UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
SCHEDULE 14D-9
Solicitation/Recommendation Statement Under Section 14(d)(4)
of the Securities Exchange Act of 1934
Amendment No. 2
State Auto Financial Corporation
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(Name of Subject Company)
State Auto Financial Corporation
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(Name of Person(s) Filing Statement)
Common Shares, without par value
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(Title of Class of Securities)
855-707105
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(CUSIP Number of Class of Securities)
John R. Lowther, Esq.
Senior Vice President, General Counsel and Secretary
State Auto Financial Corporation
518 East Broad Street
Columbus, Ohio 43215-3976
(614) 464-5000
(Name, Address and Telephone Number of Person Authorized
to Receive Notice and Communications on
Behalf of the Person(s) Filing Statement)
with copies to:
John P. Beavers, Esq.
Bricker & Eckler LLP
100 South Third Street
Columbus, Ohio 43215
(614) 227-2361
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[ ] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
TABLE OF CONTENTS
Page
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Item 4. The Solicitation or Recommendation............................ 1
Item 5. Persons/Assets Retained, Employed, Compensated or Used........ 3
Item 8. Additional Information to be Furnished........................ 3
Item 9. Exhibits...................................................... 4
ii
This Amendment No. 2 to Schedule 14D-9 amends and supplements the Solicitation/
Recommendation Statement on Schedule 14D-9 as amended and restated by Amendment
No. 1 filed on September 12, 2003.
Capitalized terms used but not defined herein have the meanings ascribed to them
in Amendment No. 1 to the Schedule 14D-9.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
Item 4(b) is amended by modifying the disclosure under the heading
"Reasons for the Recommendation of the Board of Directors" to read as follows:
Reasons for the Recommendation of the Board of Directors.
On September 1, 2003, the Company's Board of Directors and its
Special Committee were informed that State Auto Mutual's board of
directors, based on the unanimous recommendation of its independent
committee, had unanimously determined:
- To oppose and reject the Tender Offer because it is not in the
best interests of State Auto Mutual, its policyholders and other
constituencies;
- To decline and refuse to turn over control of State Auto Mutual
and its affiliates, including the Company, to Shepard because
such transfer of control would not be in the best interests of
State Auto Mutual, its policyholders and other constituencies;
- To decline and refuse to issue the surplus notes or to provide
other financing to Shepard or Offeror to finance the Tender
Offer; and
- To vote State Auto Mutual's shares of the Company (66.9% of the
Company's outstanding Shares) against approval of the Tender
Offer at any shareholder meeting that may be called to consider
the same.
The Company's Board of Directors and Special Committee unanimously believe
that the unanimous decisions of the board of directors of State Auto Mutual,
based on the unanimous recommendation of its independent committee to oppose and
reject the Tender Offer and to decline and refuse to turn over control of State
Auto Mutual and its affiliates, including the Company, mean that the Tender
Offer's Change of Control Condition (as described in Item 2 above) cannot be met
and that, therefore, it is impossible for Shepard and Offeror to complete the
Tender Offer, and the Tender Offer is illusory.
The Company's Board of Directors and Special Committee unanimously believe
that the unanimous decisions of the board of directors of State Auto Mutual,
based on the unanimous recommendation of its independent committee, not to issue
$300 million of surplus notes of State Auto Mutual - the only source of
financing identified in the
Schedule TO - or to provide any other form of financing to Shepard or Offeror
mean that the Tender Offer's Financing Condition (as described in Item 2 above)
cannot be met and that, therefore, it is impossible for Shepard and Offeror to
complete the Tender Offer, and the Tender Offer is illusory.
The Company's Board of Directors and Special Committee unanimously believe
that the unanimous decision of the board of directors of State Auto Mutual,
based on the unanimous recommendation of its independent committee, to vote its
shares of the Company (66.9% of the Company's outstanding common shares) against
approval of the Tender Offer if submitted to a vote of the Company's
shareholders pursuant to the Control Share Acquisition Statute means that the
Tender Offer's State Auto Mutual Approval Condition (as described in Item 2
above) cannot be met; therefore, (i) the Tender Offer would not receive the
required affirmative vote for approval if submitted to such a vote and could not
be completed under Ohio law, (ii) it is impossible for Shepard and Offeror to
complete the Tender Offer, and (iii) the Tender Offer is illusory.
The members of the Board of Directors and the Special Committee did not
find it practicable to assign relative weights to the foregoing factors. The
recommendation of the Board of Directors and the Special Committee was made
after considering the totality of the information and factors involved. In
addition, individual members of the Board of Directors or the Special Committee
may have given different weight to different factors.
