By Brimer H.B. No. 2842
75R7246 PB-D
A BILL TO BE ENTITLED
1-1 AN ACT
1-2 relating to the conversion of mutual insurance companies to stock
1-3 insurance companies.
1-4 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
1-5 SECTION 1. Chapter 15, Insurance Code, is amended by adding
1-6 Article 15.22 to read as follows:
1-7 Art. 15.22. CONVERSION TO STOCK INSURANCE COMPANY
1-8 Sec. 1. DEFINITIONS. In this article:
1-9 (1) "Conversion plan" means the plan adopted under
1-10 this article by the board of directors of a mutual insurance
1-11 company to convert the mutual insurance company into a stock
1-12 company.
1-13 (2) "Converted stock company" means a domestic stock
1-14 insurance company that converts under this article from a domestic
1-15 mutual insurance company.
1-16 (3) "Eligible member" means a member of a mutual
1-17 insurance company whose policy is in force on the date that the
1-18 mutual insurance company's board of directors adopts a conversion
1-19 plan. The term does not include a person:
1-20 (A) insured under a group policy; or
1-21 (B) whose policy becomes effective after the
1-22 date that the board of directors adopts the conversion plan but
1-23 before the conversion plan's effective date.
1-24 (4) "Mutual insurance company" means a domestic
2-1 mutual insurance company.
2-2 (5) "Participating policy" means a policy that grants
2-3 a holder the right to receive dividends if, as, and when declared
2-4 by the mutual insurance company.
2-5 (6) "Stock company" means a stock insurance company
2-6 that meets all of the requirements for admission to do business as
2-7 a domestic insurer in this state.
2-8 Sec. 2. ADOPTION OF CONVERSION PLAN. (a) A mutual
2-9 insurance company that seeks to convert to a stock company must
2-10 adopt, by the affirmative vote of not less than two-thirds of the
2-11 members of its board of directors, a conversion plan consistent
2-12 with the requirements of this article. A mutual insurance company
2-13 may not engage in the business of insurance as a stock company
2-14 until it complies with the requirements of this article.
2-15 (b) Before the eligible members of a mutual insurance
2-16 company may vote on approval of a conversion plan, the mutual
2-17 insurance company must comply with Section 3 of this article.
2-18 Sec. 3. PLAN INFORMATION FILED WITH COMMISSIONER;
2-19 COMMISSIONER POWERS AND DUTIES. (a) Not later than the 90th day
2-20 after the date on which a mutual insurance company's board of
2-21 directors adopts a conversion plan, the company shall file with the
2-22 commissioner:
2-23 (1) a copy of the documents relating to the conversion
2-24 plan, including the independent evaluation of pro forma market
2-25 value required by Section 10(b) of this article;
2-26 (2) the form of notice required by Section 5 of this
2-27 article;
3-1 (3) the form of proxy to be solicited from eligible
3-2 members under Section 6(b) of this article;
3-3 (4) the form of notice required by Section 17 of this
3-4 article to persons whose policies are issued after adoption of the
3-5 conversion plan but before the effective date of the conversion
3-6 plan;
3-7 (5) the proposed amended articles of incorporation and
3-8 bylaws of the converted stock company;
3-9 (6) the acquisition of control statement, if required
3-10 by the commissioner; and
3-11 (7) any other information requested by the
3-12 commissioner.
3-13 (b) Except as otherwise provided by this subsection, the
3-14 commissioner shall approve or disapprove a conversion plan not
3-15 later than the 60th day after the first day on which all the
3-16 documents required under Subsection (a) of this section are filed
3-17 with the commissioner. The commissioner may extend the time for
3-18 approval or disapproval by an additional 60 days on written notice
3-19 to the mutual insurance company. The commissioner shall
3-20 immediately give written notice to the mutual insurance company of
3-21 the commissioner's decision and, in the event of disapproval, a
3-22 detailed statement of the reasons for the adverse decision.
3-23 (c) The commissioner shall approve a conversion plan if the
3-24 commissioner finds that:
3-25 (1) the conversion plan complies with this article;
3-26 (2) the conversion plan does not prejudice the
3-27 interests of the members; and
4-1 (3) the conversion plan's method of allocating
4-2 subscription rights is fair and equitable.
