2023 California Code › Insurance Code - INS › DIVISION 2 - CLASSES OF INSURANCE › PART 1 - FIRE AND MARINE INSURANCE › CHAPTER 4 - General Mutual Insurers › ARTICLE 10 - Conversion of an Incorporated Medical Malpractice Mutual Insurer into an Incorporated Stock Insurer › Section 4097.12.

4097.12. (a) Upon the effective date of a plan of conversion in accordance with Section 4097.05, the mutual insurer immediately becomes a stock corporation, the membership interests and rights in surplus of its members are extinguished, the members of the mutual insurer immediately become members of the mutual holding company and are granted rights in surplus in the mutual holding company equivalent to those rights in surplus previously held in the converted company, all of the voting stock initially issued by the converted insurer is owned by the stock holding company, and all of the voting stock initially issued by the stock holding company is owned by the mutual holding company. Except for the membership interests in the mutual insurer, which become membership interests in the mutual holding company, nothing herein is intended to, nor shall eliminate, curtail or otherwise diminish the contract rights of policyholders of a converted company. The stock holding company may thereafter, subject to compliance with Article 8 (commencing with Section 820) of Chapter 1 of Part 2 of Division 1, issue securities to other persons. After the effective date, owners of policies that are issued by a stock insurer that has been converted from a mutual insurer pursuant to proceedings under this article shall become members of the mutual holding company immediately upon issuance of the policies, except that owners of a reporting endorsements issued by the insurer that provide strictly tail coverage on expired claims made policies shall not be members of the mutual holding company. Any person may be a member of a mutual holding company.
(b) From the effective date, the mutual holding company shall hold at least 51 percent of the issued and outstanding voting stock of the stock holding company and the stock holding company thereafter shall at all times hold all of the issued and outstanding voting stock of the converted insurer. The stock holding company may issue additional voting stock, and securities convertible into voting stock, to the mutual holding company and to other persons if, in the aggregate, the voting stock of the stock holding company held by the mutual holding company is not less than 51 percent of the issued and outstanding voting stock of the stock holding company. For purposes of the 51 percent limitation, any issued and outstanding securities of the stock holding company that are convertible into voting stock are considered issued and outstanding voting stock.
(c) From the effective date, the mutual holding company’s equity interest in the stock holding company shall not be less than 51 percent of the total stockholders’ equity in the stock holding company. For purposes of the 51 percent limitation, any issued and outstanding securities of the stock holding company that are convertible into equity securities, whether voting or nonvoting, shall be considered stockholders’ equity. Debt securities that include a default contingency conversion interest shall not be considered stockholders’ equity for compliance with the foregoing limitation.
(d) The commissioner shall retain jurisdiction over the mutual holding company pursuant to this article. For purposes of Section 1215.5, the mutual holding company shall be considered as if it were an insurance company. The commissioner shall also retain jurisdiction over the issuance of debt securities by the mutual holding company in accordance with the protections provided in Article 8 (commencing with Section 820) of Chapter 1 of Part 2 of Division 1.
(e) If any proceedings under Article 14 (commencing with Section 1010), Article 14.3 (commencing with Section 1064.1), Article 14.5 (commencing with Section 1065.1), or Article 15.5 (commencing with Section 1077), of Chapter 1 of Part 2 of Division 1, are brought naming as a party a stock insurer created as a result of proceedings authorized by this article, the mutual holding company formed as part of the conversion automatically becomes a party to the proceedings. All of the assets of the mutual holding company, including, but not limited to, its interest in the stock holding company formed pursuant to this article, are deemed assets of the estate of the stock insurer to the extent necessary to satisfy claims of persons against the stock insurer who have claims falling within the priorities established in paragraphs (1) to (5), inclusive, of subdivision (a) of Section 1033. Claims of persons in their capacity as members of the mutual holding company shall be claims falling within the priority established in paragraph (6) of subdivision (a) of Section 1033. A mutual holding company may not dissolve, liquidate, or wind up and dissolve without the prior written approval of the commissioner or the court pursuant to proceedings brought pursuant to Article 15 (commencing with Section 1070) of Chapter 1 of Part 2 of Division 1.
