Bloomberg News

Harleysville Policyholder Sues Over ‘Self Dealing’ in Buyout

November 23, 2011

Nov. 22 (Bloomberg) -- Harleysville Mutual Insurance Co. was sued by a customer contending that the company’s directors doubled their personal payout in a planned sale of the company by diverting a merger premium away from policyholders.

The directors of the customer-owned firm stand to get about $39 million from their personal holdings in a Nasdaq-listed subsidiary that’s part of a planned sale to Nationwide Mutual Insurance Co., according to a complaint filed by policyholder OCL Corp., a New Castle, Delaware-based trucking company.

The entire $435 million merger premium is being paid to minority shareholders of the subsidiary, Harleysville Group Inc., while majority owner Harleysville Mutual and its members get no payout, OCL said in the filing today in state court in Philadelphia. Those customers may be entitled to more than $275 million if the premium were divided fairly, OCL said.

The transaction “is fundamentally unfair to Harleysville Mutual’s policyholder-members and constitutes manifest self- dealing,” OCL said. The plaintiff is seeking to block the planned payout to minority shareholders and to represent other policyholders in a class-action, or group, suit.

Robert Kauffman, general counsel of the Harleysville companies, didn’t immediately return a phone message and e-mail seeking comment.

Nationwide, also owned by its policyholders, agreed in September to merge with Harleysville, Pennsylvania-based Harleysville Mutual for no cash consideration. At the same time, Columbus, Ohio-based Nationwide agreed to pay $60 a share to minority shareholders of Harleysville Group, more than twice the price before Bloomberg News reported the takeover talks in September. The total cash payout is about $840 million, Nationwide has said.

$18 Million

Board members of Harleysville Mutual would get just $18 million, rather than $39 million, if the premium was distributed fairly, OCL said in the suit.

The two Harleysville companies share the same executive staff, and some directors serve on both boards. Two Harleysville Mutual directors, Nicholas DeBenedictis and Michael Lapeyrouse, formed a special committee to review the merger because they don’t sit on the subsidiary’s board, Kauffman said in an October interview.

Both directors own stock in the Nasdaq-listed company and don’t have an economic stake in the mutual company beyond that of policyholder, Kauffman said in October.

Policyholders of the mutual will benefit because they will become affiliated with Nationwide, a larger company with a better financial-strength rating, Kauffman said in October.

Harleysville traces its roots to 1915 when the disappearance of Ford sedans prompted a local man to organize an association to protect against auto theft. The company first sold stock in Harleysville Group to the public in 1986.

Spector Roseman Kodroff & Willis PC, based in Philadelphia, and New York-based Wohl & Fruchter LLP are representing OCL. The suit names Harleysville Mutual and each of its directors as defendants.

The case is OCL Corp. v. Harleysville Mutual, Court of Common Pleas, Philadelphia County (Philadelphia).

--With assistance from Phil Milford in Wilmington, Delaware. Editors: Dan Kraut, David E. Rovella

To contact the reporter on this story: Zachary R. Mider in New York at zmider1@bloomberg.net

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; Michael Hytha at mhytha@bloomberg.net


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