Kansas Session Laws Chapter 77

CHAPTER 77 HOUSE BILL No. 2266 An Act concerning mutual holding companies; definition of voting stock; amending K.S.A.
1998 Supp. 40-4003a and repealing the existing section. Be it enacted by the Legislature of the State of Kansas:

Section 1. K.S.A. 1998 Supp. 40-4003a is hereby amended to read
as follows: 40-4003a. The plan of conversion shall comply with the terms
and conditions set forth in subsection (a), (b), (c) or (d) as follows:

(a) Plan of conversion in which policyholders exchange their mem-
bership interests for cash, securities, policy credits, dividends, subscrip-
tion rights or other consideration, or some combination thereof. A mutual
insurer seeking to convert pursuant to this subsection may do so by:

(1) Filing a plan of conversion containing:

(A) A description of the structure, forms and allocation of the pro-
posed consideration to the policyholders, the projected range of the num-
ber of shares of capital stock, if any, to be issued by the new stock insurer
or parent company of the new stock insurer, or any other company, and
such other proposed conditions and provisions as determined by the mu-
tual insurer not to be inconsistent with this act. As used in this act, ``parent
company'' means any company which on or after the effective date of the
conversion owns, directly or indirectly, 51% or more of the capital stock
of the new stock insurer;

(B) a description of any amendments to the insurer's articles of in-
corporation;

(C) provisions establishing the method by which the initial board of
directors of the stock insurer will be selected; and

(D) any other additional information as the commissioner of insur-
ance may reasonably request.

(2) providing consideration to the policyholders entitled thereto in
the form of cash, stock, policy credits, dividends, subscription rights, a
combination thereof or such other valuable consideration as the commis-
sioner may approve. With the approval of the commissioner, such con-
sideration may be paid into a trust or other account or entity existing for
the benefit of policyholders, which is established by the company for the
purpose of effecting the conversion.

(b) Plan of conversion in which policyholders exchange their mem-
bership interests solely for subscription rights. A mutual insurer seeking
to convert to a stock insurer pursuant to this subsection may do so by:

(1) Filing a plan of conversion containing:

(A) A provision that each policyholder is to receive, without payment,
nontransferable subscription rights to purchase a portion of the capital
stock of the converted stock company and that, in the aggregate, all pol-
icyholders shall have the right, prior to the right of any other party, to
purchase 100% of the capital stock of the converted company. As an
alternative to subscription rights in the converted stock company, the plan
may provide that each eligible member is to receive, without payment,
nontransferable subscription rights to purchase a portion of the capital
stock of one of the following:

(i) A corporation organized for the purpose of purchasing and holding
the stock of the converted stock company;

(ii) a stock insurance company owned by the mutual company into
which the mutual company will be merged; or

(iii) an unaffiliated stock insurance company or other corporation that
will purchase the stock of the converted stock company;

(B) a provision that the subscription rights shall be allocated in whole
shares among the policyholders using a fair and equitable formula. This
formula may, but need not, take into account how the different classes
of policies of the policyholders contributed to the surplus of the mutual
company or any other factors that may be fair and equitable;

(C) a fair and equitable means for allocating shares of capital stock
in the event of an oversubscription to shares by policyholders exercising
subscription rights received under this section;

(D) at the option of the converting company, a provision that any
shares of capital stock not subscribed to by policyholders exercising sub-
scription rights received under this section may be sold in a public offer-
ing or through a private placement or other alternative method approved
by the commissioner that is fair and equitable to policyholders. The of-
fering to others of shares not purchased by policyholders exercising such
subscription rights shall be at a price not less than the offering price to
such policyholders;

(E) a provision which sets the total price of the capital stock equal to
the estimated pro forma market value of the converted stock company
based upon an independent evaluation by one or more qualified experts.
This pro forma market value may be the value that is estimated to be
necessary to attract full subscription for the shares, as indicated by the
independent evaluation and may be stated as a range of pro forma market
value;

(F) a provision which sets the purchase price per share of capital stock
equal to any reasonable amount;

(G) a provision that any person or group of persons acting in concert
shall not acquire, in the public offering or pursuant to the exercise of
subscription rights, more than 5% of the capital stock of the converted
stock company, except with the approval of the commissioner. This lim-
itation does not apply to any entity that is to purchase 100% of the capital
stock of the converted company as part of the plan of conversion approved
by the commissioner; and

(H) a provision that the rights of a holder of a surplus note to partic-
ipate in the conversion, if any, shall be governed by the terms of the
surplus note; and

(2) providing subscription rights to the policyholders entitled thereto
in accordance with the provisions of the plan of conversion as described
in paragraph (1). With the approval of the commissioner, stock that will
be issued pursuant to such subscription rights may be provided to a trust
or other account or entity existing for the benefit of policyholders which
is established by the company for the purpose of effecting the conversion.

