Document:

rli-ex43_627.htm

Exhibit 4.3

 

DESCRIPTION OF THE REGISTRANT’S SECURITIES

REGISTERED PURSUANT TO SECTION 12 OF THE

SECURITIES EXCHANGE ACT OF 1934

 

RLI Corp. (the “Company,” “we,” “us” or “our”) has one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”): our common stock.

 

The Company’s authorized capital stock consists of 205,000,000 shares, of which 200,000,000 shares are common stock, par value $0.01 per share (“common stock”), and 5,000,000 shares are preferred stock, par value $0.01 per share.  By resolution of the Board of Directors (the “Board”), the Company may, without any further vote by its shareholders, authorize and issue shares of preferred stock. The Board may by resolution fix the voting rights, if any, designations, powers, preferences and the relative, participation, optional or other rights, if any, and the qualification, limitations or restrictions thereof, of any unissued series and/or class of preferred stock, and may fix the number of shares constituting such series and/or class, and may increase or decrease the number of shares of any such series and/or class (but not below the number of shares thereof then outstanding). The rights of the holders of common stock are subject to the rights and preferences of any series of preferred stock that the Company may issue.  There are currently no shares of preferred stock outstanding.

 

The following description of our common stock and of certain provisions of Delaware law are summaries, do not purport to be complete and are subject to and qualified in their entirety by reference to our Certificate of Incorporation and our Bylaws, each of which is an exhibit to the Annual Report on Form 10-K to which this description is an exhibit and are incorporated herein by reference.  Please also refer to the applicable provisions of the Delaware General Corporation Law (“DGCL”) for additional information.

 

Description of Common Stock

 

Market Listing

 

Our common stock trades on the New York Stock Exchange under the symbol “RLI.”

 

Dividends; Liquidation

 

The DGCL permits a corporation to declare and pay dividends upon its shares out of (i) surplus or, (ii) if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or for the preceding fiscal year as long as the amount of capital of the corporation following the declaration and payment of the dividend is not less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets.

 

Subject to the preferences of any outstanding shares of preferred stock, holders of common stock have equal ratable rights to dividends (payable in cash, stock or property) out of funds legally available for that purpose, when, as and if dividends are declared by the Board. Holders of common stock are entitled to share ratably, as a single class, in all of the assets of the Company available for distribution to holders of shares of common stock upon the liquidation or dissolution of the Company or the winding up of the affairs of the Company, after payment of the Company’s liabilities and any amounts to holders of outstanding shares of preferred stock.

 

Voting Rights

 

Generally, holders of our common stock will vote together as a single class on every matter acted upon by the shareholders. Holders of common stock are entitled to one vote per share on all matters submitted to a vote of shareholders. Shareholders are not be entitled to cumulate votes in voting for directors. The holders of a majority in voting power of the outstanding shares of stock entitled to vote on a matter, represented in person or by proxy, will constitute a quorum at any meeting of shareholders. If a quorum is present, the affirmative vote of the majority of the votes cast on a matter will be the act of the shareholders, unless the vote of a minimum or other number or amount is provided for such matter by the DGCL, the Certificate of Incorporation or the Bylaws or the rules and regulations of any stock exchange or other regulatory body, in which case such minimum or other vote will be the required vote of shareholders on such matter. Except as otherwise provided by law, or the Certificate Incorporation 

 

 

by the resolution or resolutions adopted by the Board designating the rights, powers and preferences of any series and/or class of preferred stock, the holders of common stock have the exclusive right to vote for the election of directors and for all matters presented to the shareholders.

 

Written Consent

 

The DGCL provides that shareholders may take action by the written consent of the holders of shares having not less than the minimum number of votes necessary to take action at a meeting in which all shares entitled to vote on the matter were present and voting, unless such right is limited or restricted by the certificate of incorporation. The Certificate of Incorporation does not limit or restrict such right. If action is taken by less than unanimous written consent, the DGCL requires prompt notice afterwards to non-consenting holders of the action taken.  The Bylaws provide for advance notice and other procedural requirements in connection with shareholder action by written consent.

 

Absence of Other Rights.     

 

The holders of common stock have no preferences or rights of conversion, exchange, pre-emption or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. Shareholders do not have the right of cumulative voting in the election of directors.