(f) Except as provided in this code, a mutual holding company is subject to the provisions of the general corporation law in like manner with other corporations. However, provisions of that law referring to shareholders or members shall be applied as though those provisions referred to the members of a mutual holding company. With respect to the management, records, and affairs of a mutual holding company and except as otherwise provided in this chapter, a member of a mutual holding company has the same character of rights and relationship as a stockholder has toward a domestic stock insurer subject to the provisions of this code.
(g) Each member of a mutual holding company is entitled to one vote on each matter coming to a vote at any meeting of members, regardless of the number of policies that the member holds.
(h) Notice of all meetings of members of the mutual holding company, whether annual or special, shall be given in writing to the members entitled to vote. The notice shall be given by the secretary, assistant secretary, or other persons charged with that duty. If there is no officer so charged, or if he or she neglects or refuses this duty, notice may be given by any director. At the option of the converted insurer, the notice may be imprinted on premium notices or receipts or on both. A notice may be given to any member either personally, or by mail, or other means of written communication, charges prepaid, addressed to the member at his or her address appearing on the books of the insurer, or given by the member to the converted insurer for the purpose of notice. If a member gives no address, and if there is no address on the books of the insurer, notice shall be deemed to have been given the member if sent by mail or other means of written communication addressed to the place where the principal office of the converted insurer is situated, or if published at least once in a newspaper of general circulation in the county in which the office is located and in the newspaper that has the largest daily circulation in this state. Notice of any meeting of members shall be sent to each member entitled to notice not less than 14 days before a meeting. Notice of any meeting of members shall specify the place, the day, and the hour of the meeting and the general nature of the business to be transacted. For any member who gives no address and has no address on the books of the insurer, notice of an annual meeting to be held at the time and place specified is deemed adequate if published at least once in each of four successive weeks in a newspaper of general circulation in the county in which the principal office of the converted insurer is located and in the newspaper that has the largest daily circulation in this state. If the notice is so published, no other notice of the meeting is required.
(i) The presence in person or by proxy of 5 percent of the members of a mutual holding company entitled to vote at any meeting constitutes a quorum for the transaction of all business of the mutual holding company, including, but not limited to, the amendment of the articles of incorporation or bylaws of the mutual holding company.
(j) Any required member approval shall be by the affirmative vote of a majority of the members who vote, or a higher percentage of the members as may be required by law or the articles of incorporation, a quorum being present.
(k) The board of the mutual holding company shall be comprised of not less than 6 nor more than 18 directors. A majority of the mutual holding company directors shall be policyholders of the converted insurer. Unless the plan provides that at least a majority of the directors of the boards of the stock holding company and the converted insurer are also directors of the mutual holding company, the commissioner shall determine whether the proposed composition of the boards of directors of each of the constituent corporations of the mutual holding company system, as provided in the articles of incorporation and bylaws, facilitate the control of the converted insurer by the mutual holding company. No term shall continue longer than six years. In the absence of such provisions, each director shall be elected for a term of one year. All directors shall hold office for the term for which they are elected and until their successors are elected and qualified. The bylaws of the mutual holding company shall set forth a procedure for establishing mutual holding company independent directors in the event that the stock holding company issues securities. Not less than one of every six directors of the mutual holding company shall be so designated. A director may, but need not, be a member of the mutual holding company of which he or she is acting as director. Vacancies in the board of directors may be filled by a majority of the remaining directors, though less than a quorum. Each director so elected shall hold office until the next annual meeting.
(l) Membership interests in a mutual holding company are exempt from Article 8 (commencing with Section 820) of Chapter 1 of Part 2 of Division 1. A description of the membership interests and related factual disclosure shall not be considered to be an inducement to buy insurance in violation of Section 10430. Any promise of returns, profits, or distributions, or representations with regard to the benefits of membership, made as an inducement in connection with the issuance and delivery of a policy is subject to Section 10430 and the remedy provided in Section 10433.
(Added by Stats. 1998, Ch. 421, Sec. 4. Effective January 1, 1999.)