as to the nominating shareholder and the beneficial owner, if
any, on whose behalf the nomination is made, such
shareholder’s and beneficial owner’s name and address
as they appear on our books, the class and number of shares of
our common stock that are owned beneficially and of record by
such shareholder and such beneficial owner, and an affirmative
statement of whether either such shareholder or such beneficial
owner intends to deliver a proxy statement and form of proxy to
a sufficient number of shareholders to elect such nominee or
nominees.
In addition to complying with the foregoing procedures, any
shareholder nominating a director must also comply with all
applicable requirements of the Exchange Act, including the rules
and regulations under such Act.
Special
Committee
In August 2006, our Board of Directors formed a Special
Committee of independent directors to undertake an investigation
of our past stock option granting practices for the period 1995
through 2005. The Special Committee was composed of three
independent directors. The members were Patrick B. Collins,
Walter M. Duer and James C. Flagg (Chairman). The Special
Committee held thirty-eight in person and telephonic meetings
between August 24, 2006 and December 22, 2006 when it
concluded its duties.
Certain
Relationships and Related Transactions
We have strategic investments in a limited liability company and
a related entity for which Mr. Fulkerson served as a
director and in management roles through 2004. The carrying
value of these investments was $6.1 million at
December 31, 2006. Income and realized gains (losses) from
these investments totaled $0.3 million in 2006. The limited
liability company’s sole investment was in an entity that
serves as the investment manager for fixed income securities
valued at $584.1 million at December 31, 2006. During
2006, we paid $0.4 million in investment management fees to
this entity. Mr. Fulkerson serves as a director of the
investment manager. His indirect ownership interest is less than
one-quarter of one percent.
Commencing June 1994, we entered into an arrangement with an
entity owned by Stephen L. Way, under the terms of which we
lease equipment for providing transportation services to our
employees, directors and clients. However, we provide our own
employees to operate the equipment and pay all related operating
expenses. During 2006, we paid $1.2 million to this entity.
In addition, effective November 17, 2006, we entered into
revised agreements governing this arrangement, including a
revised Aircraft Dry Lease governing our lease of the aircraft
owned by Mr. Way’s company, a Pilot Service Agreement
with the entity owned by Mr. Way under which pilots
employed by us are contracted out to operate aircraft owned by
Mr. Way’s company, and a Hangar Space Lease and
Aviation Services Agreement with Mr. Way’s company
under which his company leases space in our hangar and we agree
to provide certain maintenance and other services on his
company’s aircraft. Under the terms of the Dry Lease, we
pay an hourly lease rate based on hours flown. Under the Pilot
Service Agreement, we receive a fee based on hours flown. Under
the Hangar Space Lease and Aviation Services Agreement, we
receive rent payments and service fees.
L. Byron Way is the son of Stephen L. Way. He serves HCC in
the capacity of Vice President, for which he received total
compensation of $500,039 from all sources of compensation,
including the amortized cost of outstanding options, in 2006. He
provides services to us under the terms of an employment
agreement effective January 1, 2006, which has a three-year
term, with an evergreen provision that adds an additional year
to the term as each year expires. He received a salary of
$150,000 in 2006, which increased to $165,000 in 2007 and is to
increase to $180,000 in 2008. He is also entitled to a
discretionary bonus and a formula bonus, which is based on the
number of acquisitions and strategic investments completed by us
during a given year, related to his responsibilities within our
mergers and acquisitions department. The agreement also provides
for certain perquisites, including club dues, an automobile
allowance, first class travel, estate planning, and group
medical benefits for a certain period after the termination of
his employment with us. In the event his employment is
terminated as a result of his death or disability, his stock
options will vest and remain exercisable for the lesser of a
one-year period or the term of the option, and he or, in the
event of his death, his estate will receive his contracted-for
compensation through the remaining term of the employment
agreement, including any bonuses accrued during the year of his
disability or death. In the event his employment is terminated
by HCC other than for “Cause” or by Byron Way unless
for “Good
Reason,” in each such case as such terms are defined in the
agreement, he will be entitled to receive all of the sums
otherwise due to him under the agreement, benefits for a period
of six months and his options will vest and remain exercisable
for the lesser of thirty days or the remaining term of the
option.
There are no family relationships among the executive officers
and directors, and there are no arrangements or understandings
between any Independent or Non-management Director or any other
person pursuant to which that Independent or Non-management
Director was selected as a director.
Board
Ratification of Related Transactions
Not less than annually, our Board of Directors undertakes the
review and approval of all related-party party transactions.
