representing [●]% of the shares of Safeco common stock issued and
outstanding on that date. To Safeco's knowledge, these directors and
executive officers intend to vote their shares in favor of the proposal to
approve the merger agreement.
Purposes
and Effects of the Merger; Consideration (page 29)
The principal purpose of the merger is
to enable Liberty Mutual to acquire all of the outstanding shares of Safeco
common stock and to provide Safeco shareholders with the opportunity to receive
a cash payment for their shares at a premium over the recent market prices at
which Safeco common stock traded before the public announcement of the merger
agreement. If the merger is completed, each share of Safeco common
stock will be converted into the right to receive $68.25 in cash, without
interest and less any applicable withholding taxes.
Following the completion of the merger,
Safeco will become a subsidiary of Liberty Mutual and Safeco common stock will
be delisted from The New York Stock Exchange, which is referred to in this proxy
statement as the NYSE, will not be publicly traded and will be deregistered
under the Securities Exchange Act of 1934, as amended, which is referred to in
this proxy statement as the Exchange Act.
Effects
of the Merger Not Being Completed (page 30)
If
the merger is not completed for any reason, Safeco shareholders and holders of
stock options and restricted stock rights will not receive any payment from
Liberty Mutual for their shares, stock options or restricted stock
rights. Instead, Safeco will remain a public company and shares of
Safeco common stock will continue to be listed on the NYSE. If the
merger is not completed, Safeco expects to continue to conduct its business in a
manner similar to the manner in which it is presently conducted. In
such event, the value of shares of Safeco common stock would continue to be
subject to current risks and opportunities, including the various factors
described in Safeco's past filings with the SEC, such as the condition of the
insurance industry and prevailing economic and market conditions.
What
You Will Receive in the Merger (page 56)
If
the merger is completed, each outstanding share of Safeco common stock (other
than shares owned by Safeco and its subsidiaries and Liberty Mutual and its
subsidiaries (other than shares held in investment portfolios)) will be
converted into the right to receive $68.25 in cash, without interest and less
any applicable withholding taxes. You will receive the per share
amount in respect of your shares of Safeco common stock after you remit your
stock certificate(s) evidencing your shares of Safeco common stock in accordance
with the instructions contained in a letter of transmittal to be sent to you
promptly (and in any event no later than three business days) after completion
of the merger, together with a properly completed and signed letter of
transmittal and any other documentation required to be completed pursuant to the
written instructions.
If
you hold your shares in book-entry form – that is, without a stock certificate –
unless you do not vote in favor of the merger and you properly perfect your
dissenters' rights under the WBCA, the exchange agent will automatically send
you the per share amount of $68.25 in cash in exchange for the cancellation of
your shares of Safeco common stock after completion of the merger, provided that
you comply with applicable tax certification requirements.
If
your shares of Safeco common stock are held in "street name" by your broker,
bank or other nominee, you will receive instructions from your broker, bank or
other nominee as to how to surrender your "street name" shares and receive cash
for those shares.
Safeco
Stock Options and Restricted Stock Rights (page 56)
Each
outstanding stock option to purchase shares of Safeco common stock, whether
vested or unvested, will be converted into the right to receive an amount in
cash per share subject to the stock option equal to the excess,
if
any, of the per share amount of $68.25 over the exercise price per share of such
stock option, without interest and less any applicable withholding
taxes.
Each
outstanding restricted stock right, whether vested or unvested, will be
converted into the right to receive an amount of cash per right equal to the per
share amount of $68.25, without interest and less any applicable withholding
taxes.
Safeco
Agency Stock Purchase Plan (page 46)
Safeco, pursuant to the terms of the
merger agreement, will terminate the Safeco Agency Stock Purchase Plan prior to
completion of the merger.
Material U.S. Federal Income Tax
Consequences (page
51)
The
receipt of cash by a U.S. holder (with the meaning under "The Merger—Material
U.S. Federal Income Tax Consequences") pursuant to the merger will generally be
a taxable transaction for U.S. federal income tax purposes and such U.S. holder
generally will recognize capital gain or loss equal to the difference between
the cash that the U.S. holder is entitled to receive pursuant to the merger and
the U.S. holder's adjusted tax basis in the Safeco common stock
surrendered. A non-U.S. holder (with the meaning under "The
Merger—Material U.S. Federal Income Tax Consequences") generally will not be
subject to U.S. federal income tax on gain realized on the receipt of cash
pursuant to the merger provided that (1) the gain is not effectively connected
with the conduct of a trade or business by such non-U.S. holder in the United
States and (2) in the case of a non-U.S. holder that is an individual, such
non-U.S. holder is not present in the United States for 183 days or more in the
taxable year of the disposition.
Because
individual circumstances may differ, you should consult your own tax advisor to
determine the particular tax effects to you of the completion of the
merger.
Recommendation
of the Safeco Board of Directors (page 30)
The
Safeco board of directors has unanimously determined that the merger agreement
and the merger are advisable and in the best interests of Safeco and its
shareholders, and has unanimously adopted the merger agreement and approved the
transactions contemplated by the merger agreement. The Safeco board of directors
unanimously recommends that Safeco shareholders vote "FOR" the proposal to
approve the merger agreement.
Opinion
of Financial Advisor (page 33)
Morgan
Stanley & Co. Incorporated, which is referred to in this proxy statement as
Morgan Stanley, acted as Safeco's financial advisor in connection with the
merger. On April 22, 2008, Morgan Stanley rendered its oral opinion,
subsequently confirmed in writing, to the Safeco board of directors that as of
April 22, 2008, and, based upon and subject to the assumptions, qualifications
and limitations set forth in the written opinion, the $68.25 per share in cash
to be received by the holders of shares of Safeco common stock pursuant to the
merger agreement was fair, from a financial point of view, to such
holders.
The
full text of Morgan Stanley's written fairness opinion, dated April 22, 2008, is
attached as Annex B to this proxy statement. You should read the
Morgan Stanley opinion for a discussion of the assumptions made, procedures
followed, factors considered and limitations upon the review undertaken by
Morgan Stanley in rendering its opinion. Morgan Stanley's opinion is
directed to the Safeco Board of Directors and addresses only the fairness from a
financial point of view of the consideration received by holders of Safeco
common stock pursuant to the merger agreement to such holders as of the date of
the opinion. It does not address any other aspects of the merger and
does not constitute a recommendation to any Safeco shareholder as to how to vote
at the annual meeting.
Merger
Agreement (page 55)
A
copy of the merger agreement is attached to this proxy statement as Annex A and
a summary of the merger agreement is provided beginning on page A-1 of this
proxy statement. You are encouraged to carefully read the merger
agreement as it is the legal document that contains the terms and conditions of
the merger.
No
Solicitation (page 65)
The
merger agreement contains restrictions on Safeco's ability to solicit or engage
in discussions or negotiations with a third party regarding an acquisition
proposal as described in "The Merger Agreement – No Solicitation by
Safeco." Notwithstanding the restrictions, under certain limited
circumstances, Safeco may respond to and negotiate an unsolicited acquisition
proposal or terminate the merger agreement and enter into an acquisition
agreement with respect to a superior proposal, subject to paying Liberty Mutual
a termination fee of $182,500,000.
Conditions
to Completion of the Merger (page 71)
The respective obligations of each of
the parties to complete the merger are subject to the satisfaction or, to the
extent permitted by law, waiver, of the following conditions:
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·
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approval
of the merger agreement by Safeco
shareholders;
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·
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expiration
or termination of the applicable waiting period under the HSR
Act;
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·
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certain
specified approvals or filings under all applicable state laws regulating
the business of insurance shall have been obtained or filed without any
conditions or restrictions that would, individually or in the aggregate,
reasonably be likely to have a material adverse effect on either Safeco or
Liberty Mutual, measured at the level of what would be a material adverse
effect on Safeco, which is referred to in this proxy statement as a
Regulatory Material Adverse Effect;
and
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·
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the
absence of any law, injunction or order that makes the completion of the
merger illegal or otherwise prohibits the completion of the
merger.
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The
obligations of Liberty Mutual and Merger Sub to complete the merger are also
subject to the satisfaction or, to the extent permitted by law, waiver, of the
following conditions:
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·
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Safeco's
representation that there has been no material adverse effect on Safeco
since December 31, 2007 shall be true and correct as of the date of the
merger agreement and as of the closing date of the merger as though made
on and as of the closing date;
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·
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all
of Safeco's other representations and warranties, disregarding all
qualifications or limitations therein relating to materiality or material
adverse effect, shall be true and correct (both when made and at and as of
the closing date of the merger, provided that representations and
warranties that speak as of a specified date will be determined as of that
date), except where the failure to be so true and correct would not,
individually or in the aggregate, reasonably be expected to have a
material adverse effect on Safeco;
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·
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Safeco
shall have performed in all material respects all of its obligations
required to be performed under the merger agreement, at or prior to the
closing of the merger; and
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·
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the
absence of any material suit, action or proceeding by any U.S.
governmental entity of competent jurisdiction challenging the acquisition
by Liberty Mutual or Merger Sub of shares of Safeco common stock, seeking
to restrain or prohibit the completion of the merger, or seeking to
prohibit or limit the ownership or operation by Safeco or any of its
subsidiaries or by Liberty Mutual or any of its subsidiaries of any
material portion of any business or assets of Safeco and its subsidiaries,
taken as a whole, or Liberty Mutual and its subsidiaries, taken as a
whole, where such
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prohibition
or limitation would, individually or in the aggregate, reasonably be
likely to have a Regulatory Material Adverse
Effect.
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The
obligation of Safeco to complete the merger is also subject to the satisfaction
or, to the extent permitted by law, waiver, of the following
conditions:
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·
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all
of Liberty Mutual's and Merger Sub's representations and warranties,
disregarding all qualifications or limitations therein relating to
materiality or material adverse effect, shall be true and correct (both
when made and at and as of the closing date of the merger, provided that
representations and warranties that speak as of a specified date will be
determined as of that date), except where the failure to be so true and
correct would not, individually or in the aggregate, reasonably be
expected to have a material adverse effect on Liberty Mutual;
and
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·
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each
of Liberty Mutual and Merger Sub shall have performed in all material
respects all of its obligations required to be performed under the merger
agreement, at or prior to the closing of the
merger.
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Termination
of the Merger Agreement (page 72)
The merger agreement may be terminated
under certain circumstances (with any termination by Liberty Mutual also being
an effective termination by Merger Sub), including the following:
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·
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by
the mutual written consent of Safeco and Liberty
Mutual;
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·
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by
either Safeco or Liberty Mutual,
if:
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o
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any
governmental entity in the U.S. issues a final, non-appealable order,
injunction, or judgment or takes any other final, non-appealable action
restraining, enjoining or otherwise prohibiting the merger;
or
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o
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the
approval of the Safeco shareholders is not obtained at the annual meeting
or any adjournment or postponement of such
meeting.
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o
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Safeco
has breached or failed to perform any of its representations, warranties,
covenants or agreements contained in the merger agreement, which breach
cannot be cured or has not been cured within 45 days following written
notice and such breach would result in a failure of any of the closing
conditions for the benefit of Liberty Mutual and Merger Sub;
or
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o
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prior
to Safeco shareholders voting on the proposal to approve the merger
agreement at the annual meeting, (1) the Safeco board of directors effects
a Safeco recommendation withdrawal (as described under "The Merger
Agreement – Recommendation of the Safeco Board of Directors"), or (2)
Safeco materially breaches its obligation to hold a meeting of Safeco
shareholders to vote on the proposal to approve the merger agreement, its
no solicitation obligations under the merger agreement, its obligations
relating to the Safeco board recommendation under the merger agreement (as
described under "The Merger Agreement – Recommendation of the Safeco Board
of Directors") or its notice and other obligations to Liberty Mutual in
connection with a Safeco recommendation withdrawal or Safeco's termination
of the merger agreement to accept a superior
proposal.
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o
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if
Liberty Mutual or Merger Sub has breached or failed to perform any of its
representations, warranties, covenants or agreements contained in the
merger agreement, which breach cannot be cured or has not been cured
within 45 days following written notice and such breach would result in a
failure of any of the closing conditions for the benefit of Safeco;
or
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o
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prior
to the approval of the merger agreement by the Safeco shareholders, in
order to enter into an agreement with respect to a third party acquisition
proposal that the Safeco board of directors determines in good faith
(after consultation with its financial advisor and outside legal counsel)
constitutes a superior proposal (as described under "The Merger Agreement
– No Solicitation by Safeco"), provided that in order to terminate on this
basis (1) Safeco must notify Liberty Mutual in writing of its intention to
terminate and the terms and conditions of the acquisition proposal no less
than four business days before such termination, and must, if requested by
Liberty Mutual, negotiate in good faith with Liberty Mutual regarding any
amendment to the merger agreement proposed in writing by Liberty Mutual
during such four business day period and (2) the Safeco board of directors
must take into account any changes to the terms and conditions of the
merger agreement proposed by Liberty Mutual in response during the four
business day period.
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Termination
Fee (page 74)
Safeco has agreed to pay Liberty Mutual
a termination fee of $182,500,000 if the merger agreement is terminated under
the following circumstances, such payment to be made prior to and as a condition
to such termination in the case of the third bullet below, on the second
business day following termination in the case of the fifth bullet below, or
upon entry into a definitive agreement with respect to or completion of a third
party acquisition proposal in the case of the first, second and fourth bullets
below:
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·
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if
Liberty Mutual terminates the merger agreement because the merger is not
completed by November 15, 2008 (or if such date is extended by either
party, December 31, 2008), and (1) at any time after April 23, 2008 an
acquisition proposal is publicly proposed or announced and is not
irrevocably withdrawn prior to such termination; and (2) within twelve
months after the date of such termination, Safeco enters into a definitive
agreement with any third party with respect to, or completes, an
acquisition proposal with respect to more than 50% of Safeco's equity
securities or more than 50% of Safeco's and its subsidiaries' net income
or total assets;
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·
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if
either Safeco or Liberty Mutual terminates the merger agreement because
Safeco shareholders failed to approve the merger agreement at the annual
meeting or any postponement or adjournment thereof and (1) at any time
after April 23, 2008 an acquisition proposal is publicly proposed or
announced and is not irrevocably withdrawn as of the time of such meeting,
and (2) within twelve months after the date of such termination, Safeco
enters into a definitive agreement with any third party with respect to,
or completes, an acquisition proposal with respect to more than 50% of
Safeco's equity securities or more than 50% of Safeco's and its
subsidiaries' net income or total
assets;
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·
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if
Safeco terminates the merger agreement to accept an acquisition proposal
that the Safeco board of directors determines in good faith (after
consultation with its financial advisor and outside legal counsel),
constitutes a superior proposal;
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·
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if
Liberty Mutual terminates the merger agreement because of a Safeco breach
or failure to perform any of its representations, warranties, covenants or
agreements contained in the merger agreement and (1) at any time after
April 23, 2008 an acquisition proposal is publicly proposed or announced
and is not irrevocably withdrawn prior to the Safeco breach or failure to
perform giving rise to such termination, and (2) within twelve months
after the date of such termination, Safeco enters into a definitive
agreement with any third party with respect to, or completes,
an
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acquisition
proposal with respect to more than 50% of Safeco's equity securities or
more than 50% of Safeco's and its subsidiaries' net income or total
assets; or
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·
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if
Liberty Mutual terminates the merger agreement because the Safeco board of
directors has (1) withdrawn, or modified or qualified in a manner adverse
to Liberty Mutual, its recommendation that Safeco shareholders approve the
merger agreement, (2) failed to include its recommendation that Safeco
shareholders approve the merger agreement in this proxy statement or (3)
approved, adopted, recommended, or publicly proposed to approve, adopt or
recommend any acquisition proposal.
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Interests
of Safeco's Directors and Executive Officers in the Merger (page
41)
When
considering the recommendation by the Safeco board of directors that the Safeco
shareholders approve the merger agreement, you should be aware that a number of
Safeco's directors and executive officers may have interests in the merger that
are different from, or in addition to, the interests of other Safeco
shareholders. The Safeco board of directors was aware of these
interests and considered them, among other matters, in unanimously adopting the
merger agreement and approving the transactions contemplated by the merger
agreement.
Such
interests relate to, or arise from, among other things, (1) the fact that each
of Safeco's executive officers is party to a change in control severance
agreement with Safeco that provides for certain benefits and payments upon
termination of employment following a change in control of Safeco, (2) the fact
that unvested stock options and restricted stock rights will vest and be
converted into the right to receive an amount in cash pursuant to the terms of
the merger agreement, (3) the fact that, with respect to pre-merger acts,
omissions, facts or events, the surviving corporation will continue to (a)
provide indemnification and advancement of expenses of former or present
directors and officers and (b) for a period of six years after the effective
time of the merger, maintain directors' and officers' liability insurance and
fiduciary liability insurance having terms and conditions at least as favorable
as those presently provided or maintained by Safeco, subject to certain
limitations and (4) the fact that, during the two year period following the
merger, Liberty Mutual has agreed to provide employees of Safeco who continue
their employment with the surviving corporation after the effective time of the
merger with compensation and benefits that are not less favorable than those
currently provided by Safeco.
All
these additional interests are described in this proxy statement, to the extent
material, and, except as described in this proxy statement, such persons have,
to the knowledge of Safeco, no material interest in the merger apart from those
of Safeco shareholders generally. See "The Merger – Interests of
Safeco's Directors and Executive Officers in the Merger."
Merger
Financing (page 51)
Liberty Mutual has represented in the
merger agreement that it has, and will have available at and at all times prior
to the completion of the merger, (1) cash, marketable securities, available
lines of credit or (2) other sources of immediately available funds to pay the
merger consideration to Safeco shareholders and to pay all other amounts payable
by Liberty Mutual, Merger Sub or the surviving corporation in connection with
the transactions contemplated by the merger agreement. The receipt of
financing by Liberty Mutual is not a condition to the obligations of either
party to complete the merger under the terms of the merger
agreement.
Dissenters'
Rights (page 47)
Safeco
shareholders who do not vote in favor of approval of the merger agreement and
who otherwise comply with the procedures for asserting dissenters' rights under
the applicable statutory provisions of the WBCA, summarized elsewhere in this
proxy statement, may demand payment of the "fair value" of their shares in
connection with the merger. See "The Merger — Dissenters'
Rights."
