EMAG

The independent action group for current and ex Equitable Life policyholders, funded by contributions.

Equitable Members Action Group

Equitable Members Action Group Limited, a company limited by guarantee, number 5471535 registered in the UK

Search
Documents: 28/01/2001 - Halifax Heads of Agreement document

Appendix 1

From: Halifax PLC

To: The Equitable Life Assurance Society

PRIVATE & CONFIDENTIAL

Subject to contract


28 January 2001

Dear Sirs,

1.General

1.1 This letter sets out the principal terms on which we are willing to proceed to negotiate definitive, binding agreements for the purchase by our nominated subsidiary companies (the "Purchaser") from you (the "Seller") of the business and assets of the Seller comprising operating and asset management assets (the "Business"), unit linked and certain non-profit in-force business (the "In-Force Business") and the share capital of Equitable Investment Fund Managers Limited, Equitable Services and Consultancy Limited, Equitable Life - Finanzberatung und Versicherungsvermittlung GmbH and Equitable Investment Managers Limited (the "Included Subsidiaries") (referred to in this letter as the "proposed transaction"). All policies written by the Seller other than those comprising the In-Force Business are known as the Closed Fund.

1.2 You have provided to us a disclosure list (a copy of which is attached as Appendix 1) which has been prepared by you comprising a list of material issues which could reasonably be regarded as relevant to a third party considering the proposed transaction. You are not aware of any other material issues which should be brought to our attention. You acknowledge that in entering into these heads of agreement, we are placing considerable reliance on the accuracy and completeness of this disclosure list.

1.3 The proposed transaction is based on the assumption that the Closed Fund will remain closed and will not re-open for new business at any time unless the Purchaser agrees otherwise (such agreement not to be unreasonably withheld). This will not restrict holders of policies retained in the Closed Fund from paying additional premiums where they are contractually entitled to do so.

1.4 Neither this letter, nor our discussions so far, create any legally binding obligations, except paragraphs 12, 13, 14 and 15 which are legally binding between us.

2.The Business

2.1 The assets to be acquired will (subject to the exclusions set out in paragraph 2.2) consist of all the operating and asset management assets owned or used by the Seller, its overseas branches and its subsidiary companies in connection with the Business including, without limitation:

(a)goodwill;

(b)physical assets;

(c)freehold and leasehold properties (as listed in Appendix 2 attached);

(d)intellectual property rights (including the brand);

(e)operating and asset management contracts.

2.2 The following assets will be excluded from the sale:

(a)all amounts due to the Seller in respect of the Business up to the date of transfer; and

(b)the shares in the Seller's subsidiary companies (other than the Included Subsidiaries).

2.3 The Seller will remain liable for actual or contingent liabilities (including, without limitation, any liabilities arising out of regulatory investigations or disputes) incurred in connection with the Business relating to actions, events or omissions having taken place before completion of the sale irrespective of whether or not such liabilities are identified before or after completion of the transfer and will indemnify us in respect thereof. The Purchaser will be responsible for liabilities incurred in connection with the Business relating to actions, events or omissions taking place to the extent that they take place after completion of the sale.

2.4 All the employees engaged in the Business will be transferred to the Purchaser's employment. The Seller will be responsible for any redundancy and other related costs arising out of the termination of any such employee's employment from the effective date of the transfer of the Business up to 31 December 2002, such costs to be calculated on the basis of the current terms and conditions applicable to such employees. The Seller's agreement to this is conditional upon the Seller being satisfied, before the definitive agreements are signed, with the Purchaser's proposals in relation to such employees and accordingly the likely costs to be incurred.

2.5 The effective date of the transfer of the Business will be the date of completion of such transfer.

2.6 The Purchaser will grant to the Seller a non-assignable royalty free perpetual licence to use the Seller's name and brand in connection with the Seller's Closed Fund.

3.In-force Business

The policies to be transferred will be unit linked and other policies written by the Seller in the course of carrying on long term business (other than with profits policies and conventional immediate annuities). The transfer of the In-Force Business will include matching assets of value equivalent to the Appointed Actuary's reserves, such reserves to be determined using bases as at the date of transfer no weaker (relative to the underlying conditions) than that used by the Appointed Actuary at 31/12/2000 and at 31/12/1999.

4.Included Subsidiaries

The entire issued share capital of the Included Subsidiaries will be transferred by the Seller to the Purchaser.

5.Price

5.1 The aggregate consideration payable for the Business, the Included Subsidiaries and the In-Force Business will be £500 million (the "Initial Consideration"). The Purchaser's proposal is that £300 million shall be allocated to the In-Force Business and £200 million shall be allocated to the Included Subsidiaries and the Business. The Seller's agreement to this allocation shall be subject to any tax considerations it may have.

5.2 The Purchaser will pay £200 million in cash on the date of completion of the transfer of the Business and the Included Subsidiaries. The Seller will procure repayment to and by the Included Subsidiaries on the date of completion of the transfer of any amounts owing between them and the Seller and its other subsidiaries.

