EXHIBIT 10.46


EXCHANGE AGREEMENT


This Exchange Agreement (this “Agreement”) is made and entered into as
of January 11, 2007, by and between TOWER GROUP, INC., a Delaware corporation (the “Company”),
and CASTLEPOINT MANAGEMENT CORP., a Delaware corporation (the “Purchaser”).


RECITALS


WHEREAS, the Purchaser currently owns
40,000 shares of Series A Preferred Stock of the Company.


WHEREAS, the Company has authorized
the issuance of up to an aggregate of 40,000 shares of its Series A-I Preferred
Stock (the “Shares”) to the Purchaser in exchange for the shares of Series A
Preferred Stock of the Company owned by the Purchaser; and


WHEREAS, the Purchaser and the Company desire that the Company shall exchange the Shares for
such shares of Series A Preferred Stock on the terms and conditions set forth
herein;


AGREEMENT


NOW, THEREFORE, in consideration of the
foregoing recitals and the mutual promises, representations, warranties, and covenants
hereinafter set forth and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:


1.             CERTAIN
DEFINITIONS.


For all purposes of this Agreement, the following
terms shall have the respective meanings set
forth in this Article 1 (such definitions to be equally applicable to both the
singular and plural forms of the terms herein defined):


“8-K Filing” has the meaning ascribed to
such term in Section 6.3.


“2005 Annual Report” has the meaning ascribed to
such term in Section 4.6(a).


“Action” means any legal, administrative,
arbitration or other similar suit, inquiry, notice of violation, investigation, proceeding,
claim, or action.


“Affiliate” means
any Person that, directly or indirectly through one or more intermediaries,
controls or is controlled by or is under common
control with a Person, as such terms are used in and construed under Rule 144
under the Securities Act.


“Agreement” has the meaning
ascribed to such term in the Recitals.


“Applicable Law” means any federal,
state, local or foreign statute, law, ordinance, rule, regulation, order, writ,
injunction, judgment, decree, directive, principle of common law or 

















 


interpretation
of any of the foregoing by a Governmental Authority applicable to a Person or
any such Person’s subsidiaries, properties, assets, officers, directors,
employees or agents.


“Certificate of Designations” has the meaning ascribed to such term in Section 2.1.  “Certificate of Incorporation” has the
meaning ascribed to such term in Section 2.1. 
“Closing” has the meaning ascribed to such term in Section 3.1.


“Closing Date” has the meaning
ascribed to such term in Section 3.1.


“Common Stock” has the meaning ascribed to such term
in Section 2.1.


“Contracts” shall mean all written agreements, contracts, commitments and undertakings, indentures,
notes, bonds, loans, instruments, treaties, leases, mortgages and other binding
arrangements.


“Conversion Shares” has the meaning ascribed to such
term in Section 2.1.


“Disclosure Schedule” has the meaning ascribed to
such term in the preamble to Article 4.


“Domiciliary Regulators” means the Governmental Authorities responsible
for regulating insurance companies in the Insurance Companies’
respective states of domicile.


“DTC” has the meaning ascribed to such Wm in Section
7.1.


“DTC Transfer Conditions” has the meaning ascribed
to such term in Section 7.1.


“Encumbrance” means any lien, pledge, security
interest, easement or encumbrance of any kind or nature whatsoever, and any
agreement to give or grant or permit any of the foregoing; provided that this definition of “Encumbrance”
shall not include: (i) liens for current Taxes and assessments not yet due and
payable, including, without limitation, liens for non-delinquent ad valorem
Taxes, non-delinquent statutory liens arising other than by reason of any default on the part of the Company or the
Subsidiaries and liens for Taxes being contested by the Company in good
faith, (ii) such liens, minor imperfections of title or easements on real property, leasehold estates or personal property as
do not in any material respect detract from the value thereof and do not
in any material respect interfere with the present use of the property subject
thereto, (iii) materialmen’s, mechanics’, workmen’s, repairmen’s, employees’,
carriers’, warehousemen’s and other like liens arising in the ordinary course
of business or relating to any construction,
rebuilding or repair of any property leased, so long as the obligations to
which such liens relate are not delinquent and also so long as any such
lien does not materially impair the value of such leased property, (iv) any
such lien, pledge, security interest, easement or encumbrance arising solely as
a result of any action taken by Purchaser or any of its Affiliates and (v) any
limitation or restriction imposed upon the transfer of the Securities by any
registration provision of the Securities Act of 1933, as amended, or any
applicable state securities law regulating the disposition of the Securities.


“Exchange Act” has the meaning ascribed to such term in Section 4.6.


 


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“GAAP” has the men g ascribed to such terra in
Section 4.6.


“Global Select Market” has the meaning ascribed to
such term in Section 4.13.


“Governmental Authority” means any nation or
government, any state or other political subdivision thereof, any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government or any self-regulatory agency,
commissioner or authority.


“Indemnities” has
the meaning ascribed to such term in Section 9.11.  “Indemnified
Liabilities” has the meaning ascribed to such term in Section 9.11.


“Insurance Company”
means any Subsidiary that is engaged in the business of issuing insurance
policies.


“Insurance Contract”
means any insurance policy, annuity contract, or guaranteed investment contract
entered into with a customer whether directly or by reinsurance.


“Investigation” means any governmental or regulatory
investigation.  “Lock-Up Period” has the
meaning ascribed to such term
in Section 7.5.  “Material Adverse Effect” has the meaning ascribed
to such term in Section 4.1.


“Non-Domiciliary
Regulators” means the Governmental Authorities responsible for regulating
insurance companies outside of the Insurance Companies’ respective states of
domicile.


“Permits” means all licenses, permits, orders,
consents, approvals, registrations, authorizations, qualifications and filings
with and under all Applicable Laws and Governmental Authorities and all
industry or other non-governmental self regulatory organizations.


“Person” means any individual, corporation, company,
partnership (limited or general), joint venture, limited liability company,
association, trust, a government, any department or agency thereof or any other
entity.


“Press Release” has
the meaning ascribed to such term in Section 6.3.


“Purchaser” has
the meaning ascribed to such term in the Recitals.


“Registration Rights Agreement”
has the meaning ascribed to such terra in Section 3.2.  “Regulation D” has the
meaning ascribed to such term in the Recitals.


“Required Minimum” means, as of any date, 125% of
the maximum aggregate number of shares of Common Stock then issuable in the
future pursuant to the Transaction Documents, including any Conversion Shares
issuable upon the exchange of all Shares, ignoring any exchange, conversion or
exercise limits set forth therein, determined on the basis of the Exchange Rate
(as defined in the Certificate of Designation), in each case as in effect on
the Trading Day immediately prior to the date of determination.


 


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“Rule 144” means Rule 144 promulgated by the SEC
pursuant to the Securities Act, as such Rule may be amended from time to time,
or any similar rule or regulation hereafter adopted by the SEC having
substantially the same effect as such Rule.


“SEC” has the meaning ascribed to such term in
Section 43(b).  “SEC Reports” has the
meaning ascribed to such term in Section 4.6. 
“Securities Act” has the meaning
ascribed to such tens’ in Section 4.6.


“Security”  and “Securities”
have the meaning ascribed to such terms in Section 2.1.  “Select SEC Reports”
has the meaning ascribed to such term in Section 4.6.  “Shares” has the meaning ascribed to such
term in the Recitals.  “Subsidiaries” has
the meaning ascribed to such term in Section 4.1.


“Tax” means (i) all federal, state, local and
foreign taxes, charges, fees, imposts, levies and other assessments, including,
without limitation, all income, gross receipts, capital, sales, use, ad
valorem, value added, transfer, franchise, profits, inventory, capital stock,
license, payroll, employment, social security, unemployment, excise, severance,
stamp, occupation, property and estimated taxes, all taxes which are required
to be withheld, customs duties, fees, assessments and charges of any kind
whatsoever, (ii) all interest, penalties, fines, additions to tax and additional amounts imposed by any Taxing
Authority in connection with any item described in clause (i), and (iii)
any transferee liability in respect of any items described in clauses (i) or
(ii) payable by reason of contract, assumption, transferee liability, operation
of law, Treasury Regulation Section 1.1502-6(a) (or any predecessor or
successor thereof of any analogous or similar provision under law) or
otherwise.


“Taxing Authority” means the Internal Revenue
Service or any other Governmental Authority responsible for the administration
of any Tax.


“Trading Day” means a day on which the Common Stock
is traded on the Global Select Market.


“Transaction Documents” has the meaning ascribed to
such term in Section 3.2.


2.             AGREEMENT
TO SELL AND PURCHASE.


2.1          Authorization of Shares.  The Company has authorized (a) the issuance to Purchaser of the Shares and (b) the
issuance of such shares of its common stock, par value $0.01 per share
(the “Common Stock”) to be issued upon conversion of the Shares (the “Conversion
Shares”).  The Shares and the Conversion
Shares are collectively referenced herein as
the “Securities” and each of them may individually be referred to herein as a “Security.”
The Securities have the rights, preferences, privileges and restrictions set
forth in the Amended and Restated
Certificate of Incorporation of the Company (the “Certificate of Incorporation”)
and the Certificate of Designations of
the Series A-1 Preferred Stock attached hereto as Exhibit A (the “Certificate
of Designations”).


2.2          Exchange.  Subject to the terms and conditions hereof, at the Closing (as hereinafter
defined), the Company and the Purchaser hereby agree to exchange the Shares for
the shares of Series A Preferred Stock of the Company held by the Purchaser.


 


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3.             CLOSING, DELIVERY AND PAYMENT.


3.1          Closing.  Subject to the satisfaction (or waiver) of the conditions
set forth in Article 8 hereof, the closing of the sale and purchase of the
Shares (the “Closing”) shall take place at 10:00 a.m., New York City time, on
the date hereof, at the offices of the Company, 120 Broadway, New York, New
York 10271 or at such other time or place as the Company and the Purchaser
shall mutually agree (such date is hereinafter referred to as the “Closing Date”).


3.2          Delivery.  At the Closing, subject to the terms and conditions
hereof, the Company will deliver to the Purchaser a certificate representing
the Shares, against delivery by the Purchaser
of the certificate or certificates representing 40,000 shares of Series A
Preferred Stock of the Company, duly endorsed for transfer and accompanied by
such instruments of transfer as the Company shall reasonably request, free and
clear of all liens, claims, charges, pledges,
encumbrances and security interests of any kind or nature whatsoever.  This Agreement, the Registration
Rights Agreement dated as of December 4, 2006 between the Company and the
Purchaser (as assignee of CastlePoint Reinsurance Company, Ltd.) (the “Registration Rights Agreement”) and the
Certificate of Designations are collectively referred to herein as the “Transaction
Documents.”


3.3          Registration Rights
Agreement.  The Company and the Purchaser agree that
the Shares and the Conversion Shares shall constitute “Registrable Securities”
as such terra is defined in the Registration Rights Agreement.


3.4          Fees and Expenses.  Subject to Section 3.3 or as otherwise set forth herein
or the Registration Rights
Agreement, the Company and the Purchaser shall each be responsible for the fees
and expenses incurred by it in connection with this Agreement and the
transactions contemplated hereby.


