Bloomberg News

Delphi’s $2.7 Billion Buyout by Tokio Marine Should Be Blocked, Judge Told

March 02, 2012

Delphi Financial Group Inc. (DFG)’s $2.7 billion buyout by rival insurer Tokio Marine Holdings Inc. (8766) should be blocked because it doesn’t provide enough for investors while unfairly enriching the company’s top executive, a lawyer argued to a judge.

Robert Rosenkranz, Delphi’s chief executive officer, negotiated a side deal that would wrongly compensate him as part of the sale to Tokio Marine, Stuart Grant, a lawyer for pension- fund investors that sued, told a judge today in Wilmington, Delaware.

Under the non-binding deal, Tokio Marine would maintain contracts with two firms Rosenkranz owns that do business with Delphi, or buy them, the investors’ lawyers claim. The side agreement is different from an executive’s asking for salary and benefits from a buyer, Grant told Delaware Chancery Court Judge Sam Glasscock in a hearing on the funds’ request for a temporary order blocking the deal.

“It’s something else to say, ‘I have been stealing from the company for years and I need you to help me keep stealing,’” Grant said after Glasscock asked him why the side agreement was wrong.

Delphi’s lawyers contend that Rosenkranz only discussed a sale of the firms with Tokio Marine officials and didn’t reach any formal deal.

The pension funds want Glasscock to temporarily halt the sale while a trial on the disputes goes forward. Glasscock ended today’s hearing without issuing a decision. He said he would try to release his ruling next week.

‘Disparate Consideration’

Delphi, based in Wilmington, sells workers’ compensation and group life insurance. Delphi officials contend in court papers that the all-cash offer provides a 73 percent premium to its shareholders.

Tokio Marine, Japan’s second-largest casualty insurer, agreed in December to pay $44.88 a share for Delphi’s Class A public shares and $52.88 for its Class B shares. The proposed sale would be the second time in three years the Tokyo-based insurer bought a U.S. rival. Tokio Marine purchased Philadelphia Insurance Cos. for $4.4 billion in 2008.

Tokio Marine’s American depositary receipts, each representing one ordinary share, fell 1.4 percent to $26.81 at 3:40 p.m. New York time in over-the-counter trading. Delphi’s Class A shares rose 3 cents to $44.66 in New York Stock Exchange composite trading.

Rosenkranz structured the deal to give himself more per share for his Class B shares than Class A shareholders will get, despite a ban on “such disparate consideration” in the company’s charter, Grant said in court papers. Attorneys for the pension funds contend that Delphi directors agreed to Rosenkranz’s plan to amend the charter provision to allow him to receive the additional money for his shares.

‘Rich Deal’

Lawyers for Delphi countered in court papers that shareholders are getting an “extraordinarily rich deal” in the Tokio Marine buyout and shouldn’t be barred from deciding whether to accept the offer.

To address any concerns that Rosenkranz may have a conflict of interest, Delphi’s directors created a board committee to oversee consideration of the bid, the company’s attorneys said.

Rosenkranz, a New York-based investor, founded Delphi in 1987 to focus on providing insurance coverage to smaller businesses. The executive, who owns about 10 percent of Delphi’s shares, controls almost 50 percent of its voting power through his ownership of specially designated Class B shares, the pension funds’ lawyers said in court filings.

Premium Price

Rosenkranz didn’t begin talks on the side deal until after he negotiated a premium price for shareholders, Delphi attorney Gary Bornstein said in court. The two Rosenkranz-controlled companies provide legitimate services to Delphi, Rosenkranz attorney Christopher P. Moore said in court.

“Mr. Rosenkranz disputes that these agreements are improper in any way,” Moore said. “They have been disclosed year after year after year.”

One of the companies, Rosenkranz Asset Management, receives $10 million a year in fees from Delphi, the investors’ lawyers said. “What does RAM do for Delphi? As Rosenkranz freely admits, nothing,” they said in the Feb. 22 filing.

Another Rosenkranz-controlled firm, Acorn Asset Management, purportedly provides financial advice to Delphi, shareholders’ lawyers said in the filing. That company has no employees or offices, they said.

‘Sham Company’

“Instead, Acorn rents Delphi employees and has a cost- sharing agreement with Delphi to use Delphi’s office, technology and administration,” the lawyers said in the filing. The described the firm as a “sham company.”

As part of the Tokio Marine offer, Rosenkranz pushed officials of the Japanese insurer to buy out the two firms as part of a side deal, shareholders’ lawyers contend.

Delphi said in a Feb. 29 court filing that its dealings with the Rosenkranz-controlled companies have been disclosed in securities filings every year since 1990 and Ernst & Young LLP auditors have found that the firms are providing services more cheaply than competitors.

The pension funds’ lawyers have produced no evidence that Delphi’s agreements with Rosenkranz’s firms “are anything other than arms-length,” Delphi’s lawyers said.

The case is In RE Delphi Financial Group Shareholder Litigation, CA No. 7144, Delaware Chancery Court (Wilmington).

To contact the reporters on this story: Steven Church in Wilmington, Delaware, at schurchy@bloomberg.net; Jef Feeley in New Orleans at jfeeley@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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