EXHIBIT 10.2
TAX INDEMNITY AGREEMENT
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This Agreement is made this 4th day of August 2006 by and
among XL Capital Ltd, a Cayman Islands company ("XL Capital"), X.L. America,
Inc., a Delaware corporation ("XLA" and, together with XL Capital, the "XL
Parties"), Security Capital Assurance Ltd, a Bermuda company ("SCA"), SCA
Holdings US Inc., a Delaware corporation ("Holdings"), and XL Financial
Assurance Ltd., a Bermuda company ("XLFA"). Capitalized terms used herein
(unless otherwise defined) have the meanings set forth below in Section 2.
W I T N E S S E T H :
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WHEREAS, SCA was organized on March 17, 2006 for the purpose
of becoming a holding company for the financial guaranty insurance and
reinsurance businesses conducted by Subsidiaries of XL Capital, including XL
Capital Assurance Inc., a New York financial guarantee insurance company
("XLCA"), and XLFA;
WHEREAS, SCA, pursuant to the Registration Statement, will
offer a portion of its common shares to the public in the United States (the
"Public Offering");
WHEREAS, certain of the parties hereto and XL Insurance
(Bermuda) Ltd., a Bermuda insurance company ("XLI"), have entered into a
Transition Agreement (the "Transition Agreement") in connection with the Public
Offering;
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WHEREAS, in certain taxable periods ending on or before the
Closing Date, XLCA has been a member of the affiliated group of corporations
(within the meaning of Section 1504 of the Code) of which XLA is the common
parent (the "XLA Affiliated Group");
WHEREAS, in certain taxable periods ending on or before the
Closing Date, XLCA has been a party to the Fifth Amended Tax Sharing and Payment
Agreement effective April 1, 2004, by and among XLA and certain of its
Subsidiaries (the "Tax Sharing and Payment Agreement");
WHEREAS, in connection with the Public Offering, XLCA will
leave the XLA Affiliated Group and will become a Former Member within the
meaning of Article VIII of the Tax Sharing and Payment Agreement; and
WHEREAS, the parties to this Agreement desire to allocate the
liability for the Taxes of SCA and the SCA Post-Closing Subsidiaries that may be
owed to or asserted by any governmental authority after the Public Offering.
NOW, THEREFORE, in consideration of the foregoing and of the
mutual promises, covenants and conditions hereinafter contained, the parties
hereto agree as follows:
1. INDEMNIFICATION BY THE XL PARTIES.
(a) The XL Parties will jointly and severally indemnify and
hold harmless on an After-Tax Basis SCA and each of the SCA Post-Closing
Subsidiaries from and against any Losses with respect to (1) Taxes imposed on
SCA or any of the SCA Post-Closing Sub-
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sidiaries for all taxable periods (or portions thereof) ending on or before the
Closing Date, (2) Taxes imposed on the XLA Affiliated Group for which SCA or any
of the SCA Post-Closing Subsidiaries is severally liable under United States
Treasury Regulation ss. 1.1502-6 solely by reason of having been a member of the
XLA Affiliated Group and (3) any other Taxes, other than excise Taxes, imposed
on SCA or any of the SCA Post-Closing Subsidiaries other than XLCA or XL
Financial Administrative Services Inc. that result from business activities
conducted by SCA or any of the SCA Post-Closing Subsidiaries prior to the
consummation of the IPO; provided, however, that this Section 1(a) will not
apply to Losses with respect to any liability for Taxes that (i) is accrued or
reserved on the Financial Statement (other than as a deferred tax liability or a
reduction in a deferred tax asset) or would be so accrued or reserved if the
Financial Statement were prepared as of the Closing, or (ii) results from (A)
any decrease in the amount of any deduction allowed in a taxable period (or
portion thereof) ending on or prior to the Closing Date if such decrease
corresponds to an increase in any deduction allowed in a taxable period (or
portion thereof) ending after the Closing Date, (B) any increase in the amount
of taxable income included in a taxable period ending on or prior to the Closing
Date if such increase corresponds to a decrease in taxable income included in a
taxable period (or portion thereof) ending after the Closing Date or (C) any
similar timing difference. The parties agree that to the extent allowed by
applicable law, any payments made by the XL Parties to SCA or any of the SCA
Post-Closing Subsidiaries pursuant to this Section 1(a) will be treated as a
contribution to the capital of the indemnitee or, in the case of any payments
made pursuant to clause (2) above, as a tax-free reimbursement.