4-3 (d) The commissioner may retain, at the mutual insurance
4-4 company's expense, a qualified expert not otherwise a part of the
4-5 commissioner's staff to assist the commissioner in reviewing the
4-6 conversion plan and the independent evaluation of the pro forma
4-7 market value required under Section 10(b) of this article.
4-8 (e) The commissioner may hold a hearing on whether the terms
4-9 of the conversion plan comply with this article after giving
4-10 written notice to the mutual insurance company and other interested
4-11 persons, all of whom have the right to appear at the hearing.
4-12 Sec. 4. AMENDMENTS; WITHDRAWAL OF PLAN. At any time before
4-13 approval of a conversion plan by the commissioner, the mutual
4-14 insurance company, by the affirmative vote of not less than
4-15 two-thirds of the members of its board of directors, may amend or
4-16 withdraw the conversion plan.
4-17 Sec. 5. NOTICE TO ELIGIBLE MEMBERS; COMMENTS. (a) On
4-18 filing of the documents required under Section 3(a) of this article
4-19 with the commissioner, the mutual insurance company shall send to
4-20 each eligible member a notice advising the eligible member of the
4-21 adoption and filing of the conversion plan and of the member's
4-22 right to provide to the commissioner and the mutual insurance
4-23 company comments on the plan. The notice must include a
4-24 description of the procedure to be used in making comments.
4-25 (b) An eligible member who elects to make comments must make
4-26 the comments in writing not later than the 30th day after the date
4-27 on which the notice is sent.
5-1 (c) The mutual insurance company also shall send to each
5-2 eligible member notice of the members meeting to vote on the
5-3 conversion plan. The notice must be sent to the member's last
5-4 known address, as shown on the mutual insurance company's records,
5-5 before the 30th day preceding the date set for the meeting. The
5-6 notice must:
5-7 (1) briefly but fairly describe the proposed
5-8 conversion plan; and
5-9 (2) inform the member of the member's right to vote on
5-10 the conversion plan.
5-11 (d) If the meeting to vote on the conversion plan is held
5-12 during the mutual insurance company's annual meeting of
5-13 policyholders, only a combined meeting notice is required.
5-14 Sec. 6. ELECTION; ADOPTION OF PLAN. (a) A conversion plan
5-15 is adopted on receiving the affirmative vote of at least two-thirds
5-16 of the votes cast by eligible members at the election on
5-17 conversion.
5-18 (b) Members entitled to vote on the proposed conversion plan
5-19 may vote in person or by proxy. The number of votes each eligible
5-20 member may cast shall be determined by the mutual insurance
5-21 company's bylaws. If the bylaws are silent, each eligible member
5-22 may cast one vote.
5-23 (c) At the meeting held to vote on the conversion plan, the
5-24 members shall also consider the adoption of amended articles of
5-25 incorporation and of bylaws. Adoption of the amended articles
5-26 requires the affirmative vote of at least two-thirds of the votes
5-27 cast by eligible members.
6-1 Sec. 7. FILING BY CONVERTED STOCK COMPANY. Not later than
6-2 the 30th day after the date on which the eligible members adopt the
6-3 conversion plan, the converted stock company shall file with the
6-4 commissioner:
6-5 (1) the minutes of the meeting of the eligible members
6-6 at which the conversion plan was adopted; and
6-7 (2) the amended articles of incorporation and bylaws
6-8 of the converted stock company.
6-9 Sec. 8. REQUIRED PROVISIONS IN GENERAL. (a) Each
6-10 conversion plan must include the provisions required by this
6-11 article.
6-12 (b) Each policy in effect on the effective date of the
6-13 conversion remains in effect under the terms of that policy, except
6-14 that the following rights, to the extent they existed in the mutual
6-15 insurance company, are extinguished on the effective date of the
6-16 conversion:
6-17 (1) any voting rights of policyholders provided under
6-18 the policy;
6-19 (2) a right to share in the surplus of the mutual
6-20 insurance company provided under the policy; and
6-21 (3) any assessment provisions provided under the
6-22 policy.
6-23 (c) The holder of a participating policy in effect on the
6-24 date of the conversion continues to have a right to receive
6-25 dividends as provided by the participating policy.