Market
Price Data and Dividend Information (page 10)
Shares of Safeco common stock are
listed on the NYSE. For a description of the market price of Safeco
common stock and Safeco's payment of dividends, please see "Market Price Data
and Dividend Information."
FORWARD-LOOKING
INFORMATION
This
proxy statement contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, as amended, with respect to
the merger, Safeco's anticipated financial performance, business prospects and
plans, and similar matters. Forward-looking statements are typically
identified by words or phrases such as "will," "anticipate," "estimate,"
"expect," "project," "intend," "plan," "believe," "target," "forecast," and
other words and terms of similar meaning.
Safeco
cautions that forward-looking statements are subject to numerous assumptions,
risks and uncertainties, which change over time. Forward-looking
statements speak only as of the date they are made, and, subject to applicable
law, Safeco assumes no duty to and does not undertake to update forward-looking
statements. Actual results could differ materially from those
anticipated in forward-looking statements and future results could differ
materially from historical performance. In addition to factors
previously disclosed in Safeco's documents filed with or furnished to the SEC,
and those identified elsewhere in this proxy statement, the following factors,
among others, could cause actual results to differ materially from
forward-looking statements or historical performance: the introduction,
withdrawal, success and timing of business initiatives and strategies; the
approval of publicly filed rate adjustments; changes in political, economic or
industry conditions, the interest rate environment or financial and capital
markets, which could result in changes in demand for products or services or in
the value of our investment portfolio; the impact of increased competition; the
impact of capital improvement projects; the unfavorable resolution of legal
proceedings; the impact, extent and timing of technological changes and the
adequacy of intellectual property protection; the impact of legislative and
regulatory actions and reforms and regulatory, supervisory or enforcement
actions of governmental agencies relating to Safeco and its business and
operations; terrorist activities and international hostilities, which may
adversely affect the general economy, financial and capital markets, specific
industries and Safeco and its business and operations; the occurrence,
geographic areas impacted and severity of earthquakes, hurricanes, tornadoes or
other natural disasters; the ability to attract and retain highly talented
professionals; the Safeco shareholders may not approve the merger agreement at
the annual meeting; Liberty Mutual and Safeco may be unable to obtain
governmental and regulatory approvals required for the merger, or required
governmental and regulatory approvals may delay the merger or result in the
imposition of conditions that could cause the parties to abandon the merger;
Liberty Mutual and Safeco may be unable to complete the merger because, among
other reasons, conditions to the closing of the merger may not be satisfied or
waived; and the outcome of any legal proceedings to the extent initiated against
Safeco and others following the announcement of the merger cannot be
predicted.
MARKET
PRICE DATA AND DIVIDEND INFORMATION
Safeco common stock is listed and
traded on the NYSE under the symbol "SAF." The following table sets
forth, for the periods indicated, the high and low per share price of Safeco
common stock as quoted on the NYSE and the dividends per share declared during
such period:
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Company
Common Stock
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High
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Low
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Dividends
(1)
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2006
|
|
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First
quarter
|
$58.86
|
$50.14
|
$0.25
|
|
Second
quarter
|
$57.44
|
$49.09
|
$0.30
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|
Third
quarter
|
$59.15
|
$51.75
|
$0.30
|
|
Fourth
quarter
|
$64.85
|
$57.88
|
$0.30
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2007
|
|
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First
quarter
|
$69.15
|
$57.43
|
$0.30
|
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Second
quarter
|
$67.32
|
$60.68
|
$0.40
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Third
quarter
|
$64.26
|
$54.46
|
$0.40
|
|
Fourth
quarter
|
$62.40
|
$53.18
|
$0.40
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2008
|
|
|
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First
quarter
|
$55.55
|
$41.09
|
$0.40
|
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Second
quarter, through [●], 2008
|
$[●]
|
$[●]
|
–
|
|
(1)
|
The
merger agreement provides that, during the period from April 23, 2008
until the effective time of the merger or the termination of the merger
agreement, Safeco is permitted to declare and pay regular quarterly cash
dividends not in excess of $0.40 per share of common stock per quarter,
with agreed upon record and payment
dates.
|
The following table sets forth the
closing sale price per share of Safeco common stock as quoted on the NYSE on
April 22, 2008, the last trading day before the public announcement of the
merger agreement, and [●], 2008, the latest practicable trading day before the
date of this proxy statement.
If
the merger is completed, Safeco common stock will be delisted from the NYSE and
Safeco common stock will be deregistered under the Exchange Act.
THE
ANNUAL MEETING
Safeco is furnishing this proxy
statement to holders of Safeco common stock as part of the solicitation of
proxies by the Safeco board of directors for use at the 2008 annual meeting of
Safeco shareholders. This proxy statement and the enclosed form of
proxy are first being mailed to Safeco shareholders on or about [●],
2008.
Date,
Time and Place of the Annual Meeting
Safeco will hold its annual meeting on
[●], 2008 at [●], Pacific Time, at the Safeco Center, Magnolia Room, 1st Floor,
1191 Second Avenue, Seattle, Washington 98101.
Directions
to the location of the annual meeting are included in this proxy
statement. See "Directions to the Annual Meeting."
Purpose
of the Annual Meeting
The purpose of the annual meeting is to
take action upon the following:
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·
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Consideration
and approval of the merger
agreement;
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·
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Election
of five directors, four to serve a three year term and one to serve a two
year term on the Safeco board of directors. Safeco's nominees
for these positions are Joseph W. Brown, Kerry Killinger, Gary F. Locke,
Charles R. Rinehart and Gerardo I. Lopez, each of whom is currently a
director;
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·
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Ratification
of the selection of Ernst & Young LLP to be Safeco's independent
registered public accounting firm for
2008;
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·
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Adjournment
or postponement of the annual meeting, if necessary or appropriate, to
solicit additional proxies for the approval of the merger agreement;
and
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·
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Transaction
of any other business that may properly come before the annual meeting or
at any adjournment or postponement of the annual
meeting.
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Record
Date for the Annual Meeting
The Safeco board of directors has fixed
the close of business on [●], 2008 as the record date for determination of
Safeco shareholders entitled to notice of, and to vote at, the annual
meeting.
Shares
Entitled to Vote
Only holders of Safeco common stock as
of the close of business on [●], 2008, the record date for the annual meeting,
are entitled to vote at the annual meeting. Each record holder will
have one vote at the annual meeting for each share of Safeco common stock held
by that Safeco shareholder as of the close of business on the record
date. On the record date, [●] shares of Safeco common stock were
issued and outstanding and such shares were held by approximately [●] holders of
record.
Quorum
Requirement
No proposal may be acted on at the
annual meeting unless a quorum is present. In order for a quorum to
exist, at least a majority of the votes entitled to be cast at the annual
meeting must be present in person or by proxy. If a quorum is not
present at the annual meeting, it is expected that the annual meeting will be
adjourned or postponed to solicit additional proxies.
Adjournments
and Postponements
Although it is not currently expected,
the annual meeting may be adjourned or postponed for the purpose of soliciting
additional proxies for the approval of the merger agreement. Any
adjournment or postponement may be made without notice, other than by an
announcement made at the annual meeting, and the record date will not change due
to an adjournment or postponement unless the Safeco board of directors, in its
discretion, establishes a new record date. In order for the annual
meeting to be adjourned or postponed, if necessary or appropriate, to permit
further solicitation of proxies for the approval of the merger agreement, under
the WBCA, the proposal must receive more votes "FOR" than "AGAINST," provided
that a quorum is present. The officer of Safeco presiding at the
annual meeting or a majority of the shares of Safeco common stock present in
person or represented by proxy at the annual meeting may adjourn or postpone the
annual meeting, whether or not a quorum is present.
Any adjournment or postponement of the
annual meeting for the purpose of soliciting additional proxies will allow
Safeco shareholders who have already sent in their proxies to revoke them at any
time prior to their use at the annual meeting as adjourned or postponed,
provided that, such revocation is in compliance with the instructions (including
as to timing) set forth in the section titled "– Revocability of
Proxies."
Required
Vote
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·
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The
Merger. Under the WBCA, in order for the merger
agreement to be approved, shares of Safeco common stock representing at
least two-thirds of the votes entitled to be cast by all Safeco
shareholders at the annual meeting must be voted "FOR" the approval of the
merger agreement, provided that a quorum is
present.
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Election of
Directors. In accordance with Safeco's bylaws and the
WBCA, in order for each director candidate to be elected, such director
candidate must receive more votes "FOR" than "WITHHELD," provided that a
quorum is present.
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Ratification of Independent
Accountant. Under the WBCA, in order for the
ratification of Ernst & Young LLP as Safeco's independent registered
public accounting firm for 2008 to be approved, the proposal must receive
more votes "FOR" than "AGAINST," provided that a quorum is
present.
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Adjournment or Postponement of
the Annual Meeting to Solicit Additional Proxies for the Approval of the
Merger Agreement. Under the WBCA, in order to adjourn or
postpone the annual meeting, if necessary or appropriate, to solicit
additional proxies to approve the merger agreement, the proposal must
receive more votes "FOR" than "AGAINST," provided that a quorum is
present.
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Treatment
of Abstentions
Affirmative
abstentions will be treated as present at the meeting for purposes of
determining whether a quorum is present, but will not be counted as votes cast
for purposes of determining the approval of any matter submitted to the Safeco
shareholders for a vote at the annual meeting. Accordingly, if a
quorum is present, abstentions will have the effect of a vote "AGAINST" the
proposal to approve the merger agreement and will have no effect on the voting
results for the election of directors, the ratification Ernst & Young LLP as
Safeco's independent registered public accounting firm, or the proposal to
adjourn or postpone the annual meeting, if necessary or appropriate, to solicit
additional proxies for the approval of the merger agreement. If a
quorum does not exist, approval of adjournment of the annual meeting would
require a majority of the votes of the shareholders present, in person or by
proxy, and entitled to vote on the matters, and, as a result, affirmative
abstentions would have the same effect as a vote "AGAINST" approval of
adjournment.
Treatment
of Broker Non-Votes
Brokers,
banks or other nominees who hold shares of Safeco common stock in "street name"
for customers who are the beneficial owners of such shares may give a proxy to
vote those customers' shares on routine matters in the absence of specific
instructions from those customers. The election of directors and the
ratification of Ernst and
Young
LLP as Safeco's independent registered public accounting firm are considered
routine matters. Brokers, banks or other nominees may not give a
proxy to vote those customers' shares on the proposals to approve the merger
agreement or adjourn or postpone the special meeting to solicit additional
proxies approving the merger agreement, which are not considered to be routine
matters, in the absence of specific instructions from those
customers. Broker non-votes will be treated as present at the meeting
for purposes of determining whether a quorum is present. Accordingly,
if a quorum is present, broker non-votes will have the effect of a vote
"AGAINST" the proposal to approve the merger agreement. Broker
non-votes will have no effect on the voting results for the election of
directors, the ratification of Safeco's independent accountant or the
adjournment or postponement of the annual meeting to solicit additional proxies
approving the merger. If a quorum does not exist, approval of
adjournment of the annual meeting would require a majority of the votes of the
shareholders present, in person or by proxy, and entitled to vote on the
matters, and, broker non-votes, which are not entitled to vote, would have the
effect of reducing the aggregate number of affirmative votes required to adjourn
the annual meeting.
Voting
by Safeco's Directors and Executive Officers
On
the record date for the annual meeting, the directors and executive officers of
Safeco and their controlled affiliates beneficially owned and were entitled to
vote [●] outstanding shares of Safeco common stock, representing [●]% of the
shares of Safeco common stock issued and outstanding on that date. To
Safeco's knowledge, these directors and executive officers intend to vote their
shares in favor of the proposal to approve the merger agreement.
Voting
of Proxies
Safeco shareholders may vote their
shares by attending the annual meeting and voting their shares of Safeco common
stock in person, or by marking, signing and dating the enclosed proxy card and
mailing it in the enclosed postage-prepaid envelope or by submitting the proxy
through the Internet or by telephone by following the instructions printed on
the proxy card. Safeco shareholders who hold such shares through a
broker, bank or other nominee must follow the instructions on the proxy form
supplied by their broker, bank or other nominee, which may provide for voting
through the Internet or by telephone.
All
shares represented by properly executed proxies received in time for the annual
meeting will be voted at the annual meeting in the manner specified by the
holders of such shares.
If
you previously submitted a proxy for the annual meeting of Safeco shareholders
originally scheduled to be held on May 7, 2008, Safeco will not vote such proxy
at the annual meeting of Safeco shareholders, as rescheduled to be held on [●],
2008. Therefore, if you previously submitted a proxy for the annual
meeting to be held on May 7, 2008, and you desire to vote your shares of Safeco
common stock with respect to any or all of the proposals to be considered at the
[●], 2008 annual meeting, we urge you to vote your shares again by marking,
signing, dating and returning the attached proxy card or through the Internet or
by telephone.
Proxies
without Instructions.
Proxy
cards returned without instructions but signed by shareholders of record will be
voted:
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"FOR"
the proposal to approve the merger
agreement;
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"FOR"
the proposal to elect the directors named in the director
proposal;
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"FOR"
the proposal to ratify the selection of Ernst & Young LLP as Safeco's
independent registered public accounting firm for 2008;
and
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"FOR"
the proposal to adjourn or postpone the annual meeting, if necessary or
appropriate, to solicit additional proxies for the approval of the merger
agreement.
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Your vote is
important. Please return your marked proxy card or submit your proxy
though the Internet or by telephone so your shares can be represented, even if
you plan to attend the annual meeting in person.
Revocability
of Proxies
The
grant of a proxy on the enclosed proxy card or through the Internet or by
telephone does not preclude a Safeco shareholder from voting in person at the
annual meeting. A Safeco shareholder of record may revoke a proxy
prior to its exercise by: (1) if such shareholder previously voted through the
Internet or by telephone, casting a new vote by the method used previously no
less than 48 hours before the annual meeting; (2) if such shareholder delivered
a duly executed proxy card, delivering another proxy card dated after the prior
proxy card no less than 48 hours before the annual meeting; (3) attending the
annual meeting and voting in person; and (4) by delivering a written notice of
revocation no less than 48 hours before the annual meeting to the Secretary of
Safeco at Safeco Plaza, 1001 Fourth Avenue, Seattle,
Washington 98154. Attendance at the annual meeting will
not in and of itself constitute a revocation of the proxy.
If
you hold your shares in "street name" and have instructed your broker, bank or
other nominee to vote your shares, you should contact your broker, bank or other
nominee directly to change your vote.
Solicitation
of Proxies
Safeco
and its proxy solicitation firm, Georgeson, may solicit proxies in person or by
telephone, fax or other means. Safeco will pay Georgeson a fee of
$20,000, plus reasonable expenses, for its services. Safeco will also
pay all other reasonable expenses for solicitation. In addition,
proxies may be solicited by officers and directors and other employees of
Safeco, without additional remuneration, in person or by telephone, fax or other
means.
You
should send in your proxy by mail or vote through the Internet or by telephone
without delay. If you hold shares of Safeco common stock in "street
name" through a broker, bank or other nominee, please follow the instructions on
the proxy form supplied by your broker, bank or other nominee, which may provide
for voting through the Internet or by telephone. Safeco will also
reimburse brokers, banks and other nominees for their expenses in sending these
materials to you and obtaining your voting instructions.
You should not send your stock
certificate(s) evidencing your shares of Safeco common stock with your
proxy. Promptly (and in any event no later than three business days)
after completion of the merger, a letter of transmittal with written
instructions for the surrender of stock certificates will be mailed to holders
of shares of Safeco common stock. If you hold your shares in
book-entry form – that is, without a stock certificate – the exchange agent will
automatically send you the per share amount of $68.25 in cash, without interest
and less any applicable withholding taxes, in exchange, for the cancellation of
your shares of Safeco common stock after completion of the merger, provided that
you comply with applicable tax certification requirements. If your
shares of Safeco common stock are held in "street name" by your broker, bank or
other nominee you will receive instructions from your broker, bank or other
nominee as to how to surrender your "street name" shares and receive cash for
those shares.
Other
Business
Safeco is not currently aware of any
other business to be acted upon at the annual meeting. If, however,
other matters are properly brought before the annual meeting, or any adjourned
or postponed meeting, your proxies include discretionary authority on the part
of the individuals appointed to vote your shares or act on those matters
according to their best judgment.
THE
COMPANIES
Safeco
Corporation
Safeco
has been in business serving the insurance needs of customers since
1923. Safeco is an insurance holding company incorporated in the
state of Washington. Safeco is licensed to provide property and
casualty insurance along with related services to individuals and small- to
mid-size businesses in all 50 states through our insurance subsidiaries and as
of April 1, 2008, Safeco had 7,038 employees located throughout the United
States. Safeco also sells surety bonds to contractors and businesses.
Safeco's revenues are generated from the premiums earned on the insurance
policies Safeco writes and the income earned from Safeco's investment of premium
dollars. Safeco's principal executive offices are located at Safeco
Plaza, 1001 Fourth Avenue, Seattle, Washington 98154, and its
telephone number is (206) 545-5000.
Liberty
Mutual Insurance Company
Liberty
Mutual, a Massachusetts stock insurance company, was formed in
1912. Liberty is a member of the Liberty Mutual Group. The
Liberty Mutual Group, headed by Liberty Mutual Holding, constitutes a
diversified global group of insurance companies and the sixth largest property
and casualty insurance group in the United States based on 2007 direct written
premium. The group also ranks 94th on the Fortune 500 list of largest
corporations in the United States based on 2007 revenue. As of
December 31, 2007, the group had $94.7 billion in consolidated assets, $82.4
billion in consolidated liabilities and $26 billion in annual consolidated
revenue. The Liberty Mutual Group offers a wide range of products and
services, including personal automobile, homeowners, commercial multiple peril,
commercial automobile, general liability, surety, workers compensation, global
specialty, group disability, assumed reinsurance and fire. The
Liberty Mutual Group employs over 41,000 people in more than 900 offices
throughout the world. Following the acquisition, Safeco will be part
of Liberty Mutual Group's Agency Markets business unit. Liberty
Mutual Agency Markets utilizes approximately 7,000 employees and distributes its
products and services through over 7,000 independent agents. In 2007,
Liberty Mutual Agency Markets' net written premium was $5.1
billion. Liberty Mutual's executive offices are located at 175
Berkeley Street, Boston, Massachusetts 02117, and its telephone
number is (617) 357-9500.