 

Anti-Takeover Effects of our Certificate of Incorporation and Bylaws and of Delaware Law

 

Delaware Business Combination Statute

 

The DGCL has a “business combination” statute that is applicable to publicly traded corporations incorporated in Delaware that do not opt out of its provisions in its certificate of incorporation or bylaws. The DGCL provides in Section 203 that an “interested shareholder” (defined as a person who owns fifteen percent (15%) or more of the outstanding voting stock of a corporation or who is an associate or affiliate of the corporation and, within the preceding three-year period, owned fifteen percent (15%) or more of the outstanding voting stock of the corporation), and the affiliates and associates of such person may not engage in specified business combinations with the corporation for a period of three years after the date on which the person became an interested shareholder unless (i) prior to such time the board of directors of the corporation approved either the business combination or the transaction which resulted in the shareholder becoming an interested shareholder, (ii) upon consummation of the  transaction which resulted in the shareholder becoming an interested shareholder, the interested shareholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced excluding certain shares, and (iii) at or subsequent to the time the business combination is approved by the board of directors and authorized at an annual or special meeting of shareholders (and not by written consent) by the affirmative vote of at least sixty-six and two-thirds percent (66 2/3%) of the outstanding voting stock of the corporation not owned by the interested shareholder. The DGCL defines the term “business combination” to encompass a wide variety of transactions with or caused by an interested shareholder, including mergers, asset sales and transactions in which the interested shareholder receives or could receive a benefit on other than a pro rata basis with all other shareholders of the corporation. The Company may amend the Certificate of Incorporation in the future in accordance with the DGCL to no longer be governed by the Delaware business combination statute. Because the Company has not elected to opt-out of this provision in the Certificate of Incorporation, the provision might discourage takeover attempts that might result in a premium over the market price for shares of common stock at a given time.

 

Authorized Preferred Shares

 

Under the Certificate of Incorporation, the Board is authorized to issue 5,000,000 preferred shares. In each case, the Board may issue these preferred shares in one or more series and may establish the designations, preferences and rights, including voting rights, of each series. These preferred shares are available for issuance from time to time to any person for such consideration as the Board may determine without the requirement of further action by our shareholders, except as required by the New York Stock Exchange or other exchange on which Company shares are then listed. The Board may decide to issue such preferred stock for a variety of reasons including but not limited to the issuance in a public or private sale for cash as a means of obtaining additional capital for use in the Company’s 

 

 

business and operations, issuance as part or all of the consideration required to be paid for acquisitions of other business properties and issuance as a share dividend to equity holders. Depending on its terms, the issuance of preferred stock may or may not have a dilutive effect on the equity interest or voting power of the then current shareholders of the Company.  Although our Board has no present intention to do so, authorized but unissued and undesignated preferred shares may also be issued as a defense to an attempted takeover. 

 

Special Meetings of Shareholders

 

Limits on the rights of shareholders to call special meetings of shareholders could have an anti-takeover effect as a potential acquirer may wish to call a special meeting of shareholders for the purpose of considering the removal of directors or an acquisition offer. The Bylaws provide that shareholders holding at least twenty percent (20%) of the outstanding shares entitled to vote thereat may make written demand of the Company’s secretary to call special meetings of shareholders, provided such shareholders comply with the other requirements set forth in the Bylaws.rli-ex107_598.htm

Exhibit 10.7

MARKET VALUE POTENTIAL (MVP)

EXECUTIVE INCENTIVE PROGRAM GUIDELINE

 

Effective January 1, 2020

 

	
1.
	
PURPOSE OF PROGRAM

 

This MVP Executive Incentive Program (“MVP Program”) is adopted pursuant to the terms of the RLI Corp. Annual Incentive Compensation Plan (“Plan”).   Unless otherwise defined, capitalized terms have meaning given such terms in the Plan.  The purpose of the MVP Program is to provide incentive to executive employees to effectively utilize company capital thereby maximizing the value of shareholder investment. The MVP Program aligns Participant compensation incentive with the factors upon which RLI’s market value is driven. This Guideline is not to be construed as an employment agreement.

 

	
2.
	
DEFINITIONS

 

2.1 “Participant” is any executive employee designated by the Committee. 

 

2.2 “Peer Companies” are the companies selected by the Committee each year for benchmarking of senior executive compensation and Company performance.