This policy covers any transaction valued at greater than
$120,000 between us or our subsidiaries and any of our executive
officers, directors, nominees for director, holders of greater
than five percent of our shares, and any of such parties’
immediate family members. Under our policy, covered transactions
are to be reviewed by the disinterested members of our Board of
Directors, who shall satisfy themselves that (i) all
material facts with respect to the transaction have been
disclosed to the Board of Directors for its consideration and
(ii) that the transaction is fair to HCC. As a result of
this review, approval of a transaction may be denied if the
transaction is not fair to HCC or is otherwise a violation of
our Code of Business Conduct and Ethics. Our current intention
is that all future transactions will be approved by our Board
prior to consummation.
Legal
Proceedings
The following lawsuits related to the outcome of our stock
option investigation have been recently filed:
Civil Action
No. 07-456;
Bacas, derivatively on behalf of HCC Insurance Holdings, Inc. v.
Way et al.
; In the United States District Court for the
Southern District of Texas, Houston Division; and
Civil
Action
No. 07-709,
Halgren, derivatively on behalf of HCC Insurance Holdings, Inc.
v. Way et al
; In the United States District Court for the
Southern District of Texas, Houston Division (we refer to these
actions collectively as the “Bacas suits”). The Bacas
action was filed on February 1, 2007, and the Halgren
action was filed on February 28, 2007. We are named as a
nominal defendant in these putative derivative actions. These
actions purport to assert claims on behalf of us against several
current and former officers and directors alleging improper
manipulation of grant dates for option grants from 1995 through
2006. The complaints purport to allege causes of action for
accounting, breach of fiduciary duty, aiding and abetting breach
of fiduciary duty, abuse of control, gross mismanagement,
imposition of a constructive fraud, corporate waste, unjust
enrichment and rescission, as well as a claim under
Section 14(a) of the Securities Exchange Act. Plaintiffs
seek on our behalf, damages, punitive damages, disgorgement,
restitution, rescission, accounting, imposition of a
constructive trust and changes in our corporate governance and
internal controls. Plaintiffs also seek to recover their
attorneys’ fees and costs from us for prosecuting the
derivative claims. These actions are now consolidated into a
single action. We have not yet responded to the complaints.
Civil Action
No. 07-0801;
Bristol County Retirement System, individually and on behalf of
all others similarly situated v. HCC Insurance Holdings, Inc. et
al.
; In the United States District Court for the Southern
District of Texas, Houston Division (we refer to this action as
the “Bristol County action”). The Bristol County
action was filed on March 8, 2007. We are named as a
defendant in this putative class action along with certain
current and former officers and directors. Plaintiff seeks to
represent a class of persons who purchased or otherwise acquired
our securities between May 3, 2005 and November 17,
2006, inclusive. The action purports to assert claims arising
out of improper manipulation of option grant dates, alleging
violation of Sections 20(a) and 10(b) of the Securities
Exchange Act, as well as
Rule 10b-5
promulgated thereunder. Plaintiff also purports to assert a
claim for violation of Section 14(a) of the Securities
Exchange Act and
Rules 14a-1
and 14a-9 promulgated thereunder. Plaintiff seeks recovery of
compensatory damages for the putative class and costs and
expenses. We have not yet responded to the complaint.
Civil Action
No. 07-1084;
Intermountain Ironworkers Trust Fund, derivatively and on
behalf of HCC Insurance Holdings, Inc. v. Way et al
; In the
United States District Court for the Southern District of Texas,
Houston Division. The action was filed on March 30, 2007.
We are named as a nominal defendant in this putative derivative
action. The complaint asserts similar factual allegations and
legal claims as asserted in the Bacas action and seeks similar
relief and remedies as sought in that action. We have not been
served with the complaint.
In each of these lawsuits, current and former officers and
directors of ours have requested that they be indemnified for
any losses and that their legal fees be advanced. Pursuant to
our bylaws, our charter, applicable law and certain agreements
entered into with some of the defendants, we are currently
advancing legal fees.
Section 16(a) of the Exchange Act requires our directors
and executive officers, as defined under the Exchange Act, and
persons who own more than 10% of a registered class of our
equity securities to file initial reports of ownership and
changes in ownership with the SEC. Such executive officers,
directors and shareholders are required by SEC regulations to
furnish us with copies of all Section 16(a) forms they
file. Mr. Ellis’ transfer of 375 shares to his
wife on October 25, 2006 was not timely filed on
Form 4, as required under Section 16(a), but such
grant has been subsequently reported on Form 4. Otherwise,
based solely upon a review of the copies of such forms furnished
to us and written representations from our directors and
executive officers, all persons subject to the reporting
requirements of Section 16(a) filed all required reports on
a timely basis in 2006.
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