The Company has been advised that, in making the foregoing determinations,
the State Auto Mutual board of directors considered the report of its
independent committee, which after considering the advice of an independent
financial advisor and independent legal counsel, concluded (i) that the Proposed
Transaction made no economic sense and that it would not be responsible or
prudent for State Auto Mutual to finance the bulk of the Tender Offer and then
voluntarily surrender control to Shepard, (ii) that no potential synergies would
result from the Proposed Transaction because Shepard's acquiring entity does not
conduct any business and has no assets, (iii) that Shepard had not proposed any
plan to improve the operations of State Auto Mutual, which is already well
managed based on traditional performance measures, (iv) that State Auto Mutual
would not derive any material benefit from the participation of Shepard or his
acquiring entity in the Proposed Transaction, and (v) that the financial
benefits claimed by Shepard to result from the Proposed Transaction are illusory
and highly speculative and cannot be used to justify the substantial costs and
expenses and loss of control rights that State Auto Mutual would incur,
especially in light of the conclusion of its financial advisor that, even under
the most advantageous accounting treatment potentially permissible, the
resulting increase in State Auto Mutual's policyholders' surplus would be small
in relation to the costs incurred by it in the Proposed Transaction and likely
temporary in nature, with the lasting effects on policyholders' surplus most
likely being negative.
Also, the Company has been advised that in making the determinations
referenced above, State Auto Mutual's board of directors concluded, after
consultation with its independent financial and legal advisors, that: (i) it is
unlikely that the notes required to
2
be issued by State Auto Mutual in the Proposed Transaction would be approved by
insurance regulatory authorities as surplus notes as represented by Shepard;
(ii) the Proposed Transaction (giving effect to repayment of the notes) would
likely result in State Auto Mutual recording a decrease in policyholders'
surplus, rather than an increase as represented by Shepard, of approximately
$400 million under applicable statutory accounting principles; (iii) the
Proposed Transaction would result in $157 million of goodwill, which would
contribute to the anticipated decrease in State Auto Mutual's statutory surplus;
(iv) because the notes required to be issued by State Auto Mutual in the
Proposed Transaction would have to be repaid in two years, the repayment,
augmented by the potential large decrease in surplus, may put negative pressure
on State Auto Mutual's financial strength ratings; and (v) State Auto Mutual may
incur up to $78 million in pre-tax interest and transaction expense as a result
of the Proposed Transaction, which would significantly reduce State Auto
Mutual's operating results over the next two years.
Finally, the Company has been advised that in making the determinations
referenced above, State Auto Mutual's Board also considered that (i) American
Union Insurance Company, of which Shepard had been Chairman, President, and 50
percent shareholder over the past 18 years, had been sold in pieces to the point
it had only minimal written premium in 2002, and a combined ratio (losses and
expenses divided by premium) of 334 percent; and (ii) Illinois Healthcare, of
which Shepard had been Chairman and President since its founding, became
insolvent and was liquidated by the Illinois Department of Insurance, leaving a
reported 26,000 insureds in Ohio, Indiana, and Illinois without coverage from
that company.
ITEM 5. PERSONS/ASSETS RETAINED, EMPLOYED, COMPENSATED OR USED.
Item 5 is amended and supplemented by adding at the end thereof the
following:
By letter agreement dated September 25, 2003, the Company engaged
Georgeson Shareholder Communications, Inc. ("Georgeson") to act as information
agent in connection with the Offer. Georgeson's services as information agent
include, in addition to dissemination of the Company's communications to
shareholders, advice and consultation regarding the Offer as well as any
shareholder meeting demanded by Mr. Shepard as part of his Proposed Transaction.
Georgeson will receive reasonable customary compensation for its services and
reimbursement of out-of-pocket expenses in connection therewith. The Company has
agreed to indemnify Georgeson against certain liabilities arising out of or in
connection with the engagement.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
Item 8(a) is amended and supplemented by adding at the end of the
discussion under the heading "Litigation" the following:
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Recent Developments. On October 16, 2003, the Company filed a Current
Report on Form 8-K containing a press release issued by STFC on that date
announcing that:
- The United States District Court dismissed the lawsuit filed by
Shepard and Purchaser alleging that directors of STFC and State Auto
Mutual breached their fiduciary duty in connection with the Tender
Offer; and
- In order to resolve, once and for all, issues that Shepard has
raised, STFC and State Auto Mutual then filed suit in Franklin
County Common Pleas Court against Shepard and Purchaser seeking a
declaratory judgment that STFC directors were not obligated under
the Ohio Control Share Acquisition statute to call a shareholders
meeting to approve Shepard's and Offeror's purchase of Shares, and
that directors did not breach any fiduciary duty to minority
shareholders.
