Nationwide Mutual Insurance Co. agreed to pay $26 million to settle claims that executives of a company it acquired this year enriched themselves by diverting a takeover premium from the firm’s customers.
Nationwide filed a tentative settlement agreement in state court in Philadelphia, it said in a statement today. The lawsuit stems from Columbus, Ohio-based Nationwide’s $834 million acquisition of customer-owned Harleysville Mutual Insurance Co. in May.
Harleysville customers had said in court that they were short-changed because the purchase price was paid entirely to outside shareholders of a Nasdaq-listed subsidiary. Those shareholders, including Harleysville directors and officers, got a 137 percent premium to the market value of their stock.
The target company’s chief executive officer, Michael Browne, testified at an April court hearing that he would receive at least $29 million from the sale. That includes at least $14 million of options that were underwater before the takeover.
Harleysville executives last year rejected a competing offer from Boston-based Liberty Mutual Holding Co. that involved a $250 million payout to customers and a lower amount for the minority shareholders, Browne said in court.
Liberty urged Pennsylvania regulators to scrutinize the proposed transaction, saying it involved an “inherent conflict of interest.”
Harleysville, based in the Pennsylvania community of the same name, had said its policyholders would benefit from the deal because they would become affiliated with Nationwide, a larger company with a better financial-strength rating.
Under Pennsylvania law, a company’s board must balance the interests of policyholders, employees and other stakeholders rather than maximize economic value as a stock company incorporated in Delaware would. Pennsylvania’s insurance regulator approved the acquisition in April.
“Given the potential cost and burden of continued litigation, Nationwide believes that settling this lawsuit is in the best interest of all Nationwide and Harleysville stakeholders,” Nationwide said in the statement. Neither insurer admitted wrongdoing or liability, Nationwide said.
Nationwide paid at least $100 million in 2005 to settle similar claims in a case involving its acquisition of Allied Mutual Insurance Co., which also had a listed subsidiary.
The plaintiffs have co-lead counsel from law firms Barrack Rodos & Bacine and Wohl & Fruchter LLP. Ballard Spahr LLP is representing Harleysville Mutual, Fox Rothschild LLP is Harleysville Group’s legal counsel, and attorneys from Dechert LLP are advising Nationwide.
Nationwide separately agreed to pay $7.2 million to settle state regulators’ reviews into whether companies were holding funds that should go to beneficiaries of life policies and annuities, California Insurance Commissioner Dave Jones said in a statement today.
“We look forward to fulfilling the terms of this agreement and moving forward with this matter resolved,” the company said in a statement.
The case is In re: Harleysville Mutual, 11102137, Court of Common Pleas, Philadelphia County (Philadelphia).