6-26 (d) Except for the mutual insurance company's guaranteed
6-27 renewable accident and health policies and guaranteed renewable,
7-1 noncancelable accident and health policies, on the renewal date of
7-2 a participating policy, the converted stock company may issue the
7-3 insured a nonparticipating policy as a substitute for the
7-4 participating policy.
7-5 Sec. 9. SUBSCRIPTION RIGHTS. (a) Each conversion plan must
7-6 specify the subscription rights of eligible members.
7-7 (b) The plan must include a provision that:
7-8 (1) each eligible member is to receive, without
7-9 payment by the member, nontransferable subscription rights to
7-10 purchase a portion of the capital stock of the converted stock
7-11 company; and
7-12 (2) in the aggregate, all eligible members have the
7-13 right, before the right of any other party, to purchase 100 percent
7-14 of the capital stock of the converted company, exclusive of:
7-15 (A) shares of capital stock required to be sold
7-16 or distributed to the holders of surplus notes, if any; and
7-17 (B) capital stock purchased by the company's
7-18 tax-qualified employee stock benefit plan that is in excess of the
7-19 total price of the capital stock established under Section 10(b) of
7-20 this article, as permitted by Section 14(c) of this article.
7-21 (c) As an alternative to subscription rights in the
7-22 converted stock company, the conversion plan may provide that each
7-23 eligible member is to receive, without payment by the member,
7-24 nontransferable subscription rights to purchase a portion of the
7-25 capital stock of one of the following:
7-26 (1) a corporation organized for the purpose of
7-27 purchasing and holding all the stock of the converted stock
8-1 company;
8-2 (2) a stock insurance company owned by the mutual
8-3 insurance company into which the mutual insurance company is to be
8-4 merged; or
8-5 (3) an unaffiliated stock insurance company or other
8-6 corporation that is to purchase all the stock of the converted
8-7 stock company.
8-8 (d) The conversion plan must provide that the subscription
8-9 rights are allocated in whole shares among the eligible members
8-10 using a fair and equitable formula. The formula may consider, but
8-11 is not required to consider, how the different classes of policies
8-12 of the eligible members contributed to the surplus of the mutual
8-13 insurance company or any other factors that may be fair or
8-14 equitable.
8-15 (e) The conversion plan must provide a fair and equitable
8-16 means for allocating shares of capital stock in the event of an
8-17 oversubscription to shares by eligible members exercising
8-18 subscription rights under this section.
8-19 Sec. 10. SALE OF CAPITAL STOCK. (a) The conversion plan
8-20 must provide that any shares of capital stock not subscribed to by
8-21 eligible members exercising subscription rights under Section 9 of
8-22 this article shall be sold in a public offering through an
8-23 underwriter. If the number of shares of capital stock not
8-24 subscribed to by eligible members is so small that, or if other
8-25 factors exist so that, the time or expense of a public offering is
8-26 not warranted, the conversion plan may provide for sale of those
8-27 shares through a private placement or an alternative method
9-1 approved by the commissioner that is fair and equitable to eligible
9-2 members.
9-3 (b) The conversion plan must set the total price of the
9-4 capital stock in an amount equal to the estimated pro forma market
9-5 value of the converted stock company based on an independent
9-6 evaluation by a qualified expert. The pro forma market value may
9-7 be the value estimated to be necessary to attract full subscription
9-8 for the shares, as indicated by the independent evaluation, and may
9-9 be stated as a range of values.
9-10 (c) The conversion plan must set the purchase price per
9-11 share of capital stock at any reasonable amount. However, the
9-12 minimum subscription amount required of an eligible member may not
9-13 exceed $500. The conversion plan may provide that the minimum
9-14 number of shares a person may purchase under the conversion plan is
9-15 25 shares.
9-16 (d) The conversion plan must provide that a person or group
9-17 of persons acting in concert may not acquire, in the public
9-18 offering or through the exercise of subscription rights, more than
9-19 five percent of the capital stock of the converted stock company or
9-20 the stock of another corporation that is participating in the
9-21 conversion plan, except with the approval of the commissioner.
9-22 This limitation does not apply to an entity that purchases 100
9-23 percent of the capital stock of the converted company as part of
9-24 the conversion plan approved by the commissioner.