 

2.3 “Performance Period” is a Fiscal Year, unless otherwise established by the Committee.

 

2.4 “Invested Capital” is the historic common and preferred stock investment including retained earnings, less any unrealized gains or losses net of tax on the available-for-sale fixed maturity investments (after September 1, 2003) plus outstanding debt instruments owned by outside parties as indicated on the beginning of year audited Company financial statement.

 

2.5 “The Blended Cost of Capital” is defined for purpose of this program as the weighted average of the cost of equity capital and the cost of debt capital.  The cost of equity capital is the average ten year U.S. Treasury Note rate, plus a market risk premium of 5% modified by the Company’s 10-year beta vs. the S&P 500 index.  The average ten year U.S. Treasury Note rate shall be calculated as the average of the rate at the beginning of each quarter in the year for which a bonus award is calculated, defined as the published rate at the close of the last business day prior to the first day of the quarter.  The cost of equity capital is blended pro rata (comparing market capitalization of RLI stock with outstanding RLI long-term debt at cost or conversion price whichever is higher) with the forward market rate on debt outstanding on the outstanding long-term debt. Should preferred stock or any new capital be issued, the appropriate cost will be blended with existing capital.

 

2.6 “Required Return” is equal to the beginning of the year Invested Capital times the Blended Cost of Capital. This return is required before executive bonuses are eligible for payment. Amounts in excess of the Required Return equal MVP for bonus purposes. Required Return will be adjusted quarterly on a time-weighted basis, except that interest rates will be averaged. No adjustment will be made in the fourth quarter of the Fiscal Year.

 

2.7 “Trade Secret” means information that: is used or intended for use in a trade or business; is included or embodied in a formula, pattern, compilation, computer software, drawing, device, method, technique or process; is not publicly known and is not generally known in the trade or business of the Company; cannot be readily ascertained or derived from publicly available information; and has significant economic value.

 

	
3.
	
BONUS CALCULATION

 

3.1 For bonus purposes, the “Actual Return” is calculated as defined in section 3.11 and 3.12:

 

3.11 Company ending GAAP book value (as adjusted in 3.111-3.119);

 

1

 

3.111 Less unrealized gains or losses net of tax on the available-for-sale fixed maturity investments at the end of period after September 1, 2003.

 

3.112 Plus outstanding long-term debt instruments at end of period.

 

3.113 Less additional investments in the Company in the form of stock issues or outside long-term debt instruments issued during the year at issue price. This includes acquisitions using RLI stock or debt.

 

3.114 Plus any Company stock repurchases.

 

3.115 Plus any payment of long-term debt principal.

 

3.116 Plus after-tax accrued interest paid on all outside long-term debt instruments.

 

3.117 Plus shareholder dividends accrued during the year.

 

3.118 Plus current year after-tax accrued executive MVP bonuses.

 

3.119 Plus current year after-tax accrual of preferred dividends.

 

3.12  Less Company beginning GAAP book value (as adjusted in 3.121 and 3.122)

 

3.121 Less unrealized gains or losses net of tax on the available-for-sale fixed maturity investments at beginning of period after September 1, 2003.

 

3.122 Plus outstanding long-term debt instruments at beginning of period.

 

3.2 MVP. MVP is defined as the Actual Return less the Required Return.

 

3.3 New Participant. The MVP Award for a Participant newly hired or appointed during the Fiscal Year shall be calculated beginning the first day of the month following the date of employment or appointment and the Performance Period for such Participant shall be from the first day of participation until the end of the Fiscal Year, unless otherwise established by the Committee. The new Participant shall not be eligible to participate in the program if hired or appointed during the fourth quarter. 

 

3.4 Calculation of MVP Award. Within the first 90 days of a Performance Period, the Committee will establish an MVP percentage award for each participant to be used to calculate Participants’ MVP Awards as follows:

 

3.41 Preliminary MVP Award. At the completion of the Performance Period, a Participant’s percentage award multiplied by actual MVP for such Performance Period (which amount may be positive or negative) equals the Participant’s Preliminary MVP Award for such Performance Period. The Preliminary MVP Award will be divided into two components: (1) twenty percent (20%) will be assigned to the Personal Objectives Component; and (2) eighty percent (80%) will be assigned to the Financial Component.  

