On April 19, 2022, The New York Superintendent of Financial Services, noting the increase in the number of insurance company mergers and acquisitions in recent years, issued Circular Letter No. 5 (guidance) to educate industry participants, including prospective acquirers and counterparties of insurers and their advisors, about the broad definition of “control” under Article 15 of the New York Insurance Law. As noted in the Circular Letter, a determination of control depends on all the facts and circumstances of a transaction, and cannot be avoided by formulaic structures such as limiting the number of voting shares or board seats of a transaction party or its Control is presumed under § 1501(a)(2) if a person, directly or indirectly, owns, controls, or holds with the power to vote, 10% or more of an insurer’s voting securities. However, this presumption does not create a safe harbor for acquisitions below the 10% threshold, which may still result in a control determination. In addition, while § 1501(a)(2) makes clear that any director of an insurer, or any person with the right to appoint such a director, is not presumed to control the insurer, these facts may, in combination with other factors, lead to a control determination by DFS.
Significantly, an acquirer of less than 10% of an insurer’s voting securities, or with the right to appoint a single board member, may still be deemed to control the insurer based on all the facts and circumstances, including the terms and conditions of the proposed transaction. Moreover, a control relationship can arise from a contract or other factors, in the absence of any ownership of voting securities of an insurer. Section 1501(a)(2) defines “control” in relevant part as “the possession direct or indirect of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract (except a commercial contract for goods or non-management services) or otherwise…” Furthermore, § 1501(b) provides that the Superintendent may find a controlling relationship if a person “exercises directly or indirectly either alone or pursuant to an agreement with one or more other persons such a controlling influence over the management or policies of an authorized insurer as to make it necessary or appropriate in the public interest or for the protection of the insurer’s policyholders or shareholders that the person be deemed to control the insurer.” Finally, the Circular Letter acknowledges that the Superintendent may nonetheless consider and grant an application for a disclaimer or a request for a determination of non-control pursuant to § 1501(c).
While not detailed in the Circular Letter the changing nature of insurance company investments to include private equity and venture capital investments and the sophistication of these transactions implicating multiple parties, investment funds with individual investors or groups of investors (who without any vote or ability to control the insurer, nonetheless own a 10% interest) can complicate the change in control application process. That process entails financial disclosure, the submission of fingerprints and detailed biographical information, not to mention continued obligations on an annual basis. Thus, current acquisition activity can present even more challenging issues to the regulator and investors alike. Finally, New York DFS is not alone in its close scrutiny of these arrangements. Other states have taken increasingly conservative positions in determining who controls a domestic insurer making insurance investing a complicated business.
Questions can be directed to Cynthia J. Borrelli or another member of Bressler’s Insurance and HealthCare Regulatory and Transactional Practice Group.