18 Del. Admin. Code § 402-4.0

Current through Register Vol. 28, No. 5, November 1, 2024

Section 402-4.0 - Regulations Under 18 Del.C., 562

4.1 Section 562-1 Exemption From 18 Del.C. § 562 of Certain Transactions Effected in Connection With a Distribution.

4.1.1 Any transaction of purchase and sale, or sale and purchase, of a security which is effected in connection with the distribution of a substantial block of securities shall be exempt from the provisions of 18 Del.C. § 562, to the extent specified in this section as not comprehended within the purpose of said 18 Del.C. § 562, upon the following conditions:

4.1.1.1 The person effecting the transaction is engaged in the business of distributing securities and is participating in good faith, in the ordinary course of such business, in the distribution of such block of securities;

4.1.1.2 The security involved in the transaction is (A) a part of such block of securities and is acquired by the person effecting the transaction, with a view to the distribution thereof, from the insurer or other person on whose behalf such securities are being distributed or from a person who is participating in good faith in the distribution of such block of securities or (B) a security purchased in good faith by or for the account of the person effecting the transaction for the purpose of stabilizing the market price of securities of the class being distributed or to cover an over-allotment or other short position created in connection with such distribution; and

4.1.1.3 Other persons not within the purview of 18 Del.C. § 562 are participating in the distribution of such block of securities on terms at least as favorable -as those on which such person is participating and to an extent at least equal to the aggregate participation of all persons exempted from the provisions of 18 Del.C. § 562 by this section. However, the performance of the functions of manager of a distributing group and the receipt of a bona fide payment for performing such functions shall not preclude an exemption which would otherwise be available under this section.

4.1.2 The exemption of a transaction pursuant to this section with respect to the participation therein of one party thereto shall not render such transaction exempt with respect to participation of any other party therein unless such other party also meets the conditions of this section.

4.2 Section 562-2 Exemption From 18 Del.C. § 562 of Acquisition of Shares of Stock and Stock Options Under Certain Stock Bonus, Stock Option or Similar Plans.

4.2.1 Any acquisition of shares of stock (other than stock acquired upon the exercise of an option, warrant or right) pursuant to a stock bonus, profit sharing, retirement, incentive, thrift, savings or similar plan, or any acquisition of a qualified or a restricted stock option pursuant to a qualified or a restricted stock option plan, or a stock option pursuant to an employee stock purchase plan, by a director or officer of an insurer issuing such stock or stock option shall be exempt from the operation of §562 if the plan meets the following conditions:

4.2.1.1 The plan has been approved, directly or indirectly, (1) by the affirmative votes of the holders of a majority of the securities of such insurer present, or represented, and entitled to vote at a meeting duly held in accordance with the applicable laws of the State of Delaware, or (2) by the written consent of the holders of a majority of the securities of such insurer entitled to vote: provided, however, that if such vote or written consent was not solicited substantially in accordance with the proxy rules and regulations prescribed by the National Association of Insurance Commissioners, if any, in effect at the time of such vote or written consent, the insurer shall furnish in writing to the holders of record of the securities entitled to vote for the plan substantially the same information concerning the plan which would be required by any such rules and regulations so prescribed and in effect at the time such information is furnished, if proxies to be voted with respect to the approval or disapproval of the plan were then being solicited, on or prior to the date of the first annual meeting of security holders held subsequent to the later of (a) the date Subchapter IV first applies to such insurer, or (b) the acquisition of an equity security for which exemption is claimed. Such written information may be furnished by mail to the last known address of the security holders of record within 30 days prior to the date of mailing. Four copies of such written information shall be filed with, or mailed for filing to, the Commissioner not later than the date on which it is first sent or given to security holders of the insurer. For the purposes of this paragraph, the term "insurer" includes a predecessor corporation if the plan or obligations to participate thereunder were assumed by the insurer in connection with the succession.