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(b) SCA will notify XL Capital (or cause XL Capital to be
notified) in writing within 30 days of the receipt of any communication by SCA
or any of its Subsidiaries from or with any governmental authority concerning
Taxes owed by SCA or any of the SCA Post-Closing Subsidiaries for which
indemnification may be claimed from the XL Parties pursuant to the provisions of
this Agreement. In addition, SCA will notify XL Capital (or cause XL Capital to
be notified) in writing at least 15 days prior to the date SCA or any of its
Subsidiaries intends to make a payment of any Taxes which may be indemnifiable
by the XL Parties pursuant to the provisions of this Agreement and will consult
in good faith with XL Capital prior to making any such payment. XL Capital will
notify SCA (or cause SCA to be notified) in writing within 30 days of receipt of
any communication by XL Capital or any of the XL Post-Closing Subsidiaries from
or with any governmental authority concerning Taxes owed by SCA or any of the
SCA Post-Closing Subsidiaries.
2. DEFINITIONS.
(a) Unless otherwise indicated, all capitalized terms used
herein have the same meaning as in the Transition Agreement.
(b) For purposes of this Agreement the following terms are as
defined below:
(1) "After-Tax Basis" means that, in determining the amount of
the payment necessary to indemnify any party against, or reimburse any party
for, Losses, the amount of such Losses will be determined net of any Tax benefit
derived by the indemnified party as the result of sustaining such Losses, and
the amount of such in-
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demnification payment will be increased (I.E., "grossed up") by the amount
necessary to satisfy any Tax liabilities incurred by the indemnified party as a
result of its receipt, or right to receive, such indemnification payment (as so
increased), so that the indemnified party is put in the same net after-Tax
economic position as if it had not incurred such Losses.
(2) "Closing Date" means the date of the Closing.
(3) "Final Determination" means a determination as defined in
Section 1313(a) of the Code or any other event (including the execution of a
Form 870-AD or any other form having substantially the same effect for purposes
of any Tax law) that finally and conclusively establishes the amount of any
liability for Tax.
(4) "Financial Statement" means the U.S. GAAP consolidated
balance sheet of SCA and the SCA Post-Closing Subsidiaries prepared as of the
end of the most recent fiscal quarter ended prior to the Closing.
(5) "SCA Post-Closing Subsidiaries" means collectively all of
the Persons that are, immediately after the Closing, Subsidiaries of SCA
(including XLCA, Holdings and XLFA).
(6) "Tax" or "Taxes" means (i) any and all taxes, charges,
fees, duties, levies or other assessments, including all net income, gross
income, gross receipts, excise,
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stamp, premium, real or personal property, ad valorem, sales, withholding,
estimated, social security, employment, unemployment, occupation, use, service,
service use, license, net worth, payroll, franchise, environmental, severance,
transfer, recording, escheat, or other taxes, duties, assessments, or charges,
whether computed on a separate, consolidated, unitary, combined or any other
basis, imposed by any governmental authority; (ii) all interest, penalties,
fines, or additions to tax attributable thereto; and (iii) all transferee,
successor, joint and several, contractual, or other liability (including
pursuant to the Tax Sharing and Payment Agreement) in respect of any items
described in clauses (i) or (ii).
(7) "Tax Return" means any report, document, declaration,
information, return, or filing (including any related or supporting information
and any amendments to any of the foregoing) filed or required to be filed with
respect to Taxes.
(8) "XL Post-Closing Subsidiaries" means collectively all of
the Persons that are, at any time after the Closing, Subsidiaries of XL Capital.
(c) References in this Agreement to any Person include the
successors, predecessors, and permitted assigns of such Person.
3. INDEMNIFICATION BY SCA, HOLDINGS AND XLFA.
(a) SCA, Holdings and XLFA will jointly and severally
indemnify and hold harmless on an After-Tax Basis XL Capital and each of the XL
Capital Post-Closing
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Subsidiaries from and against any Losses with respect to Taxes imposed on SCA or
any of the SCA Post-Closing Subsidiaries other than those Losses for which the
XL Parties are responsible pursuant to Section 1(a).