4.             REPRESENTATIONS
AND WARRANTIES OF THE COMPANY.


Except as set forth under the corresponding section
of the disclosure schedule delivered to the Purchaser concurrently herewith
(the “Disclosure Schedule”), the Company hereby represents and warrants as of
the date hereof to Purchaser as follows:


4.1          Organization, Good
Standing and Qualification.  The Company and each of its direct and
indirect subsidiaries (collectively, the “Subsidiaries”) is a
corporation duly incorporated, validly existing and in good standing under the
laws of the jurisdiction in which it is incorporated, and has all requisite
corporate power and authority to own and operate its properties and assets, to
carry on its business as presently conducted The Company and each of its
Subsidiaries is duly qualified to do business and is in good standing as a
foreign corporation in all jurisdictions in which the nature of its activities
and of its properties (both owned and leased) makes such qualification
necessary, except for those jurisdictions in which failure to do so would not have or
reasonably be expected to have a Material Adverse Effect.  For
purposes of this Agreement, “Material Adverse Effect” means any effect which,
individually or in the aggregate with all other effects, reasonably
would be expected to be materially adverse to (i) the legality, validity or
enforceability any of the Transaction Documents or the Securities, (ii) the ability of the Company to perform on a
timely basis its obligations under this Agreement or 


 


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any of the
other Transaction Documents or (iii) the business, operations, assets,
properties, prospects, reputation, financial condition or results of operations
of the Company and its Subsidies,
taken as a whole.


4.2          Authorization; Binding
Obligations.  (i) The Company has the requisite
corporate power and authority to execute and deliver this Agreement and the
other Transaction Documents, to issue and sell the Securities in accordance
with the terms thereof and to carry out the provisions of this Agreement and
the other Transaction Documents, and (ii) all corporate
action on the part of the Company, its officers, directors and stockholders
necessary for the authorization, execution and delivery of this
Agreement and each of the other Transaction Documents,
the performance of all obligations of the Company hereunder and thereunder and
the authorization, sale, issuance and delivery of the Shares pursuant
hereto and the Conversion Shares pursuant to the Certificate of Incorporation
and the Certificate of Designations has been taken.  Assuming that this Agreement and the
Registration Rights Agreement have been duly authorized, executed and delivered
by the Purchaser and constitute valid and binding obligations of the Purchaser,
this Agreement is, and the other Transaction Documents will be at the Closing,
valid and binding obligations of the Company enforceable in accordance with
their terms, except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors’ rights, (b) general principles of equity that
restrict the availability of equitable remedies, and (c) to the extent that the
enforceability of the indemnification provisions in the Registration Rights
Agreement may be limited by Applicable Law.


4.3          Capitalization;
voting Rights.


(a)           The authorized
capital stock of the Company consists of 40 million shares of Common Stock and
two million shares of preferred stock, par value $0.01 per share (“Preferred
Stock”), of which 40,000 shares are (or upon filing of the Certificate of
Designation, will be) designated as Series A Preferred Stock.  As of November 1, 2006, 19,982,038 shares of
Common Stock were issued and outstanding and no shares of Preferred Stock were
issued and outstanding.


(b)           Except as provided
in the Company’s filings with the United States Securities and Exchange
Commission (the “SEC”), and except for the Securities, there are no outstanding
options, warrants, scrip, rights (including conversion, anti-dilution or
preemptive rights and rights of first refusal or similar rights), or contracts,
commitments, understandings or agreements of any kind by which the Company or any of its
Subsidiaries is or may become bound to issue any of its securities, nor are any
such issuances, contracts, commitments, understandings or arrangements
contemplated.


(c)           All issued and
outstanding shares of capital stock of the Company (i) have been duly
authorized and validly issued and are fully paid and nonassessable, and (ii)
were issued in compliance with all applicable state and federal laws concerning
the issuance of securities.


(d)           The Company does not
have any shareholder rights plan, “poison
pill” or other anti-takeover plans or similar arrangements.


 


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(e)           Except as set forth
i the Company’s filings with the SEC, there are no proxy, stockholder
agreements, voting agreements or other similar agreements with respect to the
Company’s capital stock to which the Company is a party or, to the knowledge of
the Company, between or among any of the Company’s stockholders.


(f)            The Company or one
of its Subsidiaries has the unrestricted right to vote, and (subject to
limitations imposed by Applicable Law) to receive dividends and distributions on,
all shares of capital stock of its Subsidiaries as owned by the Company or any
such Subsidiary.


(g)           The rights,
preferences, privileges and restrictions of the Securities are as stated in the
Certificate of Incorporation and the Certificate of Designations.  The Securities are duly authorized and when
issued in compliance with the provisions of this Agreement, the Certificate of
Designations and the Certificate of Incorporation, (i) the Securities will be
validly issued, fully paid and non-assessable, and will be free of any liens,
taxes, claims or other Encumbrances and (ii) will not be subject to preemptive
rights, rights of first refusal or other similar rights of stockholders of the
Company or any other person provided,
however, that the Shares and the Conversion Shares may be subject to
restrictions on transfer under the Registration Rights Agreement, state and/or
federal securities laws as set forth herein or as otherwise required by such
laws at the time a transfer is proposed. 
As of the Closing Date, the Company shall have reserved from its duly
authorized capital stock a number of shares of Common Stock for issuance of the
Conversion Shares at least equal to the Required Minimum on the date hereof.


4.4          Compliance with Other Instruments; Absence of
Conflicts.  Neither the Company nor any of its
Subsidiaries is in violation or default of, and the execution, delivery, and
performance of and compliance with this Agreement and the other Transaction Documents by the Company, and, assuming the
accuracy of the warranties and representations of the Purchaser herein,
the issuance and sale of the Shares pursuant hereto and of the Conversion
Shares pursuant to the Certificate of Incorporation and the Certificate of
Designations, will not, with or without the passage
of time or giving of notice, result in any violation of, or be in conflict
with or constitute a default under, (i) any term of the Certificate of
Incorporation or the Company’s bylaws as in effect on the date
hereof (the “Bylaws”) or the Subsidiaries’ organizational documents, (ii) any provision of any Contract to which the
Company or any of its Subsidiaries is party or by which it or any of them or
any of its or their respective properties is bound or affected, or (iii) any Applicable Law to which the Company or
any of its Subsidiaries is subject
(including United States federal and state securities laws, rules and
regulations and rules and regulations
of any self-regulatory organizations to which either the Company or its
securities  are  subject) or by which any property or asset of the Company or
any of its Subsidiaries is bound or
affected, other than, in the case of clauses (ii) and (iii), any such
violation, default, conflict that would not, individually or in the aggregate,
have a Material Adverse Effect.  The
execution, delivery, and performance by the Company of and compliance by the
Company with this Agreement and the other Transaction Documents, and the
issuance and sale of the Shares pursuant
hereto and of the Conversion Shares pursuant to the Certificate of
Incorporation and the Certificate of
Designations, will not, with or without the passage of time or giving of
notice, result in the creation of any Encumbrance or charge upon any of the
properties or assets of the Company or any of its Subsidiaries or the 


 


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suspension, revocation, impairment, forfeiture or nonrenewal of any Permit
applicable to the Company or any of its Subsidiaries or any of its or
their assets or properties, other than any such Encumbrances, charges,
suspensions, revocations, impairments, forfeitures or nonrenewals that would
not, individually or in the aggregate, have a Material Adverse Effect.


4.5          Consents.  No governmental orders, permissions, consents,
approvals or authorizations are required to be obtained by the Company and no
registrations or declarations are required to be fled by the Company in
connection with the execution and delivery of this Agreement or the issuance of
the Shares or the Conversion Shares, except such as have been duly and validly
obtained or filed, or with respect to
any filings that must be made after the Closing, as will be filed in a timely
manner.


4.6          SEC Reports; Financial Statements.  The Company has filed in a timely manner (within
applicable extension periods) all documents that the Company was required to
file with the SEC under the Securities Act of 1933, as amended (the “Securities
Act”) and the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
preceding the date of this Agreement (all of the foregoing filed prior to the
date hereof and all exhibits included therein and financial statements and
schedules thereto and documents incorporated by reference therein, the “SEC
Reports”).  The SEC Reports complied in
all material respects with the applicable requirements of the Exchange Act or
the Securities Act, as the case may be, and the rules and regulations of the
SEC as of their respective filing dates, and the information contained therein
as of the date thereof did not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading.  Except as
disclosed on Section 4.6 of the Disclosure Schedule, none of the statements
made in any such SEC Reports is, or has been, required to be amended or updated
under Applicable Law (except for such statements as have been amended or
updated in subsequent filings made prior to the date hereof).  As of their respective dates, the financial
statements of the Company included in the SEC Reports complied as to form in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC applicable with respect thereto.  Such financial statements have been prepared
in accordance with U.S. generally accepted accounting principles (“GAAP”),
consistently applied, during the periods involved (except as may be otherwise indicated in such financial statements or the notes
thereto or, in the case of unaudited interim statements, to the extent they may
not include footnotes or may be condensed or summary statements) and fairly
present in all material respects the consolidated financial position of the Company
and its consolidated Subsidiaries as of the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended (subject,
in the case of unaudited statements, to normal year-end audit adjustments).  Except as set forth in the most recent
financial statements of the Company included in the Select SEC Reports, the
Company has no liabilities, contingent or otherwise, other than (i) liabilities
incurred in the ordinary course of business subsequent to the date of such
financial statements and (ii) liabilities incurred in the ordinary course of
business and not required under GAAP to be reflected in such financial
statements, which liabilities and obligations referred to in clauses (i) and
(ii), individually or in the aggregate, are not material to the financial
condition or operating results of the Company. 
For purposes of this Agreement, “Select SEC Reports” means the Company’s
(A) Proxy Statement for its 2006 Annual Meeting, (B) Annual Report on Form
10-K/A for the fiscal year ended December 31, 2005 (the “2005 Annual Report”),
(C) 


 


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Quarterly Reports on Form 10-Q for the fiscal
quarters ended March 31, 2006, June 30, 2006, September 30, 2006 and
(D) Current Reports on Form 8-K filed since September 30, 2006.


4.7          Absence of Certain Changes; No
Material Adverse Effect.  Except as set forth in the Select SEC
Reports, since December 31, 2005, there has been no event  or occurrence which has had or would
reasonably be expected to have a Material Adverse Effect.  The Company
has not taken any steps, and does not currently expect to take any steps, to
seek protection pursuant to any bankruptcy or receivership law, nor does the
Company or any of its Subsidiaries have any knowledge or reason to believe that
its creditors intend to initiate involuntary bankruptcy proceedings with
respect to the Company or any of its Subsidiaries.


4.8          Filings.  Except as set forth in the Select SEC Reports or in
Section 4.8 of the Disclosure Schedule, since January 1, 2004, (i) the Company
and the Subsidiaries have filed all material reports, statements, documents,
registrations, filings and submissions required to be filed with any
Governmental Authority, and all such reports, statements, documents,
registrations, filing and submissions complied in all material respects with
Applicable Law in effect when
filed, and (ii) no material deficiencies have been asserted in writing by, nor
have any material comments been received from, nor any material penalties
imposed by, any such Governmental Authorities with respect to such reports,
statements, documents, registrations, filings or submissions.


4.9          Permits.  The Company and its Subsidiaries have all
Permits in each of the jurisdictions in which the Company and the Subsidiaries
conduct or operate their respective businesses as now being conducted, and all
such Permits are in full force and effect, with such exceptions which
singularly and in the aggregate have not and would not reasonably be expected
to have a Material Adverse Effect, and the Company believes it or its
Subsidiaries can obtain, without undue burden or expense, any similar authority
for the conduct of their respective businesses as planned to be conducted.  The Company and the Subsidiaries are, and at
all times since January 1, 2004 have been, in compliance in all material
respects with the terms of the Permits.  No
event has occurred or circumstance exists that (with or without the giving of
notice or lapse of time or both) (1) constitutes or would reasonably be
expected to result in, directly or indirectly, a violation of, or a failure to
comply with any Permit, or (2) has resulted or would reasonably be expected to result, directly or indirectly, in the
revocation, withdrawal, suspension, cancellation, or termination of, or any
modification to, any Permit, except for such violations or failures to comply
or revocations, withdrawals, suspensions, cancellations, terminations or modifications that would not
reasonably be expected to have a Material Adverse Effect.  The consummation of the
transactions contemplated by this Agreement and the other Transaction Documents will not result in any
revocation, cancellation, suspension or nonrenewal of any such material Permit.


