THE ,*~~-~RNEY GENERAL 

OF TEXAS 

March 17. 1959 

Hon. William A. Harrison Opinion No. WW-574 

Commissioner,of Insurance 

State Board of Insurance 

International Life Building 

Austin, Texas 

Dear Sir: 

Re: Propriety of a merger or consolidation of life insurance companies 

where the value of home office property in the resultant company exceeds 

the limits provided in Article 3.40, 

Texas Insurance Code. 

By letter dated January 28, 1959, you have asked this office for an 

optnion concerning the effect of merger, consolidation or reinsurance agreements upon the provisions of Article 3.40 Limiting the acquisition of and the 

investments in real estate by life insurance companies. This oplnton will 

be directed solely to one portion of this request, the balance of e,uch request 

still being under consideration by this department. The fact situation to be 

covered by this opinion is set forth in your request in the fottowing language: 

“NOW assume a situation in which Company X 

desires to ‘. . . . . . . i .,’ ‘merge,’ or ‘consolidate.’ 

as those terms are described above, with Company Y. 

Company X was incorporated prior to September 6, 

1955. and owns a home office building which comprises approximately 80% of its total admitted assets. This home’office building is greatly in excess 

of the statutory percentages permitted by Article 

3.40, but is exempt under the provisions of the statute as it was owned prior to the effective date thereof. 

‘Company Y does not have a home offlce bullding, and therefore is subject to the limitations in Article 3.40. After a . . . . . . . merger, the surviving corporate structure would be Company Y. After a ccmsol~- 

dation. of course,: the surviving corporate structure 

would be a brand new corporation, Company 2, which 

would be made up of the combined assets of Company X 

and Company Y. In each of the i two] situations,. . . ., 

merger or consolidation, the home office buildlng of 

Company X would constitute approximately 75% of the 

total admitted assets of the surviving corporation, and 

thereby be in excess of the statutory limits. We respectfully request your opinion on the following questions : 
Honorable Wlliiam A. Harrison, page 2 (WW-574) 

‘(1) If Company X were to be merged into 

Company Y, with Company Y to be the survivor, 

would the home office building of Company X be an 

obstacle to such a merger? Inother words, would 

Company Y be entitled to the statutory exemption 

and prlvilege granted by the Legislature to Company X? Or would Company Y be required to dlspose of the bullding as it conflicted with Article 

3.40? 

“(2) If Company X and Company Y were 

to consolidate into new Company 2, would the” 

building of Company’X be an obstacle to such con- ’ 

soildatlon? In other words, would the brand new 

corporation, Company Z, be entltied to the prlvliege granted by the Legislature to Company X7 

Or would Company 2 be required to dispose of 

the buildlng as it was in excess of the statutory 

limits 7 ” 

The question involved, in the,,portion,of~ your request here under 

-..- . . consideration is whether the(power of life insurance companies to merge 

or consoildate as provided in Articles 21.25 and 2,1.26 of the Texas Insurance Code of 1951 is limited or qualified by the provisions of Artldle 

3.40 and in particular paragraph l(b) thereof and, if so, the extent of such 

ilmitation or quaiiflcatlon. 

Article 3.40 of the ,Texas Insurance Code restricts life insurance 

companies in the atqulsitlon and holding of real estate. Such companies 

may “securei hold and convey real estate” only for the “purposes and 

in the “manner” provided In said article. One, of the purposes permitted 

1s: “l(a). One building site and office bulldlng for lts accommodation in 

the transaction of ,lts buslness and for lease and rental;. , .” This restriction has been lri the insurance laws for many years and the specific 

langua 

1 

e above quoted appears to have been employed at least as early 

as 190 . (Acts 1909, p. 192, ch.108, sec.11) 

In 1956-Article 3.40 was amended by addlng the language now set 

forth in paragraphs I(b) and l(c). These’paragraphs further restrict life 

insurance companies by llmltlng the total investments that can be made 

in *home office” property (for convenience the property described in 

Setitlon l(a) of Article 3.40 wilt be referred to in this manner) in relation 

to the “admitted assets” of such~company. Paragraph~l(b) as added, Acts 

1955, 54th Leg,, p, 916, ch. 363, sec., 13’, IS as follows: ‘, 

“l(b).~ No such company shall (after the effective date of this Act) ,make any~lnvestment in the 

properties described in Paragraph l(a) above lf, 

,,’ 
Honorable William A. Harrison, page 3 (WW-574) 

after making such investment, the total investment 

of the company in such properties is in excess of 

thlrty-three and one-third (33 l/3%) percent of its 

admitted assets as of December 31st next preceding the date of such investment; provided, however, 

that such investment may be increased to as much 

as fifty (50%) percent of the company’s admitted 

assets upon advance approval by the Board of Insurance Commissioners; provided further, that 

such investment may be further increased if the 

amount of such additional increase is paid for only 

from surplus funds and is not included as an admitted asset of the company. It is especially provided, 

