Securities and Exchange Commission (“Commission”).
Notice of an application for an order under sections 6(c) and 6(e) of the Investment Company Act of 1940 (the “Act”) exempting an escrow account established by the applicant from all provisions of the Act, except section 9 and sections 36 through 53 of the Act, and the rules and regulations under those sections.
SUMMARY OF APPLICATION:
Applicant requests an order on behalf of an escrow account (the “Escrow Account”) to be established in connection with applicant's conversion to a stock life insurance company and its subsequent acquisition by Anthem Insurance Companies, Inc. (“Anthem”). The Escrow Account will hold a portion of the cash consideration from the sale pending the resolution of a specified litigation matter involving applicant. The order would exempt the Escrow Account from certain provisions of the Act and the rules and regulations under those provisions.
Applicant: Blue Cross and Blue Shield of Kansas, Inc. (the “Company”).
Filing Date: The application was filed on November 23, 2001 and amended on December 10, 2001.
Hearing or Notification of Hearing: An order granting the application will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Commission's Secretary and serving applicants with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on January 7, 2002, and should be accompanied by proof of service on applicants, in the form of an affidavit or, for lawyers, a certificate of service. Hearing requests should state the nature of the writer's interest, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the Commission's Secretary.
Secretary, Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Applicant: Kenneth J. Berman, Debevoise & Plimpton, 555 13th Street, NW., Washington, DC 20004.Start Further Info
FOR FURTHER INFORMATION CONTACT:
Jaea F. Hahn, Senior Counsel, at (202) 942-0614, or Nadya B. Roytblat, Assistant Director, at (202) 942-0564 (Division of Investment Management, Office of Investment Company Regulation).End Further Info End Preamble Start Supplemental Information
The following is a summary of the application. The complete application may be obtained for a fee at the Commission's Public Reference Branch, 450 Fifth Street, NW., Washington, DC 20549-0102 (tel. 202-942-8090).
1. The Company is a Kansas mutual life insurance company that proposes to convert to a stock life insurance company (the “Conversion”) pursuant to a plan of conversion (the “Plan”) in accordance with Kansas law. As a mutual life insurance company, the Company has no authorized, issued or outstanding capital stock. The policyholders of the Company, through the purchase of insurance policies and contracts, acquire insurance coverage and “Membership Interests” which consist principally of the right to vote in the election of directors of the Company and the right to share in any residual value of the Company if the Company were to undergo liquidation in the future.
2. Pursuant to an Alliance Agreement between the Company and Anthem, an Indiana stock insurance company (the “Alliance Agreement”), Anthem or an affiliate of Anthem will acquire the Company upon the Company's Conversion (the “Acquisition”). On the date of effectiveness of the Conversion and the closing of the Acquisition (the “Conversion Date”), the Membership Interests of the Company policyholders will be extinguished, the Company's policyholders eligible to vote and receive consideration in the Conversion (“Eligible Policyholders”) will be entitled to receive consideration as provided in the Alliance Agreement and the Plan, and the Company will become a direct or indirect wholly-owned subsidiary of Anthem.
3. The Company's board of directors has adopted the Plan. The Plan has been submitted to the Commissioner of Insurance of the State of Kansas (the “Commissioner”) for approval. Article 40 of Chapter 40 of the Kansas Statutes Annotated (the “Kansas Conversion Law”) requires the Commissioner to hold a public hearing at which the Company's policyholders would have the right to appear and be heard. The Commissioner must approve the Plan if the Commissioner finds that (a) the Plan is fair and equitable to policyholders, (b) the Plan complies with the provisions of the Kansas Conversion Law, (c) the Plan does not unjustly enrich any director, officer, agent or employee of the Company and (d) the Company would meet minimum requirements to be issued a certificate of authority by the Commissioner to transact business in Kansas and the continued operations of the Company would not be hazardous to existing or future policyholders or the public.
4. Eligible Policyholders also must approve the Plan, including the establishment of the Escrow Account. As required by the Kansas Conversion Law, Eligible Policyholders will have received from the Company a comprehensive information booklet Start Printed Page 65012describing the Plan, including all material aspects of the Escrow Account, at least 30 days prior to a special meeting to be held on January 11, 2002 at which the Eligible Policyholders will be required to vote on the Plan. The information booklet was reviewed and approved by the staff of the Kansas Insurance Department.
5. Under the proposed transaction, Eligible Policyholders will be entitled to receive $142 million of the $190 million purchase price paid by Anthem for the stock of the Company upon the Conversion, with the remaining $48 million of the purchase price deposited into the Escrow Account on the Conversion Date. The Escrow Account will be established to address issues arising from a subpoena, dated February 28, 2001, that the Company received from the Office of the Inspector General, U.S. Department of Health and Human Services (the “Contingent Litigation Matter”). The amounts held in the Escrow Account will be used to pay all costs, expenses and liabilities related to the Contingent Litigation Matter, pay related taxes which might become payable, and pay all costs and expenses of the Escrow Account. Any remaining amounts will be distributed to Eligible Policyholders following final resolution of the Contingent Litigation Matter.
