Opinion ID: 1478250
Heading Depth: 2
Heading Rank: 5

Heading: The Key Man Insurance Policies

Text: The Corporation also purchased certain key man life insurance policies with death benefits payable to the Corporation. Several early policies insuring the lives of key executives and directors were purchased during Mr. Barton's lifetime with death benefits payable to the Corporation. In 1982 the Corporation purchased additional key man policies in connection with agreements entered into between the Corporation and nine key officers and directors. Each executive executed an agreement giving the Corporation a call option to substitute Class B non-voting stock for their Class A voting stock upon the occurrence of certain events, including death and termination of employment, so that the voting shares could be reissued to new key personnel. In return, the Board adopted a resolution creating a non-binding recommendation that a portion of the key man life insurance proceeds be used to repurchase the exchanged Class B stock from the executives' estates at a price at least equal to 80 percent of their ESOP value. The minutes of a special meeting of the Board on June 26, 1982, provide: BE IT RESOLVED that the Board of Directors of E.C. Barton & Company recommends and strongly urges the E.C. Barton & Company Employee Stock Ownership Plan Committee and the Trustees of the E.C. Barton & Company Employee Stock Ownership Trust, upon receipt of life insurance funds, resulting from the death of any one of the said nine controlling Class A stockholders, that said life insurance funds be used as next set out: 40% for the purchase of shares of E.C. Barton & Company stock from the estate of the deceased stockholder; 35% for the purchase of shares of E.C. Barton & Company stock from the remaining controlling Class A stockholders on a prorata basis; 25% retained by the Employee Stock Ownership Trust for liquidity.... Despite the strong recommendation, the ultimate decision on the use of insurance proceeds for this purpose was left to the discretion of the Corporation's management or the Board. In 1985 the Corporation purchased eight $300,000 keyman life insurance policies and adopted a plan in connection with its June self-tender. The Corporation's tender offer was for both Class A and Class B stock. The intended use for the proceeds of the keyman life insurance policies was to fund the retirement of any unpaid principal and interest on promissory notes issued in payment for Class A stock acquired in one of the self-tenders. A resolution of the Board facilitating this end was unanimously adopted at the December 17, 1985 meeting. The minutes of that meeting provide: IT IS THEREFORE RESOLVED that the death benefits inuring to the Company from the proceeds of the [eight keyman] insurance policies shall first be applied to the unpaid balance of principal and interest of the Promissory Note issued in June of 1985 to the deceased, and the balance of said proceeds prorated and applied to the unpaid principal and/or interest of such Promissory Notes held by the survivors of the aforementioned insured key men. In the five-year period, 1985 to 1989, the Corporation paid approximately $450,000 in net key man premiums. The premiums exceeded the Corporation's declared dividends in 1986 and 1989, even after the earnings on the policies were deducted (1986  premiums, $146,614, dividends, $93,133; 1989  premiums, $144,704, dividends, $143,374). The reasonableness and significance of these facts is not clear in the record or the findings of the trial court. The record and the findings of the trial court are not precisely clear on the issue of corporate benefit compared with individual benefit to the defendants with respect to the proceeds of the key man insurance policies. The death benefits of such policies, as here, are normally payable to the Corporation and are designed to benefit the Corporation by providing some measure of compensation for the loss of productive corporate executives. Here the two resolutions recited above show a desire to earmark the proceeds. On the death of each individual, the 1985 resolution would apply the proceeds to liquidation of at least part of the corporate debt (i.e., the corporate promissory note issued to the deceased in connection with that employee's previous tender of stock). Certainly that would provide liquidity to the employee's estate by paying off a corporate debt, but presumably that obligation was owing in any event and was a liability on the corporate balance sheet. Liquidation of it would improve the corporate balance sheet and would also put cash in the hands of the employee's estate. The analysis of this issue would seem to call for a disciplined balancing test by a court reviewing the matter for entire fairness. As we note hereafter, we find such an analysis to be lacking in the trial court's opinion.