Zenith National Investors Lose Bid to Halt Fairfax Financial Acquisition

Zenith National Insurance Corp. investors lost a bid to block Fairfax Financial Holdings Ltd. from acquiring the insurer for $1.3 billion in cash.

A Delaware judge, over Zenith shareholders’ objections that executives are selling the California-based workers’ compensation insurer too cheaply, denied their request to halt the buyout. Toronto-based Fairfax, a rival insurer, is offering $38 a share for Zenith.

Chancery Court Judge J. Travis Laster in Wilmington concluded today that Stanley R. Zax, Zenith’s chairman and chief executive officer, “acted reasonably” in negotiating the buyout with Fairfax CEO Prem Watsa without consulting Zenith’s board.

The ruling clears the way for Zenith shareholders to vote on the deal April 29. Fairfax’s bid was 31 percent more than Woodland Hills, California-based Zenith’s $28.91 closing price the day before the Feb. 18 offer.

“We’re happy with the judge’s decision and look forward to holding the shareholder vote as scheduled on April 29,” Mike Jansen, Zenith’s executive vice president and general counsel, said in a phone interview.

Paul Rivett, a Fairfax spokesman, and Carmella P. Keener, a Wilmington-based lawyer for Zenith investors, didn’t immediately return calls for comment.

Watsa, 59, is acquiring Zenith as part of a bet on a rebound in a workers’ compensation market pressured by rising medical costs and falling payrolls.

How Company Grew

Like Warren Buffett at Berkshire Hathaway Inc. and Loews Corp.’s Tisch family, the native of Hyderabad, India, built his company by investing the assets of insurance operations, often in out-of-favor securities.

Watsa, referred to as the “Buffett of the North” by publications such as Forbes magazine, will take over Zenith’s assets, valued at $2.4 billion at Dec. 31, and add them to the $29.8 billion Fairfax already manages. He told Fairfax shareholders at the company’s annual meeting today the insurer doesn’t need to make any more acquisitions.

Zenith, run by Zax since 1978, said in its 2009 annual report that it has “a long-term record of outperforming the industry.” Zenith’s workers’ compensation loss ratio, a measure of how much of each dollar of premium is paid in claims, was lower than the industry average every year from 2002 to 2008, according to Zenith’s annual report.

Allen M. Terrell, one of Zenith’s lawyers, told Laster at a hearing today the insurer reported a net loss of for the quarter yesterday.

Conflicting Interests?

Lawyers for disgruntled Zenith shareholders argued that Zax should have bargained for a higher price for the insurer and acted unilaterally in negotiating the buyout with Watsa, a friend.

“There was no effort on behalf of Zenith shareholders” to shop the company around for a higher offer, James Notis, a lawyer representing Zenith investors, told Laster.

Zax and Watsa agreed on the $38-per-share offer in a single meeting, and the Zenith CEO didn’t consult with fellow board members until afterwards, he added.

Zenith officials also failed to disclose important facts about the deal, including that Merrill Lynch bankers advising Zax handled a Fairfax deal that closed in February, Notis said. Bank of America Corp. acquired Merrill Lynch in January 2009.

Terrell countered that Delaware corporate law doesn’t bar CEO’s from acting unilaterally in sale negotiations and that the insurer disclosed all material facts in proxy filings.

Injunction Unjustified

“There’s nothing here that raises support for a preliminary injunction based on disclosure claims,” the company’s lawyer said.

Laster agreed, saying the absence of a formal process for negotiating the sale of a business “isn’t always problematic,” and the failure to disclose Merrill Lynch’s work on behalf of Fairfax didn’t mean the deal should be halted.

The case is In re Zenith National Insurance Corp. Shareholders Litigation, 5296-VCL, Delaware Chancery Court (Wilmington).

To contact the reporter on this story: Jef Feeley in Wilmington, Delaware, at jfeeley@bloomberg.net.

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