Item 1.01 Entry into a Material Definitive Agreement.
On February 25, 2019, 1347 Property Insurance
Holdings, Inc., a Delaware corporation (the “Company”), together with three of its wholly-owned subsidiaries, Maison
Insurance Company (“Maison”), Maison Managers Inc. (“MMI”) and ClaimCor, LLC (“ClaimCor” and,
together with Maison and MMI, the “Companies”), entered into an Equity Purchase Agreement (the “Agreement”)
with FedNat Holding Company, a Florida corporation (“Purchaser”), providing for the sale of all of the issued and
outstanding equity of Maison, MMI and ClaimCor to Purchaser, on the terms and subject to the conditions set forth in the Agreement
(the “Transaction”). As consideration for the sale of Maison, MMI and ClaimCor, Purchaser has agreed to pay the Company
$51.0 million, consisting of $25.5 million in cash (the “Cash Consideration”) and $25.5 million in Purchaser’s
common stock (the “Equity Consideration”) to be issued to the Company. In addition, upon closing of the Transaction
(the “Closing”), $18.0 million of outstanding surplus note obligations payable by Maison to the Company, plus all
accrued but unpaid interest, will be repaid to the Company.
The
Equity Consideration is expected to be issued pursuant to the terms and conditions of a Standstill Agreement to be entered into
among the Company and Purchaser at the Closing. The Company and Purchaser also plan to enter into a Registration Rights Agreement
at the Closing providing for the registration under the Securities Act of 1933, as amended, of the resale of the Equity Consideration.
All
of the employees of Maison are expected to become employees of Purchaser as of the Closing, either directly or by remaining employees
of Maison, other than John S. Hill, the Company’s Chief Financial Officer, and Brian D. Bottjer, the Company’s Controller,
who will be retained as employees of the Company after the Closing. Douglas N. Raucy, the Company’s current President and
Chief Executive Officer, and Dean E. Stroud, the Company’s current Vice President and Chief Underwriting Officer, have entered
into employment agreements with Purchaser, with the effectiveness of such agreements subject to the occurrence of the Closing
and continuous employment with the Company through the Closing.
The
Company, and not its stockholders, will receive the Cash Consideration and the Equity Consideration from the Transaction. The
Company does not intend to liquidate following the Closing. The Company’s board of directors will evaluate alternatives
for the use of the Cash Consideration, which are expected to include using a portion of the Cash Consideration to conduct the
business of its reinsurance subsidiary PIH Re, Ltd. and launching a new growth strategy focused on reinsurance, investment management
and new investment opportunities.
Purchaser’s
obligation to close the Transaction is subject to the Companies having a consolidated net book value of at least $42 million at
the Closing, Maison having at the Closing statutory surplus of at least $47 million (without considering the effect of the repayment
of the surplus notes) and total capital and surplus assets equal to or greater than 300% of its total risk-based capital, and
there being no change to Maison’s “A” rating with Demotech, Inc. as of the Closing, other than changes resulting
from the execution of the Agreement or the circumstances of Purchaser.
In
connection with the Agreement, the Company and Purchaser plan to enter into a Reinsurance Capacity Right of First Refusal Agreement
(the “Reinsurance Agreement”) at the Closing pursuant to which the Company will have a right of first refusal to sell
reinsurance coverage to the insurance company subsidiaries of Purchaser, providing reinsurance on up to 7.5% of any layer in Purchaser’s
catastrophe reinsurance program, subject to the annual reinsurance limit of $15 million, on the terms and subject to the conditions
set forth in the Reinsurance Agreement. All reinsurance sold by the Company pursuant to the right of first refusal will be memorialized
in an agreement in such form and subject to such terms and conditions as are customary in the property and casualty insurance
industry. The Reinsurance Agreement will be assignable by the Company subject to conditions set forth in the Agreement. The term
of the Reinsurance Agreement will be five years.
In
addition, at the Closing, the Company and Purchaser plan to enter into a five-year agreement, pursuant to which the Company will
provide investment advisory services to Purchaser for $100,000 per year.
The
Agreement contains customary representations, warranties and covenants of the parties, including covenants concerning the conduct
of business by Maison, MMI and ClaimCor prior to Closing. The Company is permitted to solicit superior offers to acquire its insurance
businesses, pursuant to the terms of the Agreement, during a 30-day go-shop period beginning on the date of the Agreement. After
the expiration of the go-shop period, the Company and its representatives will be prohibited from initiating, soliciting, knowingly
facilitating, encouraging or engaging in discussions or negotiations relating to any competing acquisition proposal, subject to
certain limited exceptions. In addition, the Company and Purchaser have agreed to use their commercially reasonable best efforts
to consummate the Transaction and other transactions contemplated by the Agreement. Subject to certain limitations, the Company
and Purchaser have also agreed to indemnify the other party against certain losses, including losses arising out of breaches of
representations, warranties and covenants set forth in the Agreement.
The
Company’s board of directors has approved the Agreement, the Transaction and the other transactions contemplated by the
Agreement. The Transaction is subject to the approval by the Company’s stockholders.