9-25 (e) The conversion plan must provide that a director or
9-26 officer of the mutual insurance company, or a person acting in
9-27 concert with a director or officer, may not acquire without the
10-1 permission of the commissioner any capital stock of the converted
10-2 stock company or the stock of another corporation that is
10-3 participating in the conversion plan before the third anniversary
10-4 of the effective date of the conversion, except through a
10-5 broker-dealer. This subsection does not prohibit a director or
10-6 officer from:
10-7 (1) making block purchases of one percent or more of
10-8 the outstanding common stock:
10-9 (A) other than through a broker-dealer if
10-10 approved in writing by the commissioner; or
10-11 (B) through the exercise of subscription rights
10-12 received under the conversion plan; or
10-13 (2) participating in a stock benefit plan permitted by
10-14 Section 14(c) of this article or approved by the shareholders.
10-15 Sec. 11. LIMITATION ON RESALE. The conversion plan must
10-16 provide that a director or officer may not sell stock purchased
10-17 under Section 10 of this article before the first anniversary of
10-18 the effective date of the conversion.
10-19 Sec. 12. HOLDER OF SURPLUS NOTE. The conversion plan must
10-20 provide that the rights of a holder of a surplus note to
10-21 participate in the conversion, if any, are governed by the terms of
10-22 the surplus note.
10-23 Sec. 13. REPURCHASE OF CAPITAL STOCK. (a) The conversion
10-24 plan must provide that, without the prior approval of the
10-25 commissioner, a converted stock company, or any corporation
10-26 participating in the conversion plan, may not repurchase any of its
10-27 capital stock from any person before the third anniversary of the
11-1 effective date of the conversion.
11-2 (b) This section does not apply to:
11-3 (1) a repurchase on a pro rata basis under an offer
11-4 made to all shareholders of the converted stock company or any
11-5 corporation participating in the conversion plan; or
11-6 (2) a purchase in the open market by a tax-qualified
11-7 or non-tax-qualified employee stock benefit conversion plan in an
11-8 amount reasonable and appropriate to fund the conversion plan.
11-9 Sec. 14. OPTIONAL PROVISIONS. (a) The conversion plan may
11-10 provide that the directors and officers of the mutual insurance
11-11 company receive, without payment, nontransferable subscription
11-12 rights to purchase capital stock of the converted stock company or
11-13 the stock of another corporation that is participating in the
11-14 conversion plan. The subscription rights must be allocated among
11-15 the directors and officers by a fair and equitable formula and are
11-16 subordinate to the subscription rights of eligible members. This
11-17 subsection does not require the subordination of any subscription
11-18 rights received by directors and officers in their capacity as
11-19 eligible members.
11-20 (b) The aggregate number of shares that may be purchased by
11-21 directors and officers of the mutual insurance company in their
11-22 capacity under Subsection (a) of this section may not exceed 35
11-23 percent of the total number of shares to be issued for the company
11-24 if total assets of the mutual insurance company are less than $50
11-25 million or 25 percent of the total number of shares to be issued
11-26 for the company if total assets of the mutual insurance company are
11-27 more than $500 million. For mutual insurance companies with total
12-1 assets of or between $50 million and $500 million, the maximum
12-2 percentage of the total number of shares that may be purchased
12-3 shall be interpolated.
12-4 (c) The conversion plan may allocate to a tax-qualified
12-5 employee benefit plan nontransferable subscription rights to
12-6 purchase not more than 10 percent of the capital stock of the
12-7 converted stock company or the stock of another corporation that is
12-8 participating in the conversion plan. A tax-qualified employee
12-9 benefit plan is entitled to exercise subscription rights granted
12-10 under this subsection regardless of the total number of shares
12-11 purchased by other persons.
12-12 (d) The conversion plan may provide for the creation of a
12-13 liquidation account for the benefit of members in the event of
12-14 voluntary liquidation after conversion in an amount equal to the
12-15 surplus of the mutual insurance company, exclusive of the principal
12-16 amount of any surplus note, on the last day of the quarter
12-17 immediately preceding the date of adoption of the conversion plan.
12-18 Sec. 15. ALTERNATIVE CONVERSION PLAN. (a) The board of
12-19 directors may adopt a conversion plan that does not rely wholly or
12-20 partially on issuing nontransferable subscription rights to members
12-21 to purchase stock of the converted stock company if the
12-22 commissioner finds that the alternative conversion plan:
12-23 (1) does not prejudice the interests of the members;
12-24 (2) is fair and equitable; and
12-25 (3) is not inconsistent with the purpose and intent of
12-26 this article.
