Opinion ID: 2598249
Heading Depth: 1
Heading Rank: 3

Heading: Sponsored Demutualization

Text: In May 2001, BCBSKS and Anthem entered into an Alliance Agreement (Agreement) under which Anthem or its designated affiliate would acquire ownership and control of BCBSKS. The Agreement contemplates a two-step transaction, which the parties refer to as a sponsored demutualization. The first step is BCBSKS's conversion from a mutual insurance company owned by its policyholders to a stock insurance company. The second is Anthem's purchase of all shares of common stock authorized and issued by BCBSKS after its conversion. Under the Agreement, Anthem is to pay $190 million for BCBSKS's stock. The Board of Directors of BCBSKS adopted a formal plan of conversion and submitted it to the Commissioner for approval in October 2001. Anthem filed a Form A-Statement Regarding the Acquisition of Control of or Merger with a Domestic Insurer with the Commissioner, seeking approval of its acquisition of BCBSKS. The applications state that BCBSKS would convert to a stock company upon the approval of the Commissioner and BCBSKS policyholders eligible to vote, as determined under the Plan (Eligible Policyholders). Conversion would extinguish all policyholders' membership interests. Eligible Policyholders would receive a special cash distribution from BCBSKS limited to the amount by which BCBSKS's book value upon conversion exceeds $155 million. This specific amount was later calculated as $131 million. In addition to the $131 million, Eligible Policyholders also would receive $142 million of the $190 million purchase price paid by Anthem. The remaining $48 million of the purchase price would be deposited into an escrow fund pending resolution of the Contingent Litigation Matter. Any money left in the escrow fund after that resolution and satisfaction of certain related liabilities would be distributed to Eligible Policyholders. This proposal eventually was approved by the required percentage of Eligible Policyholders. BCBSKS engaged Dresdner Kleinwort Wasserstein, Inc. (DKW), an investment firm, to evaluate whether the total consideration to be distributed to Eligible Policyholders under the Agreement was equitable. DKW concluded that, from a financial point of view, the aggregate of the purchase price and the special distribution to be paid to Eligible Policyholders was fair. BCBSKS also engaged the actuarial firm of Milliman, USA, to devise an equitable method of allocating consideration to Eligible Policyholders. The Commissioner considered the applications as a single transaction and consolidated them for further proceedings. To assist in her review, she formed a Kansas Insurance Department Testimonial Team (KID testimonial team) which consisted of independent special counsel and advisors as well as members of her staff. The Commissioner also held public comment meetings in five locations throughout the state. The examination process covered a period of several months, involving attorneys, investment bankers, actuaries, tax specialists, certified public accountants, and health care and planned development specialists. The Commissioner presided over a public evidentiary hearing in Topeka from January 7-9, 2002. On February 11, 2002, she issued a 45-page final order containing 66 findings of fact and 8 conclusions of law which addressed all issues of conversion and acquisition. Her decision was governed by the conversion statutes, K.S.A 40-4001 et seq., and the Kansas Insurance Holding Companies Act, K.S.A. 40-3301 et seq.