4.2.1.2 If the selection of any director or officer of the insurer to whom stock may be allocated or to whom qualified, restricted or employee stock purchase plan stock options may be granted pursuant to the plan, or the determination of the number or maximum number of shares of stock which may be allocated to any such director or officer or which may be covered by qualified, restricted or employee stock purchase plan stock options granted to any such director or officer, is subject to the discretion of any person, then such discretion shall be exercised only as follows:

4.2.1.2.1 With respect to the participation of directors

4.2.1.2.1.1 by the board of directors of the insurer, a majority of which board and a majority of the directors acting in the matter are disinterested persons;

4.2.1.2.1.2 by, or only in accordance with the recommendations of, a committee of three or more persons having full authority to act in the matter, all of the members of which committee are disinterested persons; or

4.2.1.2.1.3 otherwise in accordance with the plan, if the plan (i) specifies the number or maximum number of shares of stock which directors may acquire or which may be subject to qualified, restricted or employee stock purchase plan stock options granted to directors and the terms upon which, and the times at which, or the periods within which, such stock may be acquired or such options may be acquired and exercised; or (ii) sets forth, by formula or otherwise, effective and determinable limitations with respect to the foregoing based upon earnings of the insurer, dividends paid, compensation received by participants, option prices, market value of shares, outstanding shares or percentages thereof outstanding from time to time, or similar factors.

4.2.1.2.2 With respect to the participation of officers who are not directors.

4.2.1.2.2.1 by the board of directors of the insurer or a committee of three or more directors; or

4.2.1.2.2.2 by, or only in accordance with the recommendations of, a committee of three or more persons having full authority to act in the matter, all of the members of which committees are disinterested persons.

For the purpose of this paragraph, a director or committee member shall be deemed to be a disinterested person only if such person is not at the time such discretion is exercised eligible and has not at any time within one year prior thereto been eligible for selection as a person to whom stock may be allocated or to whom qualified, restricted or employee stock purchase plan stock options may be granted pursuant to the plan or any other plan of the insurer or any of its affiliates entitling the participants therein to acquire stock or qualified, restricted or employee stock purchase plan stock options of the insurer or any of its affiliates.

4.2.1.2.3 The provisions of this paragraph shall not apply with respect to any option granted, or other equity security acquired, prior to the date that 18 Del.C. § 561, 562, 563 first become applicable with respect to any class of equity securities of any insurer.

4.2.1.2.3.1 As to each participant or as to all participants the plan effectively limits the aggregate dollar amount or the aggregate number of shares of stock which may be allocated, or which may be subject to qualified, restricted, or employee stock purchase plan stock options granted, pursuant to the plan. The limitations may be established on an annual basis, or for the duration of the plan, whether or not the plan has a fixed termination date; and may be determined either by fixed or maximum dollar amounts or fixed or maximum numbers of shares or by formulas based upon earnings of the insurer, dividends paid, compensation received by participants, option prices, market value of shares, outstanding shares or percentages thereof outstanding from time to time, or similar factors which will result in an effective and determinable limitation. Such limitations may be subject to any provisions for adjustment of the plan or of stock allocable or options outstanding thereunder to prevent dilution or enlargement of rights.

4.2.1.2.3.2 Unless the context otherwise requires, all terms used in this section shall have the same meaning as in Subchapter IV elsewhere in these regulations. In addition, the following definitions apply:

4.2.1.2.3.2.1 The term "plan" includes any plan, whether or not set forth in any formal written document or documents and whether or not approved in its entirety at one time.

4.2.1.2.3.2.2 The definition of the terms "qualified stock option" and "employee stock purchase plan" that are set forth in Sections 422 and 423 of the Internal Revenue Code of 1954, as amended, are to be applied to those terms where used in this section. The term "restricted stock option" as defined in Section 424(b) of the Internal Revenue Code of 1954, as amended, shall be applied to that term as used in this section, provided, however, that for the purposes of this section an option which meets all of the conditions of that Section, other than the date of issuance shall be deemed to be a "restricted stock option."

