In the letter dated April 8, Edward Noonan, Validus' chairman and chief executive officer, said it would file the suit as a shareholder of IPC, to reduce the $50 million penalty Max would receive under termination of the agreement, stating that this was illegal under Bermuda law.

Last night, Validus announced that it filed legal proceedings in the Supreme Court of Bermuda against IPC Holdings Ltd., IPC Limited and Max Capital Group Ltd. challenging the $50 million termination fee and a "no-talk" provision contained in the March Agreement and Plan of Amalgamation between IPC and Max.

Validus said the termination fee, "because of its excessive size...amounts to an unlawful penalty under Bermuda law and is accordingly unenforceable."

Validus added, however, that if the termination fee is ultimately eliminated or reduced, Validus will not object to IPC's paying the difference as a dividend to IPC shareholders "so that IPC shareholders--and not Max or Validus shareholders--will share in the value obtained."

Referring to both the fee and a "no-talk" provision restricting IPC's board from talking to suitors other than Max, Validus argues that by entering into an agreement with Max that contained such provisions it "constituted a breach of the directors' fiduciary duties."

In addition to the lawsuit filed yesterday, Validus filed preliminary proxy materials with the Securities and Exchange Commission on April 9, urging IPC shareholders to vote against the proposed deal with Max.

Among other things, Validus contends IPC would be better off merging with them rather than Max because an IPC-Validus combination would create a market-leading carrier in Bermuda's short-tail reinsurance and insurance markets.

Max says it offers more diversification to IPC's monoline property-catastrophe reinsurance operation by adding long-tail liability business to the mix.

For its part, IPC Holdings has said that in spite of the hostile offer, the deal with Max is on track to be completed in June.

Two weeks ago, IPC and Max announced that the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice have completed their review of the deal. The government entities granted early termination of the Hart-Scott-Rodino waiting period, effective April 14, satisfying one of the conditions to complete the IPC-Max deal.

The transaction is still subject to approval of both IPC's and Max's shareholders.