6. The Escrow Account will be a separately designated investment account established on or prior to the Conversion Date pursuant to an escrow agreement (the “Escrow Agreement”) to be entered into among the Company, Anthem and an escrow agent (the “Escrow Agent”). The Escrow Agent will be a bank, savings and loan association or trust company. The sole purpose of the Escrow Account will be to liquidate its assets and distribute the income to the Eligible Policyholders in as prompt and orderly a fashion as possible following the resolution of the Contingent Litigation Matter. Amounts held in the Escrow Account will be invested by the Escrow Agent solely in obligations of, or obligations fully guaranteed as to timely payment of principal and interest by, the United States of America or an agency or instrumentality thereof with a maturity date of one year or less from the date of the investment (“Government Securities”). The Escrow Agent will not have the authority to borrow funds from, or on behalf of the Escrow Account, sell securities to, or acquire securities from, the Escrow Account, or, acquire any other assets except for Government Securities. The rights of the Eligible Policyholders to amounts held in the Escrow Account will not be represented by any form of certificate or instrument and will not be transferable or assignable except by will, the laws of intestacy or by other operation of law. The Commissioner will retain regulatory oversight over the Escrow Account, including the investment and distribution of the assets held in the Escrow Account to ensure that the interests of Eligible Policyholders are protected.
7. The Escrow Account will continue until the Contingent Litigation Matter has been finally disposed of by binding settlement, court order or otherwise, all tax amounts have been finally determined, all amounts that are reasonably recoverable from any insurer in respect of the Contingent Litigation Matter are recovered, and all amounts in the Escrow Account have been paid or distributed by the Escrow Agent in accordance with the Escrow Agreement and the Alliance Agreement. Any amounts remaining in the Escrow Account will be distributed to Eligible Policyholders in accordance with the distribution principles set forth in the Plan.
Applicant's Legal Analysis
1. Section 3(a)(1)(A) of the Act defines the term “investment company” to include an issuer that is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Because the assets held in the Escrow Account will be invested exclusively in Government Securities and the Escrow's sole source of income will be investment income attributable to such securities, applicant states that it is possible that the Escrow Account could be deemed to be an investment company as defined in section 3(a)(1)(A).
2. Section 6(c) of the Act provides, in relevant part, that the Commission may exempt any person or persons, or any transaction or transactions, from any provisions of the Act if and to the extent that such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act.
3. Section 7 of the Act generally prohibits investment companies that are not registered under section 8 of the Act from selling or redeeming their securities. Section 6(e) of the Act provides that, in connection with any order exempting an investment company from any provision of section 7, the Commission may specify that certain provisions of the Act will be applicable to the company and other persons dealing with the company as though the company were registered under the Act. Applicant contends that the costs involved in registering and operating the Escrow Account under the Act are not necessary to protect the interests of the Eligible Policyholders and would reduce the amount of cash consideration actually distributed to the Eligible Policyholders. Because of the limited nature of the Escrow Account's activities, the Company believes that most provisions of the Act are not relevant to the Escrow Account. The Escrow Account is being organized for a limited purpose, will have a limited life, and will be subject to the Commissioner's oversight. Moreover, management of the Escrow Account's assets by the Escrow Agent will be severely restricted. Accordingly, applicant states that the requested order meets the requirements of section 6(c) of the Act.
Applicant agrees that any order granting the requested relief shall be subject to the following conditions:
1. The Escrow Account will not hold itself out as being an investment company, but instead will hold itself out as an escrow account in the process of liquidating and distributing its assets to the Eligible Policyholders.
2. The Escrow Account will be limited to making temporary investments in Government Securities.
3. The Escrow Account will terminate, in accordance with the terms of the Escrow Agreement, upon final disposition of the Contingent Litigation Matter by binding settlement, court order or otherwise, final determination of certain tax matters, reasonable recovery from any insurer of costs associated with the Contingent Litigation Matter and distribution of all amounts in the Escrow Account by the Escrow Agent.Start Signature
For the Commission, by the Division of Investment Management, under delegated authority.
Margaret H. McFarland,
1. The subpoena seek documents in connection with an investigation of possible improper claims against Medicare pursuant to 5 U.S.C. App. 3 Section 6(a)(4).Back to Citation
2. Applicant notes that the last sentence of section 7(b) of the Act provides that the broad injunction against actions by unregistered investment companies contained in section 7 of the Act does not apply to “transactions of an investment company which are merely incident to its dissolution.” Applicant states that due to the nature of the Contingent Litigation Matter, it is likely that the life of the Escrow Account may need to extend beyond three years and that applicant therefore may be unable to rely on this provision in section 7(b).Back to Citation
[FR Doc. 01-30977 Filed 12-14-01; 8:45 am]
BILLING CODE 8010-01-P