4.10        Litigation.


(a)           Except as disclosed
in the Select SEC Reports and other than Actions arising in the ordinary course
of business from or related to the obligations of the Company under any
Insurance Contract or similar contract written, assumed or reinsured by the Company, there are no pending or, to the knowledge
of the Company, threatened Actions against  and to 


 


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the knowledge of the Company, no pending or threatened Investigations of,
the Company,  any Subsidiary or any of their properties or assets
challenging the validity or propriety of, or that have the effect of
preventing, delaying, making illegal or otherwise interfering with any of the
transactions contemplated by this Agreement or the other Transaction Documents.


(b)           As of the date of
this Agreement, there are no pending Actions or, to the knowledge of the
Company, threatened material Actions against, and to the knowledge of the
Company, no pending or threatened Investigations of, any current or former
officer or director of any of the Company or the Subsidiaries in his or her
capacity as an officer or director of any of the Company or the Subsidiaries.


4.11        Registration Rights.  Except as required pursuant to the Registration Rights
Agreement and except as disclosed in the SEC Reports, the Company is presently not under any obligation, and has not
granted any rights, to register under the Securities Act, any of the
Company’s presently outstanding securities or any of its securities that may
hereafter be issued.


4.12        Broker’s Fees.  No agent, broker, investment banker, person or film acting on behalf of or under the authority of the Company is or will
be entitled to any fee or commission from the Purchaser directly or
indirectly in connection with the transactions contemplated herein.


4.13        Listing and Maintenance Requirements.  The Common Stock is registered pursuant to Section 12(b) of the Exchange Act, and the Company
has taken no action designed to, or which to its knowledge is likely to have
the effect of, terminating the registration of the Common Stock under the
Exchange Act nor has the Company received any notification that the Commission
is contemplating terminating such registration. 
The Common Stock is currently listed for trading on the Nasdaq Global
Select Market (the “Global Select Market”). 
The Company has not received notice from the Global Select Market on
which the Common Stock is or has been listed
or quoted to the effect that the Company is not in compliance with the
listing or maintenance requirements of the Global Select Market.  The Company is, and has no reason to believe
that it will not continue to be, in compliance with all such listing and
maintenance requirements.  Prior to the
conversion of the Shares, the Company shall secure the listing of the Conversion Shares on the Global Select Market and on each
other national securities exchange, automated quotation system or
over-the-counter market upon which the shares
of Common Stock are then listed (subject to official notice of issuance).  The issuance and delivery of the Shares pursuant hereto and the
Conversion Shares pursuant to the Certificate of Incorporation and the
Certificate of Designations will not constitute a change of control under the
rules of the Global Select Market.


4.14        Anti-Takeover Provisions.  The Company and its board of directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison
pill (including any distribution under a rights agreement) or other similar
anti-takeover provision under its Certificate of Incorporation or the laws of
the state of its incorporation (including §203 of the Delaware General
Corporation Law) which is or could become applicable to Purchaser as a result
of the transactions contemplated by this Agreement, including, without
limitation, the Company’s issuance of the Securities and Purchaser’s ownership
of the Securities.


 


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4.15        Private Placement.  Assuming the accuracy of the Purchaser’s representations and warranties set forth in Section
5.3, no registration under the Securities Act or any state securities laws is required for the offer and sale of
the Securities by the Company to Purchaser as contemplated hereby.  The issuance and sale of the Securities
hereunder does not contravene the rules and regulations of the Global Select
Market or any state securities laws.


4.16        No General Solicitation
or Integrated Offering.  Neither the Company nor any distributor
participating on the Company’s behalf in the transactions contemplated hereby
(if any) nor any Person acting for the Company, or any such distributor, has
conducted any “general solicitation” (as such term is defined in
Regulation D) or general advertising with respect to any of the Securities
being offered hereby.  Neither the
Company nor any of its Affiliates, nor any person acting on its or their
behalf, has directly or indirectly made any offers or sales of any security or
solicited any offers to buy any security under circumstances that would require
registration of the Securities being offered hereby under the Securities Act or
cause this offering of Securities to be integrated with any prior offering of
securities of the Company for purposes of the Securities Act, which result of
such integration would require registration under the Securities Act, or that
would be integrated with the offer or sale of the Securities for the purpose of
the rules and regulations of the Global Select Market or any applicable
stockholder approval provisions.


5.             REPRESENTATIONS
AND WARRANTIES OF THE PURCHASER.


The Purchaser hereby represents and warrants to the
Company as follows (provided that such representations and warranties do not
lessen or obviate the representations and warranties of the Company set forth
in this Agreement):


5.1          Organization and Good Standing.  The Purchaser is duly incorporated, validly existing
and in good standing under the laws of the State of Delaware.  The Purchaser has all requisite corporate
power and authority to own and operate its properties and assets, to carry on its business as presently
conducted, to execute and deliver this Agreement and Registration Rights Agreement.


5.2          Requisite Power and
Authority.  All corporate action on the part of the
Purchaser, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement and the Registration
Rights Agreement and the performance of all obligations of the Purchaser
hereunder and thereunder has been taken. 
Assuming that this Agreement and the Registration Rights Agreement have
been duly authorized, executed and delivered by the Company and constitute
valid and binding obligations of the Company, this Agreement is, and the
Registration Rights Agreement will be at the Closing, valid and binding
obligations of the Purchaser enforceable in accordance with their terms, except
(a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of
general application affecting enforcement of creditors’ rights, (b) general
principles of equity that restrict the availability of equitable
remedies, and (c) to the extent that the enforceability of the indemnification
provisions in the Registration Rights Agreement may be limited by applicable
laws.


 


11

















 


5.3          Investment
Representations.  The Purchaser understands that neither
the Shares nor the Conversion Shares have been registered under the Securities
Act or under any state or non-U.S. securities law.  The Purchaser also understands that the
Shares are being offered and sold pursuant to an exemption from
registration contained in the Securities Act based in part upon the
Purchaser’s representations contained in this Agreement.  The Purchaser hereby represents and warrants
as follows:


(a)           The Purchaser Bears Economic Risk.  The Purchaser is knowledgeable, sophisticated and experienced in
making, and is qualified to make decisions with respect to investments
in shares presenting an investment decision like that involved in the purchase
of the Shares capable of evaluating the merits and risks of its investment in
the Company and has the capacity to protect its own interests.  The Purchaser understands that it must bear
the economic risk of this investment indefinitely unless the Shares (or the
Conversion Shares) are transferred in a transaction that is registered pursuant
to the Securities Act or exempt from registration.  The Purchaser understands that the Company
has no present intention of registering the Shares or the Conversion Shares
except as provided in the Registration Rights Agreement.  The Purchaser also understands that there is
no assurance that any exemption from registration under the Securities Act will
be available for any proposed transfer of the Shares or the Conversion Shares
and that, even if available, such exemption may not allow the Purchaser to
transfer all or any portion of the Shares or the Conversion Shares under the
circumstances, in the amounts or at the times the Purchaser aught propose.


(b)           Acquisition for Own Account.  The Purchaser is acquiring the
Shares and the Conversion Shares for the Purchaser’s own account for investment
only, and not with a view towards their distribution.


(c)           Accredited Investor. 
The Purchaser represents that it is an institutional “accredited
investor” within the meaning of Regulation D under the Securities Act.


(d)           Company Information. 
The Purchaser has received and read the SEC Reports and has
had an opportunity to discuss the Company’s business, management and financial
affairs with directors, officers and management of the Company and has had the
opportunity to review the Company’s operations and facilities.  The Purchaser has also had the opportunity to
ask questions of and receive answers from, the Company and its management
regarding the terms and conditions of this investment.  The Purchaser has, in connection with the
decisions to purchase the Shares, relied only upon the SEC Reports and the
representations and warranties of the Company set forth in the Transaction
Documents.


(e)           No Action Outside the United States.  The Purchaser acknowledges that
the Company has taken no action or will take any action in any jurisdiction
outside the United States to permit an offering of the Shares or the Conversion
Shares, or possession or distribution of offering materials in connection with the issuance of
the Shares or the Conversion Shares, in any jurisdiction outside the United
States where legal action by the Company for that purpose is required.  The Purchaser will comply with all applicable
laws and regulations in each jurisdiction outside the United States in which it purchases,
offers, sells or delivers Shares or
Conversion Shares or has in its possession or distributes any offering
material, in each case at its own expense.


 


12

















 


5.4          Transfer Restrictions.  The Purchaser acknowledges and agrees that the Shares
and, if issued, the Conversion Shares are subject to restrictions on transfer
as set forth herein and in the Registration Rights Agreement.


5.5          Covering Short Positions.  The Purchaser will not use the Shares or the
Conversion Shares to cover any short position in the Common Stock if doing so
would be in violation of applicable securities laws.


5.6          No Legal, Tax or
Investment Advice.  The Purchaser understands that nothing in the SEC Reports, this Agreement,
the Registration Rights Agreement or any other materials presented to
the Purchaser in connection with the purchase and sale of the Shares
constitutes legal, tax or investment advice. 
The Purchaser has consulted such legal, tax and investment advisors as
it, in its sole discretion, has deemed necessary or appropriate in connection
with its purchase of the Shares.


5.7          Ownership of Company
Stock.  None of the Purchaser or the Purchaser’s subsidiaries beneficially owns (as such term is defined for
purposes of Section 13(d) of the Exchange Act) any shares of the Common
Stock of the Company or any other class or series of the Company’s
capital stock.


5.8          Broker’s Fees.  No agent, broker, investment banker, person or fern acting on behalf of or under the authority of
the Purchaser is or will be entitled to any fee or commission from the
Company directly or indirectly in connection with the transactions contemplated
herein.


5.9          Title to Shares of Series A Preferred Stock.  The Purchaser has, and immediately prior to the
Closing will have, legal and valid title to 40,000 shares of Series A Preferred
Stock of the Company free and clear of all liens, claims, charges, pledges, encumbrances and security interests of any kind or
nature whatsoever.  At the Closing the
Company will acquire legal and valid title to such shares of Series A Preferred
Stock of the Company, in each case free and clear of all liens, claims,
charges, encumbrances and security interests of any kind or nature whatsoever,
provided that no representation is made as to any of the foregoing resulting
from any action or omission by the Company.


6.             COVENANTS.


6.1          Best Efforts.  The parties shall use their respective best efforts
timely to satisfy each of the conditions described in Sections 8.1 and 8.2 of
this Agreement.


6.2          [Reserved]


6.3          Press Release; Form 8-K;
Publicity.  The Company may issue on or before the
next business day following the date hereof a press release (the “Press Release”)
announcing the entry into the transactions contemplated hereby and shall within
two days following the date hereof file a Current Report on Form 8-K with the
SEC concerning this Agreement and the transactions contemplated hereby (the “8-K
Filing”).  The Company and the Purchaser
shall consult with each other in issuing any other press releases with respect
to the transactions contemplated hereby, and neither the Company nor the
Purchaser shall issue any such press release or otherwise make any such public
statement without the prior consent of the Company, 


 


13

















 


with respect to
any press release of the Purchaser, or without the prior consent of the
Purchaser, with respect to any press release of the Company, which consent
shall not unreasonably be withheld, except if
such disclosure is required by law, in which case the disclosing party shall
promptly provide the other party with prior notice of such public statement or
communication.


