Conversion Plans

Background

In 1998, the General Assembly established a “procedure for a medical, hospital, or dental service corporation to convert to a stock accident and health insurance company or stock life insurance company. . ..” N.C.G.S. § 58-65-131(a). The General Assembly specifically determined that if a company converts, “the conversion plan must provide a benefit to the people of North Carolina equal to one hundred percent (100%) of the fair market value of the corporation.” N.C.G.S. § 58-65-131(a). In addition, the General Assembly, through N.C.G.S. § 58-65-133, authorized the creation and operation of a foundation to “receive the fair market value of the corporation . . .when the corporation converts.” The essential purpose of the foundation is to promote the health of the people of North Carolina. N.C.G.S. § 58-65-133(b).

Under N.C.G.S. § 58-65-131(f), a plan of conversion submitted to the Commissioner for his approval “shall state with specificity . . . the terms and conditions of the proposed conversion. . ..” Terms and conditions listed in N.C.G.S. § 58-65-131(f) include:

. . .

(5)

A statement describing the manner in which the plan provides for the protection of all existing contractual rights of the corporation’s subscribers and certificate holders to medical or hospital services or the payment of claims for reimbursement for those services.

. . .

(8)

The business plan of the new corporation, including, but not limited to, a comparative premium rate analysis of the new corporation’s major plans and product offerings, that, among other things, compares actual premium rates for the three-year period before the filing of the plan for conversion and forecasted premium rates for a three-year period following the proposed conversion. This rate analysis shall address the forecasted effect, if any, of the proposed conversion on the cost to policyholders or certificate holders of the new corporation and on the new corporation’s underwriting profit, investment income, and loss and claim reserves, including the effect, if any, of adverse market or risk selection upon these reserves. Information provided under this subsection is confidential pursuant to G.S. 58-19-40.

(9)

Any conditions, other than approval of the plan of conversion by the Commissioner, to be fulfilled by a proposed date upon which the conversion would become effective.

(10)

The proposed articles of incorporation and bylaws of the Foundation, containing the provisions required by G.S. 58-65-133(h).

(11)

Any proposed agreement between the Foundation and the new corporation, including, but not limited to, any agreement relating to the voting or registration for sale of any capital stock to be issued by the new corporation to the Foundation.

N.C.G.S. § 58-65-132(a) authorizes the Commissioner to approve a conversion plan if he finds, based on substantial evidence, that the plan meets certain standards, including the following:

(2)

Upon conversion, the new corporation will meet the applicable standards and conditions under this Chapter, including applicable minimum capital and surplus requirements.

(3)

The plan of conversion adequately protects the existing contractual rights of the corporation’s subscribers and certificate holders to medical or hospital services and payment of claims for reimbursement for those services.

(4)

No director, officer, or employee of the corporation will receive:

a.

Any fee, commission, compensation, or other valuable consideration for aiding, promoting, or assisting in the conversion of the corporation other than compensation paid to any director, officer, or employee of the corporation in the ordinary course of business; or

b.

Any distribution of the assets, surplus, capital, or capital stock of the new corporation as part of a conversion.

(5)

The corporation has complied with all material requirements of this Chapter, and disciplinary action is not pending against the corporation.

(6)

The plan of conversion is fair and equitable and not prejudicial to the contractual rights of the policyholders and certificate holders of the new corporation.

(7)

The plan of conversion is in the public interest. The Commissioner shall find that the plan is in the public interest only if it provides a benefit for the people of North Carolina equal to the value of the corporation at the time of conversion, in accordance with the criteria set out in this subdivision. In determining whether the plan of conversion is in the public interest, the Commissioner may also consider other factors, including, but not limited to, those relating to the accessibility and affordability of health care. The Commissioner must determine that the plan of conversion meets all of the following criteria:

a.

Consideration, determined by the Commissioner to be equal to one hundred percent (100%) of the fair market value of the corporation, will be conveyed or issued by the corporation to the Foundation at the time the new corporation files its articles of incorporation. If the consideration to be conveyed is all of the common stock of the new corporation that is then issued and outstanding at the time of conversion, and there is no other capital stock of any type or nature then outstanding, it is conclusively presumed that the Foundation will acquire the fair market value of the corporation.

b.

At any time after the conversion, the new corporation may issue, in a public offering or a private placement, additional shares of common stock of the same class and having the same voting, dividend, and other rights as that transferred to the Foundation, subject to the applicable provisions of Chapter 55 of the General Statutes and any voting and registration agreements.

(8)

The plan of conversion contains a proposed voting agreement and registration

agreement between the Foundation and the proposed new corporation that meets the requirements of G.S. 58-65-133.

If the Commissioner makes all of the findings required by N.C.G.S. § 58-65-132(a) and approves the conversion, he must issue a certificate of authority to the new corporation.

After issuance of the certificate of authority as provided in subsection (a) of this section, the new corporation shall no longer be subject to this Article and Article 66 of this Chapter but shall be subject to and comply with all applicable laws and regulations applicable to domestic insurers and Chapter 55 of the General Statutes. . . . The legal existence of the corporation does not terminate, and the new corporation is a continuation of the corporation. The conversion shall only be a change in identity and form of organization. (Emphasis added.)

N.C.G.S. § 58-65-132(b).

Commissioner’s Authority to Impose Conditions

“An issue as to the existence of power or authority in a particular administrative agency is one primarily of statutory construction.” In the Matter of a Declaratory Ruling by the North Carolina Commissioner of Insurance, 134 N.C. App. 22, 26, 517 S.E.2d 134 (1999) (citing State ex rel. Commissioner of Insurance v. North Carolina Rate Bureau, 300 N.C. 381, 269 S.E.2d 547 (1980)).

