Shepard Announces Offer, State Auto Advises Patience

August 25, 2003

Investor Gregory Shepard, who owns approximately 5 percent of Columbus, Ohio-based State Auto Financial Corp., announced a cash tender offer for 8 million of STFC’s almost 13 million public shares for $32 per share, as part of his takeover bid.

State Auto’s board of directors advised shareholders not to tender the offer until a review it has undertaken is completed. The company has disparaged Shepard’s efforts from the outset, and Shepard has in turn filed a lawsuit against State Auto seeking injunctive relief requiring it to give “fair consideration” to his offer.

Shepard stated that he or an associate would agree to purchase an additional 1 million common shares from STFAC and not tender his shares in the public tender offer. As one of the conditions of consummation of the tender offer, State Automobile Mutual Insurance Co., and all directors and officers of State Auto and STFC would have to agree not to tender any of their shares.

He also stated that his proposal would not involve the incurrence of any debt, as defined by statutory accounting principles, by State Auto, STFC or their subsidiaries or affiliates. STFC’s officers, directors and affiliates also cannot cash out any outstanding stock options. Any transaction Shepard might negotiate would be subject to customary due diligence, and be conditioned on his nominees representing a majority of the boards of directors of STFC, State Auto and their insurance subsidiaries and affiliates.

The offer and its withdrawal rights will expire at 5 p.m. EDT, Sept. 24, 2003, unless the offer is extended.

In his lawsuit, Shepard alleges that over the past eight months, STFC’s entrenched directors, under the control of State Auto Mutual, have failed to give due consideration to various proposals to negotiate made by Shepard intended to enhance stockholder value.

Plaintiffs allege that the defendant directors, led by Robert Moone, the president, CEO, and chairman of both STFC and State Auto Mutual, have engaged in a concerted course of conduct to maintain and entrench their control over STFC at the expense of STFC’s minority shareholders, and have waged an aggressive and vituperative campaign to disparage Shepard at every opportunity.

The complaint further notes that during the time when defendants were castigating Shepard’s prior proposals as debt-laden transactions, STFC was concealing the fact that it had incurred $15 million in additional debt, in the form of the issuance of subordinated debentures, in a transaction involving one of its subsidiaries. Although that transaction occurred on or about May 22, 2003, STFC did not disclose it promptly in a Form 8-K “current report” filing.

Instead, that transaction was first made public in the August 12, 2003 quarterly report (Form 10-Q) filed by STFC with respect to the Second Quarter of 2003.

In view of the past course of conduct engaged in by STFC, State Auto Mutual and their respective directors, Shepard has concluded that defendants are overwhelmingly likely to oppose the tender offer, and they seek a declaration from the Court that State Auto Mutual and the directors of STFC and State Auto Mutual have violated their respective fiduciary duties to plaintiffs and STFC’s minority stockholders, and are likely to engage in further breaches of fiduciary duties in the absence of the entry of an injunction.

Topics Auto New Markets

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