Big
Apple Merger Corporation
Big
Apple Merger Corporation is a Washington corporation that was formed solely for
the purpose of entering into the merger agreement and consummating the
transactions contemplated by the merger agreement. It has not conducted any
activities to date other than activities incidental to its formation and in
connection with the transactions contemplated by the merger
agreement. Big Apple Merger Corporation's executive offices are
located at c/o Liberty Mutual, 175 Berkeley Street, Boston,
Massachusetts 02117, and its telephone number is (617)
357-9500.
THE
MERGER
The
following is a description of the material aspects of the merger and is
qualified in its entirety by the merger agreement, a copy of which is attached
to this proxy statement as Annex A. While Safeco believes that the
following description addresses the material terms of the merger, the
description may not contain all of the information that is important to
you. Safeco encourages you to carefully read this entire proxy
statement, including the merger agreement, which is attached as Annex A to this
proxy statement, for a more complete understanding of the merger.
Background
of the Merger
The Safeco board of directors, which is
sometimes referred to in this proxy statement as the Board, regularly evaluates
Safeco's strategic direction and ongoing business plans, with a view toward
strengthening Safeco's core businesses and enhancing shareholder
value. As part of its ongoing evaluation of Safeco, the Board has
considered a variety of strategic alternatives. In that regard,
representatives of Safeco have from time to time discussed potential business
relationships, including acquisitions by Safeco, with various companies in the
property and casualty and surety insurance industries that might expand Safeco's
business, improve its competitive position and enhance shareholder
value. In addition, from time to time, Safeco has received
indications of interest from other companies in the property and casualty
insurance industry and private equity firms regarding potential business
combination transactions involving, or acquisitions of, Safeco.
In early November 2007, Edmund Kelly,
Chairman, President and Chief Executive Officer of Liberty Mutual Holding,
contacted Paula Rosput Reynolds, Chair, President and Chief Executive Officer of
Safeco, to discuss a potential transaction involving the combination of Safeco
with Liberty Mutual's Agency Markets business unit, in which transaction Safeco
shareholders would have received cash for a portion of their shares but would
have also retained a substantial minority ownership interest in the combined
entity. Over the next two weeks, Mr. Kelly and Ms. Reynolds spoke on
several occasions regarding the potential transaction. After Ms.
Reynolds expressed possible concerns that the Board might raise regarding the
complexity and valuation of the transaction structure proposed by Mr. Kelly, he
stated that, in the alternative, Liberty Mutual would potentially be interested
in a cash acquisition of Safeco.
On November 19, 2007, at a special
meeting of the Board, which was also attended by representatives of Morgan
Stanley and Skadden, Arps, Slate, Meagher & Flom LLP, special outside
counsel to Safeco, which is referred to in this proxy statement as Skadden Arps,
Ms. Reynolds reported on her discussions with Mr. Kelly, including the
preliminary structure and the possible terms discussed with Mr. Kelly for either
a transaction combining Safeco with Liberty Mutual's Agency Markets business
unit or, in the alternative, a cash acquisition of Safeco. During the
meeting, Ms. Reynolds reviewed with the Board materials delivered in advance of
the meeting and prepared by Safeco's financial advisor, Morgan
Stanley. Ms. Reynolds discussed with the Board certain considerations
relating to the relative ability of Liberty Mutual and other participants in the
insurance industry to finance a business combination transaction with Safeco,
should the Board wish to pursue such a transaction. After extensive
discussion, taking into account Safeco's current strategic plans and stand-alone
prospects, the Board determined that Safeco management should focus on
preparations for the December 2007 strategic planning meeting of the Board, at
which time the Board would consider a broad range of strategic alternatives
available to Safeco, and directed Ms. Reynolds to contact Mr. Kelly and inform
him that the Board was not interested in pursuing discussions in advance of that
meeting.
During the latter part of November
2007, the Chief Executive Officer of another company in the insurance industry,
which is referred to in this proxy statement as Party A, contacted Ms. Reynolds
and requested that Ms. Reynolds meet with him to explore a potential business
combination transaction involving Safeco and Party A. Ms. Reynolds
responded that she would make the Board aware of Party A's
interest.
Also during the latter part of November
2007, Ms. Reynolds met with the Chief Executive Officer of Party A and engaged
in a preliminary discussion regarding a potential business combination
transaction involving Safeco and Party A.
On December 6, 2007, Mr. Kelly
contacted Ms. Reynolds to reaffirm Liberty Mutual's desire to enter into
preliminary discussions regarding a combination of Safeco and Liberty Mutual's
Agency Markets business unit or, in the alternative, a cash acquisition of
Safeco. Ms. Reynolds responded that Liberty Mutual's interest would
be considered by the Board along with other strategic
options. However, Mr. Kelly and Ms. Reynolds agreed that members of
the two companies' executive teams should have further discussions in order for
Safeco to have a more full understanding of Liberty Mutual's
proposal.
On December 11, 2007, Ross Kari,
Executive Vice President and Chief Financial Officer of Safeco, had a discussion
with Dennis Langwell, Chief Financial Officer of Liberty Mutual, and Michael
Fallon, Vice President, Corporate Finance of Liberty Mutual, regarding the
combination proposal that Ms. Reynolds and Mr. Kelly had previously discussed on
December 6, 2007, including, in particular, the amount of cash which Liberty
Mutual proposed to include in the transaction and Liberty Mutual's views
regarding the valuation of equity in the combination.
In mid-December 2007, the Chief
Executive Officer of another company in the insurance industry, which is
referred to in this proxy statement as Party B, contacted Ms. Reynolds to
express interest in entering into discussions regarding a potential business
combination involving Safeco and Party B and to inquire as to Safeco's
willingness to enter into such discussions. Ms. Reynolds responded
that she would make the Board aware of Party B's interest.
On December 13, 2007, at a regularly
scheduled meeting of the Board, Ms. Reynolds reported to the Board regarding her
discussions with Mr. Kelly and the Chief Executive Officers of Parties A and
B. During the meeting, Mr. Kari, referring to materials delivered in
advance of the meeting and prepared by Morgan Stanley, discussed financial
considerations in connection with Liberty Mutual's proposal for a potential
transaction involving the combination of Safeco with Liberty Mutual's Agency
Markets business unit or, in the alternative, a cash acquisition of
Safeco. The Morgan Stanley materials also included financial data and
analysis regarding Parties A and B. In addition, the materials
described various considerations in connection with a potential transaction with
Liberty Mutual, including the issues associated with valuing a combination with
the Agency Markets business unit arising from Liberty Mutual's mutual ownership
structure and the financing of a cash acquisition of Safeco. After
extensive discussion, including regarding the potential benefits and risks
associated with pursuing Safeco's strategic plan on a stand-alone basis and the
possibility of considering some form of business combination transaction,
provided the transaction consideration fully reflected Safeco's value, the Board
directed Ms. Reynolds to contact Mr. Kelly and inform him that Safeco was not
interested in pursuing discussions regarding a business combination transaction
with Liberty Mutual at this time. At the same time, the Board
instructed Ms. Reynolds to monitor industry and general economic conditions and
to keep lines of communication open with those companies that had expressed
interest in pursuing a business combination transaction with
Safeco.
Thereafter, Ms. Reynolds contacted Mr.
Kelly to communicate to him the Board's determination that Safeco was not
interested in pursuing discussions regarding a business combination transaction
with Liberty Mutual at this time. Mr. Kelly acknowledged the Board's
determination but stated that Liberty Mutual nevertheless remained very
interested in pursuing a combination with Safeco and that Safeco should expect
to receive future communications from Liberty Mutual regarding the possibility
of a business combination transaction.
In early January 2008, Ms. Reynolds met
with the Chief Executive Officer of Party B. During the meeting, the
Chief Executive Officer of Party B expressed Party B's interest in pursuing a
potential business combination transaction with Safeco at a price within the
range of $64.00 to $67.00 per share. The Chief Executive Officer of
Party B indicated that this indication of interest had been discussed with Party
B's Board of Directors. Ms. Reynolds responded that she would discuss
Party B's expression of interest with the Board.
Also in early January 2008, Ms.
Reynolds, Mr. Kari and Arthur Chong, Executive Vice President and Chief Legal
Officer of Safeco, met with the Chief Executive Officer and other
representatives of Party A. During the meeting, the representatives
of Party A again expressed interest in pursuing a potential business
combination
transaction
with Safeco. Subsequently, Mr. Kari contacted the Chief Financial
Officer of Party A to provide responses to certain questions raised by Party A
during the preceding day's meeting.
As
a follow up to the discussion at the January 2008 meeting between
representatives of Safeco and representatives of Party A, the General Counsel of
Party A communicated a preliminary indication of Party A's interest in a
potential business combination transaction with Safeco at a price within the
range of $64.00 to $68.00 per share. Party A was advised that Ms.
Reynolds would discuss Party A's interest with the Board. In response
to a subsequent discussion between representatives of Party A, on the one hand,
and Ms. Reynolds and Messrs. Kari and Chong, on the other hand, Ms. Reynolds
provided certain synergies estimates and other analyses to Party A in order to
assist it in reassessing its proposed value range.
Later
that month, a representative of the financial advisor of another company in the
insurance industry, which is referred to in this proxy statement as Party C,
contacted Joseph W. Brown, then Chair of the Safeco board of directors, to
inquire as to Safeco's interest in pursuing a strategic business combination
with Party C. Mr. Brown referred the representative of Party C's
financial advisor to Ms. Reynolds and the representative and Ms. Reynolds had a
discussion regarding Party C's interest. During the discussion, a
meeting between representatives of Safeco and representatives of Party C was
scheduled for a date during February 2008.
On January 30, 2008, at a regularly
scheduled meeting of the Board, Ms. Reynolds reported to the Board regarding the
expressions of interest received from Parties A and B. During the
meeting, Ms. Reynolds also discussed recent developments in the markets in which
Safeco competes, Safeco's stand-alone financial and business plans and recent
uncertainty in the financial markets. After extensive discussion of
the foregoing matters and other factors that it deemed relevant, the Board
determined not to pursue a business combination transaction with any of the
interested parties at this time.
On February 19, 2008, Safeco received a
letter addressed to Ms. Reynolds from Mr. Kelly, dated February 15, 2008,
outlining Liberty Mutual's proposal to acquire Safeco at a price of $64.00 per
share in cash. Among other things, the letter referenced recent
declines in Safeco's share price and Liberty Mutual's view that there had been
deterioration in Safeco's auto insurance business. The letter also
indicated that the proposed acquisition would not be subject to any financing
contingencies or conditions.
On
February 21, 2008, following receipt of Liberty Mutual's February 15, 2008
letter, Ms. Reynolds contacted Mr. Kelly to confirm receipt of the letter and
informed Mr. Kelly that the letter would be considered by the
Board.
On February 22, 2008, Mr. Kelly
contacted Ms. Reynolds to reiterate his desire to proceed with exploring a
potential business combination transaction with Safeco as expeditiously as
possible.
On February 24, 2008, Ms. Reynolds
contacted Mr. Kelly to indicate her view that the Board was likely to determine
that Liberty Mutual's proposed acquisition of Safeco at a per share price of
$64.00 was not of interest to the Board, in light of the fact that the Board had
declined to pursue discussions in response to indications of interest received
above that value range on several occasions in the recent past.
During the latter part of February
2008, Ms. Reynolds had a conversation with the Chief Executive Officer of Party
B to follow up on their January 2008 meeting and to arrange further
discussions. Ms. Reynolds and other representatives of Safeco
subsequently participated in a conference call to discuss Party B's interest in
exploring a potential business combination transaction with Safeco.
Also
during the latter part of February 2008, Ms. Reynolds and Messrs. Kari and Chong
met with representatives of Party C, together with representatives of Party C's
financial advisor, in order to discuss Party C's interest in better
understanding Safeco's business and the potential for joint activity, whether by
investment or otherwise, by the two companies.
On February 28, 2008, at a special
meeting of the Board held for the purpose of determining the appropriate
response to Liberty Mutual's February 15, 2008 letter, which was also attended
by representatives of Morgan Stanley and Skadden Arps, Ms. Reynolds reviewed
with the Board Liberty Mutual's proposal to acquire
Safeco
on the terms set forth in such letter. Following Ms. Reynolds' review
of the February 15, 2008 letter, Mr. Kari, referring to materials delivered in
advance of the meeting and prepared by Morgan Stanley, discussed certain
financial considerations in connection with Liberty Mutual's proposal, noting,
among other things, that while the proposal represented a premium to the value
indicated by the trading price of Safeco common stock it did not reflect, in the
view of management, the intrinsic value of Safeco based upon Safeco's business
plan and stand-alone prospects. Ms. Reynolds and Mr. Chong then
discussed potential responses to the February 15, 2008 letter, with
representatives of each of Morgan Stanley and Skadden Arps also participating in
such discussion. On the basis of these discussions, the Board
determined, after extensive deliberation, that the $64.00 per share price
proposed in the February 15, 2008 letter was not adequate at this time because
it did not reflect Safeco's actual earnings potential, strong balance sheet,
strong brand and large geographic footprint. However, in light of the
Board's determination, after taking into account the risks and uncertainties
faced by Safeco as a stand-alone entity, that a transaction with Liberty Mutual
on significantly improved terms could be of potential interest to the Board and
Safeco shareholders, the Board directed Ms. Reynolds to advise Liberty Mutual
that a transaction at the $64.00 per share price proposed in the February 15,
2008 letter was not of interest to the Board but to also offer to engage in an
information exchange with Liberty Mutual in order to potentially elicit improved
terms from Liberty Mutual. The Board directed that the information to
be provided by Safeco should be limited to information that was not
competitively sensitive and that could be gathered and presented without
broadening the number of employees within Safeco who were aware that any such
information would be provided or that discussions were taking
place. Pursuant to this limited information exchange, Safeco would
provide Liberty Mutual with non-public information regarding management's
estimates of Safeco's future performance, subject to a non-disclosure agreement,
and Liberty Mutual would provide Safeco with additional information regarding
Liberty Mutual's ability to finance a potential transaction. The
Board also directed Ms. Reynolds, with the assistance of Morgan Stanley, to
contact the other industry participants with whom Ms. Reynolds had previously
spoken and, on a confidential basis, determine their respective interest in
pursuing a potential business combination transaction with Safeco and elicit
updated valuation information useful in assessing Liberty Mutual's
proposal.
On February 29, 2008, Ms. Reynolds
contacted Mr. Kelly to communicate to him the Board's determinations at the
February 28, 2008 meeting. During this conversation, Ms. Reynolds and
Mr. Kelly agreed that Safeco and Liberty Mutual would engage in the limited
information exchange authorized by the Board, with representatives of the two
companies meeting to review certain non-public information regarding Safeco's
business plan and information regarding Liberty Mutual's ability to finance a
potential transaction.
In
early March 2008, Ms. Reynolds participated in a conversation with a
representative of Party C's financial advisor, during which conversation it was
conveyed to Ms. Reynolds that Party C would not be in a position to explore a
potential business combination transaction within a reasonable
timeframe.
On March 4, 2008, Liberty Mutual
entered into a mutual non-disclosure agreement with Safeco. After
entering into the non-disclosure agreement, the parties exchanged limited
non-public information.
On March 7, 2008, Messrs. Kari and
Chong met with representatives of Liberty Mutual to review and discuss the
non-public business plan and management estimate information provided by Safeco
to Liberty Mutual and the financing plan information provided by Liberty Mutual
to Safeco.
On March 13, 2008, Mr. Kelly contacted
Ms. Reynolds to discuss the results of Liberty Mutual's review of the non-public
information discussed at the March 7, 2008 meeting. Mr. Kelly
indicated to Ms. Reynolds that Liberty Mutual's review of the non-public
information had not led it to reconsider the value proposed in its February 15,
2008 letter and reiterated Liberty Mutual's proposal for an acquisition of
Safeco at $64.00 per share.
In mid-March 2008, Ms. Reynolds
contacted the Chief Executive Officer of Party B as a follow up to previous
discussions regarding a potential business combination transaction involving
Safeco and Party B. During the discussion, Ms. Reynolds communicated
that another industry participant had recently expressed a strong interest in
pursuing discussions with Safeco.
Also in mid-March 2008, Ms. Reynolds
contacted the Chief Executive Officer of Party A as a follow up to previous
discussions regarding a potential business combination transaction involving
Safeco and Party A. During the discussion, Ms. Reynolds communicated
that another industry participant had recently expressed a strong
interest
in pursuing discussions with Safeco. During the discussion, the Chief
Executive Officer of Party A reiterated Party A's interest in exploring a
potential business combination transaction with Safeco and Ms. Reynolds
suggested the possibility of engaging in a limited information exchange, subject
to a non-disclosure agreement, in order to enable Party A to provide a
non-binding indication of interest for a transaction with Safeco at a specific
per share value.
Also in mid-March 2008, Ms. Reynolds
and the Chief Executive Officer of Party B had a conversation during which the
Chief Executive Officer of Party B reiterated Party B's interest in exploring a
potential business combination transaction with Safeco and Ms. Reynolds
suggested the possibility of engaging in a limited information exchange, subject
to a non-disclosure agreement, in order to enable Party B to provide a
non-binding indication of interest for a transaction with Safeco at a specific
per share value.
On March 19, 2008, Party A entered into
a non-disclosure agreement with Safeco on substantially similar terms to those
contained in the non-disclosure agreement between Liberty Mutual and
Safeco. Safeco thereafter provided to Party A the same package of
limited non-public business plan and management estimate information as had been
provided to Liberty Mutual. Also on March 19, 2008, Ms. Reynolds and
Messrs. Kari and Chong participated in a conference call with certain
representatives of Party A to review the information provided by
Safeco.
Following the March 19, 2008 conference
call, the Chief Executive Officer of Party A contacted Ms. Reynolds and informed
her that it would not be possible for Party A to provide a meaningful indication
of interest without more due diligence. Party A then provided Safeco
with a request for significant, additional non-public
information. Safeco ultimately determined not to provide such
additional information to Party A due to Safeco's conclusion that the
information sought was competitively sensitive, would require Safeco to broaden
the number of employees within Safeco who would need to be informed about
information exchanges or discussions and, after consultation with Morgan
Stanley, that such information was not necessary to enable Party A to submit a
non-binding indication of interest.