In
connection with the Agreement, Fundamental Global Investors, LLC and Ballantyne Strong, Inc. entered into Voting Agreements
with Purchaser pursuant to which they have agreed, among other things, to vote all shares of Company common stock held of
record and beneficially by them as of the date of the Voting Agreements (i) in favor of the approval and adoption of the
Agreement and the Transaction, (ii) against the approval of any alternative acquisition proposal that would constitute a breach
of the Company’s obligations under the non-solicitation covenants in the Agreement, and (iii) against any other action or
agreement that results, or could reasonably be expected to result in, a material breach of any covenant, agreement, representation
or warranty or other obligation of the Company set forth in the Agreement or any other agreement entered into by the Company,
Maison, MMI, ClaimCor or any of their respective affiliates in connection with the transactions contemplated by the Purchase Agreement,
or prevent, materially impair or materially delay the consummation of the Transaction. The Voting Agreements will automatically
terminate upon the earlier to occur of the Closing and the termination of the Agreement in accordance with its terms.
In
addition to the receipt of the approval of the Company’s stockholders, each party’s obligation to consummate the Transaction
is conditioned upon certain other customary closing conditions, including, among other things, the receipt of certain regulatory
approvals, the accuracy of the other party’s representations and warranties as of the Closing, subject, in certain instances,
to certain materiality and other thresholds, the performance by the other party of its obligations and covenants under the Agreement,
the delivery of certain documentation by the other party, and the absence of any injunction or other legal prohibitions prohibiting
consummation of the Transaction.
The
Company and Purchaser have agreed to use their commercially reasonable best efforts to cause the Closing to occur on or before
June 30, 2019 (the “Target Closing Date”). If the Closing has not occurred on or before the Target Closing Date and
the Agreement has not been terminated pursuant to its terms, then the Company and Purchaser have agreed to use their commercially
reasonable best efforts to cause the Closing to occur on or before December 31, 2019 (the “Outside Closing Date”)
but not before November 30, 2019.
If
the Closing occurs after the Target Closing Date, the Purchase Price will be increased by the lesser of (i) the amount by which
the net book value of the Companies exceeds $42 million and (ii) the amount by which Maison’s statutory surplus exceeds
$47 million (without considering the effect of the repayment of the surplus notes); but only if the Company is not able, due to
regulatory restrictions, to cause the Companies to distribute such amount to the Company on the Closing Date.
The
Agreement may be terminated at any time prior to the Closing by the mutual written consent of the parties or by either the Company
or Purchaser in the event that (i) the Closing has not occurred by the Outside Closing Date, provided that the terminating party’s
failure to comply with the Agreement was not the cause of the failure of the Closing to occur on or before the Outside Date, (ii)
a court or governmental entity has issued a final, non-appealable injunction or other legal prohibition preventing consummation
of the Transaction, or (iii) a governmental entity has denied regulatory approval of the Transaction or the other transactions
contemplated by the Agreement by final, non-appealable action.
In
addition, Purchaser may terminate the Agreement if (i) at any time prior to the time the Company obtains stockholder approval
of the Transaction, the Company’s board of directors changes or revokes its recommendation to stockholders to approve the
Transaction, or the Company, Maison, MMI or ClaimCor materially breach the non-solicitation covenants in the Agreement, or (ii)
a governmental entity has denied regulatory approval of the repayment of the surplus notes by Purchaser by final, non-appealable
action. The Company may terminate the Agreement if, subject to the Company’s compliance with certain covenants, the Company’s
board of directors authorizes the Company to enter into a definitive written agreement with respect to an acquisition proposal
that it deems superior to the Transaction. If the Agreement is terminated by either Purchaser or the Company under circumstances
related to a superior acquisition proposal, the Company has agreed to pay Purchaser a termination fee in the amount of $2.16 million.
Finally,
each of Purchaser and the Company may terminate the Agreement if the other party (or, in the case of Purchaser, the Company, Maison,
MMI or ClaimCor) breaches or fails to perform any of its representations, warranties, covenants or agreements in the Agreement
such that certain conditions to close the Transaction will not be capable of being satisfied and the breach or failure cannot
be or has not been cured or has not been waived by the earlier of (i) the second business day prior to the Outside Closing Date,
and (ii) thirty days after a party has given written notice to the breaching party of such breach or failure.
The
foregoing description of the Agreement, the Transaction and other transactions contemplated by the Agreement does not purport
to be complete and is qualified in its entirety by reference to the Agreement, which is filed as Exhibit 2.1 to this Current Report
on Form 8-K (this “Current Report”) and is incorporated herein by reference.
The
Agreement has been included as an exhibit to this Current Report solely to provide investors with information regarding its terms.
It is not intended to be a source of financial, business or operational information about the Company. The representations, warranties
and covenants contained in the Agreement were made only for purposes of the Agreement as of the dates specified therein and solely
for the benefit of the parties to the Agreement. In addition, the representations, warranties and covenants contained in the Agreement
may be subject to qualifications and limitations agreed upon by the parties in connection with negotiating the terms of the Agreement,
including, in the case of the Company, being qualified by confidential disclosure schedules made for the purpose of allocating
contractual risk amongst the parties as opposed to establishing such matters as facts, and may further be subject to certain standards
of materiality applicable to the parties that differ from those applicable to investors. As a result, investors should not rely
on the representations, warranties and covenants included in the Agreement, or any descriptions thereof, as characterizations
of the actual state of facts or condition of the Company and its business. Moreover, information concerning the subject matter
of the representations and warranties may change after the date of the Agreement, which subsequent information may or may not
be fully reflected in public disclosures. Further, the Agreement should not be read alone, but should instead be read in conjunction
with the other information regarding the Company and the transactions contemplated by the Agreement that will be contained in
or attached as an annex to the proxy statement that the Company will file in connection with the transactions contemplated by
the Agreement, as well as in the other filings that the Company makes with the Securities and Exchange Commission (the “SEC”).