The guiding principle in construing statutes is to ensure that the purpose of the Legislature in enacting the law, sometimes referred to as legislative intent, is accomplished. The best indicia of that legislative purpose are “the language of the statute, the spirit of the act, and what the act seeks to accomplish.”

Id., 134 N.C. App. at 27, 517 S.E.2d at 134.

Here, the General Assembly has granted the Commissioner the express power to approve a conversion plan if he finds that the plan has a series of prescribed characteristics. N.C.G.S. § 58-65132(a). The statutes, however, are silent regarding the power to approve with conditions. Thus, the issue to be resolved is whether the General Assembly intended the express power to approve also to include the power to approve with conditions.

Courts throughout the country have construed the express power to approve to include the implied power to approve with conditions. As the United States Supreme Court explained in Southern Pacific Co. v. Olympian Dredging Co., 260 U.S. 205, 208, 43 S. Ct. 26, 67 L. Ed.213 (1922): “[T]he power to approve implies the power to disapprove and the power to disapprove necessarily includes the lesser power to condition an approval.” See also, Surf Paradise v. Arizona Racing Comm’n, 160 Ariz. 241, 772 P.2d 595 (1989) and Mello v. License Comm’n, 435 Mass. 532, 759 N.E.2d 1201 (2001). While our courts have never specifically cited this principle, they have applied it. In Golden Rule Ins. Co. v. Long, 113 N.C. App. 187, 439 S.E.2d 599 (1993), the insurer requested an increase in rates and the Commissioner conditioned approval on a “one year guarantee of rates” and “anniversary date implementation restrictions.” The company contested the order, arguing that the Commissioner lacked authority to conditionally approve a rate increase. The Court of Appeals rejected that argument. Id., 113 N.C. App. at 195-96, 439 S.E.2d at 603-604.

We find nothing in the pertinent statutes to indicate that the General Assembly intended that its express grant of power to the Commissioner to approve a plan of conversion would not also carry with it the lesser power to approve with conditions. Notably, the breadth and scope of the issues to be addressed by the Commissioner in making findings approving a plan of conversion, including “public interest” findings, strongly suggest that the General Assembly intended to confer on the Commissioner broad powers to fulfill his obligations, including the power, if needed, to approve a conversion plan with conditions.

Conditions Imposed Are Subject to Limitation

We must now examine whether the conditions that may be imposed by the Commissioner are subject to limitation. In our opinion, the Commissioner’s power to impose conditions on his approval of a plan of conversion is primarily limited by the familiar principle that administrative agencies only have those powers expressly conferred by the General Assembly and those implied powers reasonably necessary to carry out those express powers. See In re Appeal from Civil Penalty, 324 N.C. 373, 379 S.E. 2d 30 (1980). The manner in which this limitation applies here is illustrated by State ex rel. Commissioner of Insurance v. North Carolina Rate Bureau, 75 N.C. App. 201, 331, S.E.2d 124 (1985). In that case the Commissioner approved an increase in residential, farmowner insurance rates on the condition that the members of the North Carolina Rate Bureau file for a decrease in the rates for commercial farmowner insurance. The North Carolina Rate Bureau lacked authority over the regulation of commercial farmowner rates. The Court eliminated the condition and approved the rates, reasoning that it was erroneous to base approval on a condition that was not within the authority of the North Carolina Rate Bureau.

Here, the General Assembly has set forth both the broad goals any plan of conversion must meet, N.C.G.S. § 58-65-131(a), and the specific findings the Commissioner must make regarding the plan’s attributes before it may be approved. N.C.G.S. § 58-65-132(a). Any conditions imposed by the Commissioner, therefore, must be reasonably related (a) to the achievement of the broad

goals for the plan of conversion stated by the General Assembly or (b) to the Commissioner’s duty to assure through written findings that the plan has the attributes prescribed by the General Assembly. Conditions that fail to meet this standard may be ultra vires.

The foregoing limitation relates to the subject matter of any condition the Commissioner may establish on his approval of a conversion plan. An additional limitation may also apply to the Commissioner’s authority to enforce conditions he may establish on his approval of a plan. This concern would arise in the case of a conditional approval that had the following or similar format:

The plan is approved on condition that the company meet goal “x” for a period of two years from the date of approval. Upon the failure of the company to meet this goal, approval shall terminate and the company shall revert to its prior status.

To the extent a condition in this format would seek to remedy the breach of a condition by revoking approval of a change in a company’s status from nonprofit to for profit, such condition may be in excess of the powers the General Assembly intended to grant the Commissioner in two respects and thus, perhaps, ultra vires. First, such a condition would appear inconsistent with the legislature’s apparent intention that the Commissioner’s approval of a plan is not revocable. See

N.C.G.S. § 58-65-132(b) (after approval a company is subject only to the for profit corporation act and the general insurance laws). Similarly, such a condition would appear inconsistent with the legislature’s apparent intention to enforce any breach of conditions through an action by the Attorney General. See N.C.G.S. 58-65-132(d) (expressly preserving the power of the Attorney General “to seek a declaratory judgment or to take other legal action to protect or enforce the rights of the public in the corporation”). This is not to say that no condition may survive beyond the effective date of the conversion; it is only to say that any breach of such a condition would only be enforceable through an action for a declaratory judgment and for an injunction requiring compliance with the condition.

We trust our views will be of assistance to you and the Commissioner. If there are specific conditions you wish us to address, please advise us.

Sincerely,

Reginald L. Watkins Senior Deputy Attorney General

John R. Corne Special Deputy Attorney General

Ted R. Williams Special Deputy Attorney General

cc: Robin Hinson Cynthia Shoss