 

3.42 MVP Award. The Final MVP Award is calculated as follows:

 

3.421 Personal Objectives Component.  The Committee will approve for the CEO and review for all other Participants personal objectives for a Performance Period.  Upon the completion of a Performance Period, the Committee will evaluate the performance of the CEO with respect to his personal objectives and shall assign an achievement rating between zero and 100%.  The Committee will approve the respective achievement ratings recommended by the CEO for other Participants.  If actual MVP is positive, the Personal Objectives Component will be multiplied by the achievement rating to calculate that portion 

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of the MVP Award, which shall be paid as provided in section 3.8 herein.  If actual MVP is negative for a year, no Personal Objectives Component of an MVP Award shall be made for that year and no charge shall be made to Participants’ MVP Bonus Bank, nor shall any offset be made for amounts paid to Participants for the Personal Objectives component.

 

3.422 Financial Component. Annually the Committee will approve a list of Peer Companies for purposes of benchmarking senior executive compensation and Company performance.  Growth in Book Value achieved by the Company over a five year period through the end of the third quarter in the applicable Performance Period will be compared to that of the Peer Companies.  An achievement rating ranging from a minimum of 80% to a maximum of 125% will be assigned to the Financial Component based on the relative Growth in Book Value of the Company compared to the Peer Companies as follows:

 

		
	
Achievement Rating*
	
RLI’s Relative Book Value Per Share Growth

	
125% (maximum)
	
90th percentile of peers or greater

	
100%
	
60th percentile of peers 

	
80% (minimum)
	
33rd percentile of peers or less

(*Results between the stated values for relative performance will be interpolated to determine the achievement rating.)

 

If MVP is positive for the year, the achievement rating will be multiplied times the Financial Component to calculate that portion of the MVP Award. 1   If MVP is negative for the year, the achievement rating will likewise be applied to the amount otherwise charged to Participants’ MVP Bonus Banks to adjust for Company performance2. The Financial Component of an MVP Award so calculated is subject to the Committee Approval Limit provision set forth in section 3.5.

 

3.423  Calculation of Growth in Book Value. RLI’s relative Growth in Book Value will be calculated by comparing its Compound Annual Growth Rate (“CAGR”) in Comprehensive Earnings over the applicable five year period to that of its Peer Companies.  CAGR in Comprehensive Earnings will be calculated based on publicly disclosed Comprehensive Earnings of Peer Companies for the five year period ending at the third quarter of the fifth year.  The Committee Retains discretion to make adjustments as appropriate for accounting changes, significant capital events, or other circumstances in order to ensure a consistent calculation across Peer Companies.

 

3.5 Committee Approval Limit. Notwithstanding the foregoing, the Financial Component of an MVP Award to be credited (if positive) or charged (if negative) to a Participant’s MVP Bonus Bank for a Performance Period shall be subject to a Committee Approval Limit of 300% of the Participant’s Salary for the Plan Year.  In the event the Financial Component of an MVP Award that would otherwise be credited exceeds 300% of Salary, the independent directors on the Board may reduce that portion of an MVP Award credited to the Participant’s MVP Bonus Bank account but not below the Committee Approval Limit. If the Required Return is not achieved, any amount less than the Required Return will be charged to the Participant’ MVP Bonus Bank account at the same rate provided that any such reduction shall not reduce the bank account by more than 300% of the Participant’s Salary unless the independent directors approve a greater reduction; provided, however, that the maximum reduction shall not exceed the amount that would have been charged against the Participant’s bank account but for such 300% limit.

 

	
	 

	
1 
	
 If the financial component of an MVP Award is “a” and the achievement rating is “b”, then if the financial component is positive, the amount credited to the MVP Bonus Bank is: a x b = credit to MVP Bonus Bank.

	
2 
	
 See footnote 1.  If the financial component of an MVP Award is negative, the formula to adjust the negative award is: a - [a x (b -1)] = charge to MVP Bonus Bank.

3

 

 

3.6 Credit or Charge to MVP Bonus Bank.  The Financial Component of each Participant’s MVP Award will be credited (if positive) or charged (if negative) to the Participant’s MVP Bonus Bank on the Bonus Payment Date next following the Performance Period.  Crediting or charging of the Financial Component shall be subject to the Committee’s certification that the MVP Performance Goals and any other material terms of the MVP Program are satisfied, the Committee’s approval of each Participant’s MVP Award, approval of the independent directors under paragraph 3.5 if necessary, and completion of the Company’s annual audit.   