(b) SCA, Holdings and XLFA will make payments from time to
time to XLI or XL Capital (as applicable) equal to the amount of any net Tax
benefit obtained by SCA or any of the SCA Subsidiaries as the result of (1) the
exercise of any compensatory stock option granted by XL Capital (with respect to
its stock) to any Person who is an employee (or former employee) or director (or
former director) of SCA or any of the SCA Subsidiaries at the time such option
is exercised or (2) any other compensation paid after the Closing by XLI, XL
Capital or any other Post-Closing Subsidiary of XL Capital to any Person who is
an employee (or former employee) or director (or former director) of SCA or any
of the SCA Subsidiaries at the time such payment is made.
(c) The parties agree that for applicable income tax purposes,
to the extent allowed by applicable law, any payments made by SCA, Holdings or
XLFA pursuant to Section 3(b) will be treated as a reduction in the amount of
the contribution to the capital of SCA that would otherwise be deemed to have
been made as the result of the event described in subparagraph (1) or (2) of
such Section 3(b).
4. CONTROL.
(a) XL Capital will have the exclusive right to file any
amended Tax Returns and to control any audit or other administrative or judicial
proceeding with respect to
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(i) the Tax liability of SCA and/or the SCA Post-Closing Subsidiaries for any
taxable period (or portion thereof) ending on or before the Closing Date and
(ii) any other matter involving any asserted Tax liability with respect to which
any of the XL Parties provides indemnification under this Agreement. XL Capital
will consult in good faith with SCA with respect to each defense against or
compromise or settlement of any indemnified Tax liability. At its own expense,
SCA will be permitted to participate in, and be represented at, each conference,
hearing, or meeting with representatives of the pertinent governmental authority
(and will be notified reasonably in advance thereof).
(b) Except as provided in Section 4(a), SCA will have the
exclusive right to control any audit or other administrative or judicial
proceeding with respect to the Tax liability of SCA or any of the SCA
Post-Closing Subsidiaries.
5. REFUNDS.
(a) Except for any refund shown as an asset or taken into
account as an offset to the amount of any liability (other than a deferred tax
asset or liability) on the Financial Statement or any refund that would be so
shown or taken into account if the Financial Statement were prepared as of the
Closing, XL Capital will be entitled to any refunds (including interest paid
therewith), whether received in cash, as a credit or offset, or in any other
form, in respect of (i) any Tax liability of SCA or any of the SCA Post-Closing
Subsidiaries in respect of any taxable period (or portion thereof) ending on or
prior to the Closing Date, and (ii) any other Tax liability for which the XL
Parties are responsible under this Agreement;
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PROVIDED, HOWEVER, that this Section 5(a) will not apply to a refund that
results from (A) any increase in the amount of any deduction allowed in a
taxable period (or portion thereof) ending on or prior to the Closing Date if
such increase corresponds to a decrease in any deduction allowed in a taxable
period (or portion thereof) ending after the Closing Date, (B) any decrease in
the amount of taxable income included in a taxable period ending on or prior to
the Closing Date if such decrease corresponds to an increase in taxable income
included in a taxable period (or portion thereof) ending after the Closing Date
or (C) any similar timing difference.
(b) Except as provided in paragraph (a) of this Section 5, SCA
will be entitled to any refunds (including interest paid therewith) in respect
of the Tax liability of SCA or any of the SCA Post-Closing Subsidiaries.
(c) In the event of any change to the liability of SCA or any
of the SCA Post-Closing Subsidiaries for Taxes or entitlement to a refund as a
result of an audit, carryover, carryback, or otherwise, the amounts previously
payable under this Agreement will be appropriately adjusted and SCA will pay to
XL Capital, or XL Capital will pay to SCA, without duplication, the amount
required as a result of such adjustment, together with interest at the rate per
annum determined from time to time under Section 6621(a)(2) of the Code
compounded daily for the period from the original date of the payment affected
by the adjustment to the date on which the payment is made.
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6. INTEREST. In the event that any payment required to be made
under this Agreement is made after the date on which said payment is due,
interest will accrue on such amount from the due date of the payment through the
date such payment is actually made at the applicable short-term federal rate
determined from time to time under Section 1274(d)(1) of the Code, compounded
semi-annually.
7. TAX COOPERATION.
(a) XL Capital and SCA and their respective Subsidiaries will
cooperate with each other in all Tax matters, including the conduct of any audit
or other proceeding related to any Tax liability with respect to which the XL
Parties provide indemnification under this Agreement, and each will execute and
deliver such powers of attorney and other documents as are necessary to carry
out the intent of this Agreement. Without limiting the generality of the
foregoing, XL Capital and SCA will furnish or cause to be furnished to each
other, upon request, as promptly as practicable, such information and assistance
relating to SCA and its Subsidiaries or their respective assets or businesses
(including, without limitation, access to books and records) as is reasonably
necessary for the filing of all Tax Returns, the preparation for any audit by
any governmental authority, and the prosecution or defense of any claim, suit or
proceeding relating to any Tax liability with respect to which the XL Parties
provide indemnification under this Agreement. The party requesting cooperation
under this Section 7(a) will reimburse the other party for any actual
out-of-pocket expenses incurred in furnishing such cooperation.
