N.Y. Insurance Law § 7317: Conversion of certain article 43 corporations

§ 7317. Conversion of certain article 43 corporations. (a) (1) An

article forty-three corporation which was the subject of an initial

opinion and decision issued by the superintendent on or before December

thirty-first, nineteen hundred ninety-nine, as the same may be amended

or one or more article forty-three corporations whose main offices on

January first, two thousand seven were located in one of the counties

listed in section one thousand two hundred sixty-two of the public

authorities law and its or their not-for-profit subsidiaries (including,

without limitation, any such subsidiary licensed as a health service

corporation pursuant to this chapter or as a health maintenance

organization organized pursuant to article forty-four of the public

health law), hereinafter referred to in the singular, which seeks to

convert into one or more corporations or other entities organized for

pecuniary profit or into one or more for-profit organizations of any

kind shall submit a proposed plan of conversion to the superintendent

for approval pursuant to this section.

(2) This section shall apply to any transaction the effect of which is

to change the status, orientation or operation of the applicant from a

not-for-profit organization to a for-profit organization, including:

(A) Any sale, lease, transfer, exchange, option, conveyance, gift,

joint venture, merger, consolidation or disposition of all or a material

portion of the assets of the applicant over a period of five years;

(B) Any transfer of control, responsibility or governance over all or

substantially all of the assets of the applicant; or

(C) Continuation of the corporate existence of the applicant by

reconstituting the corporate form of the applicant from a not-for-profit

corporation to a business corporation by the filing of a restated

certificate of incorporation regardless of whether such changes occur in

one transaction or in a series of transactions.

(b) The proposed plan of conversion shall include all items and

address all issues as may be required by the superintendent in order for

the superintendent to assure that the conversion process will not

adversely affect the applicant's contractholders or members, will

protect the interests of and will not negatively impact on the delivery

of health care benefits and services to the people of the state of New

York and results in the fair, equitable and convenient winding down of

the business and affairs of the applicant. The superintendent may adopt

such rules or regulations or establish such procedures as he or she

deems necessary or proper to implement the provisions of this section.

(c)(1) The proposed plan shall address the following items and issues,

if applicable, to the satisfaction of the superintendent:

(A) The transition of contract forms from the not-for-profit

corporation to the converted corporation or health maintenance

organization including any related holding companies, subsidiaries or

other entities involved in the proposed conversion;

(B) Any transfer of assets agreements;

(C) Any corporate resolutions or authorizations by the board of

directors;

(D) Any reinsurance arrangements;

(E) An explanation of any transfers of employees, records and

equipment;

(F) Any management contracts or administrative service agreements;

(G) Any guarantees or cross-guarantee agreements;

(H) Any trust agreements;

(I) That the applicant's financial reserves are funded prior to the

conversion at the level required by law and provide a detailed

description of the financial structure and reserve levels of the

converted corporation or organization;

(J) The governance structure and the character and competence of

directors and officers;

(K) Any administrative agreements among related companies, including

fair and equitable terms and reasonable fees;

(L) A detailed description of any proposed public sale of stock or

securities or any initial public offering;

(M) New or revised contract forms together with notices of

discontinuance or any other explanation to contractholders of the

conversion process;

(N) A plan for outreach to consumers to explain in simple terms the

transaction and the steps, if any, consumers need to take to preserve

their coverage;

(O) Any necessary protections for contractholders to preserve contract

form anniversary dates, calculation of deductibles and consistent

premiums as part of the contract transfer process; and

(P) That sufficient safeguards are in place to ensure that the

affected community has continued or increased access to health care

coverage.

(2) The proposed plan shall explain in detail the method of transfer

of contract forms or other methods of assuring uninterrupted continuance

of coverage for all covered persons, with particular focus on medicare

supplement, policies issued pursuant to sections four thousand three

hundred twenty-one and four thousand three hundred twenty-two of this

chapter, policies subject to chapter six hundred sixty-one of the laws

of nineteen hundred ninety-seven, and any other types of coverage

designated by the superintendent which may warrant special attention.

(d) (i) The superintendent shall review the proposed plan of

conversion and may require, prior to issuing any approval, that the

applicant make any changes to the proposed plan that the superintendent

deems necessary. The superintendent shall establish a date certain by

which the initial public offering shall occur. In the event the proposed

plan of conversion affects an organization certified under article

forty-four of the public health law, the superintendent shall solicit

the views of the commissioner of health and the superintendent shall not

issue any approvals of the plan of conversion unless the commissioner

has consented in writing to those elements of the plan of conversion

which are under the commissioner's jurisdiction with respect to the

applicant's certificate of authority under article forty-four of the

public health law.