12-27 (b) An alternative conversion plan may:
13-1 (1) include the merger of a domestic mutual insurance
13-2 company into a domestic or foreign stock insurance company;
13-3 (2) provide for issuing stock, cash, or other
13-4 consideration to members instead of subscription rights;
13-5 (3) provide for partial conversion of the mutual
13-6 insurance company and formation of a mutual holding company; or
13-7 (4) set forth another plan containing any other
13-8 provisions approved by the commissioner.
13-9 (c) The commissioner may not approve an alternative
13-10 conversion plan that provides for the formation of a mutual holding
13-11 company before the commissioner adopts rules permitting partial
13-12 conversion and formation of a mutual holding company. The
13-13 commissioner may retain, at the mutual insurance company's expense,
13-14 a qualified expert not otherwise a part of the commissioner's staff
13-15 to assist in reviewing whether the conversion plan may be approved
13-16 by the commissioner.
13-17 Sec. 16. EFFECTIVE DATE OF CONVERSION. (a) For a
13-18 conversion plan to take effect:
13-19 (1) the commissioner must approve the conversion plan;
13-20 and
13-21 (2) the eligible members must approve the conversion
13-22 plan and adopt the amended articles of incorporation.
13-23 (b) A conversion plan takes effect when the amended articles
13-24 of incorporation are filed with the office of the secretary of
13-25 state.
13-26 Sec. 17. RIGHTS OF MEMBERS WHOSE POLICIES ARE ISSUED AFTER
13-27 ADOPTION OF CONVERSION PLAN AND BEFORE EFFECTIVE DATE. (a) On
14-1 issuance of a policy after a conversion plan has been adopted by
14-2 the board of directors but before the effective date of the
14-3 conversion plan, the mutual insurance company shall send to the
14-4 member to whom the policy is issued a written notice regarding the
14-5 conversion plan.
14-6 (b) Except as provided by Subsection (d) of this section, a
14-7 member of an accident and health insurance company entitled to
14-8 receive the notice described by Subsection (a) of this section is
14-9 entitled to rescind the member's policy and receive a full refund
14-10 of any amount paid for the policy not later than the 10th day after
14-11 the date on which the member receives the notice.
14-12 (c) Except as provided by Subsection (d) of this section,
14-13 each member of a property or casualty insurance company entitled to
14-14 receive the notice described by Subsection (a) of this section
14-15 shall be advised of the member's right to:
14-16 (1) cancel the policy; and
14-17 (2) receive a pro rata refund of unearned premiums.
14-18 (d) A member of an accident and health insurance company or
14-19 a property or casualty insurance company who has made or filed a
14-20 claim under the insurance policy is not entitled to a right to
14-21 receive a refund under Subsection (b) or (c) of this section. A
14-22 person who has exercised the rights provided by Subsection (b) or
14-23 (c) of this section is not entitled to make or file a claim under
14-24 the insurance policy.
14-25 Sec. 18. CORPORATE EXISTENCE. (a) On the effective date of
14-26 the conversion:
14-27 (1) the corporate existence of the mutual insurance
15-1 company continues in the converted stock company; and
15-2 (2) all assets, rights, franchises, and interests of
15-3 the mutual insurance company in and to property, real, personal,
15-4 and mixed or cloned, and any accompanying things in action, are
15-5 vested in the converted stock company, without a deed or transfer,
15-6 and the converted stock company assumes all the obligations and
15-7 liabilities of the mutual insurance company.
15-8 (b) Unless otherwise specified in the conversion plan, the
15-9 directors and officers of the mutual insurance company serving on
15-10 the effective date of the conversion serve as directors and
15-11 officers of the converted stock company until new directors and
15-12 officers of the converted stock company are elected under the
15-13 articles of incorporation and bylaws of the converted stock
15-14 company.