5.3 The balance of the Initial Consideration will be paid in cash on the date of the transfer of the In-force Business.

5.4 It is intended that no VAT will be charged as the Business will be transferred as a going concern for VAT purposes. The Seller and the Purchaser will work together to minimise any VAT on the proposed transaction and will seek clearance from H M Customs & Excise that it may be treated as a transfer as a going concern for VAT purposes, prior to signing the definitive agreements. However, if VAT is determined to be charged, the amount shall be paid in equal shares by the Seller and the Purchaser. The Seller and the Purchaser will work together to minimise any stamp duty payable on the proposed transaction. However, if stamp duty is payable, it shall be paid by the Purchaser.

6.Further Consideration

The Purchaser will pay further consideration of £500 million for goodwill on the following terms:-

(a)£250 million will be payable upon completion of a scheme or proposal to remove the guaranteed rights under GAR policies written by the Seller in terms approved by the Purchaser binding upon all holders of such GAR policies or others claiming any rights in respect thereof.

(b)A maximum amount of £250 million will be payable as performance related consideration (the "Performance Related Consideration") of which (i) £200 million relates to sales performance and (ii) £50 million is based on new business profitability in the business written under the Halifax/Equitable brand.

A maximum of £200 million is payable for Sales Performance based on Equivalent Premium Income written under the Halifax/Equitable brand in the 2 years ending 31 December 2004. The amounts are payable on a straight line basis as indicated in the table below, subject to revision based on discussions between the respective sales and marketing managements, on the understanding that Halifax intends the £200 million payment to be a realistically attainable target which can be so endorsed by the Seller's board:-

Equivalent Premium Income (2003 and 2004) (£m)

650

(or below)

1050

(or above)

Payment (£m)

0

200

A maximum of £50 million is payable for the new business profitability written by Halifax/Equitable in the 2 years ending 31 December 2004. The amounts are payable on a straight line basis as indicated in the table below subject to further discussions:-

Profitability

(% of effective premiums)

10

12.5

15

Payment (£m)

0

25

50

New business profitability is calculated on the same basis as reported in Halifax group accounts for the same period.

The amounts payable under paragraphs 6(b) (1) and (2) are conditional upon completion of a scheme or proposal to remove the guaranteed rights under GAR policies written by the Seller in terms approved by the Purchaser binding upon all holders of such GAR policies or others claiming rights in respect thereof.

7.Provision of services

7.1 With effect from completion of the sale of the Business to the Purchaser, the Purchaser will provide administration services to the Seller's closed fund on the terms of a Third Party Administration Agreement which will include the following terms:

(a)Charges: In the period between completion of the sale of the Business and 31 December 2002, services to the Seller's Closed Fund would be charged on the basis of the actual costs incurred by the Purchaser of running the administration business transferred to the Purchaser (less an equitable apportionment of such actual costs incurred by the Purchaser which relate to the administration of policies other than those forming part of the Closed Fund). Following 31 December 2002, services to the Seller's Closed Fund will be charged on the basis of an equitable apportionment of the actual costs incurred by the Purchaser in administering such policies on the Equitable system. The apportionment of such costs would be certified initially by the Purchaser's Appointed Actuary for review by the Appointed Actuary of the Seller's Closed Fund. For the avoidance of doubt, the costs of administering the In-Force Business shall be no greater than those set out in the Embedded Values contained in the Ernst & Young report dated 25 August 2000.

(b)Term: The Agreement would continue in perpetuity subject to termination upon the giving of not less than 18 months' notice by the Seller expiring on the tenth anniversary or any fifth anniversary thereafter. The termination charge in paragraph (d) would apply in the event of termination by the Seller without cause. In the event of termination by the Seller with cause at any time, the termination charge would not apply. Termination with cause would cover insolvency, material breach of the Agreement and sustained failure to meet minimum performance criteria over a prescribed period. The Agreement would need to achieve a position where the termination rights are not capable of being invoked too readily and only after the Purchaser has been given a reasonable opportunity to remedy any breach (where possible).

(c)Service standards: Agreed service standards will be set out in the Agreement.

(d)Termination Charge: The termination fee shall be equal to £10 million multiplied by the number of unexpired years (or part thereof) of the initial ten year period.

7.2 With effect from completion of the sale of the Business to the Purchaser, the Purchaser will provide asset management services to the Seller's closed fund on the terms of an Asset Management Agreement which will include the following terms:

(a)Charges: The charges would be levied as a proportion of the fund as follows:

Unit Linked (effective until the transfer of the In-Force Business)

25 basis points

All other funds based on asset class


Fixed income

5 basis points

Cash

2 basis points

UK equity

10 basis points

International equity

17.5 basis points

Property

35 basis points

Alternative Investments

35 basis points

The above charges are based on complying with the investment brief agreed between the Seller and the Purchaser. No further performance fees would be payable.

