An investor advocacy group announced it is suing the board of Zenith National Insurance Corp., alleging Zenith's planned $1.4 billion sale to Fairfax Financial Holdings Ltd. undervalues the company.
Shareholders Foundation Inc. in San Diego said it had filed a lawsuit against the board of the workers' compensation insurer in California State Court, alleging its members had breached their fiduciary duties.
The action was brought on behalf of Zenith investors who bought their shares before the merger was announced on Feb. 18 by the Woodland Hills, Calif.-based insurer.
Under that agreement, Toronto-based Fairfax Financial Holdings would acquire the 92 percent of the outstanding shares of Zenith it does not already own for $38 a share in cash.
The announcement that the Zenith board unanimously approved the merger said the offer represented a premium of 31.4 percent over the Feb. 17 closing price, and a 34 percent premium over the 30-day average closing price for the period ending Feb. 17.
The merger consideration of $38 per share also represents a premium of 34.5 percent over Zenith's book value as of Dec. 31, 2009.
But the Shareholders Foundation said Zenith shares had traded slightly over $38 per share after the announcement, and at almost $29 per share the day before the news. It said shares had reached $32.24 per share in October 2009, $41.08 per share in September 2008, $43.93 per share in January 2008 and over $50 per share in 2007.
According to the Foundation announcement, the lawsuit's complaint alleges that the transaction substantially undervalues Zenith shares, and that Zenith National Insurance "is selling itself too cheaply, through an unfair process, to Fairfax Financial Holdings."
The Foundation said affected investors should contact it by e-mail at mail@shareholdersfoundation.com or by calling 858-779-1554.
Shareholders Foundation Inc. says it is not a law firm, but helps investors by "matching shareholder problems with the right legal experts." The organization describes itself as an investor advocacy group which does research related to shareholder issues and informs investors of securities class actions, settlements, judgments and other legal related news to the stock/financial market.
The group said it offers help, support and assistance for shareholders and investors to find answers to questions and equitable solutions to problems.
Calls to the Foundation and Stanley Zax, Zenith's chair and chief executive officer, were not returned.
In announcing the merger, Mr. Zax said in a statement that "we believe the transaction will benefit our key constituents and enable our shareholders to realize compelling value for their investment in Zenith."
Under their agreement, after the purchase for $38 a share, Zenith will continue to operate from its California headquarters and become a wholly-owned Fairfax subsidiary. The transaction is expected to close in the second quarter of 2010.
Zenith said its board of directors determined the merger was in the best interest of the company and its shareholders, and will recommend stockholder approval.
Zenith's directors and executive officers, who own approximately 3.4 percent of Zenith's common stock, agreed to vote their shares in favor of the merger, according to the announcement issued about the deal.
The transaction is subject to stockholder and regulatory approval. There is no financing condition to consummate the transaction.
Fairfax said it intends to finance the acquisition with a combination of holding company cash and subsidiary dividends, but will also raise $200 million through an equity issue prior to the closing.
Following the completion of the acquisition, Fairfax said it expects to continue to maintain approximately $1 billion in cash and marketable securities at the holding company level.
Prem Watsa, Fairfax chair and CEO, said in a statement that the acquisition reflects his company's strategy of "investing in well-managed and well-positioned insurance companies." He added that Zenith had an "outstanding long-term underwriting track record spanning over 30 years" under the leadership of Mr. Zax.
He advised that following completion of the transaction, "there will be no changes in Zenith's strategic or operating philosophy. Zenith will continue to operate its business as it has always been run under Stanley's excellent leadership, with investment management centralized at Fairfax."
Mr. Watsa said "all other Fairfax group companies will continue to operate independently on a decentralized basis."
Mr. Zax said, "We believe the transaction will benefit our key constituents and enable our shareholders to realize compelling value for their investment in Zenith. I am very proud of the employees, agents, management and directors at Zenith in creating one of the most successful specialty workers' compensation companies."
He added that "we admire Fairfax's accomplishments in creating an extremely successful insurance and reinsurance business and are delighted to become part of the Fairfax family."
Fairfax is a financial services holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and investment management.
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