(ii) For purposes of granting his approval pursuant to subsection (f)

of this section, the superintendent may deem sufficient and as meeting

all legal requirements any or all portions of the conversion transaction

completed by an applicant organized under article forty-three of this

chapter which was the subject of an initial opinion and decision issued

by the superintendent on or before December thirty-first, nineteen

hundred ninety-nine, as the same may be amended.

(e) The superintendent shall provide in an opinion and decision

approving the conversion for the timely transfer of the public asset

consistent with the purposes of this chapter so as to maximize the value

of the public asset. The public asset shall be deposited in a special

fund to be known as the "public asset fund." Such fund shall consist of

assets or moneys paid to it as a result of the creation of a "public

asset", as defined in paragraph three of subsection (j) of section four

thousand three hundred one of this chapter, together with any earnings

thereon. Such fund shall be separate and apart from any other fund and

from all other state moneys. The comptroller shall be the sole custodian

of the fund. Custodial authority of the fund shall be limited to the

rights set forth in this subsection, and any and all other rights,

including shareholder rights with respect to the public asset shall be

vested in the board, as set forth in paragraph four of subsection (j) of

section four thousand three hundred one of this chapter. All

disbursements shall be made by the comptroller upon vouchers signed by

the superintendent, or his deputy, upon the direction of the board

established pursuant to subparagraph (B) of paragraph four of subsection

(j) of section four thousand three hundred one of this chapter. The

moneys of the fund shall be invested by the comptroller, pursuant to the

direction of such board, so as to maximize the value of the assets in

such fund consistent with the board's statutory obligation to direct

disbursements as described herein and in subsection (j) of section four

thousand three hundred one of this chapter. The fund shall continue

until there are no longer any assets or moneys therein available for

distribution.

(f) (i) Notwithstanding any other provision of law, the

superintendent's approval of the conversion transaction shall constitute

final approval of the transaction and no further authorizations or

approvals shall be required. Notwithstanding any other provision of law,

sole jurisdiction for any challenge of the superintendent's final

determination regarding the conversion transaction shall rest with the

New York supreme court and shall be commenced within thirty days of the

superintendent's final determination. Judicial review shall be limited

to a determination as to whether the superintendent acted in an

arbitrary or capricious manner with respect to reaching a determination.

(ii) This section shall be deemed to supercede all otherwise

applicable laws and legal requirements and compliance with this section

and subsection (j) of section four thousand three hundred one of this

chapter and the use of such funds as provided in such section, and in

subsection (k) of this section, shall be deemed to constitute compliance

with and shall supercede all such other legal requirements, including,

but not limited to, statutory, common law and any other requirements

relating to not-for-profit corporations and fiduciary requirements

applicable to the board of directors of any company filing a plan

pursuant to this section. In addition, and not in limitation of the

foregoing, a transaction approved by the superintendent shall be deemed

for all purposes to be a transaction that is fair and reasonable to an

applicant and to promote the purposes of that applicant, and the use of

proceeds as described herein shall be deemed for all purposes to be a

use for a purpose that is consistent with and as near as may be to the

purposes for which the applicant was originally organized and

subsequently operated.

(g) The conversion transaction shall not result in inurement to any

private person or entity. The converted corporation shall not issue to

any employee or member of the board of directors of either the applicant

or the converted corporation, any stock options, warrants or stock

appreciation rights unless the value of such options, warrants or rights

is initially set at the publicly traded price of the stock of the

converted insurer on a date no earlier than six months after the

commencement of the initial public offering. In no event shall a

director of the applicant receive stock options in his or her capacity

as a director of the applicant.

(h) After the superintendent deems the proposed plan of conversion

sufficiently complete, the superintendent shall hold one or more public

hearings regarding the proposed plan of conversion within the geographic

area served by the applicant. The number and locations of the hearings

shall be sufficient to ensure adequate public involvement and comment.

The applicant shall provide notice of the public hearings throughout the

geographic area affected by the application by distributing a form or

notice approved by the superintendent and including such notices in the

state register, in accordance with the provisions of the state

administrative procedure act, in newspapers of general circulation and

electronic notices posted on the internet. The applicant shall notify

contractholders, subscribers and enrollees, as well as participating

providers of health care services under the applicant's health plan, in

writing of the application and hearings. In the event that there is an

amendment to the application, additional hearings shall be held with due

notice provided that the superintendent determines that such changes to

the plan are materially adverse to the interests of policyholders,

subscribers or enrollees. Upon receipt of a complete application, the

application and any supporting material submitted to the superintendent

in conjunction with the application shall be deemed to be public records

and shall be made available to the public for inspection during normal

business hours, at no cost, at the applicant's main office within the

state of New York and at the office of the superintendent. Prior to the

hearing date, the applicant shall post its application and all such

supporting material electronically on the internet. The superintendent

shall cause a transcript to be made of each public hearing and such

transcript and any submitted written comments shall become public

records. The superintendent shall similarly promptly provide copies of

transcripts of any hearings held by the superintendent to the

commissioner of health and all members of the board.

