Opinion ID: 415638
Heading Depth: 3
Heading Rank: 1

Heading: The Southern Acquisition

Text: 3 In 1970 Security set its sights on Southern as a potential acquisition target; negotiations between the two companies began in September or October of that year. At about the same time, Security approached several lenders with regard to financing the purchase. Because Security showed a deficit in its insurance accounting, however, the banks were reluctant to loan Security the funds necessary to consummate the merger. 4 Ultimately Security arranged to borrow over $2 million from Louisiana National Bank (Bank). As a condition of the loan, the Bank required Ourso and the other Security shareholders to form a holding company, Ourso Investment Co. (OIC). The Bank also demanded the stock of Security and OIC and Ourso's personal signature as collateral for the loan. The Security shareholders formed OIC on December 8, 1970, exchanging each of their Security shares for one share in OIC. Security thus became a wholly owned subsidiary of OIC. OIC's assets included the Security shares, funeral homes, and real estate. 5 With this condition of the loan agreement satisfied, Ourso proceeded with the purchase of the Southern shares. On December 9, 1970, Ourso and the majority shareholders of Southern executed a purchase agreement for the Southern shares. OIC's directors met on January 2, 1971, and resolved to acquire the Southern shares, to borrow the necessary funds from Security and the Bank, and to liquidate Southern and reinsure its outstanding policies following the acquisition. The purchase of the Southern shares was consummated by January 4, 1971, whereupon OIC became Southern's sole shareholder. The following day, January 5, 1971, OIC (as sole shareholder of Southern) resolved to liquidate Southern and appointed Ourso as liquidator. 6 At this time OIC, Southern, and Security executed two collateral agreements that had been informally cleared with the Louisiana Commissioner of Insurance about one month earlier. Ourso, acting in his capacity as liquidator of Southern, entered into a reinsurance agreement with Security effective as of January 5, 1971, at midnight. Pursuant to this reinsurance agreement, Security assumed all of Southern's outstanding policies and the associated risks and liabilities; in return, Southern transferred to Security assets sufficient to reserve fully the assumed risks. A reinsurance agreement of this sort is the insurance industry's functional equivalent of a sale of assets. 7 In addition to its reinsurance agreement with Southern, Security executed a contingent payment agreement with OIC. This agreement obligated Security to pay $1,367,000 to OIC in consideration for OIC's consent to Security's reinsurance agreement with Southern. The OIC-Security agreement provided for monthly payments of $17,500 each, payable out of premiums collected on the reinsured Southern policies. 8 In early January 1971, Southern's assets and liabilities were transferred from Southern's books to OIC's books. Immediately thereafter, OIC converted Southern's surplus and net worth into cash and used the proceeds to pay off a portion of OIC's purchase money loan at the Bank. OIC then transferred the remaining assets and liabilities of Southern to Security. In February and March 1971, all of Southern's collections were posted to Security's books. 9 Southern filed its life insurance company income tax return for the taxable year 1970 on June 12, 1971. This return was captioned Final Return and was the last income tax return filed by Southern. On December 7, 1971, the Louisiana Commissioner of Insurance issued a certificate declaring Southern formally and finally dissolved under state law.