Question
(redacted)
November 23, 1983
Premerger Notification Office
Room 303
Federal Trade Commission
Washington, D.C. 20580
Re:Request for Information Interpretation of
Requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976
Gentlemen:
Pursuant to 16 C.F.R. 801.30, we hereby request an informal interpretation by the Commission staff and a confirmation that the transaction described herein will not be subject to the reporting and waiting requirements of Section 7A of the Clayton Act as added by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. `18A (the Act).
Material Facts
A is a non-profit corporation engaged principally in the issuance of service contracts under the (redacted). Persons covered by the service contracts (subscribers) are entitled to receive health care services as specified therein at facilities such as hospitals. A is also engaged in certain related activities, such as the operation of a health maintenance organization. A has annual revenues in excess of $100 million. A has no stockholders, but it does have members who serve as the Trustees. As board of Trustees is self-perpetuating, this is, the Trustees choose the new members (and Trustees) of the corporation. However, as with other non-profit corporations generally and all of the non-profit corporations described herein, no earnings of A can be used for the benefit of any individual member of trustee.
B is a non-profit mutual insurance company engaged in the issuance of accident and health insurance contracts. B has annual revenues in excess of $25 million. B was organized by A, but it has no stock holders. Its members consist of the holders of the insurance policies issued by B. Bs Trustees elected annually by its members. At all times since its organization, a majority of Bs Trustees have been Trustees of A. There is no requirement in Bs organizational papers that persons affiliated with A constitute a majority of Bs members or of its Trustees, but A and the other (redacted) from which Bs Trustees have been drawn have agreed to use their best efforts to ensure that a majority of Bs Trustees will be Trustees of A.
C is a non-profit mutual insurance company engaged in the issuance of accident and health insurance contracts under the (redacted) trademark. It also has annual revenues in excess of $100 million. C has no stockholders; its directors are chosen by vote of its member-policyholders, each policy-holder having one vote regardless of the number of policies held. A majority of Cs policyholders are also subscribers under service contracts issued by A. C also controls a for-profit life insurance company, D, and a corporation controlling health maintenance organizations, E of whose shares C owns 50%. D and E together have annual revenues and assets of less than $15 million.
A and C propose to consolidate, forming a new non-profit mutual insurance corporation, F, which would be engaged in the issuance of health and accident insurance policies. F will have no stockholders; its members will be the holders of its insurance policies. By virtue of the consolidation, those of As subscribers who are not holders of Cs policies and who therefore do not already have the right to vote for Cs directors will gain the right to vote for the directors of F, and Cs existing policyholders will now have the right to vote for Fs directors instead of Cs. Also, the new corporation F will succeed to voting control of D and E. Presumably Fs directors would be eligible to be members of B, and is likely that a majority of Bs Trustees after the consolidation will be persons who are also Fs directors.
For purposes of coverage under the Act, it may be assumed that the size-of-the-parties test and the size-of-the-transaction test would be met and that A and C are engaged in an activity affecting interstate commerce.
Coverage Under the Act
The principal question is whether this consolidation involves the acquisition of voting securities or assets such that the transaction is subject to the Act. The first issue is whether the policyholders of C hold voting securities. Our interpretation, under the analysis below, is that Cs present policyholders and those of the proposed F do not and will not hold voting securities of those companies. Accordingly, there could be no acquisition of voting securities.
Neither assets nor securities are defined within the Act or the Regulations. In fact, the Statement of Basis and Purpose indicates that a definition of security was deliberately deleted from the Regulations. 43 F.R. 33,462. One must look to the normal definition of the security in order to determine the usage of the term in the Act and the Regulations.
Under the federal securities laws, it is clear that an insurance contract is not a security. The normal test under those laws is whether the investor has given his or her money to the issuer with an eye to possible profits. It will be immediately seen that an insurance policy does not constitute such an investment contract but rather an indemnity contract, providing a return only upon the occurrence of some chance event. In recognition of this distinction, the Congress specifically exempted insurance policies from the coverage of the Securities Act of 1933. 15 U.S.C. 77c(a)(8). The House report makes clear that this was merely confirming everyones understanding and that the section 3(a)(8) exemption
makes clear what is already implied in the act, namely, that insurance policies are not to be regarded as securities subject to the provisions of the act.
H.R. Rep. No. 85, 73rd Cong., lst Sess. (1933), p. 15. The Supreme Court and the Securities & Exchange Commission have also confirmed that insurance contracts are not securities. Tcherepnin v. Knight, 389 U.S. 332, 342 n. 30 (1967); Testimony of Professor Loss on Behalf of SEC, Securities Exchange Act Amendments, Hearings before Subcom. of Senate Com. on Banking & Currency on S.2408, 81st Cong.2d Sess. (1950), at 33.
The only indication that the policyholders of a mutual insurance company might be deemed to hold voting securities is in Section 801.2(d) of the Regulation, which declares that consolidation are transactions subject to the Act and shall be treated as acquisitions of voting securities. However, that regulation is obviously directed only at characterization of purposes of accurately completing the report form, as are the other provisions of 801.2. (The section is headed Acquiring and Acquired Persons.) There is no indication that the Commission intended to expand coverage of the Act where the parties do not have voting securities. In any event, the Commission does not have authority to expand the coverage of the Act, only to contract it though exemptions. 15 U.S.C. 18A(c)(12),(d)(2)(B).
Under the same analysis, B, another mutual insurance company, does not now and will not after the proposed consolidation have voting securities. In any event, A does not and F would not control B within the definition in 801.1(b) of the Regulations, because A does not hold 50% or more of Bs voting securities nor have the contractual power to designate a majority of Bs Trustees.
D and E do have voting securities and F will succeed to control of D and E, but the acquisition of D and E would be exempted under the Minimum Dollar Value exemption in 802.20. Thus, the indirect acquisition of control and D and E does not make the consolidation reportable.
To complete the analysis under 7A(c), this proposed consolidation would not constitute the acquisition of assets within the meaning of the Act. The recent amendments to 801.2(d) makes that clear. 48 F.R. 34,430, et. seq. Also, under the state law, this consolidation is not characterized as the purchase of assets and the assumption of liabilities, but rather as the succession of F to the rights and obligations of A and C.
The Question To Be Resolved
We ask that the Commission staff render an informal interpretation of the Act and the Regulations confirming that the proposed consolidation described herein is not subject to the requirements of the Act.
Additional Information
If further information is required, we would be happy to attempt to provide it.
Sincerely yours,
(Redacted)
(Redacted)