6.4          Reservation of Shares.  The Company shall, if applicable: (i) in the time and
manner required by the Global Select Market, but in any event prior to the
conversion of the Shares into Common Stock, prepare and file with the Global
Select Market an additional shares listing
application covering a number of shares of Common Stock at least equal
to the Required Minimum on the date of such application, (ii) take all steps
necessary to cause such shares of Common Stock to be approved for listing on the
Global Select Market as soon as possible thereafter, (iii) provide to the
Purchaser evidence of such listing, and (iv) from and after the conversion of
the Shares into Common Stock, maintain the listing of such Common Stock on the
Global Select Market.


6.5          No Integrated Offerings.  The Company shall not make any offers or sales of any
security (other than the Securities) under circumstances that would require
registration of the Securities being offered or sold hereunder under the
Securities Act or cause this offering of the Securities to be integrated with
any other offering of securities by the Company for purposes of any stockholder
approval provision applicable to the Company or its securities.


6.6          Legal Compliance.  The Company shall conduct its business and the
business of its Subsidiaries in compliance with all Applicable Laws, except
where the failure to do so would not have a Material Adverse Effect.


6.7          Information.  So long as Purchaser (or any of
its Affiliates) beneficially owns any of the Securities, the Company shall
furnish to Purchaser the information the Company must deliver to any
holder or to any prospective transferee of Securities in order to permit the sale or
other transfer of such Securities pursuant to Rule 144A of the SEC or any similar
rule then in effect.  The Company shall
keep at its principal executive office a true copy of this Agreement (as at the
time in effect), and cause the same to be available for inspection at such
office during normal business hours by any holder of Securities or any
prospective transferee of Securities designated by a holder thereof.


6.8          Pledge of Securities.  The Company acknowledges and agrees that the
Securities may be pledged by Purchaser in connection with a bona fide margin
agreement or other loan or financing arrangement that is secured by the
Securities.  The pledge of Securities
shall not be deemed to be a transfer, sale or assignment of the Securities
hereunder, and if Purchaser effects a pledge
of Securities, it shall not be required to provide the Company with any  notice thereof or otherwise make any delivery to
the Company pursuant to this Agreement or any other Transaction Document.  The Company shall execute and deliver such
documentation as a pledgee of the Securities
may reasonably request in connection with a pledge of the Securities to
such pledgee by Purchaser.


 


14

















 


6.9          Investment Company Act.  The Company shall conduct its business in a manner so
that it will not be required to register as an investment company under the
Investment Company Act.


7.             SECURITIES
TRANSFER MATTERS.


7.1          Conversion and Exercise.  Upon conversion of the Shares by any person, (i) if
the DTC Transfer Conditions (as defined below) are satisfied, the Company shall
cause its transfer agent to electronically transmit all Conversion Shares by
crediting the account of such person or its nominee with the Depository Trust
Company (“DTC”) through its Deposit Withdrawal Agent Commission system; or (ii)
if the DTC Transfer Conditions are not satisfied, the Company shall issue and deliver, or instruct its transfer agent to
issue and deliver, certificates  (subject
to the legend and other applicable provisions hereof and the Certificate of
Designation), registered in the name of such person its nominee,
physical certificates representing the Conversion Shares.  Even if the DTC Transfer Conditions are
satisfied, any person effecting a conversion
of Shares may instruct the Company to deliver to such person or its nominee
physical  certificates representing the
Conversion Shares, in lieu of delivering such shares by way of DTC
Transfer.  For purposes of this
Agreement, “DTC Transfer Conditions” means that (A) the Company’s
transfer agent is participating in the DTC Fast Automated Securities Transfer program and (B) the certificates for the Conversion
Shares required to be delivered do not bear a legend and the person
effecting such conversion or exercise is not then required to return such
certificate for the placement of a legend thereon.


7.2          Transfer or Resale. 
Purchaser
understands that (i) except as provided in the Registration Rights Agreement,
the sale or resale of the Securities have not been and are not being registered
under the Securities Act or any state securities laws, and the Securities may not be transferred unless (A) the
transfer is made pursuant to and as set forth in an  effective registration statement under the
Securities Act covering the Securities; or (B) Purchaser shall have delivered to the Company an opinion of
counsel reasonably satisfactory to the Company (which opinion shall be in form,
substance and scope customary for opinions of counsel in comparable transactions) to the effect that the Securities to
be sold or transferred may  be sold or transferred pursuant to an exemption
from such registration; or (C) sold or transferred  to an
affiliate of Purchaser that agrees to be bound by this .Article 7; and (ii)
neither the Company nor any other
person is under any obligation to register such Securities under the Securities
Act or any state securities laws (other than pursuant to the terms of the
Registration Rights Agreement).  Notwithstanding
the foregoing or anything else contained herein to the contrary, the Securities
may be pledged as collateral in connection with a bona fide margin account or
other lending arrangement, provided such pledge is consistent with Applicable
Laws.


7.3          Legends.  Purchaser understands that the Shares and, until such
time as the Conversion Shares have been registered under the Securities Act
(including registration pursuant to Rule 416 thereunder) as contemplated by the
Registration Rights Agreement or otherwise may be sold by such Purchaser under
Rule 144, the Certificates for the Conversion Shares may bear a restrictive
legend in substantially the following form:


 


15

















 


THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF
ANY STATE OF THE UNITED STATES OR IN ANY OTHER JURISDICTION.  THE SECURITIES REPRESENTED HEREBY MAY NOT BE
OFFERED, SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES LAWS UNLESS OFFERED, SOLD
OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION E ROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS.


The Company shall, immediately prior to a
registration statement covering the Securities (including, without limitation,
the Registration Statement contemplated by the Registration.  Rights Agreement) being declared effective,
deliver to its transfer agent an opinion letter of counsel, opining that at any
time such registration statement is effective, the transfer agent may issue, in
connection with the issuance of the Conversion Shares, certificates
representing such Conversion Shares without
the restrictive legend above, provided such Conversion Shares are to  be sold pursuant to the prospectus contained in
such registration statement.  Upon
receipt of such opinion, the Company shall cause the transfer agent to
confirm, for the benefit of the holders, that no further opinion of counsel is
required at the time of transfer in order to issue such shares without such
restrictive legend.


The legend set forth above shall be removed and the
Company shall issue a certificate without such legend to the holder of any
Security upon which it is stamped, if, unless otherwise required by state
securities laws, (i) the sale of such Security is registered under the
Securities Act (including registration pursuant to Rule 416 thereunder) or (ii)
such holder provides the Company with an opinion of counsel, in form, substance
and scope customary for opinions of counsel in comparable transactions, to the
effect that a public sale or transfer of such Security may be made without
registration under the Securities Act, If the holder of any Security is an
affiliate of the Company, the legend on any such Security shall not he so
removed.  In the event the above legend
is removed from any Security and thereafter the effectiveness of a registration
statement covering such Security is suspended or the Company determines that a
supplement or amendment thereto is required by applicable securities laws, then upon reasonable advance written
notice to Purchaser the Company may require that the above legend be placed on
any such Security that cannot then be sold pursuant to an effective
registration statement or under Rule 144 and Purchaser shall cooperate in the
replacement of such legend.  Such legend
shall thereafter be removed when such
Security may again be sold pursuant to an effective registration
statement or under Rule 144.


7.4          Transfer Agent
Instruction.  Upon compliance by Purchaser with the
provisions of this Article 7 with respect to the transfer of any Securities,
the Company shall permit the transfer of such Securities and, in the case of
the transfer of Conversion Shares, promptly
instruct its transfer agent to issue one or more certificates (or effect a DTC
Transfer) in such name and in such denominations as specified by
Purchaser.  The Company shall not give
any instructions to its transfer agent with respect to the Securities, other
than any permissible or required instructions provided in this Article 7, and
the Securities shall otherwise be freely 


 


16

















 


transferable on
the books and records of the Company as and to the extent provided in this
Agreement.


7.5          Lock-Up Period.  During the period from the date hereof until 1 80 days
from November 13, 2006 (the “Lock-Up Period”), the Purchaser will not (a)
directly or indirectly, offer, sell, agree to offer
or sell, solicit offers to purchase, grant any call option or purchase
any put option with respect to, pledge, borrow or otherwise dispose of any
Registrable Security, as defined in the Registration Rights Agreement, (b)
establish or increase any “put equivalent position” or liquidate or
decrease any “call equivalent position” with respect to any Registrable Security (in each case within the
meaning of Section 16 of the Exchange Act and the  rules and regulations promulgated thereunder), or
(c) otherwise enter into any swap, derivative or other transaction or
arrangement that transfers to another, in whole or in part, any of the economic consequence of ownership of a Registrable
Security, whether or not such transaction is to be settled by delivery
of Registrable Securities, other securities, cash or other consideration.


8.             CONDITIONS
TO CLOSING.


8.1          Conditions to the
Purchaser’s Obligations to Purchase the Shares. 
The
Purchaser’s obligations to purchase the Shares at the Closing are subject to
the satisfaction or waiver on or prior to the Closing Date of the following
conditions:


(a)           Representations and Warranties True; Performance of
Obligations.  The
representations and warranties made by the Company in Article 4 shall be true
and correct in all material respects as of the Closing Date, with the same
force and effect as if they had been
made on and as of said date, and the Company shall have performed, satisfied and
complied with all obligations, covenants and conditions herein required to be
performed, satisfied or complied with by it on or prior to the Closing.


(b)           Legal Investment. 
On the Closing Date, the sale and issuance of the Shares and
the proposed issuance of the Conversion Shares shall be legally permitted by
all laws and regulations to which the Purchaser and the Company are subject,


(c)           Consents, Permits, Waivers and Approvals.  The Company and the Purchaser shall have obtained any and all
consents, permits, waivers and approvals necessary or appropriate for
consummation of the transactions contemplated by this Agreement and the other
Transaction Documents and such consents, permits, waivers and approvals shall
be in full force and effect.


(d)           Compliance Certificate.  The Company shall have delivered
to the Purchaser a Compliance Certificate, executed by the Senior Vice President
and CFO of the Company, dated the Closing Date to the effect that the
conditions specified in subsections (a) and (c) (as it pertains to the Company)
of this Section 8.1 have
been satisfied, except that such Compliance Certificate shall not be
required if the Closing Date is the date hereof or the Business Day immediately
following the date hereof.


(e)           Listing.  The
Common Stock shall be authorized for quotation and listed on the Global Select
Market and trading in the Common Stock (or on the Global Select Market
generally) shall not have been suspended by the SEC or the Global Select
Market.


 


17

















 


(f)            Certificate of Designations.  The Certificate of Designations,
substantially in the form attached hereto as Exhibit A, shall have been
approved and adopted by the Company.


8.2          Conditions to
Obligations of the Company to Issue and Sell the Shares.  The Company’s obligation to issue and sell the Shares
to the Purchaser at the Closing is subject to the satisfaction or waiver of the
following conditions:


(a)           Representations and Warranties True.  The representations and warranties
in Article 5 made by the Purchaser shall be true and correct in all material respects as of the Closing Date, with the
same force and effect as if they had been made on and as of said date,
and the Purchaser shall have performed all obligations and conditions herein required
to be performed or observed by it on or prior to the Closing.


(b)           Consents, Permits, Waivers and Approvals.  The Company and the Purchaser
shall have obtained any and all consents, permits, waivers and approvals
necessary or appropriate for consummation of the transactions contemplated by
this Agreement and the other Transaction Documents and such consents, permits,
waivers and approvals shall be in full force and effect.


