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Shareholders sue Tower for ‘unfair’ sales process

A number of Tower Group shareholders are suing the firm, its departed CEO Michael Lee and several of its directors and officers for allegedly neglecting their fiduciary duty to investors.

The shareholders argued that the "paltry" $3 per share consideration offered by ACP Re was the result of an "unfair process" leaving investors with an "unfair" return.

The class action filing pointed out that Tower's share price closed at $2.94 on the trading day before the proposed merger was announced. The plaintiffs also noted that the firm's share price exceeded the $3 mark on a number of the days preceding the offer.

The filing said there was at least six analysts that valued the company "well above" the proposed consideration, but it argued that despite this, the board entered into a number of "preclusive and onerous" deals.

It said that these deals diminished the chances of shareholders getting maximum value for the shares.

The filing alleged that the proposed merger agreement included a "no-solicitation clause", which prevented Tower from pursuing a better offer. It said that keeping the sales process under wraps prevented bidders coming forward offering a superior price.

But it said ACP Re had negotiated a three-day period to return with a counter offer if a competing, unsolicited buyer did approach Tower. It also said that ACP Re had "unfettered" access to the competing offer, which meant that it only needed to match that offer to secure the deal.

It added that Tower would be required to pay ACP Re $8.2mn termination fee if it went with a different buyer.

"These provisions reflect an attempt by the board to lock up the proposed transaction at a price that grossly undervalues the company while simultaneously securing for themselves certain personal benefits," the filing said.

It added that the benefits were not shared equally with Tower's public shareholders.

The suit aims to obtain an injunction to block the proposed merger.

"The merger agreement reveals that the proposed transaction is the product of a flawed sales process and, unless the offer price is increased, would be consummated at an unfair price.

"The merger agreement also reveals that the individual defendants agreed to numerous deal protection devices designed to preclude any competing bids for Tower," it added.

The filing also alleged that Lee had entered into an agreement with the ACP Re to support the merger. It said he owned 4.2 percent of the common stock, suggesting this meant that any competing bidder would "necessarily" have the vote stacked against it.

It said this further precluded the possibility of Tower receiving a competing bid.

"The individual defendants disloyally placed their own interest first and tailored the terms and conditions of the proposed transaction to meet their own personal needs and objectives."

In a financial filing Tower said: "The Company believes that it is not probable that the Merger Complaints will result in a loss, and if they would result in a loss, that the amount of any such loss cannot reasonably be estimated."

Earlier this month Tower announced that it would hold a special general meeting on Wednesday 6 August in connection with its proposed acquisition by ACP Re.

Under the terms of the merger, the transaction will be cancelled if more than 15 percent of shareholders vote against the proposal.

Both companies have until 15 November 2014 to complete the merger, after which either party can terminate the merger agreement.

The arrangement was first announced in January, when Tower's board agreed to sell the company to ACP Re for $3.00 a share.

However, in early May, the proposed transaction between the two firms was restructured and the consideration reduced to $2.50 per share after Tower took another $62.5mn reserve charge in its delayed Q4 results.

Tower's board had previously recommended that its shareholders accept a $2.50 a share all-cash offer from ACP Re.

At the end of June, fresh doubts emerged over the planned deal after Tower sent a letter to ACP Re asking the entity to "unequivocally assure" it in writing of its commitment to close the deal under previously agreed terms by a set deadline.

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