On March 20, 2008, Party B entered into
a non-disclosure agreement with Safeco on substantially similar terms to those
contained in the non-disclosure agreement between Liberty Mutual and
Safeco. Safeco thereafter provided to Party B the same package of
limited non-public business plan and management estimate information as had been
provided to each of Liberty Mutual and Party A.
Also on March 20, 2008, Ms. Reynolds
contacted Mr. Kelly, at his request, to discuss Liberty Mutual's proposed
acquisition of Safeco. During the discussion, Mr. Kelly reaffirmed
his belief that the $64.00 per share price proposed in Liberty Mutual's February
15, 2008 letter reflected an attractive price and Liberty Mutual's strong desire
to negotiate a transaction expeditiously. Ms. Reynolds informed Mr.
Kelly that Safeco had retained Morgan Stanley and that, unless Liberty Mutual
raised its proposed $64.00 per share acquisition price, it was likely that the
Board would seek other market input before deciding on a strategic
direction. Ms. Reynolds further indicated that, if appropriate,
Safeco would provide Liberty Mutual with additional information.
On March 21, 2008, Ms. Reynolds and
Messrs. Kari and Chong participated in a conference call with certain
representatives of Party B to review the information provided by
Safeco.
Also on March 21, 2008, Mr. Kari
contacted a representative of Party A to discuss Party A's additional
information requests. During the discussion, Mr. Kari indicated that
much of the information requested by Party A could be viewed as competitively
sensitive.
Following the March 21, 2008 conference
call, the Chief Executive Officer of Party B contacted Ms. Reynolds and affirmed
Party B's interest in exploring a potential business combination transaction at
a per share price of $60.00 in cash, with the possibility of a higher per share
value if a portion of the transaction consideration were to take the form of
Party B stock.
On March 26, 2008, at a special meeting
of the Board held for the purpose of updating the Board regarding contacts with
Liberty Mutual and other interested parties and reviewing Safeco's recent
operating performance, which meeting was also attended by representatives of
Morgan Stanley and Skadden Arps, Ms. Reynolds discussed
with
the Board Safeco's contacts with each of Liberty Mutual, Party A and Party C and
the indication of interest received from Party B. Following her
discussion of these contacts, Ms. Reynolds and Mr. Kari reviewed with the Board
Safeco's 2008 actual year to date operating performance and compared such
performance to Safeco's operating plan. Representatives of Skadden
Arps discussed the Board's fiduciary duties generally and in the context of a
potential change of control transaction. Following the discussion by
Skadden Arps, representatives of Morgan Stanley, referring to materials
delivered in advance of the meeting and prepared by Morgan Stanley, discussed
Safeco's recent historical financial performance, recent stock price
performance, market conditions in, and outlook for, the property and casualty
insurance industry, certain analyses suggesting that Safeco's stock was
undervalued in relation to that of its peers on a historical basis and recent
mergers and acquisitions activity in the property and casualty insurance
industry. The representatives of Morgan Stanley also discussed with
the Board certain parties that might potentially be interested in pursuing a
business combination transaction with Safeco and their expected ability to
finance and consummate such a transaction. The parties that Morgan
Stanley identified as potentially most interested in pursuing a transaction with
Safeco were Liberty Mutual, Party A, Party B and another company in the
insurance industry, which is referred to in this proxy statement as Party
D. The representatives of Morgan Stanley then discussed with the
Board potential responses to Liberty Mutual's proposal and the possibility that
Liberty Mutual could make such proposal public if the Board determined not to
pursue substantive discussions regarding the proposal. Ms. Reynolds
then discussed with the Board the potential responses to Liberty Mutual and
management's recommendation. Following an executive session of
Safeco's independent directors attended only by such directors and Skadden Arps,
during which Safeco's independent directors discussed the uncertain economic
climate and the challenges facing Safeco's business, the Board determined, based
on, among other things, the recommendation of such independent directors, that
Liberty Mutual's proposed acquisition of Safeco at a price of $64.00 per share
was not financially attractive or compelling based on Safeco's strategic plans
and anticipated stand-alone operating performance. The Board directed
Ms. Reynolds to communicate to Mr. Kelly the Board's determination that a price
in a range near $70.00 per share would more adequately reflect the Board's view
of Safeco's value. The Board also directed Ms. Reynolds to maintain
communications with Party A and Party B and to contact the Chief Executive
Officer of Party D as well.
On March 27, 2008, representatives of
Morgan Stanley contacted the Chief Executive Officer of Party D to determine
Party D's interest in exploring a potential business combination transaction
involving Safeco and Party D. On this call, the Chief Executive
Officer of Party D expressed Party D's interest in exploring such a
transaction.
On
March 28, 2008, Ms. Reynolds had a conference call with the Chief Executive
Officer of Party D to discuss Party D's interest in evaluating a potential
business combination transaction involving Safeco and Party D. During
the discussion, Ms. Reynolds communicated that another industry participant had
recently expressed a strong interest in pursuing discussions with
Safeco. Later that day, Party D entered into a non-disclosure
agreement with Safeco on substantially similar terms to those contained in the
non-disclosure agreement between Liberty Mutual and Safeco and Safeco provided
to Party D the same package of limited non-public business plan and management
estimate information as had been provided to each of Liberty Mutual, Party A and
Party B.
Also
on March 28, 2008, Ms. Reynolds contacted Mr. Kelly to inform him that the Board
had given consideration to the possibility of a strategic transaction as it had
previously requested that Ms. Reynolds contact selected industry participants
regarding their respective interest in a transaction with Safeco. Ms.
Reynolds indicated that, informed by the information obtained through such
contacts, the Board had determined that based on Liberty Mutual's $64.00 per
share proposal, Safeco would not proceed with discussions with Liberty Mutual at
this time. However, Ms. Reynolds indicated that the Board would
consider negotiating with Liberty Mutual if an indication of interest in a range
near $70.00 per share were offered.
Also on March 28, 2008, Ms. Reynolds
contacted the Chief Executive Officer of Party B to indicate to him that the
$60.00 per share cash value contemplated by Party B's indication of interest
would not be financially attractive to the Board and to inquire as to whether
Party B would be willing to proceed on significantly improved
terms. The Chief Executive Officer of Party B indicated that he would
be interested in continuing discussions with Safeco to determine whether Party B
could provide a revised indication of interest on improved value
terms. Ms. Reynolds, on the same day, also authorized Morgan Stanley
to contact representatives of Party A and indicate that Party A's failure to
provide a firm indication of interest could result in Party A not being part of
further discussions relating to a potential business combination transaction
that the Board might initiate, and cautioned that Safeco would not disclose
competitively-sensitive information without a meaningful indication of
interest. Representatives
of
Morgan Stanley subsequently contacted representatives of Party A and engaged in
a discussion with them in accordance with Ms. Reynolds'
instructions.
On March 29, 2008, Ms. Reynolds and Mr.
Kari participated in a conference call with representatives of Party B to review
the information previously provided to Party B by Safeco. Also on
March 29, 2008, Ms. Reynolds and Messrs. Kari and Chong participated in a
conference call with representatives of Party D to review the information
previously provided to Party D by Safeco.
On March 31, 2008, Ms. Reynolds
continued her previous discussion with Mr. Kelly regarding the terms on which
discussions of a transaction between Safeco and Liberty Mutual could potentially
continue. Ms. Reynolds reiterated to Mr. Kelly that the Board had
directed her to contact other parties and that such contacts had revealed
substantial interest on the part of the parties contacted in pursuing a
potential business combination transaction with Safeco. Mr. Kelly
affirmed his view that $64.00 per share represented an attractive price for
Safeco shareholders. Mr. Kelly added that if the Board thought the
$64.00 per share value was too low, Liberty Mutual might be willing to accept a
lower termination fee than it otherwise would request in the definitive
agreement governing the transaction. Ms. Reynolds and Mr. Kelly
agreed to meet on April 1, 2008 to continue their discussions.
As a follow up to previous discussions,
representatives of Morgan Stanley had a conversation with a senior executive of
Party A. During this conversation, the senior executive of Party A
declined to improve Party A's previously indicated range of $64.00 to $68.00 per
share, but indicated that Party A would reaffirm its previously communicated
indication of interest, subject, however, to Safeco providing Party A with the
additional due diligence materials previously requested by Party A.
On April 1, 2008, Ms. Reynolds met with
Mr. Kelly to continue their discussions of the previous day. During
the meeting, Ms. Reynolds reiterated to Mr. Kelly that the Board had not found
Liberty Mutual's proposal for an acquisition of Safeco at a price of $64.00 per
share financially attractive or compelling and had, accordingly, instructed Ms.
Reynolds and Safeco management to initiate a process of contacting other parties
as a means of obtaining other indications of interest and comparing those to
Liberty Mutual's proposal. Ms. Reynolds described Safeco's business
outlook for Mr. Kelly and affirmed management's view that Safeco's business plan
was generally proceeding in accordance with expectations. Ms.
Reynolds reiterated that unless Liberty Mutual could make a sufficiently
preemptive proposal, the Board would not consider dealing with Liberty Mutual on
an exclusive basis and would continue discussions with other
parties. Mr. Kelly indicated that he was confident that Liberty
Mutual would be willing to consummate a transaction at a price that would be
competitive with any party but stated that Liberty Mutual was not willing to
offer to proceed with an acquisition of Safeco at a price that the Board would
likely find preemptive. Mr. Kelly further indicated that he did not
believe that it would be likely that there would be third party interest at the
level of Liberty Mutual's current offer of $64.00 per share.
On April 2, 2008, prior to the special
meeting of the Board on the same day, Safeco received a letter addressed to Ms.
Reynolds from the Chief Executive Officer of Party D. The letter
contained a non-binding proposal for an acquisition of Safeco by Party D at a
per share price between $64.00 and $67.00, with Party D being willing to
consider paying either all cash consideration or consideration consisting of a
mix of cash and Party D stock. The letter also expressed Party D's
view that it would be appropriate, in light of the resources that Party D was
prepared to devote to the potential transaction and in the interest of
expediting the transaction process, for Safeco to enter into an agreement with
Party D to proceed with negotiations on an exclusive basis with Party D for a
period of 30 days.
Later, on April 2, 2008, at a special
meeting of the Board held for the purpose of updating the Board regarding
contacts with Liberty Mutual and other interested parties and determining the
appropriate course of action for Safeco in light thereof, which meeting was also
attended by representatives of Morgan Stanley and Skadden Arps, Ms. Reynolds
discussed with the Board Safeco's or Morgan Stanley's, as the case may be,
contacts with each of Liberty Mutual, Party A, Party B and Party
D. In this regard, Ms. Reynolds discussed in detail, among other
things, (1) her discussions with Mr. Kelly in which he had expressed Liberty
Mutual's refusal to raise its proposed acquisition price of $64.00 per share,
(2) the letter received from Party D on April 2, 2008 and the terms set forth
therein, including Party D's request for a 30 day exclusivity period, and, with
participation by Morgan Stanley, potential synergies that might be achieved in a
potential business combination transaction with Party D, (3) Party B's failure
to provide a revised indication of interest at an improved value range and (4)
Party A's failure to improve its
previously
indicated range and its indication that it would reaffirm its previous
indication of interest, subject, however, to its being provided with extensive,
additional competitively sensitive due diligence materials. A
discussion ensued regarding the additional information requested by Party A and
the concerns raised by Board members and management regarding the competitively
sensitive nature of such information, as well as the determination previously
reached, after consultation with Morgan Stanley, that such information was not
necessary for Party A to submit an indication of
interest. Representatives of Morgan Stanley then reviewed with the
Board various alternative courses of action available to the Board, including
determining to cease discussions with all interested parties, selecting one
party among the interested parties based on discussions to date with which
Safeco would enter into exclusive discussions for a limited period of time and
seek to negotiate a transaction on terms favorable to Safeco, conducting a
process involving multiple parties over an extended period of time and
conducting a more limited process in which a limited number of parties would
receive additional due diligence materials and provide revised indications of
interest, based upon which Safeco would either choose to negotiate exclusively
with one party or terminate the process. Representatives of Skadden
Arps then discussed the Board's fiduciary duties in the context of the Board's
consideration of the various alternatives. After extensive
discussion, the Board determined, in light of the limited discussions that had
occurred to date with Party D, the potential disruption to Safeco's business
that could arise from engaging in a broader and more extensive process at this
time and the fact that Party D had not yet been given the same opportunity to
improve its indication of interest that had been given the other parties, to
direct Ms. Reynolds to contact Party D and to provide Party D with the
opportunity to provide a revised indication of interest at a preemptive level in
exchange for Safeco agreeing to negotiate on an exclusive basis with Party D for
a limited period of time.
In early April 2008, Ms. Reynolds met
with the Chief Executive Officer of Party D in order to discuss the terms upon
which Safeco would be prepared to grant Party D a limited period of exclusive
negotiations. Among other things, Ms. Reynolds indicated that any
grant of exclusivity would be conditioned upon Party D providing a revised
indication of interest at an increased price per share, agreeing to a detailed
term sheet outlining certain key terms to be included in any definitive
transaction agreement and agreeing to proceed with the transaction on an
expedited timetable. The Chief Executive Officer of Party D responded
by indicating that Party D would provide a revised indication of interest
addressing the terms outlined by Ms. Reynolds.
On April 4, 2008, Ms. Reynolds
contacted Mr. Kelly to inform him that the Board had again determined that
Liberty Mutual's proposed acquisition price of $64.00 per share was not
attractive, that other parties had expressed interest in a potential transaction
with Safeco at higher valuation levels and that Safeco would not be pursuing
discussions with Liberty Mutual at this time. Mr. Kelly responded by
indicating that Ms. Reynolds and Mr. Brown should expect to receive a letter
from Mr. Kelly outlining Liberty Mutual's continued, strong interest in pursuing
a potential acquisition of Safeco.
In early April 2008, Ms. Reynolds
contacted the Chief Executive Officer of Party B, at his request, to discuss
Party B's continued interest in exploring a business combination transaction
with Safeco. During the discussion, the Chief Executive Officer of
Party B stated that Party B could provide a revised indication of interest
reflecting a $64.00 per share value and could potentially slightly increase such
indication if provided with additional due diligence in certain additional
subject matter areas. In exchange for providing such a revised
indication of interest, the Chief Executive Officer of Party B requested that
Safeco agree to negotiate on an exclusive basis with Party B for a limited
period of time. Ms. Reynolds responded that the Board was not in a
position to provide exclusivity in exchange for an indication of interest
reflecting a $64.00 per share value.
Also in early April 2008, Safeco
received a letter addressed to Ms. Reynolds from the Chief Executive Officer of
Party D containing a revised indication of interest for an acquisition of Safeco
at a per share price between $64.00 and $68.50. This letter stated
that the revised indication of interest was conditioned upon Safeco's execution
of an accompanying draft exclusivity agreement obligating Safeco to, among other
things, negotiate on an exclusive basis with Party D until 11:59 p.m., New York
time, on May 5, 2008. Neither this letter nor the draft exclusivity
agreement addressed any of the key non-price deal terms that Ms. Reynolds had
discussed with the Chief Executive Officer of Party D.
Representatives of Skadden Arps, in
consultation with representatives of Safeco and Morgan Stanley, then negotiated
the terms of the exclusivity agreement with representatives of Party D's outside
legal counsel, including terms and conditions addressing certainty of closing,
Safeco's rights to respond to third party acquisition proposals
and
terminate the definitive agreement in order to accept a third party superior
proposal and the termination fee and the circumstances under which such fee
would be paid, which are collectively referred to in this proxy statement as the
Selected Key Terms.
On April 8, 2008, Safeco and Party D
entered into an exclusivity agreement. Under the terms of the
exclusivity agreement, Safeco agreed, among other things, not to initiate,
solicit, provide non-public information in connection with, or continue or enter
into any discussions or negotiations or agreement regarding, a third party
acquisition proposal. In addition, the exclusivity agreement included
an annex containing agreed upon provisions to be included in the definitive
acquisition agreement to address the Selected Key
Terms. Specifically, the annex provided that, among other things, the
definitive acquisition agreement would provide for customary "no shop"
provisions allowing Safeco to respond to third party acquisition proposals, a
right for Safeco to terminate the agreement to accept a third party superior
acquisition proposal, a termination fee in the range of 2.8% to 3.5% of Safeco's
equity value at the proposed transaction price (with the exact percentage to be
agreed), which would be payable to Party D under certain circumstances
enumerated in the annex, provisions obligating each party to use its reasonable
best efforts to obtain all necessary governmental and regulatory approvals
(subject to a material adverse effect standard), no financing condition or
contingency and provisions allowing Safeco to continue to declare and pay its
regular quarterly cash dividend between signing and closing. In
addition, the annex contemplated that the parties would negotiate the form of
consideration and any mix between cash and Party D stock. The
exclusivity agreement, and the restrictions on Safeco's actions in connection
with third party acquisition proposals, were to terminate upon the earlier of
11:59 p.m., New York time, on April 28, 2008, the execution of a definitive
acquisition agreement between Safeco and Party D or the occurrence of certain
specified events, including modifying any of the provisions contained in the
annex to the exclusivity agreement. The exclusivity agreement also
provided that it could be terminated if Party D failed, by April 17, 2008, to
confirm in writing its agreement to proceed with an acquisition of Safeco at a
per share price of $68.50.
Later on April 8, 2008, representatives
of Party D and representatives of Party D's outside legal counsel and financial
advisor commenced their due diligence review of non-public information relating
to Safeco through access to an electronic data room.
On April 9, 2008, Safeco received a
letter addressed to Ms. Reynolds from Mr. Kelly, with Mr. Brown copied,
expressing Liberty Mutual's disappointment in Safeco's failure to enter into
negotiations with Liberty Mutual, reaffirming Liberty Mutual's view that its
proposed acquisition of Safeco at a price of $64.00 per share should be
attractive to Safeco. In this letter, Mr. Kelly reiterated Liberty
Mutual's desire to negotiate a transaction on a confidential basis and that if
the parties were unable, Liberty Mutual would reassess this position, as well as
its offer price.
On April 12 and April 13, 2008,
representatives of Party D, together with representatives of its outside legal
counsel and financial advisor, attended due diligence meetings with
representatives of Safeco who conducted presentations regarding Safeco's various
business lines and other aspects of Safeco's business. Also on these
days, representatives of Party D and Safeco discussed a possible signing date
for a definitive merger agreement of April 22, 2008. During the
meetings on April 12, 2008, the Chief Executive Officer of Party D indicated to
Ms. Reynolds that he did not believe it likely that Party D would be able to
confirm the $68.50 per share acquisition price contemplated by the exclusivity
agreement.