(c)           Compliance Certificate.  The Purchaser shall have delivered
to the Company a Compliance Certificate, executed by an executive officer of
the Purchaser, dated the Closing Date to the effect that the conditions
specified in subsections (a) and (b) (as it pertains to the Purchaser) of this
Section 8.2 have been satisfied, except that such Compliance Certificate shall
not be required if the Closing Date is the date hereof or the Business Day
immediately following the date hereof.


9.             MISCELLANEOUS.


9.1          Governing Law.  This Agreement shall be governed by and construed
under the laws of the State of Delaware. 
The parties agree that any action brought by either party under or in
relation to this Agreement, including without limitation to interpret or
enforce any provision of this Agreement, shall be brought in, and each party
agrees to and does hereby submit to the
jurisdiction and venue of, any state or federal court located in the County of
New Castle, State of Delaware.  The
Company irrevocably waives the defense of an inconvenient forum to the
maintenance of such suit or proceeding in such forum.  The Company further agrees that service of
process upon the Company mailed by first class mail shall be deemed in every
respect effective service of process upon the Company in any such suit or
proceeding.  Nothing herein shall affect
the right of Purchaser to serve process in any other manner permitted by law.  The Company agrees that a final
non-appealable judgment in any such suit or proceeding shall be conclusive and
may be enforced in other jurisdictions by suit on such judgment or in any other
lawful manner.


9.2          Successors and Assigns.  The Purchaser may assign its right to purchase the
Shares to any one or more direct or indirect majority-owned subsidiaries;
provided that no such assignment shall
relieve the Purchaser of its obligations hereunder to the extent that
the assignee fails to fulfill the same.  Upon
any such permitted assignment, the references in this 


 


18

















 


Agreement to the
Purchaser shall also apply to any such assignee unless the context otherwise
requires.  Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of and be
binding upon the parties hereto and their respective successors, assigns,
heirs, executors and administrators; provided, however, that prior to the receipt by the
Company of adequate written notice of the transfer of any Shares specifying the
full name and address of the transferee, the Company may deem and treat the
person listed as the holder of such Shares in its records as the absolute owner
and holder of such Shares for all purposes.


9.3          Entire Agreement.  This Agreement, the Disclosure Schedule and the other
Transaction Documents and the other documents delivered pursuant hereto or
thereto constitute the full and entire
understanding and agreement between the parties with regard to the
subjects hereof.


9.4          Severability.  In the event one or more of the provisions of this
Agreement should, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or enforceability
shall not affect any other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.


9.5          Amendment and Waiver.  This Agreement may be amended or modified, and the
rights and obligations of the Company and the Purchaser may be waived, only
upon the written consent of the Company and the holders of at least a majority
of the Shares purchased or agreed to be purchased pursuant to this Agreement.


9.6          Notices.  All notices or other communications
required or per fitted hereunder shall be in writing and shall be deemed
effectively given: (i) upon personal delivery to the party to be notified, (ii)
upon receipt, if sent by facsimile during normal business hours of the recipient or, if not sent by facsimile
during normal business hours of the recipient, then on the next business day;
(iii) three days after having been sent, if sent by registered or certified
mail, return receipt requested, postage prepaid, or (iv) one day after deposit
with a nationally recognized overnight courier, if sent by such a courier,
specifying next day delivery, with written verification of receipt.  Notices to the Company shall be addressed to:


Tower Group, Inc.

120 Broadway, 31st Floor

New York, New York 10271

Attention: Stephen L.  Kibblehouse, Esq.  Fax Number: (646) 514-8612


with
a copy to:


LeBoeuf, Lamb, Greene & MacRae LLP  

125 West 55th Street

New York, New York 10019

Attention: Matthew Ricciardi, Esq.  Fax Number: (212) 424-8500


 


19

















 


Notices
to the Purchaser shall be addressed to:


CastlePoint Management Corp.  120 Broadway

New York, New York 10271 Attention: Roger A. 
Brown Fax Number: (212) 847-9549


9.7          Titles and Subtitles.  The titles of the sections and subsections of the
Agreement are for convenience of reference only and are not to be considered in
construing this Agreement.


9.8          Third Party
Beneficiaries.  This Agreement is intended for the benefit
of the parties hereto and their respective permitted successors and assigns,
and is not for the benefit of, nor may any provision hereof be enforced by, any
other person.


9.9          Survival.  The representations and warranties
of the Company axed the
agreements and covenants set forth in Sections 4, 6, 7 and 9 hereof shall
survive until the one  year anniversary
of the Closing notwithstanding any due diligence investigation conducted by or on behalf of Purchaser.  Moreover, none of the representations and, warranties
made by the Company herein shall act as a waiver of any rights or remedies
Purchaser may have under applicable U.S. 
federal or state securities laws.


9.10        Further Assurances. 
Each party
shall do and perform, or cause to be done and performed, all such further acts
and things, and shall execute and deliver all such other agreements,
certificates, instruments and documents, as the other party may reasonably consummation of the transactions contemplated
hereby.


9.11        Indemnification.  In consideration of Purchaser’s execution and delivery
of this Agreement and the other Transaction Documents and purchase of the
Securities hereunder, and in addition to all of the Company’s other obligations
under this Agreement and the other
Transaction Documents, from and after the Closing, the Company shall defend,
protect, indemnify and hold harmless Purchaser and all of its officers,
directors and employees and any of the foregoing persons’ agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement, collectively, the “Indernnitees”) from and against any and all
actions, causes of action, suits, claims, losses, costs, penalties,
fees, liabilities and damages, and expenses in connection therewith
(irrespective of whether any such Indemnitee is a party to the action for which
indemnification hereunder is sought), and including reasonable attorneys’ fees
and disbursements (the “Indemnified Liabilities”), incurred by any Indemniee as
a result of, or arising out of, or relating to (i) any misrepresentation or
breach of any representation or warranty made by the Company in this Agreement,
any other Transaction Document or any other certificate, instrument or document
delivered by the Company at the Closing or (ii) any breach of any covenant,
agreement or obligation of the
Company contained in this Agreement, any other Transaction Document or any
other certificate, instrument or document delivered by the Company at the
Closing.  To the extent that the
foregoing undertaking by the Company may be unenforceable for any reason, the
Company shall make the maximum contribution to the payment and satisfaction of
each of the Indemnified Liabilities which is permissible under Applicable Law.  Except as otherwise set 


 


20

















 


forth herein, the
procedures with respect to the rights and obligations under this Section 9.11
shall be the same as those set forth in Section 6 of the Registration Rights
Agreement.


9.12        Payment Set Aside.  To the extent that the Company makes a payment or
payments to Purchaser, or the Purchaser makes a payment or payments to the
Company, hereunder or pursuant to any of the other Transaction Documents or
Purchaser or the Company enforces or exercises its respective rights hereunder
or thereunder, and such payment or payments
or the proceeds of such enforcement or exercise or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set
aside, recovered from, disgorged by or are required to be refunded, repaid or
otherwise restored to the Company or Purchaser, as applicable, a trustee,
receiver or any other person under any Applicable Law (including, without
limitation, any bankruptcy law, state or federal law, common law or equitable
cause of action), then to the extent of any such restoration the obligation or
part thereof originally intended to be satisfied shall be revived and continued
in full force and effect as if such payment had not been made or such
enforcement or setoff had not occurred.


9.13        Joint Participation in
Drafting.  Each party to this Agreement has
participated in the negotiation and drafting of this Agreement and the other
Transaction Documents.  As such, the
language used herein and therein shall be deemed to be the language chosen by
the parties hereto to express their mutual intent, and no rule of strict
construction will be applied against any party to this Agreement.


9.14        Remedies.  No provision of this Agreement or any
other Transaction Document providing for any remedy to Purchaser shall limit
any other remedy which would otherwise be
available to Purchaser at law, in equity or otherwise.  Nothing in this Agreement
or any other Transaction Document shall limit any rights Purchaser may have
under any applicable federal or state securities laws with respect to the
investment contemplated hereby.


9.15        Knowledge.  As used in this Agreement, the term “knowledge” of any person or entity shall mean and include (i)
actual knowledge and (ii) that knowledge which a reasonably prudent
business person could have obtained in the management of his or her business
affairs after making due inquiry and exercising due diligence which a prudent
business person should have made or exercised, as applicable, with respect thereto.


9.16        Arms-Length Transaction.  Each of the Parties acknowledges and agrees that they
are acting on their own behalf and in the capacity of an arm’s-length purchaser
or seller, as applicable.  Each Party
further acknowledges and agrees that it has independently evaluated the merits
of the transactions contemplated by this Agreement and the other Transaction
Documents, that it has independently determined to enter into the transactions
contemplated hereby and thereby, that it is not relying on any advice from or
evaluation by any other person (other than its representatives), and that it is
not acting in concert with any other person in making its purchase of
securities hereunder or in monitoring its investment in the Company.


9.17        Counterparts.  This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.  Facsimile
signatures shall be as effective as original signatures.


 


21

















 


IN WITNESS WHEREOF, the parties hereto have executed
this Exchange Agreement as of the date set forth in the first paragraph hereof.


 


TOWER
GROUP, INC.


By: /s/ Francis M. Colalucci                                             

Name: Francis M. Colalucci

Title:  Senior Vice President &CFO


CASTLEPOINT
MANAGEMENT CORP.


By:       /s/ Joel S. Weiner                        

Name: Joel S. Weiner

Title:  Senior Vice President &CFO


 


 


22

















 


Exhibit A

Certificate of Designations


 





















 


CERTIFICATE OF DESIGNATIONS


SERIES A-1 PREFERRED STOCK


OF


TOWER GROUP, INC.


____________________________


Pursuant to Section 151 of the General Corporation
Law
 of the State of Delaware


___________________________________


Tower Group, Inc., a Delaware corporation (the “Company”),
in accordance with the provisions of Sections
103 and 151 of the General Corporation Law of the State of Delaware (the
“DGCL”) thereof, does hereby make this Certificate of Designations and
DOES HEREBY CERTIFY:


That the board of directors of the Company (the “Board”)
has the authority, pursuant to the Amended and Restated Certificate of
Incorporation of the Company (the “Certificate of  Incorporation”)
and the DGCL, to adopt resolutions providing for the designations, preferences
and relative, participating, optional and other special rights, and
qualifications, limitations or restrictions of one or more series of preferred
stock, par value $0.01 per share, of the Company (the “Preferred Stock”).


That pursuant to resolutions of
the Board of Directors adopted on January 10, 2007, the  creation of the Series A-1 Preferred Stock, $0.01
par value per share (the  “Series
A-1 Preferred  Stock”),
was authorized and the designations, preferences and relative, participating,
optional and other special rights and qualifications, limitations and
restrictions of such Series A-1 Preferred Stock, in addition to those set forth
in the Certificate of Incorporation and Amended and Restated By-Laws (the “By-Laws”)
of the Company, were fixed as follows:


1.             Designation.


The designation of the Series A-1 Preferred Stock
shall be “Series A-1 Preferred Stock,” and the number of shares constituting
the Series A-1 Preferred Stock shall be 40,000. 
The Series A-1 Preferred Stock shall have a liquidation preference of
$1,000 per share.  The Company may from
time to time, without notice to or the consent of holders of the Series A-1
Preferred Stock, issue additional preferred stock, No such issuance shall
affect the due authorization of any issued and outstanding shares of the Series
A-1 Preferred Stock.


2.             Definitions.


“Board” shall mean the Board of Directors of
the Company or any duly authorized committee of the Board of Directors.


 

















 


“Business Day” shall mean a day that is a
Monday, Tuesday, Wednesday, Thursday or Friday
and is not a day on which banking institutions in New York City generally are
authorized or obligated by law or executive order to close.


