Pennsylvania’s Donegal Buys Out Activist Investor’s Shares for $70M

By | December 23, 2015

Gregory M. Shepard, an activist investor who’s been a major stockholder of Pennsylvania-based Donegal Group and a frequent critic of the company, has sold off his shares Tuesday, according to securities filings.

Shepard’s stake consisted of 3.675 million shares of Donegal Group Class A common stock and 400,000 shares of Donegal Group Class B common stock — which together made up nearly 10 percent of the voting power in Donegal Group. He sold all of his shares to Donegal Group and Donegal Mutual Insurance Company for approximately $70.04 million.

Shepard has been a Donegal Group stockholder since 2005 and was Donegal’s largest shareholder with the exception of Donegal Mutual, the holder of majority voting control of Donegal Group.

Standstill Provisions

The Securities and Exchange Commission filings Tuesday show that the sales agreement contains “standstill” provisions in which Shepard and his affiliates agree not to take control-seeking actions with respect to seeking control of Donegal Group for a period of 25 years from the date of the sale. This means Shepard would no longer try to get involved in Donegal Group’s business or buy Donegal’s stock.

As a result of these purchases, Donegal Mutual will now hold 73.8 percent of the total voting power of Donegal Group’s common stock outstanding, and Shepard owns no shares of either class.

Donegal Group and Donegal Mutual have used a combination of cash on hand and borrowings on their respective lines of credit at M&T Bank to fund the purchases.

Donald H. Nikolaus, chairman of the Board of Donegal Group and president and chief executive officer of Donegal Mutual, commented, “We believe the purchases represent a positive step forward for all of the constituencies of the Donegal organization and will enable us to focus on our long-term business strategies.”

Shepard, a Florida-based lawyer and former insurance executive, has publicly criticized Donegal Group’s management and ownership in recent years. Last year, he charged that Donegal Group’s Board of Directors has “failed miserably” to meet its fiduciary duties and that Donegal shareholders have suffered from the company management’s lack of commitment to shareholder value. Shepard also unsuccessfully pushed for the sale of Donegal Group to a third party and announced last year that he had plans to approach at least 18 property/casualty insurance companies to discuss their interest in acquiring Donegal Group.

Donegal Group, based in Marietta, Pennsylvania, is an insurance holding company with insurance subsidiaries offering personal and commercial property/casualty lines of insurance in 21 Mid-Atlantic, Midwestern, New England and Southern states. In October, Donegal Group reported $19.01 million net income, $481.12 million in net premiums written and a 99.0 percent GAAP combined ratio for the first nine months of 2015.

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