(i) Within a reasonable time after receipt of a final plan of

conversion, the superintendent shall render a written decision

determining whether the proposed plan of conversion shall become

effective as filed, shall become effective as modified or shall be

disapproved.

(j) To assist in the review of the proposed plan of conversion, the

superintendent shall be authorized to hire independent financial,

health, legal and other experts and consultants, the reasonable and

necessary costs of which shall be paid by the applicant. The applicant

shall deliver to the superintendent at the time of submission of the

proposed plan of conversion a written undertaking in form and substance

satisfactory to the superintendent and signed by the applicant and by

such other persons as the superintendent may require specifying the

manner in which all costs and expenses incurred in any manner in

connection with the plan of conversion shall be paid or reimbursed. Such

undertaking shall provide for the payment or reimbursement of all

expenses incurred by the superintendent or the department in connection

with the plan of conversion, other than normal operating expenses of the

department.

(k) (1) A charitable organization shall be established for the purpose

of receiving the charitable asset and shall operate as a tax exempt

organization pursuant to section 501(c)(3) of the federal internal

revenue code for the purposes of receiving the charitable asset. Whether

or not the charitable organization is classified as a private foundation

under section 509 of the internal revenue code, as amended or any

comparable provision of any successor law, it shall be subject to the

restrictions and limitations that apply to private foundations in

sections 4941 through 4945 of the federal internal revenue code, as

amended or any comparable provision of any successor law. The

superintendent shall provide in an opinion and decision approving the

conversion for the timely transfer of the charitable asset consistent

with the purposes of this chapter. In the case of the conversion of a

corporation or corporations which occurs after the effective date of the

chapter of the laws of two thousand seven which amended this paragraph,

the superintendent shall provide in an opinion and decision approving

such conversion for the timely transfer of the charitable asset to the

New York state health foundation created pursuant to this subsection and

in compliance with all applicable provisions of this subsection.

(2) The charitable organization shall be governed by a board of

directors composed of nine members, three of whom shall be voting

members and six of whom shall be non-voting members, which shall be

appointed as follows: one voting member and two non-voting members shall

be appointed by each of the governor, the temporary president of the

senate, and the speaker of the assembly. Each member shall have a term

of three years and may be reappointed at the end of said term by the

same person that made the original appointment. A vacancy in the

membership of the board shall be filled for the unexpired portion of the

term provided for by the original appointment by the same person that

made the original appointment. Members may not be officers or employees

of the state or any municipal subdivision thereof. The board of such

charitable organization shall be broadly representative of the community

and include representatives of patient, consumer and public interest

organizations and individuals with expertise in public health, health

care delivery and financing, patient health issues, investments and

philanthropic administration, provided further, no more than three board

members of the entire board shall be representatives from any one

organization or provider group and board vacancies shall be filled from

eligible representatives who are not represented or who are under

represented on the board. The charitable organization's structure shall

provide mechanisms for ongoing community consultation and engagement

including, but not limited to, the establishment of a community advisory

board. A vacancy in the membership of the board shall be filled for the

unexpired portion of the term provided for by the original appointment

by the same person that made the original appointment.

(3) The mission of such charitable organization shall include:

(A) expansion of access to health care by extending health insurance

coverage to state residents who cannot afford to purchase their own

coverage or who have coverage that is inadequate to meet their needs;

(B) expansion and enhancement of access to health care by augmenting

and creating health care programs that deliver services to populations

that are unable to access health care or that improve public health; and

(C) augmentation of its other program priorities by supporting

programs that inform and educate New Yorkers about public health issues

and empower communities to address these issues by becoming more

effective at identifying and articulating health care needs and

implementing solutions.

Programs or initiatives instituted by the charitable organization

shall not neglect the residents or institutions served by the applicant

prior to the conversion.

(4) The members of the board of directors of the charitable

organization shall serve without compensation for their services as

members, but shall be entitled to reimbursement for actual and necessary

expenses incurred in the performance of their official duties. Such

members, except as otherwise provided by law, may engage in private

employment, or in a profession or business.

(5) The members of the board of directors of the charitable

organization and its corporate existence shall continue until there are

no longer any assets or moneys comprising the charitable asset available

for distribution.