On April 13, 2008, Skadden Arps
provided to representatives of Party D and representatives of Party D's outside
legal counsel a draft amendment to the non-disclosure agreement between Party D
and Safeco, providing for, among other things, certain restrictions on the
ability of Party D to solicit for employment and hire certain Safeco
employees. Safeco and Party D thereafter entered into this
amendment.
On
April 15, 2008, Skadden Arps provided a draft merger agreement to
representatives of Party D and Party D's outside legal counsel.
On April 17, 2008, the Chief Executive
Officer of Party D contacted Ms. Reynolds to inform her that Party D's board of
directors had authorized him to provide a revised indication of interest in
proceeding with an acquisition of Safeco at a price of $66.00 per
share. In response, Ms. Reynolds noted that this indication of
interest
was
significantly below the $68.50 per share price which Party D was required to
confirm in order to maintain exclusivity.
Also
on April 17, 2008, Safeco received a letter addressed to Ms. Reynolds from the
Chief Executive Officer of Party D confirming a revised indication of interest
for an acquisition of Safeco by Party D at the per share price of $66.00, which
would require that Safeco agree not to declare or pay any further dividends on
Safeco common stock and that the definitive merger agreement would provide for a
termination fee of approximately 3.8% of Safeco's equity value at the proposed
transaction price. The letter indicated that, at Party D's option, as
much as 20% of the total consideration would be in the form of Party D common
stock and that there would be no financing contingency. The April 17,
2008 letter stated that the revised indication of interest was conditioned upon
Safeco not terminating the exclusivity agreement.
Later
on April 17, 2008, Safeco, after extensive discussion internally and with
representatives of Morgan Stanley and Skadden Arps, provided written notice to
Party D terminating the exclusivity agreement, effective at 11:59 p.m., New York
time, on April 17, 2008. Safeco also terminated Party D's access to
Safeco's electronic data room.
On
April 18, 2008, following discussions with Mr. Brown and representatives of
Skadden Arps regarding potential courses of action, Ms. Reynolds contacted Mr.
Kelly to indicate her belief that the Board would consider pursuing an
acquisition transaction with Liberty Mutual at a price of $68.50 per
share. Ms. Reynolds also indicated to Mr. Kelly that the Board was
considering a third party offer and would be prepared to move expeditiously
toward the announcement of an acceptable transaction. Mr. Kelly
responded that Liberty Mutual's board of directors had previously considered an
offer to acquire Safeco at a price of as high as $68.00 per share, that Liberty
Mutual would be prepared to complete due diligence and negotiation of a
definitive merger agreement by the evening of April 22, 2008, and that Liberty
Mutual would be willing to proceed without requiring that Safeco negotiate with
Liberty Mutual on an exclusive basis. Ms. Reynolds reiterated her
belief that the Board would support a transaction at $68.50 per share, but
indicated that she would discuss with the Board permitting Liberty Mutual to
commence due diligence and negotiation of a definitive merger agreement based on
its $68.00 per share indication of interest. Ms. Reynolds and Mr.
Kelly also discussed Safeco's employees, Safeco's strong brand identity and its
presence in key geographic markets and Liberty Mutual's future plans for
Safeco.
Also
on April 18, 2008, at a special meeting of the Board held for the purpose of
updating the Board regarding contacts with Party D and Liberty Mutual and
determining the appropriate course of action for Safeco in light thereof, which
meeting was also attended by representatives of Morgan Stanley and Skadden Arps,
Ms. Reynolds discussed with the Board Safeco's contacts with each of Party D and
Liberty Mutual. With respect to the contacts with Party D, Ms.
Reynolds discussed in detail, among other things, Party D's April 4, 2008
indication of interest in an acquisition of Safeco at a per share price between
$64.00 and $68.50, Safeco's entering into the exclusivity agreement with Party D
requiring, among other things, that Party D confirm its willingness to proceed
at a per share price of $68.50 on April 17, 2008, Party D's failure to confirm
the $68.50 price and its April 17, 2008 counterproposal to acquire Safeco at a
per share price of $66.00, based on the understanding that Safeco would not
declare or pay any further dividends on Safeco common stock, and Safeco's
consequent termination of the exclusivity agreement. With respect to
Liberty Mutual, Ms. Reynolds reported to the Board Liberty Mutual's indication
of interest in an acquisition of Safeco at a per share price of $68.00 and
willingness to move forward, on a non-exclusive basis, with due diligence and
negotiation of a definitive merger agreement on an expedited
timeframe. Following the discussion by Ms. Reynolds, representatives
of Morgan Stanley reviewed for the Board the financial aspects of the current
proposals from each of Party D and Liberty Mutual, the ability of each of Party
D and Liberty Mutual to finance a potential acquisition of Safeco and, in regard
to the proposal from Party D, discussed the fact that the requested termination
fee was at the high end of the range of termination fees observed in recent
transactions. Ms. Reynolds, Mr. Kari and Mr. Chong then discussed
their views of each of Party D and Liberty Mutual from a business fit and
potential synergy perspective and expressed the consensus view that based on
their understanding of Liberty Mutual's future plans and expressed interest in
implementing Safeco's current initiatives, a transaction with Liberty Mutual
could likely be accomplished with the least amount of disruption to Safeco's
business. Following the discussion, representatives of Skadden Arps
discussed the Board's fiduciary duties with respect to responding to the
proposals from Party D and Liberty Mutual, including in the context of the
previous indications of interest from Party A and Party B. Following
the discussion, Safeco's independent directors met in executive session with
representatives of Skadden Arps and discussed, among other things, management's
assessments and views of the
parties
and the possibility of a potential transaction. After extensive
discussion, the Board determined that Liberty Mutual's proposal for an
acquisition of Safeco at $68.00 per share represented an attractive price level
at which to commence negotiations and directed Ms. Reynolds to proceed with
negotiations toward finalizing transaction terms with each of Party D and
Liberty Mutual, in a competitive dynamic, to obtain the most attractive terms
and consideration for evaluation by the Board, which should include an
understanding of a potential acquiror's commitment to continuing Safeco's
presence in the Seattle, Washington area, to the maintenance of Safeco's brand
identity, to employee retention and to maintaining Safeco's commitment to the
communities in which it operates.
Following the April 18, 2008 Board
meeting, Ms. Reynolds contacted the Chief Executive of Party D to discuss the
Board's reaction to Party D's proposal. Ms. Reynolds stated that the
Board had determined that Party D's proposed per share acquisition price of
$66.00 was not financially attractive to Safeco at this time. Ms.
Reynolds informed the Chief Executive Officer of Party D that Party D would have
to increase its proposed acquisition price and requested that there be further
due diligence discussions among representatives of Party D and representatives
of Safeco to address concerns that had caused Party D to lower its proposed
acquisition price.
Ms.
Reynolds then contacted Mr. Kelly to discuss the Board's reaction to Liberty
Mutual's proposal. Ms. Reynolds reiterated her request that Liberty
Mutual increase its proposed per share acquisition price to $68.50 and indicated
that, in order for its proposal to be attractive to the Board, the proposal must
not be subject to any financing condition or contingency and Liberty Mutual
would need to provide information regarding its financing of the
transaction. Ms. Reynolds further indicated that the final terms of
any transaction should address Liberty Mutual's proposed approach to continuing
Safeco's presence in the Seattle, Washington area and Safeco's branding and
charitable commitments.
During
this time, Ms. Reynolds was contacted by a representative of Party C's financial
advisor who reiterated that Party C was not interested in pursuing a potential
transaction within a reasonable timeframe.
On
April 18, 2008, Skadden Arps provided to representatives of Liberty Mutual and
Debevoise & Plimpton LLP, outside counsel to Liberty Mutual, which is
referred to in this proxy statement as Debevoise, a draft amendment to the March
4, 2008 non-disclosure agreement between Liberty Mutual and Safeco, providing
for, among other things, certain restrictions on the ability of Liberty Mutual
to solicit for employment and hire certain Safeco employees. Safeco
and Liberty Mutual thereafter entered into this amendment.
Also
on April 18, 2008, representatives of Liberty Mutual, Debevoise and Lehman
Brothers, financial advisor to Liberty Mutual, commenced their due diligence
review of non-public information relating to Safeco through access to the
electronic data room. Also on April 18, 2008, representatives of
Party D, Party D's outside legal counsel and Party D's financial advisor were
again granted access to the electronic data room.
Also on April 18, 2008, Skadden Arps
provided to representatives of Liberty Mutual and Debevoise a draft merger
agreement and accompanying draft Safeco disclosure schedule and provided to
representatives of Party D and Party D's outside legal counsel a draft Safeco
disclosure schedule to accompany the draft merger agreement provided by Skadden
Arps on April 15, 2008.
On April 19, 2008, Party D's outside
legal counsel provided comments on the draft merger agreement. Also
on April 19, 2008, representatives of Skadden Arps and representatives of Party
D's outside legal counsel participated in a conference call to discuss Party D's
proposed changes to the draft merger agreement. During the
discussion, the representatives of Skadden Arps indicated that the comments
provided by Party D's outside legal counsel represented a departure from certain
of the terms set forth in the annex to the exclusivity agreement between Safeco
and Party D, which had since been terminated.
On April 20, 2008, representatives of
Liberty Mutual and representatives of Lehman Brothers attended due diligence
meetings with representatives of Safeco who conducted presentations regarding
Safeco's various business lines and other aspects of Safeco's
business.
Also on April 20, 2008, Ms. Reynolds
contacted the Chief Executive Officer of Party D to discuss the need for Party D
to increase its proposed per share acquisition price to a price in the range of
$68.50 and to reduce its requested termination fee. During the
discussion, Ms. Reynolds also suggested that the parties could work
together
to
develop a plan to attain additional synergies, which could be used to support an
increase in Party D's offer price. The Chief Executive Officer of
Party D responded that, while Party D might be able to increase its previously
indicated acquisition price of $66.00 per share, he did not expect to be in
position to increase the proposed price to a price in the range of $68.50 per
share.
Also on April 20, 2008, Mr. Kelly
contacted Ms. Reynolds to discuss the status of discussions between Safeco and
Liberty Mutual. During the discussion, Ms. Reynolds emphasized the
lack of progress on an increase in Liberty Mutual's proposed per share
acquisition price from $68.00 to $68.50.
Also on April 20, 2008, representatives
of Skadden Arps participated in a conference call with representatives of Party
D's outside legal counsel to further discuss certain issues raised by the
comments on the draft merger agreement provided by Party D's outside legal
counsel on April 19, 2008. At the conclusion of the discussion, the
representatives of Skadden Arps and the representatives of Party D's outside
legal counsel concurred that the parties' respective positions reflected
substantive differences and that further discussion directly involving
representatives of Safeco and Party D would likely be necessary to further
advance discussions on the treatment of such issues.
Also on April 20, 2008, Debevoise
provided comments on the draft merger agreement.
On April 21, 2008, Messrs. Kari and
Chong, together with representatives of Skadden Arps and Morgan Stanley, met
with Mr. Fallon and Richard Quinlan, Deputy General Counsel of Liberty Mutual,
together with representatives of Debevoise and Lehman Brothers, to negotiate the
terms of the draft merger agreement. The negotiation focused on a
number of issues raised by the proposed changes to the draft merger agreement
provided by Debevoise on April 20, 2008, and specifically, among other things,
the proposed changes related to (1) the scope of Liberty Mutual's representation
regarding the availability of the financing necessary to consummate the proposed
acquisition of Safeco, (2) the level of efforts required of Liberty Mutual in
seeking governmental and regulatory approvals necessary for the consummation of
the proposed acquisition, (3) the ability of Safeco to continue to declare and
pay its regular quarterly cash dividend during the time between the execution of
a definitive merger agreement and the closing of the proposed acquisition, (4)
Safeco's ability to respond to third party acquisition proposals, (5) the amount
of the retention payments to be made available to Safeco employees to help
ensure the continued performance of the business pending closing, (6) the terms
of Liberty Mutual's commitments relating to the maintenance of Safeco's brand
identity and community commitments, (7) the conditions relating to the terms
under which governmental and regulatory approvals were obtained and the absence
of certain governmental litigation, (8) Liberty Mutual's proposed termination
fee in an amount equal to 3.5% of Safeco's equity value at the proposed
transaction price, as compared to the 2.25% termination fee proposed in the
initial draft of the merger agreement, (9) the 12-month "tail period" for
determining whether the termination fee would be payable under certain
circumstances, as compared to the 9-month period proposed in the draft merger
agreement (10) Liberty Mutual's proposed right to receive the termination fee if
the definitive merger agreement had been terminated due to a change in
recommendation by the Board, regardless of whether a third party acquisition
proposal was then outstanding and (11) the scope of the rights of Safeco,
including on behalf of its shareholders, to bring claims against Liberty Mutual
for breach following a termination of the merger agreement. At the
conclusion of the meeting, certain issues remained outstanding and the parties
agreed to resume negotiations later that day in an attempt to further resolve
open issues.
Also on April 21, 2008, Messrs. Kari
and Chong met with representatives of Party D in an attempt to resolve certain
of the issues outstanding between the parties. At the conclusion of
the meeting, several significant issues remained outstanding.
Also on April 21, 2008, Ms. Reynolds
contacted the Chief Executive Officer of Party D to express Safeco's view that
Party D was capable of financing an acquisition of Safeco at a higher value than
that offered under Party D's current proposal. During the discussion,
the Chief Executive Officer of Party D indicated that Party D would not increase
its proposed per share acquisition price to $68.00, regardless of its financing
capability. Ms. Reynolds then requested that Party D consider
increasing its proposed per share acquisition price to $67.00, with Safeco
retaining the ability to continue to declare and pay regular quarterly cash
dividends prior to closing. The Chief Executive Officer of Party D
responded by increasing Party D's proposed per share acquisition price to
$67.00, but based on the understanding that Safeco would not declare or pay any
further dividends prior to closing.
Also on April 21, 2008, Mr. Kelly
contacted Ms. Reynolds to discuss the terms that Liberty Mutual was prepared to
offer with respect to the arrangements relating to the retention of Safeco
employees and the maintenance of Safeco's brand identity, community commitments
and presence in the Seattle, Washington area. In response to Ms.
Reynolds's repeated request to improve the price terms of Liberty Mutual's
proposal, Mr. Kelly offered to increase its per share acquisition price to
$68.25, with Safeco retaining the ability to continue to declare and pay regular
quarterly cash dividends prior to closing.
Following her conversation with Mr.
Kelly, Ms. Reynolds contacted the Chief Executive Officer of Party D and
reiterated that Party D's proposal was not competitive and informed the Chief
Executive Officer of Party D that Safeco would now seek to finalize a
transaction with another party. Following this conversation, Safeco
received a letter from Party D addressed to Ms. Reynolds formally withdrawing
Party D's acquisition proposal.
Also on April 21, 2008 and through the
early morning hours of April 22, 2008, Messrs. Kari and Chong, together with
representatives of Skadden Arps and Morgan Stanley, resumed their meeting with
Messrs. Fallon and Quinlan, together with representatives of Debevoise and
Lehman Brothers, to finalize the terms of the draft merger
agreement. During this meeting, agreement was reached among the
parties regarding, among other things, the following key terms (1) Liberty
Mutual's representation regarding financing, (2) Liberty Mutual's commitment to
use its reasonable best efforts to obtain governmental and regulatory approvals,
subject to a no Regulatory Material Adverse Effects standard, (3) Safeco's right
to continue to declare and pay its regular quarterly cash dividend at agreed
upon record and payment dates prior to closing, (4) the aggregate amount of the
retention payments to be made to Safeco employees, (5) Liberty Mutual's
agreements to maintain the surviving corporation's executive offices in the
Seattle, Washington area, to cause the surviving corporation to honor certain
agreed upon charitable and community commitments, to use the "Safeco" brand in
connection with certain business lines, products and services and to maintain
certain branding and naming rights, including with respect to Safeco Field, (6)
Liberty Mutual's right to receive a termination fee equal to $182,500,000,
representing approximately 2.9% of Safeco's equity value at the proposed
transaction price, under certain circumstances, (7) Liberty Mutual's right to
receive the termination fee in connection with any change in recommendation by
the Board followed by a termination of the merger agreement by Liberty Mutual
and (8) the right of Safeco, including on behalf of its shareholders, to bring
claims against Liberty Mutual for breach following a termination of the merger
agreement.
Throughout the day on April 22, 2008,
representatives of Safeco and Skadden Arps, on the one hand, and representatives
of Liberty Mutual and Debevoise, on the other hand, worked to finalize the
remaining terms of the merger agreement and the accompanying Safeco disclosure
schedule.
Also on April 22, 2008, the Liberty
Mutual board of directors approved the entering into of the merger agreement and
the transactions contemplated thereby.
Also on April 22, 2008, a special
meeting of the Board was held for the purpose of considering approval of the
merger agreement with Liberty Mutual. Representatives of Morgan
Stanley and Skadden Arps were in attendance at the
meeting. Representatives of Skadden Arps began the meeting by
discussing the Board's fiduciary duties in connection with the proposed
transaction with Liberty Mutual and reviewing the key aspects of the process in
which the Board and Safeco had engaged in evaluating the advisability of a
business combination transaction, in general, and the specific indications of
interests received from Liberty Mutual and the various other interested
parties. Ms. Reynolds then provided the Board with an update on the
contacts with Liberty Mutual and Party D since the April 18, 2008 Board meeting,
which had culminated in a substantially negotiated proposed transaction with
Liberty Mutual and Party D's formal withdrawal of its proposal. Next,
representatives of Morgan Stanley presented for the Board's consideration its
financial analysis of the proposed transaction, reviewing with the Board, among
other things, certain valuation metrics as applied to the proposed transaction,
Safeco's historical financial performance and future performance outlook (in the
context of the property and casualty insurance industry and Safeco management's
business plan) and Safeco's stand-alone valuation
profile. Representatives of Skadden Arps then reviewed with the Board
the key terms and conditions of the proposed merger agreement. All of
which materials were delivered in advance of the meeting. Following
Skadden Arps' presentation, Morgan Stanley delivered its oral opinion to the
Board, which was subsequently confirmed in writing, that, as of that date and
based upon and subject to the limitations, qualifications and assumptions set
forth in the written opinion, the $68.25 per share in cash to be received by the
holders of the shares of Safeco common stock pursuant to the merger
agreement
was
fair from a financial point of view to such holders. A description of
this opinion appears under "– Opinion of Financial
Advisor." Following this presentation, Ms. Reynolds provided Safeco
management's view of the proposed transaction noting that management believed
the transaction provided Safeco shareholders with the opportunity to receive an
attractive premium for their shares of Safeco common stock and provided for
relatively strong protections for Safeco and its employees. Following
this presentation, Safeco's independent directors met in executive session with
representatives of Skadden Arps present and discussed, among other things, the
merits of the proposed transaction with Liberty Mutual as compared to Safeco's
stand-alone prospects and the risks and uncertainties associated
therewith. Following the discussion, it was the unanimous view of
Safeco's independent directors that proceeding with the proposed transaction
with Liberty Mutual was in the best interests of Safeco and its
shareholders. Following the executive session, the full Board
reconvened and unanimously adopted the merger agreement, approved the
transactions contemplated by the merger agreement and resolved to recommend that
Safeco shareholders approve the merger agreement.