15-15 Sec. 19. CONFLICT OF INTEREST. (a) A director, officer,
15-16 agent, or employee of the mutual insurance company may not receive
15-17 a fee, commission, or other consideration, other than that person's
15-18 usual salary or compensation, for aiding, promoting, or assisting
15-19 in a conversion under this article except as provided by the
15-20 conversion plan approved by the commissioner. This subsection does
15-21 not prohibit the payment of reasonable fees and compensation to an
15-22 attorney, accountant, or actuary for professional services
15-23 performed by that person, even if the attorney, accountant, or
15-24 actuary is also a director or officer of the mutual insurance
15-25 company.
15-26 (b) Until the second anniversary of the effective date of
15-27 the conversion, a converted stock company may not implement any
16-1 non-tax-qualified stock benefit conversion plan unless that
16-2 conversion plan is approved by a majority of votes eligible to be
16-3 cast at a meeting of shareholders held at least six months after
16-4 the effective date of the conversion.
16-5 (c) All the costs and expenses connected with a conversion
16-6 plan shall be paid for or reimbursed by the mutual insurance
16-7 company or the converted stock company. However, if the conversion
16-8 plan provides for participation by another corporation or stock
16-9 company in the conversion plan, that corporation or stock company
16-10 may pay for or reimburse all or a portion of the costs and expenses
16-11 connected with the conversion plan.
16-12 Sec. 20. EFFECT OF FAILURE TO GIVE NOTICE. If the mutual
16-13 insurance company complies substantially and in good faith with the
16-14 notice requirements of this article, the mutual insurance company's
16-15 failure to send a member the required notice does not impair the
16-16 validity of any action taken under this article.
16-17 Sec. 21. LIMITATION ON ACTIONS. An action challenging the
16-18 validity of or arising out of acts taken or proposed to be taken
16-19 regarding a conversion plan under this article must be commenced
16-20 not later than the 30th day after the effective date of that
16-21 conversion plan.
16-22 Sec. 22. INSOLVENT MUTUAL INSURANCE COMPANY. If a mutual
16-23 insurance company is insolvent or, in the judgment of the
16-24 commissioner, is in hazardous financial condition, its board of
16-25 directors, by a majority vote, may request in its petition that the
16-26 commissioner waive the requirements imposing notice to and
16-27 policyholder approval of the planned conversion. The petition must
17-1 specify:
17-2 (1) the method and basis for the issuance of the
17-3 converted stock company's shares of its capital stock to an
17-4 independent party in connection with an investment by the
17-5 independent party in an amount sufficient to restore the converted
17-6 stock company to a sound financial condition; and
17-7 (2) that the conversion is to be accomplished without
17-8 payment of consideration to past, present, or future policyholders,
17-9 if the commissioner finds that the value of the mutual insurance
17-10 company is insufficient to warrant that consideration.
17-11 Sec. 23. LAWS APPLICABLE TO CONVERTED STOCK COMPANY. (a) A
17-12 mutual insurance company may not be permitted to convert under this
17-13 article if, as a direct result of the conversion, any person or any
17-14 affiliate acquires control of the converted stock company, unless
17-15 that person or the affiliate complies with this article. For
17-16 purposes of this subsection, "control" has the meaning assigned by
17-17 Section 2, Article 21.49-1 of this code.
17-18 (b) Except as otherwise specified in this article, a stock
17-19 company converted under this article has all of the rights and
17-20 privileges and is subject to all of the requirements and
17-21 regulations imposed on stock companies formed under this code and
17-22 any other laws of this state relating to the regulation and
17-23 supervision of insurance companies, but may not exercise rights or
17-24 privileges that other stock insurance companies may not exercise.
17-25 Sec. 24. AMENDMENT OF POLICIES. A mutual insurance company,
17-26 by endorsement or rider approved by the commissioner and sent to
17-27 the policyholder, may simultaneously with or at any time after the
18-1 adoption of a conversion plan amend any outstanding insurance
18-2 policy to extinguish the right of the holder of the policy to share
18-3 in the surplus of the mutual insurance company. However, such an
18-4 amendment is void if the conversion plan does not take effect.
18-5 SECTION 2. Article 15.22, Insurance Code, as added by this
18-6 Act, takes effect September 1, 1997.
18-7 SECTION 3. The importance of this legislation and the
18-8 crowded condition of the calendars in both houses create an
18-9 emergency and an imperative public necessity that the
18-10 constitutional rule requiring bills to be read on three several
18-11 days in each house be suspended, and this rule is hereby suspended.