(6) The affirmative vote of all three voting members of the board of

directors of the charitable organization shall be necessary for the

transaction of any business or the exercise of any power or function of

such board. Such board may delegate to one or more of its members, or

its agents, such powers and duties as it may deem proper.

(7) The members of the board of directors of the charitable

organization shall have the power to make and execute contracts and all

other instruments, and to exercise such other powers, necessary or

convenient for the exercise of its powers and functions.

In directing investments pursuant to this subparagraph, the board of

directors of the charitable organization shall not be limited by any

restrictions on investments contained in any other section of law,

subject only to the board's obligations and the considerations set forth

above.

(8) (A) Neither the members of the board of directors of the

charitable organization nor any agent or other person or persons acting

on its behalf, while acting within the scope of their authority as

members or agents of the board, shall be subject to any personal

liability resulting from the carrying out of the powers conferred

hereunder; and (B) the provisions of section seventeen of the public

officers law shall apply to members of the board and agents or other

persons acting on its behalf, in connection with any and all claims,

demands, suits, actions or proceedings which may be made or brought

against any of them arising out of any determination made or actions

taken or omitted to be taken in compliance with any obligations under or

pursuant to the terms of this section or section four thousand three

hundred one of this chapter. The provisions of this subparagraph shall

be severable from and shall survive any legal challenge to the legality,

validity, or constitutionality of this section.

(9) The charitable organization receiving the charitable asset agrees

in writing to register and file annual financial reports with the

attorney general in compliance with section 8-1.4 of the estates,

powers, and trusts law and to post its registration filing and annual

reports electronically on the internet.

(10) The charitable organization receiving the charitable asset, its

directors, officers, and staff shall be and will remain independent of

any control or influence by the surviving corporation or other surviving

entity organized for pecuniary profit and its affiliates and successors.

Such requirement shall not prevent the charitable organization from

voting its equity shares in the for-profit organization in accordance

with the voting and shareholders rights agreement entered into by the

board with respect to the public asset and the charitable organization

shall be subject to such voting and shareholders rights agreement and

the asset preservation agreement between the board with respect to the

public asset and the converted corporation. No person who is an officer,

director, or staff member of the applicant at the time such corporation

applies to the superintendent for permission to convert, or thereafter

shall be an officer, director, or staff member of the charitable

organization receiving the charitable asset. No director, officer,

agent, or employee of the applicant or the charitable organization

receiving the charitable asset will receive additional compensation

arising from the conversion transaction.

(11) The charitable organization receiving the charitable asset will

establish formal mechanisms to avoid conflicts of interest and to

prohibit grants benefitting the surviving corporation or other surviving

entity organized for pecuniary profit, or its affiliates or successors,

directors, management, and staff.

(12) Any action or proceeding in which any question arises as to the

validity of any provision in this subsection or in section seven

thousand three hundred seventeen of this chapter, shall be preferred

over all other civil causes except election causes in all courts of the

state of New York and shall be heard and determined in preference to all

other civil business pending therein except election causes,

irrespective of position on the calendar. The same preference shall be

granted upon application of counsel to the board in any action or

proceeding questioning the validity of any provision herein in which he

or she may be allowed to intervene.

(13) To assist in carrying out its functions, the board shall be

authorized to hire independent financial, legal and other experts and

consultants.

(14) Inconsistent provisions of other laws are superseded. Insofar as

any provision herein is inconsistent with the provisions of any other

law, general, special or local, the provisions herein shall be

controlling.

(15) This section, being necessary for the welfare of the state and

its inhabitants, shall be liberally construed so as to effectuate its

purposes.

(l) For the purposes of this section, fair market value shall consist

of either; (i) one hundred percent of the stock that is transferred,

provided that a portion of the shares may be sold in an initial public

offering and that the net proceeds shall be transferred, together with

the remaining unsold shares, (provided further that additional stock may

be sold for fair market value that is transferred to the converted

corporation), or (ii) in the case where one hundred percent of the stock

is not transferred and a public stock offering is not anticipated, an

independent valuation that takes into account market value, investment

or earnings value and not asset value. Within five days of the

superintendent's final determination of the fair market value, the

superintendent shall forward to the attorney general such independent

valuation. The attorney general may, within thirty days after having

received such valuation, provide the superintendent with written

objections to such valuation. The superintendent shall respond to such

written objections within seven days stating either that the

superintendent accepts such objections and has modified his or her

determination accordingly, or that the superintendent rejects such

objections. The attorney general may, thereafter, pursue an action in

supreme court seeking to have the valuation adjusted in accordance with

the attorney general's objections. Such action shall be preferred over

all other civil causes except election causes in all courts of the state

of New York and shall be heard and determined in preference to all other

civil business pending therein except election causes, irrespective of

position on the calendar.