The merger agreement and the
accompanying disclosure schedules were then finalized and the merger agreement
was executed. The proposed merger was announced by joint press
release on the morning of April 23, 2008 prior to the opening of trading on the
NYSE.
The
principal purposes of the merger are to enable Liberty Mutual to acquire all of
the outstanding shares of Safeco common stock and to provide Safeco shareholders
with the opportunity to receive a cash payment for their shares at a premium
over the recent market prices at which Safeco common stock traded before the
public announcement of the merger agreement. The acquisition will be
accomplished by a merger of Merger Sub with and into Safeco, with Safeco
continuing as the surviving corporation and as a subsidiary of Liberty
Mutual. If the merger is completed, each outstanding share of Safeco
common stock (other than shares owned by Safeco and its subsidiaries and Liberty
Mutual and its subsidiaries (other than shares held in investment portfolios))
will be converted into the right to receive $68.25 in cash, without interest and
less any applicable withholding taxes. You will receive the per share
amount after you remit your certificate(s) evidencing your shares of Safeco
common stock in accordance with the instructions contained in a letter of
transmittal to be sent to you promptly (and in any event no later than three
business days) after completion of the merger, together with the properly
completed and signed letter of transmittal and any other documentation required
to be completed pursuant to the written instructions. If you hold
your shares in book-entry form – that is, without a stock certificate – unless
you do not vote in favor of the merger and you perfect your dissenters' rights
under the WBCA, the exchange agent will automatically send you the per share
amount in cash in exchange for the cancellation of your shares of Safeco common
stock after completion of the merger, provided that you comply with applicable
tax certification requirements. If your shares of Safeco common stock
are held in "street name" by your broker, bank or other nominee, you will
receive instructions from your broker, bank or other nominee as to how to
surrender your "street name" shares and receive cash for those
shares.
At
the effective time of the merger, each outstanding stock option to purchase
shares of Safeco common stock, whether vested or unvested, will be converted
into the right to receive an amount in cash per share subject to the stock
option equal to the excess, if any, of the per share amount of $68.25 over the
exercise price per share of such stock option, without interest and less any
applicable withholding taxes.
Each
restricted stock right, whether vested or unvested, that is outstanding
immediately prior to the effective time of the merger will be converted into the
right to receive an amount of cash per right equal to the per share amount of
$68.25, without interest and less any applicable withholding taxes.
The
merger will terminate all interests in Safeco common stock held by the Safeco
shareholders, Safeco will become a subsidiary of Liberty Mutual and Liberty
Mutual will be the sole beneficiary of any earnings and growth of Safeco
following the merger. Upon completion of the merger, Safeco common
stock will be delisted from the NYSE, will no longer be publicly traded and will
be deregistered under the Exchange Act.
Effects
of the Merger Not Being Completed
If
the merger is not completed for any reason, Safeco shareholders and holders of
stock options and restricted stock rights will not receive any payment from
Liberty Mutual for their shares, stock options or restricted stock
rights. Instead, Safeco will remain a public company and shares of
Safeco common stock will continue to be listed on the NYSE. If the
merger is not completed, Safeco expects to continue to conduct its business in a
manner similar to the manner in which it is presently conducted. In
such event, the value of shares of Safeco common stock would continue to be
subject to current risks and opportunities, including the various factors
described in Safeco's past filings with the SEC, such as the condition of the
insurance industry and prevailing economic and market conditions.
If
the merger is not completed, Safeco common stock may trade at pre-announcement
levels or below due to adverse market reaction. If the merger is not
completed, there can be no assurance that any other transaction similar to the
merger would be available to Safeco. Even if such a transaction were
available, there can be no assurance that such transaction would be acceptable
to the Safeco board of directors and would offer Safeco shareholders the
opportunity to receive a cash payment for their shares of Safeco common stock at
a premium over the recent market prices at which Safeco common stock traded
before the public announcement of any such transaction.
Finally,
if the merger agreement is terminated under certain circumstances, Safeco may be
obligated to pay a termination fee of $182,500,000, see "The Merger Agreement –
Termination Fee."
After
careful consideration, the Safeco board of directors has unanimously determined
that the merger agreement and the merger are advisable and in the best interest
of Safeco and its shareholders. Accordingly, the Safeco board of
directors has unanimously adopted the merger agreement and approved the
transactions contemplated by the merger agreement. The Safeco board of directors
unanimously recommends that Safeco shareholders vote "FOR" the proposal to
approve the merger agreement. In making this determination,
the Safeco board of directors consulted with its financial advisor and outside
legal counsel and considered a number of factors that supported its unanimous
decision to adopt the merger agreement and approve the transactions contemplated
by the merger agreement, including the following:
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·
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the
Safeco board of directors' analysis and understanding of the business,
operations, financial performance, financial condition, earnings and
future prospects of Safeco on a stand-alone basis, and the Safeco board of
directors' assessment, based on such analysis and understanding, that the
merger would be more favorable to Safeco and its shareholders than
remaining an independent public company in light of the potential rewards
and risks and uncertainties associated with Safeco continuing to operate
on a stand-alone basis. Those risks and uncertainties included
those relating to Safeco's ability to achieve its business plan and
projected future financial performance, the increasingly competitive
nature of the industries in which Safeco operates and Safeco's relatively
small size in comparison with a number of its competitors, many of which
are better capitalized and have significantly greater resources than
Safeco;
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·
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the
current and historical market prices of Safeco common stock and the fact
that the merger consideration of $68.25 per share to be paid to Safeco
shareholders represented a premium of
approximately:
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o
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50%
over the closing trading price of Safeco common stock on April 21,
2008;
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o
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47%
over the average closing trading price of Safeco common stock during the
three month period prior to April 21, 2008;
and
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o
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34%
over the average closing trading price of Safeco common stock during the
six month period prior to April 21,
2008;
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·
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the
fact that the merger consideration of $68.25 in cash per share to be paid
to Safeco shareholders exceeded or was within the range of results of the
valuation analyses performed by Morgan
Stanley;
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·
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the
view of the Safeco board of directors that continuing to operate on a
stand-alone basis was not likely to produce greater value in the near
term, if Safeco common stock were to trade consistently in line with the
values of Safeco's peers;
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·
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the
fact that the merger consideration would be paid entirely in cash, which
provides certainty and immediate value to Safeco shareholders, and holders
of stock options for Safeco common stock and restricted stock rights
(including as compared to a transaction involving a substantial amount of
securities, such as the case in the acquisition proposal submitted by
Party D);
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·
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the
fact that the merger consideration of $68.25 per share reflected the
highest value proposed by any of the parties following due diligence, and
the view of the Safeco board of directors, after consultation with Safeco
management and Morgan Stanley, that based upon the information then
available, it was unlikely that there would be available an alternative
transaction, if one were to be pursued, that would provide greater value
to Safeco shareholders than the
merger;
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·
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the
judgment of the Safeco board of directors that further negotiation with
Party A, Party B or Party D or entering into negotiations with any other
parties, including Party C, could unduly risk the proposal received from
Liberty Mutual;
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·
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the
opinion of Morgan Stanley that, as of April 22, 2008, and, based upon and
subject to the assumptions, qualifications and limitations set forth in
such opinion, the merger consideration of $68.25 per share in cash to be
paid to the holders of shares of Safeco common stock pursuant to the
merger agreement was fair, from a financial point of view, to such
shareholders. A summary of Morgan Stanley's financial analyses
is described under "—Opinion of Financial Advisor" beginning on
page 33 and the written opinion of Morgan Stanley, dated April 22,
2008, is included as Appendix B to this proxy
statement;
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the
terms of the merger agreement,
including:
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o
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the
limited number and nature of the conditions to Liberty Mutual's and Merger
Sub's obligation to consummate the merger, including in particular the
absence of a financing condition, and the likelihood of satisfying such
conditions;
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o
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the
fact that Liberty Mutual has agreed to use its reasonable best efforts to
take all actions necessary to obtain required governmental and regulatory
approvals, except to the extent that taking such actions would reasonably
be expected to have a Regulatory Material Adverse
Effect;
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o
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Safeco's
ability, under certain circumstances, to furnish information to and
conduct negotiations with third parties regarding acquisition
proposals;
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o
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the
fact that, subject to compliance with the terms and conditions of the
merger agreement, the Safeco board of directors is permitted to change its
recommendation that Safeco shareholders vote in favor of the proposal to
approve the merger agreement whether or not such change of recommendation
is in response to an acquisition proposal and, prior to the approval of
the merger agreement by Safeco shareholders, to terminate the merger
agreement in order to enter into a definitive alternative acquisition
agreement with respect to a superior proposal, in each case, upon the
payment to Liberty Mutual of a $182,500,000 termination fee (representing
approximately 2.9% of Safeco's equity value based on the per share amount
of $68.25);
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o
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the
view of the Safeco board of directors, after consultation with Morgan
Stanley and Skadden Arps, that as a percentage of the aggregate merger
consideration to be paid in the merger, the termination fee was within the
range of termination fees provided for in recent comparable acquisition
transactions and the conditions to its payment were similar to those
applicable to such transactions;
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o
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the
fact that Liberty Mutual had represented that it has and will have
available at and at all times prior to the completion of the merger
sufficient funds to complete the merger and the other transactions
contemplated by the merger agreement and the fact that Safeco, on behalf
of its shareholders, would have the right to bring claims for breach of
such representation even if the merger agreement were to be
terminated;
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o
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the
fact that the merger agreement permits Safeco to continue to declare
regular quarterly cash dividends at its current
levels;
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o
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Liberty
Mutual's agreement to, during the two year period following the effective
time of the merger, provide employees of Safeco and its subsidiaries who
continue employment with the surviving corporation with compensation and
benefits under employee benefit and compensation plans that in the
aggregate are not less favorable than those currently provided by Safeco
to its employees;
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the
fact that Liberty Mutual has agreed to maintain the "Safeco" brand
following the merger;
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the
fact that Liberty Mutual has agreed to honor Safeco's commitments to the
Safeco Insurance Foundation; and
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the
fact that Liberty Mutual intends to maintain the surviving corporation's
principal executive offices in Seattle, Washington following the merger;
and
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·
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the
availability of dissenters' rights to Safeco shareholders who comply with
all of the procedural requirements under the WBCA, which allows such
shareholders to seek determination of the fair value of their shares in
Washington courts.
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In
the course of its deliberations, the Safeco board of directors also considered a
variety of material risks and other potentially adverse factors, including the
following:
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the
fact that Safeco will no longer exist as an independent public company and
that Safeco shareholders will not participate in any future earnings or
growth of Safeco business and will not benefit from any appreciation in
Safeco value, including any appreciation in value that could be realized
as a result of improvements to our
operations;
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the
conditions to Liberty Mutual's obligation to complete the merger and the
right of Liberty Mutual to terminate the merger agreement under certain
circumstances;
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the
risks and uncertainties related to the announcement and pendency of the
merger and the risks and costs to Safeco if the merger does not close,
including the diversion of management and employee attention, potential
employee attrition and the potential effect on our business and our
relationships with agents and
customers;
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the
amount of time it could take to complete the merger, including the fact
that consummation of the merger is subject to governmental and regulatory
approvals and that there can be no assurance that such approvals will be
received prior to the outside date, or at all, or that the governmental or
regulatory bodies will not seek to impose conditions that may cause the
parties not to consummate the
merger;
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the
terms of the merger agreement that place certain limitations on Safeco's
ability to consider third party acquisition proposals and to terminate the
merger agreement and accept a superior
proposal;
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the
fact that Safeco may be required to pay the termination fee to Liberty
Mutual, under certain circumstances, including if Safeco terminates the
merger agreement to accept a superior proposal or in the event that the
Safeco board of directors changes its recommendation that Safeco
shareholders vote in favor of approval of the merger agreement other than
in response to an acquisition
proposal;
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the
restrictions on the conduct of Safeco's business prior to the completion
of the merger, requiring Safeco to conduct our business only in the
ordinary course, subject to specific limitations, which may delay or
prevent Safeco from undertaking business opportunities that may arise
pending completion of the merger;
and
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the
fact that an all cash transaction would be taxable to Safeco shareholders
that are U.S. persons for U.S. federal income tax
purposes.
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In
addition, the Safeco board of directors was aware of and considered the
interests that certain directors and executive officers may have with respect to
the merger that differ from, or are in addition to, their interests as Safeco
shareholders generally, as described in "– Interests of Safeco's Directors and
Executives Officers in the Merger."
The
foregoing discussion of the information and factors considered by the Safeco
board of directors in reaching its conclusions and recommendation includes
material positive and potentially material adverse factors considered by the
Safeco board of directors, but it is not intended to be exhaustive and may not
include all of the factors the Safeco board of directors
considered. In reaching its determination to adopt the merger
agreement and approve the transactions contemplated by the merger agreement, the
Safeco board of directors did not attempt to quantify, rank or otherwise assign
any relative or specific weights to the various factors that it considered in
reaching its determination that the merger agreement and the merger are
advisable and in the best interest of Safeco and its
shareholders. Rather, the determination and recommendation of the
Safeco board of directors were based on an analysis of the totality of the
information presented to, and the factors considered by the Safeco board of
directors. In addition, in considering the factors described above,
the individual members of the Safeco board of directors may have accorded
greater or lesser relative importance to specific factors considered than did
other members of the board of directors.
The
Safeco board of directors recommends that you vote "FOR" the approval of the
merger agreement.
Safeco retained Morgan Stanley to act
as its financial advisor in connection with the merger because of its expertise
and reputation and because its investment banking professionals have substantial
experience in comparable transactions. On April 22, 2008, Morgan
Stanley rendered its oral opinion, subsequently confirmed in writing, to the
Safeco board of directors that as of such date and, based upon and subject to
the assumptions, qualifications and limitations set forth in the written
opinion, the $68.25 per share in cash to be received by the holders of shares of
Safeco common stock pursuant to the merger agreement was fair, from a financial
point of view, to such holders.
THE FULL TEXT OF MORGAN STANLEY'S
WRITTEN FAIRNESS OPINION, DATED APRIL 22, 2008, IS ATTACHED AS ANNEX B TO THIS
PROXY STATEMENT. YOU SHOULD READ THE MORGAN STANLEY OPINION FOR A
DISCUSSION OF THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, FACTORS CONSIDERED AND
LIMITATIONS UPON THE REVIEW UNDERTAKEN BY MORGAN STANLEY IN RENDERING ITS
OPINION. THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE FULL TEXT OF SUCH OPINION. MORGAN STANLEY'S OPINION IS DIRECTED
TO THE SAFECO BOARD OF DIRECTORS AND ADDRESSES ONLY THE FAIRNESS FROM A
FINANCIAL POINT OF VIEW OF THE CONSIDERATION RECEIVED BY THE HOLDERS OF
SAFECO
COMMON
STOCK PURSUANT TO THE MERGER AGREEMENT TO SUCH HOLDERS AS OF THE DATE OF THE
OPINION. IT DOES NOT ADDRESS ANY OTHER ASPECTS OF THE MERGER AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY SAFECO SHAREHOLDER AS TO HOW TO VOTE AT
THE ANNUAL MEETING.
In arriving at its opinion, Morgan
Stanley, among other things:
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reviewed
certain publicly available financial statements and other business and
financial information of Safeco and Liberty Mutual,
respectively;
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reviewed
certain internal financial statements and other financial and operating
data concerning Safeco;
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reviewed
certain financial projections prepared by the management of
Safeco;
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discussed
the past and current operations and financial condition and the prospects
of Safeco, including information relating to certain potential strategic,
financial and operational benefits to a buyer anticipated from the merger,
with senior executives of
Safeco;
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reviewed
the reported prices and trading activity for Safeco common
stock;
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compared
the financial performance of Safeco, and the prices and trading activity
of Safeco common stock with that of certain other comparable
publicly-traded companies and their
securities;
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reviewed
the financial terms, to the extent publicly available, of certain
comparable acquisition
transactions;
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participated
in discussions and negotiations among representatives of Safeco and
Liberty Mutual and their financial and legal
advisors;
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reviewed
the merger agreement and certain related documents;
and
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performed
such other analyses, reviewed such other information and considered such
other factors as Morgan Stanley deemed
appropriate.
|
In arriving at its opinion, Morgan
Stanley assumed and relied upon, without independent verification, the accuracy
and completeness of the information that was publicly available or supplied or
otherwise made available to it by Safeco and Liberty Mutual, and formed a
substantial basis for the opinion. With respect to the financial
projections, including information relating to certain potential strategic,
financial and operational benefits to a buyer anticipated from the merger,
Morgan Stanley assumed that they had been reasonably prepared based on
assumptions that reflect Safeco management's best currently available estimates
and judgments of the future financial performance of Safeco. In
addition, Morgan Stanley assumed that the merger will be consummated in
accordance with the terms set forth in the merger agreement without any material
waiver, amendment or delay of any material terms or
conditions. Morgan Stanley assumed that in connection with the
receipt of all the necessary governmental, regulatory or other approvals and
consents required for the proposed merger, no delays, limitations, conditions or
restrictions will be imposed that would have a material adverse effect on the
contemplated benefits expected to be derived in the proposed
merger. Morgan Stanley is not a legal, tax, regulatory or actuarial
advisor. Morgan Stanley is a financial advisor only and relied upon,
without independent verification, the assessment of Safeco and its legal, tax,
regulatory or actuarial advisors with respect to legal, tax, regulatory or
actuarial matters. Morgan Stanley did not make any independent
valuation or appraisal of the assets or liabilities of Safeco, nor was it
furnished with any such appraisals. Morgan Stanley's opinion was
necessarily based on financial, economic, market and other conditions as in
effect on, and the information made available to Morgan Stanley as of, the date
of the opinion. Events occurring after such date may affect its
opinion and the assumptions used in preparing it, and Morgan Stanley did not
assume any obligation to update, revise or reaffirm its
opinion.
