Validus Sues IPC and Max Capital Over Proposed Merger

Validus Holdings Ltd. has filed a lawsuit against IPC Holdings Ltd. and Max Capital Group Ltd. to challenge the $50 million termination fee and the "no talk" provision in the IPC/Max proposed merger.

Validus (NYSE: VR) said it filed the lawsuit this week in the Supreme Court of Bermuda. Validus is seeking an injunction to restrain payment of the termination fee and to restrain operation of the “no-talk” provision, saying that because of its "excessive" size, the termination fee amounts to an unlawful penalty under Bermuda law and is accordingly unenforceable. Also, Validus said the IPC/Max merger agreement's termination fee and “no-talk” provision constitute a breach of the directors’ fiduciary duties.

In March, IPC (NASDAQ: IPCR) and specialty insurer/reinsurer Max Capital (NASDAQ: MXGL) said they would merge to form the sixth-largest global underwriter in Bermuda. The combined company will be named Max Capital Group and will have $3 billion in shareholder equity and total assets of about $10 billion (BestWire, March 3, 2009).

However, rival Validus made a counter bid to buy IPC, and is taking its proposal directly to IPC shareholders by filing a preliminary proxy with the U.S. Securities and Exchange Commission to urge IPC shareholders to vote down the proposed merger with Max Capital.

Validus said in a statement that it believes that its merger offer is "clearly superior" to the Max proposal, which Validus said "would provide IPC’s shareholders little or no premium for their shares. In addition, the proposed Max amalgamation would combine IPC with an unprofitable company under the guise of 'diversification,' and expose IPC’s shareholders to Max’s investment portfolio of high-risk alternative investments and non-agency asset-backed securities."

Under the proposed IPC/Max merger, Max common shareholders would each receive 0.6429 IPC shares for each Max share. Upon closing of the tax-free, stock-for-stock merger, IPC shareholders would own about 58% of the combined company on a fully diluted basis, with Max shareholders owning about 42%. The combined company would be named Max Capital Group and would have $3 billion in shareholder equity and total assets of about $10 billion (BestWire, March 3, 2009).

Under Validus' proposal, each IPC common share will be exchanged for 1.2037 Validus common shares. Based on closing market prices as of March 30, the Validus offer values IPC shares at $29.98 a share. The offer represents an 18% premium to IPC's closing stock price on March 30, 2009, and values IPC's common equity at $1.68 billion.

Shares of Validus were trading at $22.74 a share on the morning of April 29, up 0.26% from the previous close. IPC shares were $25.19, up 0.04%. Max Capital shares were $16.14 a share, up 0.62%.

On March 4, A.M. Best Co. placed IPC's Best's Financial Strength Rating of A (Excellent), under review with negative implications following the Max Capital merger announcement. Max Specialty Insurance Co. currently has a Best's Financial Strength Rating of A- (Excellent).

Validus Reinsurance has a current Best's Financial Strength Rating of A- (Excellent).

(By Meg Green, senior associate editor, BestWeek: [email protected])