“Certificate of Designations”
shall mean this Certificate of Designations relating to the Series A-l
Preferred Stock, as amended from time to time.


“Change in Control” shall have the meaning
assigned to such term in Section 6(a).


“Common Stock” shall mean
the common stock, par value $0.01 per share, of the Company.


“Conversion” shall have the meaning set forth
in Section 5(a) hereof.  “Conversion Date” shall have the meaning set forth in Section 5(a) hereof.


“Dividend Payment Date”
shall have the meaning assigned to such teen in Section 3(a)(i).


“Dividend Period” shall have the meaning assigned to such term in Section 3(c).


“Dividend Rate” shall mean 8.66% per annum.


“Dividend Record Date” shall have the meaning
assigned to such term in Section 3(b).


“Issue Date” shall mean the initial date of
delivery of the Series A-1 Preferred Stock.


“Junior Stock” shall mean the Co=on Stock and any other class or series
of shares of the Company that ranks junior to the Series A-I Preferred Stock
either as to the payment of dividends or as
to the distribution of assets upon any liquidation, dissolution or winding up
of the Company.


“Liquidation Preference”
shall have the meaning assigned to such term in Section 8(b).


“Nonpayment” shall have the
meaning assigned to such term in Section 10(b).


“Optional Conversion Shares”
shall have the meaning assigned to such term in Section 5(a).


“Parity Stock” shall mean
any class or series of preferred shares of the Company that ranks equally
with the Series A-1 Preferred Stock in the payment of dividends and in the
distribution of assets on any liquidation, dissolution or winding up of the
Company.


“Person” shall mean any
individual, corporation, partnership, joint venture, trust, limited liability
company or corporation, unincorporated organization or government or any agency
or political subdivision thereof.


“Preferred Stock Director”
shall have the meaning assigned to such term in Section 10(b).


 


2

















 


“solvent” shall have the meaning assigned to
such term in Section 3(a).


“Value of Consideration” shall have the
meaning assigned to such term in Section 6(a).


“Voting Preferred Stock” shall mean any other
class or series of preferred stock of the Company ranking equally with the
Series A-l Preferred Stock either as to dividends or the distribution of assets
upon liquidation, dissolution or winding up and upon which voting rights similar to those granted to the holders of the
Series A-1 Preferred Stock have been conferred and are exercisable.


3.             Dividends.


(a)           Dividend
Payment Dates.  The holders of
the Series A-1 Preferred Stock shall be entitled to receive cash 1) dividends
when, as and if declared by the Board or a duly authorized committee of the
Board, out of assets legally available for that purpose and to the extent the
Company is able to pay its debts as they fall due (“solvent”) after giving
effect thereto, at the applicable Dividend Rate set forth below in this Section
3.  Dividends on the Series A-1 Preferred
Stock shall be payable on a non-cumulative basis, quarterly in arrears on the
27th day of March, June, September and December of each year, the Mandatory
Conversion Date (except with respect to shares of Series A-1 Preferred Stock
that have been called for redemption pursuant to Section 4) and, if applicable,
the date of consummation of any Change in Control (each, a “Dividend Payment
Date”), subject to Section 3(e).


(b)           Dividend Record Date. 
Each such dividend shall be paid to the holders of record of
the Series A-1 Preferred Stock as they appear on the share register of the
Company on the applicable record date (each, a “Dividend Record Date”),
which shall be a record date fixed by the
Board that is not more than  60 nor less than 10 days prior to such Dividend
Payment Date or, if no such date is fixed by the Board, shall be 10 days
prior to such Dividend Payment Date.  The
Dividend Record Date shall apply regardless of whether any particular Dividend
Record Date is a Business Day.


(c)           Dividend Period. 
Each dividend period (a “Dividend Period”) shall
commence on and include a Dividend Payment Date and shall run to but excluding
the next Dividend Payment Date, except that the initial Dividend Period will
commence on and include December 27, 2006, and will run to and exclude the
first Dividend Payment Date thereafter.


(d)           Day Count Convention. 
The amount of dividends payable per she of Series A-1 Preferred Stock on each Dividend Payment Date
will be calculated using the per annum Dividend
Rate and on the basis of a 360-day year consisting of twelve 30-day months.


(e)           Business Day Convention.  If any Dividend Payment Date is
not a Business Day, then dividends will be
payable on the first Business Day following such Dividend Payment Date
unless such day is in the next calendar month, in which case dividends shall be
payable on the first Business Day preceding such Dividend Payment Date and
dividends, in each case, shall accrue to the actual payment date.


(f)            Junior Stock.  So
long as any shares of Series A-1 Preferred Stock remain outstanding for any Dividend Period, unless the full dividends for the
current Dividend Period 


 


3

















 


on all
outstanding Series A-1 Preferred Stock and Parity
Stock have been declared and paid (or declared and a sum sufficient for
the payment thereof has been set aside): (i) no dividend whatsoever shall be paid or declared during such
Dividend Period on the  Common Stock or other  Junior Stock (other than a dividend payable solely in Common Stock or
other Junior Stock); and  (ii) no
Common Stock or other Junior Stock shall be purchased, redeemed or otherwise
acquired for consideration by the Company, directly or indirectly (other
than as a result of a reclassification of
such Junior Stock for or into other Junior Stock, or the exchange or conversion
of one share of Junior Stock for or into another share of Junior Stock) during
such Dividend Period.


(g)           Pro Rata
Adjustments.  ‘When dividends are not paid in full (or duly provided for) on any
Dividend Payment Date (or, in the case of Parity Stock having dividend payment
dates different from the Dividend Payment Dates, on a dividend payment date
falling within a Dividend Period) upon the Series A-1 Preferred Stock and any
Parity Stock, all dividends declared upon the
Series A-1 Preferred Stock and all such Parity Stock payable on such Dividend
Payment Date (or, in the case of Parity Stock having dividend payment dates
different from the Dividend Payment Dates, on a dividend payment date falling
within the Dividend Period related to such Dividend Payment Date) shall be
declared pro rata so that the
respective amounts of such dividends shall hear the same ratio to each other as
all accrued but unpaid dividends per share of
Series A-1 Preferred Stock and all Parity Stock payable on such Dividend
Payment Date (or, in the case of Parity Stock having dividend payment
dates different from the Dividend Payment Dates, on a dividend payment date
falling within the related Dividend Period) bear to each other.


(h)           Additional Series A-1 Preferred Stock.  In
the event that additional shares of the Series
A-1 Preferred Stock are issued after the original issue date, dividends on such
shares may accrue from the original issue date or any other date
specified by the Company at the time such additional
shares are issued.  These dividends will
accrue, with respect to each Dividend Period, in the manner set forth in
Sections 3(a)(i) and 3(b).


(i)            Non-Cumulative Dividends.  Dividends on Series A-1 Preferred
Stock shall be non-cumulative.  To the extent that any dividends payable on
the Series A-1 Preferred Stock on any Dividend Payment Date are not
declared and paid, in full or otherwise, on such Dividend Payment Date, then
such unpaid dividends shall not cumulate and shall cease to accrue and be
payable and the Company shall have no obligation to pay dividends accrued for
the applicable Dividend Period subsequent to such Dividend Payment Date or to
pay interest with respect to such dividends, whether or not dividends are
declared on Series A-1 Preferred Stock for any subsequent Dividend Period.


4.             Redemption.


(a)           The Company, at its
option, may redeem, in whole at any time or in part from time to time, the
Series A-i Preferred Stock at the time outstanding, upon notice given as
provided in Section 4(c) below, at a redemption price equal to $1,000 per share
of Series A-1 Preferred Stock, together with an amount equal to any dividends
that have been declared but not paid prior to the redemption date (but with no
amount in respect of any dividends that have not been declared prior to such
date).  The redemption price for the
Series A-1 Preferred Stock shall 


 


4

















 


be payable on the
redemption date to the holder of such shares against surrender of the
certificate(s) evidencing such shares to the Company or its agent.  If the redemption date occurs subsequent to
the Dividend Record Date for a Dividend Period, any declared but unpaid
dividends payable on such redemption date shall not be paid to the holder
entitled to receive the redemption price on the redemption date, but rather
shall be paid to the holder of record of the redeemed shares on such Dividend
Record Date relating to the Dividend Payment Date as provided in Section 3.


(b)           Notice of redemption
shall be given to the holders of record of the Series A-l Preferred Stock in
accordance with Section 14(a) hereof at least one Business Day before the date
fixed for redemption.  Any notice
delivered as provided m Section 14(a) shall be conclusively presumed to have
been duly given, whether or not the holder receives such notice, but failure to
duly give such notice, or any defect in such notice or in the mailing thereof,
to any holder of Series A-1 Preferred Stock designated for redemption shall not
affect the validity of the proceedings for the redemption of any other Series
A-1 Preferred Stock.  Each such notice
given to a holder shall state: (i) the redemption date; (ii) the number of
shares of Series A-1 Preferred Stock to be redeemed and, if less than all the
shares of the Series A-1 Preferred Stock held by such holder are to be
redeemed, the number of such shares of Series A-I Preferred Stock to be redeemed
from such holder and whether the shares to be redeemed are Optional Conversion
Shares; (iii) the redemption price; and (iv) the place or places where holders
may surrender certificates evidencing the shares of Series A-1 Preferred Stock
for payment of the redemption price.


(c)           If notice of
redemption has been duly given and if on or before the redemption date
specified in the notice all funds necessary for the redemption have been set
aside by the Company for the benefit of the holders of the Series A-1 Preferred
Stock called for the redemption, then on and after the redemption date
dividends shall cease to accrue on such shares of Series A-i Preferred Stock so
called for redemption, all such shares of Series A-1 Preferred Stock so called
for redemption shall no longer be deemed outstanding and all rights with
respect to such shares of Series A-I Preferred Stock shall forthwith on such
redemption date cease and terminate, except only the right of the holders
thereof to receive the amount payable on such redemption, without interest.


(d)           In case of any
redemption of only part of the Series A-1 Preferred Stock at the time
outstanding, the shares to be redeemed shall be selected either pro rata or in
such other manner as the Board may determine to be fair and equitable.  Subject to the provisions hereof, the Board
shall have full power and authority to prescribe the terms and conditions upon
which the Series A-i Preferred Stock shall be redeemed from time to time.  In case fewer than all the shares of Series
A-1 Preferred Stock represented by any certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares without cost to
the holder thereof.


5.             Conversion in Connection with a Public
Offering.


(a)           Unless previously
called for redemption pursuant to Section 4, on the closing date of the Company’s
first underwritten public offering of its common stock after October 31, 2006
(other than offers made to employees, officers or directors of the Company
registered on a Fowl S-8 or offers made to agents of the Company pursuant to
shares registered on a Form S-3 filed 


 


5

















 


with the United
States Securities and Exchange Commission (the “SEC”)) (the “Conversion Date”),
30,000 shares of Series A-1 Preferred Stock will automatically convert (the “Conversion”)
into a number of shares of Common Stock per share of Series A-1 Preferred Stock
equal to the liquidation preference amount of a share of Series A-1 Preferred
Stock divided by the offering price of the Common Stock in such offering or
private placement (the “Conversion Price”). 
The remaining 10,000 shares of Series A-1 Preferred Stock (the- “Optional
Conversion Shares”) shall be convertible on the Conversion Date at the election
of the holders of the shares of the Series A-1 Preferred Stock.  Such Optional Conversion Shares shall be
converted into a number of shares of Common Stock per Optional Conversion Share
based on the Conversion Price as defined above. 
Notice of such election shall be delivered to the Company in accordance
with the provisions of Section 14(a) not later than the date on which the
preliminary prospectus pertaining to the underwritten public offering is filed
with the SEC.