The following is a summary of the
material financial analyses used by Morgan Stanley in connection with providing
its opinion to the Safeco board of directors. The financial analyses
summarized below include information presented in tabular format. In
order to fully understand the financial analyses used by Morgan Stanley, the
tables must be read together with the text of each summary. The
tables alone do not constitute a complete description of the financial
analyses. Rather, the analyses listed in the tables and described
below must be considered as a whole; considering any portion of such analyses
and of the factors considered, without considering all analyses and factors,
could create a misleading or incomplete view of the process underlying Morgan
Stanley's fairness opinion.
Historical
Stock Trading Analysis
Morgan Stanley performed a trading
range analysis to provide background and perspective with respect to the premium
that the $68.25 per share cash consideration represented to various share price
metrics of Safeco common stock.
Morgan Stanley observed the
following:
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Purchase
Price Premiums
|
Share
Price
|
Premium
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| |
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$45.61
|
50%
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Premium
to 3 Month Average
|
$46.38
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47%
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Premium
to 6 Month Average
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$50.88
|
34%
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Premium
to 52-week High
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$67.23
|
1%
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Transaction
Multiple Analysis
In addition, Morgan Stanley calculated
the multiple of the transaction equity value per share to several operating
metrics for calendar years 2008 and 2009, including estimated earnings per share
based upon both Safeco management estimates and median estimates obtained from
Institutional Brokers Estimate System, which is referred to in this proxy
statement as IBES.
Morgan Stanley observed the
following:
|
|
|
Purchase
Price
Valuation
Multiples
|
|
| |
|
|
|
|
2008E
P/E – IBES estimates
|
$5.95
|
11.5x
|
|
|
2009E
P/E – IBES estimates
|
$6.05
|
11.3x
|
|
|
2008E
P/E – Management estimates
|
$6.70
|
10.2x
|
|
|
2009E
P/E – Management estimates
|
$7.66
|
8.9x
|
|
|
Price
/ Book Value (3/31/08)
|
$37.09
|
1.84x
|
|
|
Price
/ Book Value (12/31/07)
|
$37.81
|
1.81x
|
|
Comparable
Company Analysis
Morgan Stanley reviewed and compared
specific financial ratios relating to Safeco to corresponding financial ratios
for comparable publicly-traded insurance companies and reviewed and compared the
trading value of Safeco as compared to the trading values of the selected
companies. Morgan Stanley selected these companies based upon its
views as to the comparability of the financial and operating characteristics of
these companies to Safeco.
The companies included in the
comparable companies analysis were divided into two segments:
|
|
·
|
Large
capitalization companies:
|
|
|
o
|
The
Travelers Companies
|
|
|
o
|
The
Allstate Corporation
|
|
|
o
|
The
Hartford Financial Services Group,
Inc.
|
|
|
o
|
The
Progressive Corporation; and
|
|
|
·
|
Small
/ mid capitalization companies:
|
|
|
o
|
Mercury
General Corporation
|
|
|
o
|
The
Hanover Insurance Group
|
|
|
o
|
OneBeacon
Insurance Group Ltd.
|
|
|
o
|
Selective
Insurance Group
|
|
|
o
|
State
Auto Financial Corporation
|
|
|
o
|
Harleysville
Group Inc.
|
Morgan Stanley used publicly available
research analysts' estimates to compare specific financial multiples of these
companies to those of Safeco as follows:
|
|
·
|
closing
stock price as of April 21, 2008 to 2008 estimated earnings per share, or
net income per share, which is referred to in this proxy statement as EPS;
and
|
|
|
·
|
closing
stock price as of April 21, 2008 to 2007 year end book value per share,
which is referred to in this proxy statement as YE
BV.
|
The following table sets forth the
multiples that were calculated and selected for purposes of the
analysis:
|
|
Price
/ 2008
E
EPS
|
Price
/ 2007
YE
BV
|
| |
|
|
|
Safeco
Corporation
|
7.7x
|
1.21x
|
|
Large Cap Trading
Value
Comparables
|
|
|
|
The
Travelers Companies
|
8.2x
|
1.17x
|
|
The
Allstate Corporation
|
8.2x
|
1.28x
|
|
The Hartford Financial Services Group, Inc.
|
7.5x
|
1.21x
|
|
Chubb
Corporation
|
8.6x
|
1.34x
|
|
The
Progressive Corporation
|
14.8x
|
2.47x
|
|
Large
Cap Median
|
8.2x
|
1.28x
|
|
Small / Mid Cap
Trading Value
Comparables
|
|
|
|
Mercury
General Corporation
|
11.5x
|
1.36x
|
|
The
Hanover Insurance Group
|
9.7x
|
0.95x
|
|
OneBeacon
Insurance Group Ltd.
|
10.3x
|
0.86x
|
|
Selective
Insurance Group
|
11.2x
|
1.27x
|
|
State
Auto Financial Corporation
|
13.0x
|
1.27x
|
|
Harleysville
Group Inc.
|
11.1x
|
1.55x
|
|
Overall
Median
|
10.3x
|
1.27x
|
Applying a range of multiples derived
from the comparable public companies analysis to corresponding financial data
for Safeco provided to Morgan Stanley by Safeco, as discussed with Safeco
management, Morgan Stanley calculated a range of equity values per share of
Safeco common stock of $45.00 to $52.00. This range of equity values
per share of Safeco common stock implied multiple ranges of 7.6-8.7x 2008 IBES
estimated EPS, 6.7-7.8x 2008 Safeco management estimated EPS and 1.19-1.38x 2007
year end book value per share. In addition to performing its analysis
on a standalone basis, Morgan Stanley also included assumed transaction
synergies of $250 million per annum, net of assumed tax expense of 35%,
capitalized at 8.5x. Using this analysis, Morgan Stanley calculated a
range of equity values per share of Safeco common stock of $60.00 to
$68.00. This range of equity values per share of Safeco common stock
implied multiple ranges of 10.1-11.4x 2008 IBES estimated EPS, 9.0-10.1x 2008
Safeco management estimated EPS and 1.59-1.80x 2007 YE BV.
Morgan Stanley noted that Safeco
shareholders will receive $68.25 per share of Safeco common stock in the
merger.
No company utilized in the comparable
company analysis is identical to Safeco. In evaluating comparable
companies, Morgan Stanley made judgments and assumptions with regard to industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Safeco, such as the
impact of competition on the businesses of Safeco and the industry generally,
industry growth and the absence of any adverse material change in the financial
condition and prospects of Safeco or the industry or in the financial markets in
general. Mathematical analysis (such as determining the average or
median) is not in itself a meaningful method of using comparable company
data.
Comparable
Transaction Analysis
Using
public filings and other publicly available information, Morgan Stanley reviewed
and compared the purchase prices and financial multiples paid in twelve
acquisitions that Morgan Stanley, based on its experience, deemed relevant to
arriving at its opinion. All of these transactions involved companies
with property and casualty insurance operations and were announced after
July 2006. Morgan Stanley chose the transactions used in the
comparable transaction analysis based on the similarity of the target companies
in such transactions to Safeco in their property and casualty insurance business
focus, underwriting activities and other characteristics of their businesses.
Morgan Stanley reviewed the following transactions:
|
|
·
|
Meadowbrook
Insurance Group, Inc. acquisition of ProCentury Corporation (announced
February 20, 2008);
|
|
|
·
|
Employers
Holdings, Inc. acquisition of AmCOMP Incorporated (announced January 10,
2008);
|
|
|
·
|
QBE
Insurance Group Ltd. acquisition of North Pointe Holdings Corporation
(announced January 3, 2008);
|
|
|
·
|
The
MAPFRE Group acquisition of The Commerce Group, Inc. (announced October
30, 2007);
|
|
|
·
|
Münchener
Rückversicherungs-Gesellschaft Aktiengesellschaft, which is referred to in
this proxy statement as Munich Re, acquisition of The Midland Company
(announced October 17, 2007);
|
|
|
·
|
The
Doctors Company acquisition of SCPIE Holdings Inc. (announced October 16,
2007);
|
|
|
·
|
D.
E. Shaw & Co., L.P. acquisition of James River Group, Inc. (announced
June 11, 2007);
|
|
|
·
|
Liberty
Mutual Insurance Company acquisition of Ohio Casualty Corporation
(announced May 6, 2007);
|
|
|
·
|
Zurich
Financial Services Group acquisition of Bristol West Holdings, Inc.
(announced March 1, 2007);
|
|
|
·
|
QBE
Insurance Group Ltd. acquisition of Winterthur US Holdings, Inc.
(announced January 4, 2007);
|
|
|
·
|
Elara
Holdings, Inc. acquisition of Direct General Corporation (announced
December 4, 2006); and
|
|
|
·
|
The
Delek Group Ltd. acquisition of Republic Companies Group, Inc. (announced
August 4, 2006);
|
Morgan Stanley used publicly available
research analysts' estimates and publicly disclosed book value per share to
compare those financial results to the transaction equity price per share
received as consideration by each of the acquired companies as
follows:
|
|
·
|
transaction
equity price per share to estimated one year forward earnings per share,
or net income per share, which is referred to in this proxy statement as
NTM EPS; and
|
|
|
·
|
transaction
equity price per share to YE BV.
|
The following table sets forth the
multiples that were calculated and selected for purposes of the
analysis:
|
|
Price / YE
BV
|
Price / NTM
EPS
|
|
Meadowbrook
Insurance Group, Inc. acquisition of ProCentury
Corporation
|
1.66x
|
12.2x
|
|
Employers
Holdings, Inc. acquisition of AmCOMP Incorporated
|
1.27x
|
11.6x
|
|
QBE
Insurance Group Ltd. acquisition of North Pointe Holdings
Corporation
|
1.51x
|
17.8x
|
|
The
MAPFRE Group acquisition of The Commerce Group, Inc.
|
1.65x
|
12.9x
|
|
Munich
Re acquisition of The Midland Company
|
2.16x
|
16.0x
|
|
The
Doctors Company acquisition of SCPIE Holdings Inc.
|
1.20x
|
N/A
|
|
D.
E. Shaw & Co., L.P. acquisition of James River Group,
Inc.
|
2.34x
|
13.6x
|
|
Liberty
Mutual Insurance Company acquisition of Ohio Casualty
Corporation
|
1.65x
|
15.3x
|
|
Zurich
Financial Services Group acquisition of Bristol West Holdings,
Inc.
|
1.87x
|
14.5x
|
|
QBE
Insurance Group Ltd. acquisition of Winterthur US Holdings,
Inc.
|
1.27x
|
11.0x
|
|
Elara
Holdings, Inc. acquisition of Direct General Corporation
|
1.64x
|
13.3x
|
|
The
Delek Group Ltd. acquisition of Republic Companies Group,
Inc.
|
1.64x
|
9.6x
|
|
Mean
|
1.65x
|
13.4x
|
|
Median
|
1.65x
|
13.3x
|
Applying a range of multiples derived
from the comparable transaction analysis to corresponding financial data for
Safeco provided to Morgan Stanley by Safeco, as discussed below, Morgan Stanley
calculated a range of equity values per share of Safeco common stock of $63.00
to $73.00. This range of equity values per share of Safeco common
stock implied multiple ranges of 10.6-12.3x 2008 IBES estimated EPS, 9.4-10.9x
2008 Safeco management estimated EPS and 1.67-1.93x 2007 YE BV.
Morgan Stanley noted that Safeco
shareholders will receive $68.25 per share of Safeco common stock in the
merger.
No company or transaction utilized in
the precedent transaction analyses is identical to Safeco or the
merger. In evaluating the precedent transactions, Morgan Stanley made
judgments and assumptions with regard to general business, market and financial
conditions and other matters, which are beyond the control of Safeco and Liberty
Mutual, such as the impact of competition on the business of Safeco, Liberty
Mutual or the industry generally, industry growth and the absence of any adverse
material change in the financial condition of Safeco, Liberty Mutual or the
industry or in the financial markets in general, which could affect the public
trading value of the companies and the aggregate value of the transactions to
which they are being compared.
Premiums
Paid Analysis
Morgan Stanley reviewed the premiums
paid to shareholders in the precedent transactions in the property and casualty
insurance sector selected for the comparable transactions
analysis. The selected precedent transactions used in the premium
paid analysis were based on the similarity of the target companies in such
transactions to Safeco in their insurance business focus, underwriting
activities and other characteristics of their businesses.
For each of the selected precedent
transactions, Morgan Stanley calculated the premiums paid by the acquirer by
comparing the per share purchase price to the historical stock price of the
acquired company as of one day prior to the announcement date. Based
on the results of the premiums paid valuation methodology, Morgan Stanley
selected a range of premiums of 25% to 40%. Using the midpoint of
32.5% from such premium range and applying it to the comparable company trading
value range of $45.00-52.00, Morgan Stanley calculated a range of implied equity
values per share of Safeco common stock of $60.00 to $69.00. This
range of equity values per share of Safeco common stock implied multiple ranges
of 10.1-11.6x 2008 IBES estimated EPS, 9.0-10.3x Safeco management estimated EPS
and 1.59-1.82x 2007 YE BV.
Morgan Stanley noted that Safeco
shareholders will receive $68.25 per share of Safeco common stock in the
merger.
Because the market conditions,
rationale and circumstances surrounding each of the transactions analyzed were
specific to each transaction and because of the inherent differences between the
business, operations, financial condition and prospects of Safeco and the
acquired business analyzed, Morgan Stanley believed that it was inappropriate
to, and therefore did not, rely solely on the quantitative results of the
analysis and, accordingly, also made qualitative judgments concerning
differences between the characteristics of these transactions and the
acquisition values of Safeco and such acquired companies.
Discounted
Cash Flow Analysis
As part of its analysis, and in order
to estimate the present value of Safeco common stock, Morgan Stanley performed a
discounted cash flow analysis for Safeco, calculated as of April 21, 2008,
utilizing Safeco management internal projections for the years 2008 through 2012
and extrapolations of such projections for 2013. Morgan Stanley
performed its analysis both on the cash flows on a standalone basis and
including assumed transaction synergies of $250 million per annum, with 50%
realized in year one, net of $150 million of year one implementation
costs. Morgan Stanley performed the discounted cash flow analysis by
adding (1) the present value of our projected after-tax un-levered free
cash flows for the remainder of fiscal year 2008 and for fiscal years 2009
through 2012 and (2) the present value of the projected terminal value of
Safeco in 2012.
Morgan Stanley calculated terminal
values by applying a range of terminal multiples of 7.5x to 9.0x to Safeco's
2013 projected net income. The cash flow streams and terminal values
were discounted to present values using a range of discount rates from
9.00-11.00% with a midpoint discount rate of 10.00%. The range of
discount rates used was based on a weighted average cost of capital calculation,
which considered Safeco's capital structure, after-tax cost of debt and cost of
equity as well as the cost of capital for comparable publicly traded
companies.
Morgan Stanley calculated per share
equity values by first determining a range of aggregate values of Safeco by
adding the present values of the after-tax un-levered free cash flows and
terminal values for each terminal multiple and discount rate scenario, and then
subtracting from the aggregate values the net debt of Safeco, and dividing such
amounts by the number of common shares outstanding of Safeco.
Based on this analysis, Morgan Stanley
calculated a range of implied equity values per share of Safeco common stock of
$53.00 to $69.00 on a standalone basis and $64.00-72.00 including the value
created from potential transaction synergies. On a stand-alone basis,
this range of equity values per share of Safeco common stock implied multiple
ranges of 8.9-11.6x IBES estimated EPS, 7.9x-10.3x Safeco management estimated
EPS and 1.40-1.82x 2007 YE BV. On a stand-alone basis taking into
account the value created from potential transaction synergies, this range of
equity values per share of Safeco common stock implied multiple ranges of
10.8-12.1x IBES estimated EPS, 9.6-10.7x Safeco management estimated EPS and
1.69-1.90x 2007 YE BV.
Morgan Stanley noted that Safeco
shareholders will receive $68.25 per share of Safeco common stock in the
merger.
Miscellaneous
In connection with the review of the
merger by the Safeco board of directors, Morgan Stanley performed a variety of
financial and comparative analyses for purposes of rendering its
opinion. The preparation of a financial opinion is a complex process
and is not necessarily susceptible to a partial analysis or summary
description. In arriving at its opinion, Morgan Stanley considered
the results of all of its analyses as a whole and did not attribute any
particular weight to any analysis or factor it considered. Morgan
Stanley believes that selecting any portion of its analyses, without considering
all analyses as a whole, would create an incomplete view of the process
underlying its analyses and opinion. In addition, Morgan Stanley may
have given various analyses and factors more or less weight than other analyses
and factors, and may have deemed various assumptions more or less probable than
other assumptions. As a result, the ranges of valuations resulting
from any particular analysis described above should not be taken to be Morgan
Stanley's view of the actual value of Safeco. In performing its
analyses, Morgan Stanley made numerous assumptions with respect to industry
performance, general business and economic conditions and other
matters. Many of these assumptions are beyond the control of
Safeco. Any estimates contained in Morgan Stanley's analyses are not
necessarily indicative of future results or actual values, which may be
significantly more or less favorable than those suggested by such
estimates.
Morgan Stanley conducted the analyses
described above solely as part of its analysis of the fairness of the
consideration pursuant to the merger agreement from a financial point of view to
Safeco shareholders and in connection with the delivery of its opinion to the
Safeco board of directors. These analyses do not purport to be
appraisals or to reflect the prices at which shares of Safeco common stock might
actually trade.
The merger consideration was determined
through arm's-length negotiations between Safeco and Liberty Mutual and was
approved by the Safeco board of directors. Morgan Stanley provided
advice to Safeco during these negotiations. Morgan Stanley did not,
however, recommend any specific merger consideration to Safeco or that any
specific merger consideration constituted the only appropriate merger
consideration for the merger.