4.3 Section 562-3 Exemption From 18 Del.C. § 562 of Certain Transactions in Which Securities Are Received by Redeeming Other Securities.

4.3.1 Any acquisition of an equity security (other than a convertible security or right to purchase a security) by a director or officer of the insurer issuing such security shall be exempt from the operation of Section 2 of the Act upon condition that

4.3.1.1 the equity security is acquired by way of redemption of another security of an insurer substantially all of whose assets other than cash (or Government bonds) consist of securities of the insurer issuing the equity security, so acquired, and which

4.3.1.1.1 represented substantially and in practical effect a stated or readily ascertainable amount of such equity security,

4.3.1.1.2 had a value which was substantially determined by the value of such equity security, and

4.3.1.1.3 conferred upon the holder the right to receive such equity security without the payment of any consideration other than the security redeemed;

4.3.1.2 no security of the same class as the security redeemed was acquired by the director or officer within six months prior to such redemption or is acquired within six months after such redemption;

4.3.1.3 the insurer issuing the equity security acquired has recognized the applicability of paragraph (a) of this section by appropriate corporate action.

4.4 Section 562-4 Exemption of Long Term Profits Incident to Sales Within Six Months of the Exercises of an Option.

4.4.1 To the extent specified in paragraph (b) of this section, the Commissioner hereby exempts as not comprehended within the purposes of 18 Del.C. § 562 any transaction or transactions involving the purchase and sale, or sale and purchase, of any equity security where such purchase is pursuant to the exercise of an option or similar right either (1) acquired more than six months before its exercise, or (2) acquired pursuant to the terms of an employment contract entered into more than six months before its exercise.

4.4.2 In respect of transactions specified in paragraph (a) the profits inuring to the insurer shall not exceed the difference between the proceeds of sale and the lowest market price of any security of the same class within six months before or after the date of sale. Nothing in this section shall be deemed to enlarge the amount of profit which would inure to such insurer in the absence of this section.

4.4.3 The Commissioner also hereby exempts, as not comprehended within the purposes of 18 Del.C. § 562, the disposition of a security, purchased in a transaction specified in paragraph (a) of this section, pursuant to a plan or agreement for merger or consolidation, or reclassification of the insurer's securities, or for the exchange of its securities for the securities of another person which has acquired its assets, or which is in control, as defined in Section 368(c) of the Internal Revenue Code of 1954, of a person which has acquired its assets, where the terms of such plan or agreement are binding upon all stockholders of the insurer except to the extent that dissenting stockholders may be entitled, under statutory provisions or provisions contained in the certificate of incorporation, to receive the appraised or fair value of their holdings.

4.4.4 The exemptions proved by this section shall not apply to any transaction made unlawful by 18 Del.C. § 563 or by any rules and regulations thereunder.

4.4.5 The burden of establishing market price of a security for the purpose of this section shall rest upon the person claiming the exemption.

4.5 Section 562-5 Exemption From 18 Del.C. § 562 of Certain Acquisitions and Dispositions of Securities Pursuant to Merger or Consolidations.

4.5.1 The following transactions shall be exempt from the provisions of § 562 as not comprehended within the purpose of said Section:

4.5.1.1 The acquisition of a security of an insurer, pursuant to a merger or consolidation, in exchange for a security of a company which, prior to said merger or consolidation, owned 85 per cent or more of the equity securities of all other companies involved in the merger or consolidation except, in the case of consolidation, the resulting company;

4.5.1.2 The disposition of a security, pursuant to a merger or consolidation of an insurer which, prior to said merger or consolidation, owned 85 per cent or more of the equity securities of all other companies involved in the merger or consolidation except, in the case of consolidation, the resulting company;

4.5.1.3 The acquisition of a security of an insurer, pursuant to a merger or consolidation, in exchange for a security of a company which, prior to said merger or consolidation, held over 85 per cent of the combined assets of all the companies undergoing merger or consolidation, computed according to their book values prior to the merger or consolidation as determined by reference to their most recent available financial statements for a 12-month period prior to the merger or consolidation;

4.5.1.4 The disposition of a security, pursuant to a merger or consolidation, of an insurer which, prior to said merger or consolidation, held over 85 per cent of the combined assets of all the companies undergoing merger or consolidation, computed according to their book values prior to merger or consolidation, as determined by reference to their most recent available financial statements for a 12-month period prior to the merger or consolidation.