(c) Plan of conversion in which policyholders exchange their mem-
bership interests for membership interests in a mutual holding company.

(1) A plan of conversion adopted pursuant to this subsection shall
provide that the mutual insurer will become a stock insurer and that the
owners of policies of the converted insurer that are in force on the effec-
tive date of the plan of conversion or thereafter will become members of
a mutual holding company organized pursuant to paragraph (2) for as
long as their policies remain in force;

(2) a mutual insurer seeking to convert to a stock insurer pursuant to
this subsection may do so by:

(A) Forming a mutual holding company and continuing the corporate
existence of the insurer as a stock insurance company that is a wholly-
owned subsidiary (except to the extent qualifying shares are required to
be held by directors of an insurance company admitted and authorized
to do business in Kansas pursuant to K.S.A. 40-305 and amendments
thereto) of a stock holding company of which at least 51% of the voting
stock is held by the mutual holding company;

(B) forming a mutual holding company and continuing the corporate
existence of the insurer as a stock insurance company of which at least
51% of the voting stock is held by the mutual holding company; or

(C) forming a mutual holding company and continuing the corporate
existence of the insurer as a stock insurance company with another own-
ership structure that is approved by the commissioner with at least 51%
of the voting stock of the stock insurance company is ultimately held by
the mutual holding company.

(3) a mutual holding company is not an insurer for purposes of this
act, but the provisions of this act with regard to corporate organization
and procedure of mutual insurers and the election of directors by mutual
insurers, and those provisions of chapter 17 of the Kansas Statutes An-
notated and amendments thereto that are applicable to mutual insurers,
shall apply to the mutual holding company;

(4) a mutual holding company and any stock holding company shall
each be deemed to be a ``holding company'' of the insurer within the
meaning of article 33 of chapter 40 of the Kansas Statutes Annotated and
amendments thereto. Approval of the plan of conversion by the commis-
sioner pursuant to this act shall constitute approval of the acquisition of
control by the mutual holding company and stock holding company, if
applicable, under K.S.A. 40-3304 and amendments thereto, without any
separate filings or other action;

(5) a mutual holding company shall not dissolve, liquidate or wind-
up and dissolve except through proceedings under article 36 of chapter
40 of the Kansas Statutes Annotated and amendments thereto for the
liquidation or dissolution of the converted insurer or as the commissioner
of insurance may otherwise approve. A mutual holding company may,
however, convert to a stock corporation in accordance with the terms of
this article and a plan of conversion approved by the commissioner of
insurance to be fair and equitable after a hearing upon notice to the
company's members;

(6) the charter of the mutual holding company shall be filed with the
commissioner and shall contain the matters required to be contained in
the charter of a mutual insurer by article 5 or article 12 of chapter 40 of
the Kansas Statutes Annotated and amendments thereto, as applicable,
except that the name of the mutual holding company shall contain the
word ``mutual'' and shall not contain the word ``insurance'' and the com-
pany's powers shall not include doing an insurance business;

(7) the commissioner of insurance may, by adoption of rules and reg-
ulations, require a mutual holding company to file annual statements with
the commissioner in such form as the commissioner prescribes;

(8) any subsidiaries of the company that have been reorganized pur-
suant to this act and amendments thereto may remain as subsidiaries of
such company or become subsidiaries of the mutual or stock holding
company provided that if such subsidiaries shall become subsidiaries of a
stock holding company, then the reorganized company shall be reim-
bursed the value of its holdings in such subsidiaries, as reflected on the
company's most recently filed financial statements, in the event shares of
the stock holding company are or have been issued to other than the
mutual holding company;

(9) with the written approval of the commissioner, and subject to
conditions that the commissioner may impose, a mutual holding company
may:

(A) Merge or consolidate with, or acquire the assets of, a mutual
holding company;

(B) together with its converted insurer subsidiary, merge or consoli-
date with or acquire the assets of any other insurer; or

(C) engage in any other merger, consolidation or acquisition trans-
action which may be approved by the commissioner;

(10) a member of a mutual holding company is not, as a member,
personally liable for the acts, debts, liabilities or obligations of such com-
pany. No assessment of any kind may be imposed upon the members of
a mutual holding company by the board of directors, members or credi-
tors of such company or because of any liability of any company owned
or controlled by the mutual holding company or because of any act, debt
or liability of the mutual holding company;

(11) a membership interest in a mutual holding company shall not
constitute a security under the laws of this state; and

(12) the commissioner shall retain jurisdiction over any mutual hold-
ing company or stock holding company organized pursuant to this section
to assure that policyholder interests are protected.; and

(13) as used in this section, ``at least 51% of the voting stock'' means
shares of the capital stock which carry the right to cast a majority of the
votes entitled to be cast by all of the outstanding shares of capital stock
of the company for the election of directors and on all other matters sub-
mitted to a vote of the shareholders of the company.