A copy of the October 16, 2003 press release is attached as Exhibit 99a(9). The
lawsuit filed in Franklin County Common Pleas Court referenced above was
thereafter amended to include the directors of each of STFC and State Auto
Mutual along with STFC and State Auto Mutual as plaintiffs.
Item 8(c) is amended and restated in its entirety to read as follows:
(c) Forward-looking Statements.
Forward-looking Statements. Certain statements made in this Statement
indicating the Company's or management's or its board of directors' or any board
of directors committee's intentions, beliefs, expectations or predictions for
the future are forward-looking statements. Such forward-looking statements are
not guarantees of future performance and may involve known and unknown risks,
uncertainties and other factors including those detailed from time to time in
the Company's filings with the SEC.
ITEM 9. EXHIBITS.
ITEM EXHIBIT
NO. NO. DESCRIPTION OF EXHIBIT
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a(1) 99a(1) STFC Press Release issued September 2, 2003(1)
a(2) 99a(2) Letter from State Auto Mutual to Shepard dated
June 4, 2003(1)
a(3) 99a(3) Letter from State Auto Mutual to Shepard dated
June 13, 2003(1)
a(4) 99a(4) Letter from State Auto Mutual to Shepard dated
June 30, 2003(1)
a(5) 99a(5) Letter from Robert H. Moone, Chairman and Chief
Executive Officer of STFC, to Shepard dated
September 2, 2003(1)
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a(6) 99a(6) Letter from Robert H. Moone, Chairman and Chief Executive
Officer of State Auto Mutual, to Shepard dated September 2,
2003(1)
a(7) 99a(7) Letter from Robert H. Moone, Chairman and Chief Executive
Officer of STFC, to Shepard dated June 6, 2003(2)
a(8) 99a(8) Letter to STFC's shareholders dated September 12, 2003(2)
a(9) 99a(9) STFC Press Release issued October 16, 2003(3)
e(1) 99e(1) STFC 2003 Proxy Statement(1)
e(2) 99e(2) Amended and Restated Put Agreement(1)
e(3) 99e(3) Amended and Restated Credit Agreement(1)
e(4) 99e(4) Amended and Restated Standby Purchase Agreement(1)
e(5) 99e(5) STFC Code of Regulations(1)
e(6) 99e(6) Indemnification Agreement(1)
(1) Included with the Company's Solicitation/Recommendation Statement on
Schedule 14D-9 originally filed by STFC on September 2, 2003.
(2) Included with Amendment No. 1 to the Company's Solicitation/Recommendation
Statement on Schedule 14D-9 filed by STFC on September 12, 2003.
(3) Filed with this Amendment.
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
STATE AUTO FINANCIAL CORPORATION
Dated: October 20, 2003 By /s/ John R. Lowther
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John R. Lowther
Senior Vice President, General
Counsel and Secretary
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EXHIBIT INDEX
ITEM EXHIBIT
NO. NO. DESCRIPTION OF EXHIBIT
---- ------- ----------------------
a(1) 99a(1) STFC Press Release issued September 2, 2003(1)
a(2) 99a(2) Letter from State Auto Mutual to Shepard dated June 4, 2003(1)
a(3) 99a(3) Letter from State Auto Mutual to Shepard dated June 13, 2003(1)
a(4) 99a(4) Letter from State Auto Mutual to Shepard dated June 30, 2003(1)
a(5) 99a(5) Letter from Robert H. Moone, Chairman and Chief Executive
Officer of STFC, to Shepard dated September 2, 2003(1)
a(6) 99a(6) Letter from Robert H. Moone, Chairman and Chief Executive
Officer of State Auto Mutual, to Shepard dated September 2,
2003(1)
a(7) 99a(7) Letter from Robert H. Moone, Chairman and Chief Executive
Officer of STFC, to Shepard dated June 6, 2003(2)
a(8) 99a(8) Letter to STFC's shareholders dated September 12, 2003(2)
a(9) 99a(9) STFC Press Release issued October 16, 2003(3)
e(1) 99e(1) STFC 2003 Proxy Statement(1)
e(2) 99e(2) Amended and Restated Put Agreement(1)
e(3) 99e(3) Amended and Restated Credit Agreement(1)
e(4) 99e(4) Amended and Restated Standby Purchase Agreement(1)
e(5) 99e(5) STFC Code of Regulations(1)
e(6) 99e(6) Indemnification Agreement(1)
(1) Included with the Company's Solicitation/Recommendation Statement on
Schedule 14D-9 originally filed by STFC on September 2, 2003.
(2) Included with Amendment No. 1 to the Company's Solicitation/Recommendation
Statement on Schedule 14D-9 filed by STFC on September 12, 2003.
(3) Filed with this Amendment.