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

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

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

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

The Securities and Exchange Commission filings on Dec. 22, 2015, show that the sales agreement contains “standstill” provisions where Shepard and his affiliates agree not to take actions with respect to seeking control of Donegal Group for a period of 25 years from the date of the sale. This means Shepard would no longer try to get involved in Donegal Group’s business affairs or buy Donegal’s stock.

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

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

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

Shepard, a Florida-based lawyer and former insurance executive, has publicly criticized Donegal Group’s management and ownership in recent years. In 2014, he charged that Donegal Group’s Board of Directors has “failed miserably” to meet its fiduciary duties and that Donegal shareholders have suffered from the company management’s lack of commitment to shareholder value.

Shepard also unsuccessfully pushed for the sale of Donegal Group to a third party and announced in 2014 that he had plans to approach at least 18 property/casualty insurance companies to discuss their possible interest in acquiring Donegal Group.

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