(b)           The holders of the
Series A-1 Preferred Stock to be converted on the Conversion Date shall have
the right to receive, in addition to the number of shares of Common Stock
specified in Section 5(a), an amount in cash equal to any dividends that have
been declared but not paid prior to the Conversion Date (but with no amount in
respect of any dividends that have not been declared prior to such date), such
amount to be paid at the time of the Conversion, to the extent that the Company
has sufficient lawful funds to pay such amount at such time.  If the Conversion Date occurs subsequent to
the Dividend Record Date for a Dividend Period, any declared but unpaid
dividends payable on the Conversion Date shall not be paid to the holder
entitled to receive the redemption price on the Mandatory Conversion Date, but
rather shall be paid to the holder of record of the redeemed shares on such
Dividend Record Date relating to the Dividend Payment Date as provided in
Section 3.


(c)           To the extent that
the Company does not have sufficient lawful funds to pay in cash the amount
equal to all of such dividends that have been declared but not paid prior to
the Conversion Date, the holders of Series A-1 Preferred Stock to be converted
on the Conversion Date shall be entitled to receive, upon conversion of such
Series A-1 Preferred Stock on the Conversion Date, an additional number of
shares of Common Stock per share of Series A-1 Preferred Stock equal to the
amount of such dividends that have been declared but not paid prior to the
Conversion Date in cash divided by the Conversion Price.  Any resulting fractional shares of Common
Stock shall be settled in cash as provided below, subject to the availability
of sufficient lawful funds to make such settlement.


(d)           From and after the
Conversion Date, all shares of Series A-1 Preferred Stock that have been
converted on such Conversion Date shall no longer be deemed outstanding and all
rights with respect to such shares of Series A-1 Preferred Stock shall
forthwith cease and terminate, except only the right of the holders thereof to
receive the Common Stock and any cash due and owing on conversion of the Series
A-I Preferred Stock, without interest.


(e)           No fractional shares
of Common Stock will be issued to holders of Series A-1 Preferred Stock as a
result of any Conversion of shares of Series A-1 Preferred Stock pursuant to
this Section 5.  In lieu of any
fractional share of Common Stock otherwise issuable in respect of any
Conversion pursuant to this Section 5, the Company shall pay an amount in cash
(computed to the nearest cent) equal to the same fraction of the Conversion
Price.


 


6

















 


(f)            Notwithstanding
this Section 5, if the Conversion shall result in the issuance of shares of
common stock of the Company that would require the vote of the stockholders of
the outstanding shares of common stock pursuant to the listing rules of the
Nasdaq Global Select Market, the number of shares of Series A-1 Preferred Stock
to be initially converted into Common Stock shall be limited to a number that
would not require such a vote and the remaining shares of Series A-1 Preferred
Stock shall not be converted until the required stockholder vote is obtained.


(g)           The issuance of
certificates for shares of Common Stock on Conversion of the Series A-1
Preferred Stock pursuant to this Section 5 shall be made without charge to the
holder of the Series A-1 Preferred Stock for any documentary stamp or similar
taxes that may be payable in respect of the issue or delivery of such
certificate, provided that the Company shall not be required to pay any tax
that may be payable in respect of any transfer involved in the issuance and
delivery of any such certificate upon conversion in a name other than that of
the holder of such shares of Series A-1 Preferred Stock so converted and the
Company shall not be required to issue or deliver such certificates unless or
until the person or persons requesting the issuance thereof shall have paid to
the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.


6.             Conversion Upon Change in Control.


(a)           Immediately prior to
the consummation of any Change in Control (as defined below) that is
consummated at a time when CastlePoint Holdings, Ltd.  or one of its subsidiaries holds any shares
of Series A-1 Preferred Stock, each share of Series A-i Preferred Stock held by
CastlePoint Holdings, Ltd.  or one of its
subsidiaries shall be converted into a number of shares of Common Stock equal
to the liquidation preference amount of a share of Series A-1 Preferred Stock,
determined in accordance with Section 8(a), divided by the Value of the
Consideration (as defined below) per share of Common Stock in such Change in.  Control. 
A “Change in Control” means (i) any merger or consolidation of the
Company with and into another company, other than a merger or consolidation in
which (x) the Company is the surviving entity and (y) the holders of the
Company’s Common Stock immediately prior to the consummation of such merger or
consolidation own more than 50% of the voting equity interests of the surviving
entity immediately after the consummation of such merger or consolidation; (ii)
any transaction by which any person or group of persons (within the meaning of
Rule 13d-5 under the Securities Exchange Act of 1934, as amended, or any
successor or replacement rule) acquires beneficial ownership (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended, or any
successor or replacement rule) of securities of the Company representing more
than 50% of the voting power of the Company holder of at the time of such
Change in Control.  The “Value of
Consideration” means the value of any consideration paid per share of Common
Stock or value of the consideration into which a share of Common Stock is
converted in a Change in Control transaction or, if such Change in Control
Value does not involve a merger or consolidation of the Company or the
acquisition of shares of Common Stock, the equivalent value placed upon a share
of Common Stock in such transaction; provided, that (i) in the case of any
publicly traded securities payable per share of Common Stock or into which a
share of Common Stock shall be converted, the value of such securities shall be
the last price at which such securities are traded on a public market
immediately prior to the closing of the Change in Control and (ii) in the case
of any securities that are not publicly traded or any other property 


 


7

















 


payable per share
of Common Stock or into which a share of Common Stock shall be converted, the
value of such securities shall be fixed in good faith by the Board.


(b)           The holders of the
Series A-1 Preferred Stock to be converted in connection with a Change in
Control shall have the right to receive, in addition to the number of shares of
Common Stock specified in Section 6(a), an amount in cash equal to any
dividends that have been declared but not paid prior to the consummation of
such Change in Control (but with no amount in respect of any dividends that
have not been declared prior to such date), such amount to be paid at the time
of the consummation of such Change in Control, to the extent that the Company
has sufficient lawful funds to pay such amount at such time.  If the consummation of such Change in Control
occurs subsequent to the Dividend Record Date for a Dividend Period, any
declared but unpaid dividends payable upon the consummation of such Change in
Control shall not be paid to the holder entitled to receive the redemption
price on the date of the consummation of such Change in Control, but rather
shall be paid to the holder of record of the redeemed shares on such Dividend
Record Date relating to the Dividend Payment Date as provided in Section 3.


(c)           To the extent that
the Company does not have sufficient lawful funds to pay in cash the amount
equal to all of such dividends that have been declared but not paid prior to
the consummation of a Change in Control, the holders of Series A-1 Preferred
Stock to be converted in connection with a Change in Control shall be entitled
to receive, upon conversion of such Series A-1 Preferred Stock upon the
consummation of such Change in Control, an additional number of shares of
Common Stock per share of Series A-1 Preferred Stock equal to the amount of
such dividends that have been declared but not paid prior to the consummation
of such Change in Control in cash divided by the Value of Consideration.  Any resulting fractional shares of Common
Stock shall be settled in cash as provided below, subject to the availability
of sufficient lawful funds to make such settlement.


(d)           From and after the
consummation of a Change in Control, all shares of Series A-l Preferred Stock
that have been converted in connection with such Change in Control shall no
longer be deemed outstanding and all rights with respect to such shares of
Series A-1 Preferred Stock shall forthwith cease and terminate, except only the
right of the holders thereof to receive the Common Stock and any cash due and
owing on conversion of the Series A-1 Preferred Stock, without interest.


(e)           No fractional shares
of Common Stock will be issued to holders of Series A-1 Preferred Stock as a
result of any conversion of shares of Series A-1 Preferred Stock pursuant to
this Section 6.  In lieu of any
fractional share of Coon Stock otherwise issuable in respect of any conversion
pursuant to this Section 6, the Company shall pay an amount in cash (computed
to the nearest cent) equal to the same fraction of the Value of Conversion.


(f)            The issuance of
certificates for shares of Common Stock on conversion of the Series A-1
Preferred Stock pursuant to this Section 6 shall be made without charge to the
holder of the Series A-1 Preferred Stock for any documentary stamp or similar
taxes that may be payable in respect of the issue or delivery of such
certificate, provided that the Company shall not be required to pay any tax
that may be payable in respect of any transfer involved in the issuance and
delivery of any such certificate upon conversion in a name other than that of
the 


 


8

















 


holder of such
shares of Series A-1 Preferred Stock so converted and the Company shall not be required
to issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.


7.         Conversion Upon Regulatory Change.


If both (a) and (b) below occur:


(a)           after the date of
the issuance of the Series A-1 Preferred Stock, the criteria used by A.M.  Best Company, Inc.  for determining whether and to what extent a
security qualifies as permanent equity capital shall change such that the
Series A-1 Preferred Stock no longer qualifies for treatment as favorable as
the treatment afforded to the Series A-1 Preferred Stock on its date of
issuance, and


(b)           the Company
affirmatively elects to qualify the Series A-1 Preferred Stock for treatment as
permanent equity capital by A.M.  Best
Company, Inc.  without any sublimit or
other quantitative restriction on the inclusion of the Series A-1 Preferred
Stock in permanent equity capital (other than any limitation the Company elects
to accept and any limitation requiring that common equity or a specified form
of common equity constitute the dominant form of permanent equity capital)
under such criteria,


then, upon such affirmative election, the Series A-1 Preferred Stock
shall be convertible at the Company’s option into a new series of preferred
stock having terms and provisions substantially identical to those of the
Series A-1 Preferred Stock, except that such new series may have such additional
or modified rights, preferences, privileges and voting powers, and limitations
and restrictions thereof, as are necessary in the judgment of the Board (after
consultation with legal counsel of recognized standing) to comply with the
Required Equity Capital Provisions (as defined below), provided that the
Company will not cause any such conversion unless the Board determines that the
rights, preferences, privileges and voting powers, and the qualifications,
limitations and restrictions thereof, of such new series of preferred stock,
taken as a whole, are not materially less favorable to the holders thereof than
the rights, preferences, privileges and voting powers, and the qualifications,
limitations and restrictions thereof, of the Series A-1 Preferred Stock, taken
as a whole.


As used above, the term “Required Equity Capital Provisions” means such
terms and provisions as are, in the judgment of the Company (after consultation
with legal counsel of recognized standing), required for preferred stock to
qualify for equity capital treatment by A.M. 
Best Company, Inc.  that is as
favorable as the treatment afforded to the Series A-1 Preferred Stock on its
date of issuance, without any sublimit or other quantitative restriction on the
inclusion of such preferred stock in permanent equity capital (other than any
limitation the Company elects to accept and any limitation requiring that
common equity or a specified form of common equity constitute the dominant form
of permanent equity capital) pursuant to the applicable criteria used by A.M.  Best Company, Inc.


 


9

















 


8.             Liquidation Rights.


(a)           Upon the voluntary
or involuntary dissolution, liquidation or winding up of the Company, the
holders of the Series A-1 Preferred Stock shall be entitled to receive and to
be paid out of the assets of the Company available for distribution to its
stockholders, before any payment or distribution shall be made on the Common
Stock or on any other Junior Stock the liquidation preference of $1,000 per
share of Series A-1 Preferred Stock, plus any declared and unpaid dividends for
the then-current Dividend Period, without accumulation of any undeclared
dividends.


