Court Opinion

ID: 4136405
Source: CourtListenerOpinion
Date Created: 2017-02-18 02:13:14.116305+00
Date Added: 2024-06-11T14:42:31.736522
License: Public Domain

THE       ,*~~-~RNEY              GENERAL

                                 OF     TEXAS

                                      March    17. 1959

Hon. William A. Harrison                      Opinion No. WW-574
Commissioner,of    Insurance
State Board of Insurance                      Re: Propriety    of a merger or consol-
International Life Building                   idation of life insurance companies
Austin, Texas                                 where the value of home office prop-
                                              erty in the resultant company exceeds
                                              the limits provided in Article 3.40,
Dear   Sir:                                   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 agree-
ments 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,uch request
still being under consideration by this department.    The fact situation to be
covered by this opinion is set forth in your request in the fottowing language:

                     “NOW assume 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 com-
              prises approximately      80% of its total admitted as-
              sets. This home’office      building is greatly in excess
              of the statutory percentages permitted by Article
              3.40, but is exempt under the provisions of the stat-
              ute as it was owned prior to the effective date thereof.

                      ‘Company Y does not have a home offlce bulld-
              ing, and therefore is subject to the limitations in Arti-
              cle 3.40. After a . . . . . . . merger, the surviving cor-
              porate 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 i two] 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 re-
              spectfully request your opinion on the following ques-
              tions :
Honorable     Wlliiam   A. Harrison,   page 2 (WW-574)

                   ‘(1) If Company X were to be merged into
            Company Y, with Company Y to be the survivor,
            would the home office building of Company X be an
            obstacle to such a merger?     Inother words, would
            Company Y be entitled to the statutory exemption
            and prlvilege  granted by the Legislature  to Com-
            pany X? Or would Company Y be required to dls-
            pose 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 to such con- ’
            soildatlon?    In other words, would the brand new
            corporation,    Company Z, be entltied to the prlvl-
            iege granted by the Legislature   to Company X7
            Or would Company 2 be required to dispose of
            the buildlng 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 in Articles     21.25 and 2,1.26 of the Texas Insur-
ance Code of 1951 is limited or qualified by the provisions      of Artldle
3.40 and in particular paragraph l(b) thereof and, if so, the extent of such
ilmitation or quaiiflcatlon.

           Article 3.40 of the ,Texas Insurance Code restricts    life insurance
companies in the atqulsitlon and holding of real estate. Such companies
may “securei hold and convey real estate” only for the “purposes          and
in the “manner” provided In said article.     One, of the purposes    permitted
1s: “l(a).   One building site and office bulldlng for lts accommodation       in
the transaction of ,lts buslness and for lease and rental;. , .” This re-
striction has been lri the insurance laws for many years and the specific
langua e above quoted appears to have been employed at least as early
as 1901 . (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) of Article 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, 54th Leg,, p, 916, ch. 363, sec., 13’, IS as follows:     ‘,

                   “l(b).~ No such company shall (after the ef-
            fective 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
            of the 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 preced-
            ing 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 the Board of In-
            surance 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 an admit-
            ted 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 the fact situation in question Company X has a home office
property acquired before the effective date of this Act and therefore even
though the value of thls property is in excess of the statutory percentages
stated in paragraph l(b), Company X’s investment in the building is, never-
theless, proper in view of the provisions of paragraph l(b), first, that the
limitations involved apply to an investment made after the effective date
of the Act, and second, the proviso in the last sentence of this paragraph
that the limitations of paragraph l(b) should not “affect any bona fide in-
vestment. . .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 a new 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 of a consoltdation and, stated differently.
whether the acquisition of such home office property with a value 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 a violation in either of the two factual circumstances,   would the
prospect of such a violation be a legal obstacle to the merger or consollda-
tion proposed.

           Our conclusion is that the acquisltitin of the home office property
by Company Y in fact situation number one in a merger and by Company Z
in fact sltuation number two In a consolidation are proper and do not vio-
late the provisions of paragraph l(b) of Article 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 con-
tained in Articles 21.25 and 21.26 of the Texas Insurance Code. These 'pro-
visions in substantially the same language were introduced lnto the insurance
Honorable    William   A. Harrison,   page 4 (WW-574)

laws of this State in 1919. While the term “merger*       1s not mentioned,
it 1s clear that provision for ymerger” 1s made as well as for “consoli-
dation” as those terms are commonly used with reference         to the affairs
of corporations.    The prwlsions  of Article 21.26 evidence that it was
contemplated by the Legislature    that either the surviving corporation
in case of a merger or the newly created corporation in consolidation
would take over all of the assets of the two corporations.      For example,
Section 1 of Article 21.26 provides in part:

                   *Such companies proposing to consolidate may
            unite their assets. or any part thereof, and become in-
            corporated in one body. . .*

Further,    Section 2 applying   to merger   states in part:

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

            We would further point out that under the fact situations men-
tioned if in a merger X Company (the company with the building) should
be the surviving company, there could be no reasonable contention that
the provisions of Article 3.40 have been violated.   From the standpoint
of the objectives intended to be regulated by Article 3.40, or for that
matter of insurance regulation in general, there does not appear to be
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 of any form of merger or consolida-
tion is that two or more insurance companies have united their assets
and will henceforth conduct their affairs as one corporation.      Recognie-
ing the rule that the Legislature  should not be presumed to have created
arbitrary distinctions between persons and corporations distinctive
principally   in form strengthens our conclusion that the prohibition against
investment of funds in home office property in excess of the snecif~ied
Iimlts was not intended to apply to an acquisition of such property in a
merger or consolidation such as is described in the portlon of your request
cwered by this opinion. By this construction, full meaning is given to each
of the portions of the Code discussed, i.e., paragraph I(b) ofArtlcle     3.40
and Articles    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 of the Texas Insurance Code
                 is not made unlawful by the fact that the
                 value of the home office property ob-
                 tained from one such company exceeds
                 the percentages in paragraph l(b) of
                 Article 3.40, Texas Insurance    Code, of
                 permitted investment in home office
                 property where such investment was
                 made by the company prior to the ef-
                 fective date of the 1955 amendment to
                 Article 3.40, and the resulting company
                 may continue to hold such property.

                                          Very truly yours,

                                          WILL WILSON
                                          Attorney General    of Texas

                                          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