(d) Plan of conversion in which policyholders exchange their mem-
bership interests for an option to purchase a proportionate amount of
stock in the converted company.

A mutual insurer seeking to convert pursuant to this subsection may
do so by filing a plan of conversion containing:

(1) A description of any amendments to the insurer's articles of in-
corporation to effect a conversion from a mutual corporation into a stock
corporation. Any other amendments proposed for the articles of incor-
poration shall be set forth in the plan.

(2) The establishment of a conversion value, as of the calendar quar-
ter ending immediately preceding the date of the adoption of the reso-
lution specified in subsection (a) of K.S.A. 40-4002, and amendments
thereto. The conversion value shall be equal to the company's policyhol-
ders' surplus, determined in accordance with the statutory method of
accounting used in preparing the last annual statement filed with the
commissioner of insurance. The insurer shall submit a list of qualified
disinterested appraisers, from which the commissioner shall appoint one
or more such appraisers, who shall establish the conversion value in ac-
cordance with the above procedure.

(3) The procedure by which each policyholder shall receive a pro-
portionate amount of the conversion value in the manner prescribed
herein and in paragraph (4). Such amount shall be based upon net pre-
mium paid to the general account of the insurer within three years prior
to the date on which the board of directors approved the plan.

(4) Provisions whereby the insurer or any holding company of the
insurer shall distribute such proportionate conversion value, in the fol-
lowing method:

(A) Each policyholder will be issued an option to purchase stock in
the converted company;

(B) the total stated value of the stock to be issued shall be equal to
the conversion value as determined in paragraph (2);

(C) the stock option shall provide that the policyholders may pur-
chase the stock at its stated value;

(D) the maximum amount of stock that may be purchased by each
policyholder shall be in proportion to the policyholder's share of the con-
version value, with the number of shares rounded to the nearest whole
number, plus any shares purchased pursuant to purchased stock options,
subject to the limitations provided in subparagraph (J);

(E) policyholders not exercising their option to purchase the stock
shall be entitled to sell such option to any person or corporation, including
the parent corporation;

(F) the sale of any such stock option shall transfer to the purchaser
all rights in and conditions to the option;

(G) all stock options shall be exercised within 60 days from the date
such options are distributed to the policyholders and the options shall
expire at the end of such sixty-day period;

(H) the converted company or the parent corporation shall purchase,
at a price not less than the amount set forth in the plan, all stock options
that have not been exercised within 60 days from the date such options
are distributed to the policyholders;

(I) the converted company or the parent corporation shall purchase,
at the stated value, all stock not purchased pursuant to the stock options
and such purchase must be made within 60 days from the date the stock
options expire;

(J) notwithstanding the provisions of subparagraph (D), ownership of
the voting stock of the insurer is subject to the provisions of K.S.A. 40-
4008 and amendments thereto.

The above distribution method shall constitute full payment and dis-
charge of the policyholder's proportionate conversion value, but this pro-
vision shall not be held to prohibit the converted company or the parent
corporation from including in the plan provisions for the distribution of
any other valuable consideration to policyholders. Notwithstanding any
other provision of law, the policyholders shall have no other rights re-
sulting from membership in a mutual insurance company with respect to
the insurer.

(5) A statement as to the number of shares to be authorized for the
insurer and their value. The paid-in capital and surplus of the converted
capital stock insurer shall be in an amount not less than two times the
minimum initial paid-in capital and surplus required of a domestic stock
insurer doing business as of the same date as the converted company, to
transact like kinds of insurance.

(6) Provisions establishing the method by which the initial board of
directors of the stock insurer will be selected.

Sec. 2. K.S.A. 1998 Supp. 40-4003a is hereby repealed.

Sec. 3. This act shall take effect and be in force from and after its
publication in the Kansas register.

Approved April 7, 1999.
Published in the Kansas Register April 15, 1999.
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