(b)Term: The Agreement would continue in perpetuity subject to termination upon the giving of not less than 18 months' notice by the Seller expiring on the tenth anniversary or any fifth anniversary thereafter. The termination charge in paragraph (d) would apply in the event of termination by the Seller without cause. In the event of termination by the Seller with cause at any time, a reduced termination charge would apply. Termination with cause would cover insolvency, material breach of the Agreement and sustained failure to meet minimum performance criteria over a prescribed period. The Agreement would need to achieve a position where the termination rights are not capable of being invoked too readily and only after the Purchaser has been given a reasonable opportunity to remedy any breach (where possible).

(c)Service standards: Agreed service standards will be set out in the Agreement.

(d)Termination Charge: The termination fee shall be:-

(i)in the case of termination before the expiry of the first ten years, equal to £15 million multiplied by the number of unexpired years (or part thereof) of the initial ten year period, subject to a minimum payment of £15 million; and

(ii)in the case of termination after the expiry of the first ten years, equal to two years' fees calculated on the basis of the previous 12 months' fees.

8.Guarantee

(a)A guarantee of the obligations of the Purchaser's subsidiary companies under the definitive agreements will be required to the extent that the obligations are not assumed directly by the Purchaser.

9.Definitive Agreements

9.1 Definitive agreements will include:-

(a)a Framework Agreement setting out the order of the various transfers, the payments of the consideration, the resolution of the GAR/non-GAR issue, the earn out and conduct of the Closed Fund;

(b)a combined Business Transfer and Share Sale and Purchase Agreement for the immediate transfer of the Business and the Included Subsidiaries (the "Business Transfer Agreement");

(c)a Transfer Agreement for the transfer of the In-Force Business (the "In-force Transfer Agreement") together with a Summary Schedule 2C Scheme;

(d)a Third Party Administration Agreement for the provision of administration services from the Purchaser to the Seller's closed fund;

(e)an Asset Management Agreement for the provision of asset management services from the Purchaser to the Seller's closed fund;

(f)a non-assignable Licence from the Purchaser to the Seller to use the Seller's name and brand in connection with the Seller's closed fund.

(g)such other documents as may be necessary to regulate the relationship between us following the signing of definitive agreements in relation, inter alia, to the content of public and other announcements or discussions concerning the proposed transactions.

10.Conditions

10.1 It is intended that the Business Transfer Agreement would not be subject to any conditions and would be completed on the date of signature on the basis that confirmation is obtained from Counsel that the existing board of the Seller is empowered to enter into the proposed transaction without a vote of the members in general meeting. The Purchaser is entering into these heads of agreement on the assumption that Counsel provides such confirmation and that the existing board unanimously acts accordingly.

10.2 The In-Force Transfer Agreement would be conditional upon obtaining all necessary regulatory and revenue consents and the approval of the Court under Schedule 2C. Subject to their fiduciary duties, the existing board of the Seller will unanimously recommend the transfer of the Business and the In-Force Business.

10.3 Subject to the FSA confirming to both of us that they will support the proposed transaction as set out in the definitive agreements (including the proposed scheme or proposal to remove the guaranteed rights under GAR policies) and being willing publicly to confirm this support, it is intended to sign the definitive agreements by midnight on 4 February 2001.

10.4 Subject to prior completion of due diligence to the satisfaction of the Purchaser, it is intended to sign the definitive agreements by midnight on 4 February 2001.

11.Board appointments

You will consult with us in respect of any proposed appointment to your board, in particular the appointment of a new Chairman.

12.Confidentiality

12.1 All information supplied (in whatsoever form) by either of us to the other, the extent of our negotiations, the terms of this letter, and the contents of all discussions between us will be held in complete and strict confidence and will not be disclosed by you or us to any other person, firm or company (other than to senior employees/directors or advisers in each case who need to know that information for the purposes of carrying out the proposed transaction). This obligation does not apply to any information to the extent that either of us is required to disclose that information to a court of competent jurisdiction acting pursuant to its powers or under the rules and regulations of any applicable regulatory authority, but then only to the extent so required. To the extent practicable, any disclosure by either of us is to be agreed in advance between us.

12.2 We confirm that the confidentiality agreement between us will continue to apply and will extend to any further information supplied to us, as well as to the existence of these negotiations, the terms of this letter and the content of all discussions between us.

13.Negotiating period

Until the expiry of the period from the date of this letter to midnight on 4 February 2001, or until negotiations between us relating to the proposed transaction terminate by mutual agreement in writing (whichever is the earlier), each of us undertakes that it shall negotiate with the other in good faith with a view to agreeing the proposed transaction.

14.Costs

Each party will pay its own costs in respect of all the matters covered by this letter.

15.Governing law

This letter is governed by English law.

If you find this letter satisfactory, please countersign and return it, so that we may put in hand arrangements for investigation and negotiation.

Yours faithfully

For and on behalf of

Halifax PLC

...........................

We agree the terms set out in this letter

...........................

For and on behalf of

The Equitable Life Assurance Society

LIB01/A3JSS/788637.04