Based on what you describe, the Exchange is its own UPE. The attorney-in-fact’s duties with respect to the Exchange are not sufficient to confer control of the Exchange.
Question
This letter concerns the treatment of a reciprocal insurance exchange (the “Exchange”) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and the rules and regulations promulgated thereunder.
A. A Reciprocal Insurance Exchange is an “Entity” Under Rule 801.1(a)(2)
It is our understanding that the Premerger Notification Office (“PNO”) has taken the position that (a) a reciprocal insurance exchange (1) is an “entity” under Rule 801.1(a)(2) of the HSR Act, (2) is comparable to a limited liability company, limited partnership and general partnership and (3) should be treated as a non-corporate entity under the HSR Act; and (b) “control” of a reciprocal insurance exchange is determined under Rule 801.1(b)(1)(ii) of the HSR Act (whether any person has the right to 50% or more of the profits of the reciprocal insurance exchange or 50% or more of the assets of the reciprocal insurance exchange upon its dissolution). See Interpretation No. 16 in the Premerger Notification Practice Manual (Fifth Edition).
B. No Person Controls the Exchange Under Rule 801.1(b)(1)(ii) of the HSR Act
No person has the right to 50% or more of the profits of the Exchange or to 50% or more of the assets of the Exchange upon its dissolution.
C. The Attorney-In-Fact is Not the Ultimate Parent Entity
A reciprocal insurance exchange is based on the mutual or cooperative principle of protecting its policyholders (called “subscribers”). The Exchange (1) is owned by the subscribers, (2) is not organized as a corporation, limited liability company, partnership, mutual fund company or business trust; (3) does not have a traditional organizational document (but is subject to operating guidelines described in further detail below); and (4) does not have a board of directors, officers or employees. The Exchange does have a board of advisors comprised of 11 subscriber representatives. The operating guidelines provide this board of advisors with enumerated authorities and responsibilities which are generally more limited than a typical board of directors. These authorities include the authority to fill vacancies on the board of advisors; supervise finances; supervise operations (in conformity with the guidelines and subscriber agreements); procure audits; enter into contracts with the attorney-in-fact; adopt rules and regulations for the operation of the Exchange; modify subscriber agreements subject to approval by attorney-in-fact and insurance regulatory approval; declare undistributed amounts to subscribers (as proposed by attorney-in-fact); and to take other actions to implement the foregoing. No subscriber has the contractual power presently to designate 50% or more of the members of the board of advisors. The subscribers, through a subscription agreement containing a limited power of attorney appoint a manager, called the attorney-in-fact, to control, conduct and manage the day-to-day business and affairs of the Exchange. The attorney-in-fact has a fiduciary relationship with the subscribers and must act in their best interests, as well as in accordance with the provisions of the subscription agreement. The Exchange is not capable of performing, and does not perform, any activity except through the attorney-in-fact.
It is our understanding that it is the PNO’s position that an attorney-in-fact does not control a reciprocal insurance exchange under Rule 801.1(b)(1)(ii) of the HSR Act and therefore is not the ultimate parent entity of a reciprocal insurance exchange solely in its capacity as the attorney-in-fact.
D. Conclusions
1. The Exchange:
(a) Is an “entity” under Rule 801.1(a)(2) of the HSR Act.
(b) Should be treated as a non-corporate entity under the HSR Act comparable to a limited liability company, limited partnership or general partnership.
2. Control of the Exchange is determined under Rule 801.1(b)(1)(ii) of the HSR Act.
3. Since no person has the right to 50% or more of the profits of the Exchange or to 50% or more of the assets of the Exchange upon its dissolution, no person controls the Exchange under Rule 801.1(b)(1)(ii) of the HSR Act.
4. The attorney-in-fact does not control the Exchange under Rule 801.1(b)(1)(ii) of the HSR Act solely in its capacity as the attorney-in-fact.
5. The Exchange is its own ultimate parent entity.
Please let us know if you concur with our analysis and conclusions.