Item 1.01 Entry into a Material Definitive Agreement.
The Merger Agreement
On January 26, 2022, The National Security Group, Inc., a Delaware corporation (“NSG”), entered into an Agreement and Plan of Merger (the "Merger Agreement") with VR Insurance Holdings, Inc., a Delaware corporation ("VR Holdings"), and VR Insurance Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of VR Holdings ("Merger Sub"), pursuant to which, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into NSG (the "Merger"), with NSG surviving the Merger as a wholly owned subsidiary of VR Holdings. The Board of Directors of NSG unanimously approved the Merger Agreement.
At the effective time of the Merger (the "Effective Time"), each share of NSG common stock issued and outstanding immediately prior to the Effective Time, including any allocated and unallocated shares held by NSG’s employee stock ownership plan and any shares of restricted stock, will be automatically cancelled and converted into the right to receive $16.35 in cash (the "Merger Consideration"). The Merger Consideration is subject to downward adjustment if the combined statutory capital and surplus of NSG’s insurance subsidiaries is less than $43,000,000 according to the financial statements most recently filed with the insurance regulators prior to closing. If the combined statutory capital and surplus is less than $43,000,000 and not less than $38,700.000, the per share price will be subject to a downward adjustment in an amount up to 10% of the per share price. In such event, the Merger Consideration will be an amount equal to $16.35 multiplied by a fraction in which the sum of the combined statutory capital and surplus is the numerator and $43,000,000 is the denominator. If the combined statutory capital and surplus is less than $38,700,000, the Merger Consideration will not be reduced below 90% of $16.35, but VR Holdings will have the right to terminate the Merger.
Consummation of the Merger is also subject to customary conditions, including (i) the approval of NSG's shareholders, (ii) receipt of insurance regulatory approvals, (iii) the absence of any law, order or injunction prohibiting the Merger, (iv) the accuracy of each party's representations and warranties (subject to customary materiality qualifiers), and (v) each party's compliance with its covenants and agreements contained in the Merger Agreement. In addition, VR Holding’s obligation to consummate the Merger is subject to no occurrence, circumstance, or combination thereof, shall have occurred that, individually or in the aggregate, has, or is reasonably likely to have, a material adverse effect on NSG. The Merger is not subject to any financing condition.
Each of VR Holdings and NSG has made representations and warranties in the Merger Agreement. NSG has agreed to certain covenants and agreements, including, among others, (i) to conduct its business in the ordinary course of business, consistent with past practice, during the period between the execution of the Merger Agreement and the closing of the Merger, (ii) not to solicit alternate transactions, subject to a customary "fiduciary-out" provision which allows NSG under certain circumstances to provide information to and participate in discussions with third parties with respect to unsolicited alternative acquisition proposals that NSG’s Board of Directors has determined, in good faith judgment, is appropriate in furtherance of the best interests of NSG (an "Acquisition Proposal"), and (iii) to call and hold a special shareholders' meeting and recommend adoption of the Merger Agreement.
The Merger Agreement contains specified termination rights for both VR Holdings and NSG. Among other termination rights, NSG may terminate the Merger Agreement if the Board of Directors of NSG approves or recommends or enters into an agreement with respect to an Acquisition Proposal. In connection with such termination, NSG must pay VR Holdings’ a termination fee equal to $1,242,256.
The representations, warranties and covenants contained in the Merger Agreement (i) have been made only for purposes of the Merger Agreement, (ii) are subject to materiality qualifications contained in the Merger Agreement that may differ from what may be viewed as material by investors, (iii) were made only as of the date of the Merger Agreement or such other date as is specified in the Merger Agreement, and (iv) may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures made for the purposes of allocating contractual risk between the parties to the Merger Agreement instead of establishing these matters as facts. Accordingly, the Merger Agreement is included with this filing only to provide investors with information regarding the terms of the Merger Agreement, and not to provide investors with any other factual information regarding the parties or their respective businesses. Investors are not third-party beneficiaries under the Merger Agreement and should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of VR Holdings, Merger Sub or NSG or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in the parties' public disclosures. The Merger Agreement should not be read alone, but should instead be read in conjunction with the other information regarding the parties and the Merger that is or will be contained in, or incorporated by reference into, the proxy statement that NSG will file in connection with the Merger, and the other documents that the parties will file, with the SEC.
The foregoing description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Merger Agreement, a copy of which is attached hereto as Exhibit 2.1 and incorporated herein by reference.
Additional Information and Where to Find It
In connection with the proposed transaction, The National Security Group, Inc. will file with the Securities and Exchange Commission (“SEC”) a proxy statement on Schedule 14A and may file or furnish other documents with the SEC regarding the proposed transaction. This material is not a substitute for the proxy statement or any other document which NSG may file with the SEC. INVESTORS IN AND SHAREHOLDERS OF NSG ARE URGED TO READ THE PROXY STATEMENT AND ANY OTHER RELEVANT DOCUMENTS THAT ARE FILED OR FURNISHED OR WILL BE FILED OR WILL BE FURNISHED WITH THE SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THESE DOCUMENTS, CAREFULLY AND IN THEIR ENTIRETY (IF AND WHEN THEY BECOME AVAILABLE) BECAUSE THEY CONTAIN OR WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION AND RELATED MATTERS. Investors and shareholders may obtain a free copy of these documents (when they are filed and become available) free of charge at the SEC’s website at www.sec.gov. NSG also will provide a copy of these materials without charge on its website at www.nationalsecuritygroup.com.
NSG and its executive officers and directors may be deemed to be participants in the solicitation of proxies from the shareholders of NSG in connection with the proposed Merger. Information about NSG's directors and executive officers is available in NSG's definitive proxy statement, dated April 7, 2021, for its 2021 annual meeting of shareholders. Other information regarding the participants and a description of their direct and indirect interests, by security holdings or otherwise, will be contained in the proxy statement that NSG will file with the SEC regarding the Merger.