 

3.7 Interest on MVP Bonus Bank.  Interest will be accrued to the bank in arrears by the Company to each Participant’s MVP Bonus Bank once a year on December 31st on any unpaid positive Bonus Bank balance before the current year’s contribution. The interest rate applied will be the three-year U.S. Government Treasury Note rate in effect at the beginning of the Fiscal Year, defined as the published rate at the close of the last business day prior to the first day of the Fiscal Year.

 

3.8 MVP Payout.  The Personal Objectives Component of the MVP Award and 33% of any positive total Bonus Bank balance (as adjusted as required in paragraphs 3.6 and 3.7) will be paid to Participants on the Bonus Payment Date next following the Performance Period.  Payment of the Personal Objectives Component of the MVP Award and 33% of any positive total Bonus Bank balance shall be subject to the Committee’s certification that the MVP Performance Goals and any other material terms of the MVP are satisfied, the Committee’s approval of each Participant’s MVP Award, and completion of the Company’s annual audit.     A Participant may elect to defer any amount due to be paid in future periods, subject to the terms of the RLI Corp. Executives Deferred Compensation Plan. Positive or negative balances in a Participant’s MVP Bonus Bank after an MVP Payout will be carried forward to the next year. The Participant will not be required to reimburse the Company for a negative balance.

 

3.9 Payment of MVP Bonus Bank Balance Upon Termination of Employment. Upon Termination of Employment by a Participant who meets the definition of Retirement, should the Participant’s MVP Bonus Bank balance be positive, it will be payable to the Participant subject to the following limitations:

 

3.91 The MVP Bonus Bank account balance of the terminated Participant will be calculated as of the end of the quarter prior to and during the quarter in which the termination took place. It will be the Company’s option to pay the lower of the calculated amounts.  The Participant’s Bonus Bank account balance will be at risk from a negative MVP charge only until that time. 

 

If the Participant’s Termination of Employment is at age 65 or after, a lump sum distribution will be made on the first day of the seventh month following the Participant’s Termination of Employment.  If the Participant’s Termination of Employment is before age 65, the balance will be paid quarterly, starting with the quarter following the Participant’s Termination of Employment, as an annuity to age 65 using the 5 year Treasury Note rate at the date of Termination of Employment.  Notwithstanding the foregoing, if a Participant is a Specified Employee, all installments due within 6 months following the Participant’s Termination of Employment shall be delayed to the first day of the seventh month following the Participant’s Termination of Employment.  All payments are subject to the following restrictions:

 

3.911 The Participant shall not enter into any employment directly or indirectly related to the insurance industry without the prior written approval of the Company’s Executive Resources Committee. 

 

3.912 During the payment period the Participant must cooperate with the Company and must not divulge or use in any way, either directly or indirectly, whether or not for personal gain, proprietary Company information such as, but not limited to, customer lists, software, or company procedures. The Participant must never disclose any Company Trade Secret.

 

3.913 The Participant agrees to give depositions and testify in any court matter affecting the Company without charging a fee. The Company will reimburse out of pocket transportation, meal and lodging costs.

4

 

 

3.914 The Participant does not directly or indirectly solicit Company employees to work for another company. In addition the Participant shall not directly or indirectly solicit any person who was employed by the Company within six months prior to the date the Participant’s employment terminated.

 

3.915 The Participant shall not contact any producer of the Company for the purpose of soliciting business away from the Company. 

 

3.10 Forfeiture of MVP Bonus Bank Balance. Upon termination of employment for any reason other than Retirement, death or Disability, the Participant will forfeit any unpaid MVP Bonus Bank balance. Any exceptions require the Committee’s approval. 

 

	
4.
	
AMENDMENT AND TERMINATION OF PROGRAM

 

The Committee may at any time terminate, modify or amend this program. Any change shall not adversely affect the then existing earned Bonus Bank of each Participant.  Notwithstanding the foregoing, the Company reserves the right to require a Participant to forfeit or return to the Company any cash or Shares received under an Award under the Plan to the extent required by law, under any applicable exchange listing standard or under any applicable policy adopted by the Company that is designed to meet any legal obligations or obligations under any applicable exchange listing standard.

 

 

 

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