Morgan Stanley's opinion and its
presentation to the Safeco board of directors was one of many factors taken into
consideration by the Safeco board of directors in deciding to approve, adopt and
authorize the merger agreement. Consequently, the analyses as
described above should not be viewed as determinative of the opinion of the
Safeco board of directors with respect to the merger consideration or of whether
the Safeco board of directors would have been willing to agree to a different
merger consideration.
Morgan Stanley is an internationally
recognized investment banking firm and, as part of its investment banking
activities, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other
purposes.
In the ordinary course of Morgan
Stanley's securities underwriting, trading, brokerage, foreign exchange,
commodities and derivatives trading, prime brokerage, investment management,
financing and financial advisory activities, Morgan Stanley or its affiliates
may at any time hold long or short positions, finance positions, and may trade
or otherwise structure and effect transactions, for its own account or the
accounts of customers, in debt or equity securities or loans of Liberty Mutual,
Safeco or any other company or any currency or commodity that may be involved in
this transaction or any related derivative instrument. In the two
years prior to the date of Morgan Stanley's opinion, Morgan Stanley has provided
financing services to Liberty Mutual and its affiliates and received fees in
connection with such services. Subsequent to the date of Morgan
Stanley's opinion, Morgan Stanley has also served as a co-manager in a Rule 144A
and Regulation S hybrid securities offering for Liberty Mutual Group Inc., an
affiliate of Liberty Mutual, which offering was publicly announced on May 16,
2008.
As compensation for its services in
connection with the merger, the Safeco board of directors has agreed to pay
Morgan Stanley a fee of $30 million, of which $5 million was paid upon
public announcement of the merger and the balance is to be paid upon completion
of the merger. Safeco has also agreed to reimburse Morgan Stanley for
certain expenses incurred by Morgan Stanley, including fees of outside legal
counsel up to an agreed upon cap,
and
to indemnify Morgan Stanley and its affiliates, their respective directors,
officers, employees and agents and each other person, if any, controlling Morgan
Stanley or any of its affiliates against customary liabilities and expenses,
including certain liabilities under the federal securities laws, related to or
arising out of Morgan Stanley's engagement.
Interests
of Safeco's Directors and Executive Officers in the Merger
When
considering the recommendation by the Safeco board of directors that Safeco
shareholders vote to approve the merger agreement, you should be aware that a
number of Safeco's directors and executive officers may have interests in the
merger that are different from, or in addition to, the interests of other Safeco
shareholders. The Safeco board of directors was aware of these
interests and considered them, among other matters, in unanimously adopting the
merger agreement and approving the transactions contemplated by the merger
agreement. Such interests relate to, or arise from, among other
things:
|
|
·
|
the
fact that each of Safeco's current five most highly compensated executive
officers is party to a change in control severance agreement with Safeco
that provides for certain benefits and payments upon a termination of
employment following a change in control of
Safeco;
|
|
|
·
|
the
fact that unvested stock options and restricted stock rights, including
those held by Safeco's directors and executive officers, will vest and be
converted into the right to receive an amount in cash pursuant to the
terms of the merger
agreement;
|
|
|
·
|
the
fact that the surviving corporation will continue to (1) provide
indemnification against and advancement of expenses for claims against
former or present directors and officers of Safeco for acts or omissions
occurring at or prior to the effective time of the merger and (2) for a
period of six years after the effective time of the merger, maintain
directors' and officers' liability insurance policies on terms no less
favorable than those presently provided or maintained by Safeco with
respect to claims arising from facts or events occurring at or prior to
the effective time of the merger;
and
|
|
|
·
|
the
fact that, during the two year period following the effective time of the
merger, the surviving corporation has agreed to provide employees of
Safeco and its subsidiaries who continue employment with the surviving
corporation or any of its subsidiaries after the merger with compensation
and employee benefits that in the aggregate are not less favorable than
those currently provided by Safeco and its subsidiaries to its employees
immediately prior to the date of the merger
agreement.
|
All
these additional interests are described below, to the extent material, and,
except as described below, such persons have, to the knowledge of Safeco, no
material interest in the merger apart from those of Safeco shareholders
generally.
For
further discussion of arrangements that trigger payments or benefits to Safeco's
named executive officers as of December 31, 2007, upon termination of employment
in various circumstances or upon a change in control, see "– Potential Payment
Upon Separation of Service or Change in Control" on page 116.
Change
in Control Severance Arrangements
Executive
Agreements. Each of Safeco's current five most highly
compensated executive officer (Ms. Reynolds, Mr. Kari, Mr. Chong, Michael
Hughes, Executive Vice President, Insurance Operations of Safeco, and R. Eric
Martinez, Jr., Executive Vice President, Fulfillment of Safeco) has entered into
a change in control severance agreement with Safeco. During the seven
years following a change in control (as defined under the agreements), if the
executive is discharged without cause, demoted or resigns for good reason, the
agreement calls for the following severance payments:
|
|
·
|
a
lump-sum cash payment of three times annual base
salary;
|
|
|
·
|
a
lump-sum cash payment of any incentive compensation that has already been
allocated or awarded to the executive for a completed period and which is
contingent only on continued
employment;
|
|
|
·
|
a
pro rata portion of the aggregate value of all contingent incentive
compensation awards, assuming the highest achievement of individual and
company goals so as to produce maximum
payouts;
|
|
|
·
|
continuation
of life, disability, accident and health benefits for thirty-six months
substantially similar to those which the executive is receiving
immediately prior to termination, reduced to the extent any comparable
benefits are received or made available to the executive during such
period; and
|
|
|
·
|
a
tax gross-up to the extent a certain excise tax is imposed on any amounts
payable in connection with a change in control or termination of the
executive.
|
The
above payments are also payable if the executive resigned, for any reason,
during the thirteenth full calendar month following the change in
control.
With
respect to the tax gross-up referenced above, if the executive is required to
pay any excise tax pursuant to Sections 280G and 4999 of the Internal Revenue
Code of 1986, as amended, which is referred to in this proxy statement as the
Internal Revenue Code, the executive would be entitled to an additional payment
in the amount of the excise tax plus all additional taxes associated with this
excise tax payment so that the total amount that the executive receives is equal
to the amount the executive would have received if there was no excise tax,
which is referred to in this proxy statement as the 280G tax
gross-up.
No
severance payments are due under any of the change in control severance
agreements if an executive is terminated by reason of death, disability,
retirement or is terminated for "cause," which is defined under the agreements
to mean (1) the willful and continued failure by the executive to substantially
perform the executive's duties after a written demand for substantial
performance is delivered to the executive by the Safeco board of directors, or
(2) the willful engaging by the executive in conduct that is demonstrably and
materially injurious to Safeco, monetarily or otherwise.
The
completion of the merger will constitute a change in control under each of the
change in control severance agreements.
Bonus Payments upon a Change
in Control. The merger agreement provides that if, and to the
extent, not paid by Safeco prior to the completion of the merger, Liberty Mutual
will, or will cause the surviving corporation to, pay within 10 business days
following the date on which the merger is completed, to each person who,
immediately prior to the completion of the merger, was eligible to and
participated in the Safeco Leadership Performance Plan, the Safeco Success
Sharing Plan, the Safeco Sales Incentive Plan or the Safeco Surety Plan, the
amount that would have been payable to such person for the performance period
ending December 31, 2008, determined as if all company, individual and other
performance targets established under such plan were achieved at target,
prorated for the performance period beginning January 1, 2008 and ending on the
date on which the merger is completed.
The
following tables summarize the estimated compensation amounts to be received by
Safeco's current five most highly compensated executive officers upon
consummation of the merger, assuming the merger is consummated on October 1,
2008.
Paula
Rosput Reynolds
|
Type
of Benefit or Payment
|
Change
in Control
No
Termination($)
|
Termination
Without Cause or
With
Good Reason
upon
Change in Control ($)
|
|
Cash
Payment
|
–
|
2,925,000
|
|
Prorated
2008 Bonus
|
1,050,959
|
1,050,959
|
|
Incentive
Compensation
|
–
|
8,079,247
|
|
280G
Tax Gross-Up
|
–
|
5,568,462
|
|
Other
Perks or Benefits
|
–
|
25,339
|
Ross
Kari
|
Type
of Benefit or Payment
|
Change
in Control
No
Termination($)
|
Termination
Without Cause or
With
Good Reason
upon
Change in Control ($)
|
|
Cash
Payment
|
–
|
1,710,000
|
|
Prorated
2008 Bonus
|
342,312
|
342,312
|
|
Incentive
Compensation
|
–
|
2,487,113
|
|
280G
Tax Gross-Up
|
–
|
1,958,675
|
|
Other
Perks or Benefits
|
–
|
55,679
|
Arthur
Chong
|
Type
of Benefit or Payment
|
Change
in Control
No
Termination($)
|
Termination
Without Cause or
With
Good Reason
upon
Change in Control ($)
|
|
Cash
Payment
|
–
|
1,350,000
|
|
Prorated
2008 Bonus
|
236,466
|
236,466
|
|
Incentive
Compensation
|
–
|
1,862,168
|
|
280G
Tax Gross-Up
|
–
|
1,408,477
|
|
Other
Perks or Benefits
|
–
|
37,703
|
Michael
Hughes
|
Type
of Benefit or Payment
|
Change
in Control
No
Termination($)
|
Termination
Without Cause or
With
Good Reason
upon
Change in Control ($)
|
|
Cash
Payment
|
–
|
1,500,000
|
|
Prorated
2008 Bonus
|
300,274
|
300,274
|
|
Incentive
Compensation
|
–
|
2,181,678
|
|
280G
Tax Gross-Up
|
–
|
1,789,561
|
|
Other
Perks or Benefits
|
–
|
4,975
|
Eric
Martinez
|
Type
of Benefit or Payment
|
Change
in Control
No
Termination($)
|
Termination
Without Cause or
With
Good Reason
upon
Change in Control ($)
|
|
Cash
Payment
|
–
|
1,620,000
|
|
Prorated
2008 Bonus
|
324,296
|
324,296
|
|
Incentive
Compensation
|
–
|
2,356,212
|
|
280G
Tax Gross-Up
|
–
|
1,775,442
|
|
Other
Perks or Benefits
|
–
|
58,713
|
Stock
Options and Restricted Stock Rights
At
the effective time of the merger, pursuant to the merger agreement, each
outstanding stock option to purchase shares of Safeco common stock, whether
vested or unvested, will be converted into the right to receive an amount in
cash per share subject to the stock option equal to the excess, if any, of the
per share amount of $68.25
over
the exercise price per share of such stock option, without interest and less any
applicable withholding taxes. Based on stock options outstanding as
of May 1, 2008, the number of stock options to acquire shares of Safeco common
stock that will be converted into the right to receive an amount in cash at the
effective time of the merger is 1,214,026. In addition, pursuant to
the merger agreement, each restricted stock right, whether vested or unvested,
that is outstanding immediately prior to the effective time of the merger shall
be converted into the right to receive an amount of cash per right equal to the
per share amount of $68.25, without interest and less any applicable withholding
taxes. Based on restricted stock rights outstanding as of May 1,
2008, the number of unvested restricted stock rights that will be converted into
the right to receive an amount in cash at the effective time of the merger is
1,020,068.
The
following table sets forth, for each of Safeco's current five most highly
compensated executive officers, as of May 1, 2008, the aggregate number of
shares subject to outstanding stock options to purchase shares of Safeco common
stock, the aggregate number of shares of Safeco common stock subject to vested
stock options, the weighted average exercise price of all such outstanding stock
options, and the number of restricted stock rights outstanding with respect to
Safeco common stock.
|
Name
and
Position
|
Aggregate
Number
of
Shares
Subject to
Outstanding
Stock Options
|
Aggregate
Number
of
Shares
Subject
to
Vested Stock Options
|
Weighted
Average
Exercise
Price
of
Outstanding
Stock
Options
|
Number
of
Restricted
Stock
Rights
|
|
Paula
Rosput Reynolds, President and CEO
|
424,272
|
0
|
$54.31
|
152,645
|
|
Ross
Kari, EVP and CFO
|
69,872
|
2,442
|
$50.90
|
40,419
|
|
Arthur
Chong,
EVP
and Chief Legal Officer
|
45,636
|
0
|
$47.92
|
42,209
|
|
Michael
H. Hughes
EVP,
Insurance Operations
|
60,975
|
31,060
|
$44.61
|
29,081
|
|
R.
Eric Martinez, Jr.
EVP,
Fulfillment
|
65,804
|
0
|
$50.10
|
37,228
|
Non-employee
directors of Safeco are awarded annual grants of restricted stock
rights. The directors' restricted stock rights are granted pursuant
to the terms of Safeco's stock awards program for non-employee directors under
the Safeco Long-Term Incentive Plan of 1997, which is referred to in this proxy
statement as the LTIP, in May of each year immediately following the annual
meeting of shareholders and they generally vest on the date of the next annual
meeting. Directors' vested restricted stock rights, however, are not
settled until the director leaves the board, except that the director may elect
to defer the settlement value of restricted stock rights into the Deferred
Compensation Plan for Directors. Pursuant to the merger agreement,
all outstanding restricted stock rights held by non-employee directors will
fully vest upon the effective time of the merger and be converted into the right
to receive an amount of cash per restricted stock right equal to the per share
amount of $68.25, without interest and less any applicable withholding
taxes. Stock options are not currently part of Safeco's non-employee
director compensation program, but certain directors retain stock option awards
granted during prior years of service. At the effective time of the
merger, pursuant to the merger agreement, these stock options will be converted
into the right to receive an amount in cash per share subject to the stock
option equal to the excess, if any, of the per share amount of $68.25 in cash
over the exercise price per share of such stock option, without interest and
less any applicable withholding taxes. As of May 1, 2008, the
non-employee directors of Safeco held the following number of stock options and
restricted stock rights:
|
Name
|
Number
of Stock Options
|
Number
of Restricted Stock Rights
|
|
Joseph
W. Brown
|
4,000
|
22,500
|
|
Robert
S. Cline
|
8,000
|
11,825
|
|
Peter
L.S. Currie (Audit Committee Chair)
|
0
|
4,325
|
| Maria
S. Eitel* |
0
|
4,325
|
|
Joshua
Green, III
|
8,000
|
11,825
|
|
John
S. Hamlin
|
0
|
2,500
|
|
Kerry
Killinger (Compensation Committee Chair)
|
0
|
11,825
|
|
Gary
F. Locke
|
0
|
6,825
|
|
William
G. Reed, Jr. (Finance Committee Chair)
|
0
|
11,825
|
|
Charles
R. Rinehart
|
0
|
1,825
|
|
Judith
Runstad (Nominating / Governance Committee Chair)
|
8,000
|
11,825
|
* Ms. Eitel resigned
as a member of the Safeco board of directors effective
May 7, 2008.
Directors'
and Officers' Indemnification and Insurance
The
merger agreement provides that, following the completion of the merger, Liberty
Mutual will, and will cause the surviving corporation to, indemnify and hold
harmless (and advance expenses, provided the person to whom expenses are
advanced provides a reasonable and customary undertaking (which shall not
include posting of any collateral) to repay such advances if it is ultimately
determined that such person is not entitled to indemnification), to the fullest
extent permitted by law (including to the fullest extent authorized or permitted
by any amendments to or replacements of the WBCA adopted after the date of the
merger agreement that increase the extent to which a corporation may indemnify
its officers and directors), the present and former directors and officers of
Safeco and its subsidiaries, any person acting as director, trustee or officer
of the Safeco Insurance Foundation on behalf of Safeco or any fiduciaries under
any Safeco benefit plan, each referred to in this proxy statement as an
indemnified party, against any and all costs or expenses (including reasonable
attorneys' fees and expenses), judgments, fines, losses, claims, damages,
penalties, liabilities and amounts paid in settlement in connection with any
actual or threatened claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative, regulatory or investigative, arising out of,
relating to or in connection with any circumstances, developments or matters in
existence, or acts or omissions occurring or alleged to occur prior to or at the
effective time.
The
surviving corporation will, and Liberty Mutual will cause the surviving
corporation to, either (1) continue to maintain in effect for six years from the
effective time directors' and officers' liability insurance and fiduciary
liability insurance having terms and conditions at least as favorable to the
indemnified parties as Safeco's currently existing directors' and officers'
liability insurance and fiduciary liability insurance or (2) purchase a six year
extended reporting period endorsement with respect to the currently existing
directors' and officers' liability insurance and fiduciary liability insurance
and maintain this endorsement in full force and effect for its full
term. Liberty Mutual and the surviving corporation will not be
required to spend for any such policies an annual premium (measured for an
extended reporting period endorsement by reference to 1/6th of the premium paid
therefor) in excess of 300% of the annual premiums currently paid by Safeco for
such insurance at the date of the merger agreement.
The
articles of incorporation and bylaws of the surviving corporation will include
provisions for indemnification, advancement of expenses and exculpation of the
indemnified parties on the same basis as the articles of incorporation and
bylaws of Safeco in effect as of the date of the merger
agreement. Liberty Mutual has agreed to cause Safeco, as the
surviving corporation in the merger, to maintain the provisions in its articles
of incorporation and bylaws providing for indemnification, advancement of
expenses and exculpation of the indemnified parties, to the fullest extent
permitted by law, with respect to any facts or circumstances occurring prior to
the effective time. In addition, Liberty Mutual and Safeco, as the
surviving corporation in the merger, have agreed not to amend, modify, limit or
terminate the advancement of expenses, exculpation and indemnification
provisions of (1) certain agreements between Safeco and the indemnified parties
in effect as of the date of the merger agreement or (2) the articles of
incorporation and bylaws of the surviving corporation.
Under
the merger agreement, the indemnified parties are third party beneficiaries of
the provisions described above under "Indemnification and Insurance" and are
entitled to enforce these provisions. If an indemnified party makes a
claim for indemnification or advancement of expenses under these provisions that
is denied by Liberty Mutual or Safeco, as the surviving corporation in the
merger, and a court determines that the indemnified party is entitled to such
indemnification, then Liberty Mutual or Safeco, as the surviving corporation in
the merger, will pay the indemnified party's costs and expenses incurred in
pursuing such claim against Liberty Mutual and/or Safeco, as the surviving
corporation in the merger.
Employee
Matters
Under
the terms of the merger agreement, following the completion of the merger
Liberty Mutual and Safeco have agreed that:
|
·
|
during
the two year period following the effective time of the merger, subject to
certain exceptions, Safeco, as the surviving corporation, will provide
employees of Safeco and its |