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(b) Unless there has previously been a Final Determination to
the contrary, none of SCA and its Subsidiaries will take any position with
respect to Taxes (including on any Tax Return or in connection with any Tax
controversy) for any taxable period (or the portion thereof) ending after the
Closing Date that is inconsistent with any position taken by the SCA or any of
its Subsidiaries for any taxable period (or the portion thereof) ending on or
before the Closing Date (including any position relating to the timing or
character of any income, deduction, credit, or other item).
(c) XL Capital and SCA (and their respective Subsidiaries)
agree to report to the other any communication from or with the Internal Revenue
Service or any other taxing authority that reasonably could affect any Tax
liability with respect to which the XL Parties may be required to provide
indemnification under this Agreement.
8. TERMINATION. Notwithstanding any provision of this
Agreement, the Transition Agreement, or any Ancillary Agreement to the contrary,
this Agreement may be terminated at any time prior to the Closing by and in the
sole discretion of XL Capital. In the event of such termination, no party will
have any liability of any kind to any other party on account of such
termination, except as set forth in Section 9.11 of the Separation Agreement.
9. SURVIVAL. The covenants, agreements and other obligations
of the parties contained in this Agreement will survive the Closing Date until
45 days after the expiration of the applicable statutes of limitations.
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10. SUCCESSORS AND ASSIGNS. This Agreement will be binding
upon and inure to the benefit of the parties hereto and the respective
successors and permitted assigns.
11. NO THIRD PARTY BENEFICIARIES. This Agreement is solely for
the benefit of the parties hereto and will not be deemed to confer upon third
parties (including stockholders or members of any party hereto) and any remedy,
claim, reimbursement, claim of action, or other right in excess of those
existing without reference to this Agreement.
12. HEADINGS. The section headings contained in this Agreement
are for reference purposes only and will not in any way affect the meaning or
interpretation of this Agreement.
13. SEVERABILITY. To the extent any provision of this
Agreement is invalid or unenforceable, such provision will be considered deleted
herefrom and the remaining provisions of this Agreement will be unaffected and
will continue in full force and effect.
14. ASSIGNMENT OF THIS AGREEMENT. No party may assign this
Agreement by operation of law or otherwise without the express written consent
of the other parties; provided, however, this Agreement may be assigned by
operation of law or otherwise without the express written consent of the other
parties hereto by XL Capital and/or SCA to their respective Post-Closing
Subsidiaries so long as such assignment does not relieve the assigning party of
liability hereunder.
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15. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which will be deemed an original, but all of which
will constitute one and the same instrument.
16. AMENDMENT; WAIVER. No provision of this Agreement may be
amended, waived, or otherwise modified without the prior written consent of each
of the parties hereto.
17. GOVERNING LAW. This Agreement will be governed by, and
construed in accordance with, the internal laws of the State of New York,
without reference to the principles of conflicts of law.
[Intentionally left blank]
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IN WITNESS WHEREOF, this Agreement has been duly executed as
of the day and year first above written.
XL CAPITAL LTD
By: /s/ Xxxxxxx X. Xxxxxxxx, Xx.
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Name: Xxxxxxx X. Xxxxxxxx, Xx.
Title: Chairman of the Board
X.L. AMERICA, INC.
By: /s/ Xxxxxxx X. XxXxxxx
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Name: Xxxxxxx X. XxXxxxx
Title: SVP, General Counsel
and Secretary
SECURITY CAPITAL ASSURANCE LTD
By: /s/ Xxxxxxx Xxxx
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Name: Xxxxxxx Xxxx
Title: Executive Vice President
SCA HOLDINGS US INC.
By: /s/ Xxxxx Xxxxxxxxx
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Name: Xxxxx Xxxxxxxxx
Title: Authorized Officer
XL FINANCIAL ASSURANCE LTD.
By: /s/ Xxxxxxx Xxxx
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Name: Xxxxxxx Xxxx
Title: Chief Operating Officer