however, that these limitations shall not affect any 

bona fide investment in such properties actually 

made by contract or otherwise for reasonable and 

adequate consideration prior to the effective date 

of -_ this _-_- __- Act.? __ 

Under the fact situation in question Company X has a home office 

property acquired before the effective date of this Act and therefore even 

though the value of thls property is in excess of the statutory percentages 

stated in paragraph l(b), Company X’s investment in the building is, nevertheless, proper in view of the provisions of paragraph l(b), first, that the 

limitations involved apply to an investment made after the effective date 

of the Act, and second, the proviso in the last sentence of this paragraph 

that the limitations of paragraph l(b) should not “affect any bona fide investment. . .made. . .prior to the effective date of this Act”. Since, 

under the two fact situations given, X’s identity will either be merged~ 

MO Y or into a new Company Z, the question is whether the exemption 

previously extending to Company X may be utilized by Company Y ln case 

of a merger or Company Z in case of a consoltdation and, stated differently. 

whether the acquisition of such home office property with a value in excess 

of the permissible percentages constitutes an investment in excess of the 

percentages permitted by paragraph l(b). The second principal questiop is, 

assuming a violation in either of the two factual circumstances, would the 

prospect of such a violation be a legal obstacle to the merger or consolldation proposed. 

Our conclusion is that the acquisltitin of the home office property 

by Company Y in fact situation number one in a merger and by Company Z 

in fact sltuation number two In a consolidation are proper and do not violate the provisions of paragraph l(b) of Article 3.40 and, therefore, would 

not be a legal obstacle to stih proposed merger or consolidation. 

Authority for insurance companies to merge or consolidate IS contained in Articles 21.25 and 21.26 of the Texas Insurance Code. These 'provisions in substantially the same language were introduced lnto the insurance 
Honorable William A. Harrison, page 4 (WW-574) 

laws of this State in 1919. While the term “merger* 1s not mentioned, 

it 1s clear that provision for ymerger” 1s made as well as for “consolidation” as those terms are commonly used with reference to the affairs 

of corporations. The prwlsions of Article 21.26 evidence that it was 

contemplated by the Legislature that either the surviving corporation 

in case of a merger or the newly created corporation in consolidation 

would take over all of the assets of the two corporations. For example, 

Section 1 of Article 21.26 provides in part: 

*Such companies proposing to consolidate may 

unite their assets. or any part thereof, and become incorporated in one body. . .* 

Further, Section 2 applying to merger states in part: 

“One company may take over ail the assets of 

‘the other companies proposing to consolidate. . .” 

In our view, under the fact sftuation covered there has been no 

‘investment” or, more particularly, no Ylnvestment of company funds* 

occasioned by the transaction --there has simply been In the terms of 

Article 21.26 a Yuniting of the assets” of the two companies. Further, 

the last sentence of paragraph l(b) expressly provides that the limltations of ~this paragraph should not affect any bona fide investment made 

prior to the effective date of the Act. It does not seem reasonable in 

view of the language utilized by the Legislature ln paragraph l(b) that 

by adding this paragraph in 1955 the Legislature intended to restrict 

the then existing opportunities of life insurance companies to merge and 

consolidate under Articles 21.25 and 21.26. 

We would further point out that under the fact situations mentioned if in a merger X Company (the company with the building) should 

be the surviving company, there could be no reasonable contention that 

the provisions of Article 3.40 have been violated. From the standpoint 

of the objectives intended to be regulated by Article 3.40, or for that 

matter of insurance regulation in general, there does not appear to be 

any significant distinction whether the end result is X Company or Y 

Company or some new Company Z . The significant result from the 

standpoint of insurance regulation of any form of merger or consolidation is that two or more insurance companies have united their assets 

and will henceforth conduct their affairs as one corporation. Recognieing the rule that the Legislature should not be presumed to have created 

arbitrary distinctions between persons and corporations distinctive 

principally in form strengthens our conclusion that the prohibition against 

investment of funds in home office property in excess of the snecif~ied 

Iimlts was not intended to apply to an acquisition of such property in a 

merger or consolidation such as is described in the portlon of your request 

cwered by this opinion. By this construction, full meaning is given to each 

of the portions of the Code discussed, i.e., paragraph I(b) ofArtlcle 3.40 

and Articles 21.25 and 21.26. 
Honorable William A. Harrison, page 5 (WW-574) 

SUMMARY 

Merger or consolidation of two domestic 

Ilfe insurance companies regulated by 

Chapter 3 of the Texas Insurance Code 

is not made unlawful by the fact that the 

value of the home office property obtained from one such company exceeds 

the percentages in paragraph l(b) of 

Article 3.40, Texas Insurance Code, of 

permitted investment in home office 

property where such investment was 

made by the company prior to the effective date of the 1955 amendment to 

Article 3.40, and the resulting company 

may continue to hold such property. 

Very truly yours, 

WILL WILSON 

Attorney General of Texas 

BY 

Fred B. Werkentbln 

Assistant 

FBW:jg 

APPROVED: 

OPINION COMMITTEE: 

Geo. P. Blackburn, Chairman 

J. Mllton Richardson 

Marvin H. Brown, Jr. 

Tom I. McFarllng 

REVIEWEDFORTHEATTORNEY GENERAL 

BY: 

W. V. Geppert