4.5.2 A merger within the meaning of this section shall include the sale or purchase of substantially all the assets of one insurer by another in exchange for stock which is then distributed to the security holders of the insurer which sold its assets.

4.5.3 Notwithstanding the foregoing, if an officer, director or stockholder shall make any purchase (other than a purchase exempted by this section) of a security in any company involved in the merger or consolidation and any sale (other than a sale exempted by this section)of a security in any other company involved in the merger or consolidation within any period of less than six months during which the merger or consolidation took place, the exemption provided by this section shall be unavailable to such officer, director, or stockholder.

4.6 Section 562-6 Exemption From 18 Del.C. § 562 of Certain Securities Received Upon Surrender of Similar Equity Securities.

4.6.1 Any receipt by a person from an insurer of shares of stock of a class having general voting power, upon the surrender by such person of an equal number of shares of stock of the insurer of a class which does not have general voting power, pursuant to provisions of the insurer's certificate of incorporation, for the purpose of an accompanied simultaneously or followed immediately by the sale of the shares so received, shall be exempt from the operation of 18 Del.C. § 562 as a transaction not comprehended within the purpose of said Section, if the following conditions exist:

4.6.1.1 The person so receiving such shares is not an officer or director, or the beneficial owner, directly or indirectly, immediately prior to such receipt, of more than 10 per cent of an equity security of the insurer;

4.6.1.2 The shares surrendered and the shares issued upon such surrender shall be of classes which are freely transferable and entitle the holders thereof to participate equally per share in all distributions of earnings and assets;

4.6.1.3 The surrender and issuance are made pursuant to provisions of a certificate of incorporation which require that the shares issued upon such surrender shall be registered upon issuance in the name of a person or persons other than the holder of the shares surrendered and may be required to be issued as of right only in connection with the public offering, sale and distribution of such shares and the immediate sale by such holder of such shares for that purpose, or in connection with a gift of such shares;

4.6.1.4 Neither the shares so surrendered nor any shares of the same class, nor other shares of the same class as those issued upon such surrender, have been or are purchased (otherwise than in a transaction exempted by this section), by the person surrendering such shares, within six months before or after such surrender or issuance.

4.7 Section 562-7 Exemption From 18 Del.C. § 562 of Certain Transactions Involving an Exchange of Similar Securities.

4.7.1 Any acquisition or disposition of securities made in an exchange of shares of a class (or series thereof) of stock of an insurer for an equivalent number of shares of another class (or series thereof) of stock of the same insurer, pursuant to a right of conversion under the terms of the insurer's charter or other governing instruments shall be exempt from the operation of 18 Del.C. § 562 if:

4.7.1.1 The shares surrendered and those acquired in exchange therefor evidence substantially the same rights and privileges except that, pursuant to the provisions of the insurer's charter or other governing instruments, the board of directors may declare and pay a lesser dividend per share on shares of the class surrendered than on shares of the class acquired in exchange therefor, or may declare and pay no dividend on shares of the class surrendered; and

4.7.1.2 The transaction was affected in contemplation of a public sale of the shares acquired in the exchange; Provided, that this section shall not be construed to exempt from the operation of 18 Del.C. § 562 any purchase or sale of shares of the class surrendered and any sale or purchase of shares of the class acquired in the exchange (otherwise than in the transaction of exchange exempted by this section) within a period of less than six months.

18 Del. Admin. Code § 402-4.0