(b)           If in any
distribution described in Section 5(a) above the assets of the Company or
proceeds thereof are not sufficient to pay the Liquidation Preferences (as
defined below) in full to all holders of the Series A-1 Preferred Stock and all
holders of any Parity Stock, the amounts paid to the holders of the Series A-1
Preferred Stock and to the holders of all such other Parity Stock shall be paid
pro rata in accordance with the respective aggregate Liquidation Preferences of
the holders of the Series A-1 Preferred Stock and the holders of Al such other
Parity Stock.  In any such distribution,
the “Liquidation Preference” of any holder of Series A-1 Preferred Stock
or Parity Stock shall mean the amount otherwise payable to such holder in such
distribution, including any declared but unpaid dividends (and, in the case of
any holder of shares other than Series A-1 Preferred Stock and on which
dividends accrue on a cumulative basis, an amount equal to any unpaid, accrued
cumulative dividends, whether or not declared, as applicable).


(c)           If the Liquidation
Preference has been paid in full to all holders of the Series A-1 Preferred
Stock, the holders of other shares of the Company shall be entitled to receive
all remaining assets of the Company according to their respective rights and
preferences and the holders of the Series A-1 Preferred Stock as such shall
have no right or claim to any of the remaining assets of the Company.


(d)           Neither the sale,
lease, exchange, transfer or conveyance of all or substantially all of the
assets of the Company for cash, securities or other property, nor the merger or
consolidation of the Company into or with any other corporation or the merger
or consolidation of any other corporation into or with the Company, shall be
deemed to be a dissolution, liquidation or winding up, voluntary or
involuntary, for the purposes of this Section 8.


9.             Ranking.


The Series A-1 Preferred Stock
shall rank, with respect to the payment of dividends and distributions
prior to or upon the liquidation, dissolution or winding up of the Company:


(i)            senior
to all Common Stock outstanding and other Junior Stock, and each other series
of Junior Stock that the Company may later issue;


(ii)           equally
with Parity Stock and each other series of Parity Stock that the Company may
later issue; and


(iii)          junior
to any series of senior shares that the Company may later issue, subject to
compliance with Section 11(b).


 


10

















 


10.          Voting and Certain Other Rights.


(a)           Except as set forth
herein or required by applicable law, holders of Series A-1 Preferred Stock
shall have no voting rights.


(b)           Whenever dividends
on any Series A-1 Preferred Stock shall have not been declared and paid for the
equivalent of six or more dividend payments, whether or not for consecutive
Dividend Periods (a “Nonpayment”), the holders of such Series A-1 Preferred
Stock, voting together as a single class with holders of any and all other
series of Voting Preferred Stock then outstanding, will be entitled to vote for
the election of a total of one additional member to the Board (the “Preferred
Stock Director”), provided that the election of any such director shall not
cause the Company to violate the corporate governance requirement of the Nasdaq
Global Select Market (or any other exchange on which the securities of the
Company may be listed) that listed companies must have a majority of
independent directors.  The Preferred
Stock Director shall be elected by simple majority at a special meeting called
at the request of the holders of record of at least 20% of the shares of Series
A-1 Preferred Stock or of any other series of Voting Preferred Stock then
outstanding (unless such request for a special meeting is received less than 90
days before the date fixed for the next annual meeting or special meeting of
the stockholders of the Company, in which event such election shall be held
only at such next annual or special meeting of stockholders), and at each
subsequent annual meeting of stockholders of the Company.  For this purpose, the Board shall reserve one
vacant place on the Board of the Company to accommodate such election and pass
such resolutions as are necessary to give effect to such election.


(c)           If the holders of
the Series A-1 Preferred Stock become entitled to elect a director to the
Board, the Company shall promptly give notice to all holders and take all
action necessary, including calling a meeting or circulating a consent to
permit the nomination and election of such director.  Applicable provisions of the Company’s
Certificate of Incorporation shall be applicable to the holders of Series A-1
Preferred Stock and any other Voting Preferred Stock as a class, provided that
any written consents approved by the holders of record of a majority of the
Series A-1 Preferred Stock and any other Voting Preferred Stock outstanding
shall be effective and shall bind all holders of Series A-1 Preferred Stock.  If and when dividends for at least four
Dividend Periods, whether or not consecutive, following a Nonpayment have been
paid in full (or declared and a sum.  sufficient
for such payment has been set aside), then the right of the holders of the
Series A-1 Preferred Stock to elect the Preferred Stock Director shall cease
(but subject to revesting of such voting rights in the event of any future
Nonpayment pursuant to this Section 10) and the number of Dividend Periods in
which dividends have not been declared and paid shall be reset to zero and, if
and when any rights of holders of the Series A-1 Preferred Stock to elect the
Preferred Stock Director shall have ceased, the terms of office of the
Preferred Stock Director shall terminate forthwith and the number of directors
constituting the Board shall automatically be reduced by one.


(d)           The Preferred Stock
Director may be removed at any time without cause by the holders of record of a
majority of the outstanding Series A-1 Preferred Stock and any other shares of
Voting Preferred Stock, when they have the voting rights described above
(voting together as a single class).  So
long as a Nonpayment shall continue, any vacancy in the office of the Preferred
Stock Director (other than prior to the initial election of a Preferred Stock
Director 


 


11

















 


after a
Nonpayment) may be filled by a vote of the holders of record of a majority of
the shares of Series A-1 Preferred Stock outstanding and any other Voting
Preferred Stock then outstanding (voting together as a single class), when they
have the voting rights described above.  The
Preferred Stock Director shall be entitled to one vote on any matter.


(e)           Holders of the
Series A-1 Preferred Stock shall be entitled to vote on matters as described in
Section 11.


11.          Modification.


(a)           With the Consent of
Holders.  Except as provided below in
this Section 11(a), this Certificate of Designations may be amended, modified
or supplemented, and noncompliance in any particular instance with any provision
of this Certificate of Designations or the Series A-1 Preferred Stock may be
waived, in each case with the written consent or affirmative vote of the
holders of at least two-thirds of the shares of Series A-1 Preferred Stock at
the time outstanding, including any modification occurring in connection with
any merger or consolidation of the Company or otherwise.


Subject to Sections 6 and 7, without the written
consent or the affirmative vote or consent of the holders of at least
two-thirds of the outstanding shares of Series A-1 Preferred Stock, given in
person or by proxy, either in writing or at a meeting, an amendment or waiver
under this Section 11(a) may not:


(i)            amend,
alter or repeal the provisions of the Company’s Certificate of in corporation,
By-Laws or this Certificate of Designations so as to materially and adversely
affect the special rights, preferences, privileges and voting powers of the
Series A-1 Preferred Stock, taken as a whole; or


(ii)           consummate
a binding share exchange or reclassification involving the Series A-1 Preferred
Stock or a merger or consolidation of the Company with another entity, unless
in each case the Series A-1 Preferred Stock (x) remains outstanding or (y) in
the case of any such merger or consolidation with respect to which the Company
is not the surviving or resulting entity, is converted into or exchanged for
preference securities of the surviving or resulting entity or its ultimate
parent having such rights, preferences, privileges and voting powers, taken as
a whole, as are not materially Is favorable to the holders thereof than the
rights, preferences, privileges and voting powers of the Series A­1 Preferred
Stock, taken as a whole;


provided, however, that for all purposes of this Section 11(a), any
increase in the amount of the authorized or issued Series A-1 Preferred Stock,
or the creation and issuance, or an increase in the authorized or issued
amount, of any other series of preferred stock ranking equally with and/or
junior to the Series A-1 Preferred Stock with respect to the payment of dividends
(whether such dividends are cumulative or non-cumulative) and/or the
distribution of assets upon liquidation, dissolution or winding up of the
Company will not be deemed to adversely affect the special rights, preferences,
privileges or voting powers of the Series A-1 Preferred Stock.


 


12

















 


(b)           Changes after
Provision for Redemption.  No vote or
consent of the holders of the Series A-1 Preferred Stock shall be required pursuant
to Sections 10(b) and 11(a) above if, at or prior to the time when any such
vote or consent would otherwise be required pursuant to such Section, all
outstanding Series A-1 Preferred Stock shall have been redeemed, or called for
redemption upon proper notice and sufficient funds shall have been set aside by
the Company for the benefit of holders of such Series A-1 Preferred Stock
called for redemption, in each case pursuant to Section 4 above.


12.          Currency of Payments.


Any cash payments with respect to the Series A-1
Preferred Stock shall be paid in United States dollars in immediately available
funds.


13.          No Preemptive Rights.


No holder of Series A-1 Preferred Stock shall have
any preemptive right as to any additional issue of shares of capital stock of
the Company, or to any security convertible, exercisable or exchangeable into
such shares.


14.          Miscellaneous.


(a)           Notices.  Any and all notices or other communications
or deliveries to be provided by the holders hereunder shall be in writing and
delivered personally, by facsimile, sent by a nationally recognized overnight
courier service, addressed to the Company, at 120 Broadway, 31st Floor, New
York, New York 10271, facsimile number (646) 514-8612, Attn: General Counsel,
or such other address or facsimile number as the Company may specify for such
purposes by notice to the holders delivered in accordance with this Section.  Any and all notices or other communications
or deliveries to be provided by the Company hereunder shall be in writing and
delivered personally, by facsimile, sent by a nationally recognized overnight
courier service addressed to each holder of record of the Series A-1 Preferred
Stock at the facsimile telephone number or address of such holder of record at
their respective last addresses or facsimile telephone number appearing on the
share register of the Company, or if no such facsimile telephone number or
address appears, at the principal place of business of the holder.  Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
5:30 p.m.  (New York City time), (ii) the
date after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section later than 5:30 p.m.  (New York
City time) on any date and earlier than 11:59 p.m.  (New York City time) on such date, (iii) the
second Business Day following the date of mailing, if sent by nationally
recognized overnight courier service, or (iv) upon actual receipt by the party
to whom such notice is required to be given.


(b)           Lost or
Mutilated Preferred Stock Certificate.  If a holder’s Series A-1 Preferred Stock
certificate shall be mutilated, lost, stolen or destroyed, the Company shall
execute and deliver, in exchange and substitution for and upon cancellation of
a mutilated certificate, or in lieu of or in substitution for a lost, stolen or
destroyed certificate, a new certificate for the shares 


 


13

















 


of Series A-1
Preferred Stock so mutilated, lost, stolen or destroyed but only upon receipt
of evidence of such loss, theft or destruction of such certificate, and of the
ownership hereof, and indemnity, if requested, all reasonably satisfactory to
the Company.


(c)           Waiver.  Any waiver by the Company or the holder of a
breach of any provision of this Certificate of Designations shall not operate
as or be construed to be a waiver of any other breach of such provision or of
any breach of any other provision of this Certificate of Designations.  The failure of the Company or the holder to
insist upon strict adherence to any term of this Certificate of Designations on
one or more occasions shall not be considered a waiver or deprive that party of
the right thereafter to insist upon strict adherence to that term or any other
term of this Certificate of Designations. 
Any waiver must be in writing.


(d)           Status of
Converted or Redeemed Preferred Stock.  In case any shares of Series A-1 Preferred
Stock shall be converted, redeemed or reacquired by the Company, such shares
shall resume the status of authorized but unissued shares of preferred stock
and shall no longer be designated as Series A-1 Preferred Stock.


(e)           Other Rights.  Except as provided in Sections 5, 6 and 7,
the Series A-1 Preferred Stock will not be convertible into, or exchangeable
for, any other class or series of securities of the Company, and holders of the
Series A-1 Preferred Stock will have no subscription rights to acquire
additional shares of the Company.  Holders
of the Series A-1 Preferred Stock shall have no right to require the redemption
or repurchase of the Series A-1 Preferred Stock.


[Signature
appears on subsequent page.]


 


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IN WITNESS WHEREOF, the parties hereto have executed
this Exchange Agreement as of the date set forth ix1 the first paragraph
hereof.


TOWER
GROUP, INC.


By:  /s/ Steven G. Fauth__ 

Corporate Secretary