### 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 thevalue ofhome office property in the resultant company exceeds the limits provided inArticle 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,uchrequest still being under consideration by this department. The fact situation tobe covered by this opinion is set forth in your request in the fottowing language:

“NOWassume 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 inexcess of thestatutory percentages permitted byArticle 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 ahome offlce bullding, andtherefore 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 itwo] 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 thefollowing questions:Honorable Wlliiam A. Harrison, page 2 (WW-574)

‘(1) If Company X were tobe merged into Company Y, with Company Y tobe the survivor, would thehome office building of Company X be an obstacle tosuch a merger? Inother words, would Company Y be entitled to the statutory exemption and prlvilege granted by the Legislature to CompanyX? Or would Company Ybe required todlspose 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 tosuch con- ’ soildatlon? In other words, would the brand 

### new corporation, Company Z, be entltied to theprlvliege granted by the Legislature to Company X7 Or would Company 2 be required to dispose of thebuildlng 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 inArticles 21.25 and 2,1.26of the Texas Insurance Code of 1951 is limited or qualified by theprovisions ofArtldle 3.40 and in particular paragraph l(b) thereof and, if so, the extent of such ilmitation or quaiiflcatlon.

Article 3.40 ofthe,Texas Insurance Code restricts life insurance companies in the atqulsitlon andholding of real estate. Such companies may “securei hold and convey real estate” only for the “purposes and in the “manner” provided Insaid article. One,of thepurposes permitted 1s: “l(a). One building site and office bulldlng for lts accommodation in the transaction of ,ltsbuslness and for lease and rental;. , .” This restriction has been 

### lrithe insurance laws for many 

### years and the specific langua1e above quoted appears tohave 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) ofArticle 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, 54thLeg,, p, 916, ch. 363, sec., 13’,ISas 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 ofthe 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 theBoard 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 anadmitted 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 thefact situation inquestion Company Xhas ahome office property acquired before the effective date of this Act and therefore even though thevalue of thls property is in excess ofthe statutory percentages stated in paragraph l(b), Company X’s investment in thebuilding is, nevertheless, proper inview of the provisions ofparagraph l(b), first, that the limitations involved apply toan investment made after the effective date of theAct, and second, theproviso 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 anew 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 ofa consoltdation and, stated differently. whether the acquisition of such home office property with avalue 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 aviolation in either of the two factual circumstances, would the prospect of such aviolation be a legal obstacle to the merger or consolldation proposed.

Our conclusion is that the acquisltitin of thehome office property by Company Y in fact situation number one in a merger andby Company Z in fact sltuation number two Ina consolidation are proper and donot violate the provisions of paragraph l(b) ofArticle 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 inArticles 21.25 and 21.26 of the Texas Insurance Code. These 'provisions in substantially the same language were introduced lnto the insuranceHonorable William A. Harrison, page 4 (WW-574)

laws of this State in 1919. While the term “merger* 1snot mentioned, it 1sclear that provision for ymerger” 1smade as well as for “consolidation” as those terms are commonly used with reference to the affairs of corporations. The prwlsions ofArticle 21.26 evidence that it was contemplated by theLegislature that either the surviving corporation in case ofa merger or the newly created corporation in consolidation would take over all of the assets of the two corporations. For example, Section 1ofArticle 21.26 provides in part:

*Such companies proposing to consolidate may unite their assets. or any part thereof, andbecome incorporated in one body.

. .* Further, Section 2 applying tomerger states inpart:

“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 ofparagraph l(b) expressly provides that the limltations of~thisparagraph should not affect any bona fide investment made prior to the effective date of theAct. It does not seem reasonable in view of the language utilized by the Legislature ln paragraph l(b) that by adding this paragraph in 1955the Legislature intended torestrict the then existing opportunities of life insurance companies tomerge and consolidate under Articles 21.25 and 21.26.

We would further point out thatunder the fact situations mentioned if in a merger X Company (the company with the building) should be the surviving company, there could be

### noreasonable contention that the provisions ofArticle 3.40 have been violated. From the standpoint of the objectives intended tobe regulated byArticle 3.40, or for that matter ofinsurance regulation in general, there does not appear tobe 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 ofany 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 theLegislature should notbe presumed tohave created arbitrary distinctions between persons and corporations distinctive principally inform strengthens our conclusion that the prohibition against investment offunds in home office property in excess ofthe snecif~ied Iimlts was not intended to apply to anacquisition of such property in a merger or consolidation such as is described in theportlon ofyour request cwered by this opinion. By this construction, full meaning is given to each ofthe portions ofthe Code discussed, i.e., paragraph I(b) ofArtlcle 3.40 andArticles 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

### ofthe Texas Insurance Code is not made unlawful by thefact that the value of thehome office property obtained from one such company exceeds thepercentages in paragraph l(b) of Article 3.40, Texas Insurance Code, of permitted investment inhome office property where such investment was made by the company prior to theeffective date ofthe 1955amendment to Article 3.40, and the resulting company may continue tohold such property. Very truly yours, WILL WILSON Attorney General ofTexas



### 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