Subchapter C. EXEMPTIONS UNDER SECTION 302.1(2) OF THE ACT
Sec.
21.31. Distribution transactions.
21.32. Certain stock options and acquisitions.
21.33. Securities received by redeeming other securities.
21.34. Long-term profits incident to options.
21.35. Acquisitions and dispositions pursuant to mergers and consolidations.
21.36. Deposit or withdrawal of equity securities.
21.37. Conversion of equity securities.
21.38. Transactions involving sale of subscription rights.
21.39. Qualified or restricted stock options; acceptance of general tender offers.§ 21.31. Distribution transactions.
(a) 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 section 302.1(2) of the act (40 P. S. § 422.1(2)) to the extent specified in this section upon the following conditions:
(1) The person effecting the transaction shall be engaged in the business of distributing securities and shall be participating in good faith in the ordinary course of the business in the distribution of the block of securities.
(2) The security involved in the transaction shall be one of the following:
(i) A part of the block of securities, and shall be acquired by the person effecting the transaction with a view to the distribution thereof, from the insurer or other person on whose behalf the securities are being distributed or from a person who is participating in good faith in the distribution of the block of securities.
(ii) 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 the distribution.
(3) Other persons not within the purview of section 302.1(2) of the act shall participate in the distribution of the block of securities on terms at least as favorable as those on which the person is participating and to an extent at least equal to the aggregate participation of all persons exempted from the act by this section. The performance of the functions of manager of a distributing group, however, 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.
(b) The exemption of a transaction under subsection (a) with respect to participation of one party thereto, may not render that transaction exempt with respect to participation of any other party therein unless the other party also meets the conditions of this section.
§ 21.32. Certain stock options and acquisitions.
(a) General. Any acquisition of shares of stock (other than stock acquired upon the exercise of an option, warrant, or right) under a stock bonus, profit sharing, retirement, incentive, thrift, savings or similar plan, or any acquisition of a qualified or restricted stock option under a qualified or a restricted stock option plan, or a stock option under an employe stock purchase plan by a director or officer of an insurer issuing the stock or stock option, shall be exempt from the operation of section 302.1(2) of the act (40 P. S. § 422.1(2)) if the plan conforms with all of the following:
(1) Approval. The plan shall be approved directly or indirectly by the affirmative votes of the holders of a majority of the securities of the insurer present, or represented and entitled to vote at a meeting duly held in accordance with the applicable laws of the Commonwealth, or by the written consent of the holders of a majority of the securities of the insurer entitled to vote. This method of approval shall be valid, provided that if the 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 the 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 the rules and regulations so prescribed and in effect at the time the 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 date the act first applies to the insurer, or the acquisition of an equity security for which exemption is claimed, whichever is later. The 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 the written information shall be filed with, or mailed for filing to, the Insurance Commissioner not later than the date on which it is first sent or given to security holders of the insurer. For the purpose 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.
(2) Discretion. If the selection of any director or officer of the insurer to whom stock may be allocated or to whom qualified, restricted or employe stock purchase plan stock options may be granted under the plan, or the determination of the number or maximum number of shares of stock which may be allocated to the director or officer or which may be covered by qualified, restricted or employe stock purchase plan stock options granted to the director or officer, is subject to the discretion of any person, then the discretion shall be exercised only as follows:
(i) With respect to the participation of directors, in any of the following ways:
(A) 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.
(B) 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.
(C) In accordance with the plan, if the plan does one of the following:
(I) Specifies the number or maximum number of shares of stock which directors may acquire or which may be subject to qualified, restricted or employe stock purchase plan stock options granted to directors and the terms upon which, and the times at which, or the periods within which, the stock may be acquired or the options may be acquired and exercised.
(II) Sets forth, by formula or otherwise, effective and determinable limitations with respect to the number of shares of stock specified in subclause (I) 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.
(ii) With respect to the participation of officers who are not directors, in any of the following ways:
(A) By the board of directors of the insurer or a committee of three or more directors.
(B) By, or only in accordance with the recommendatios 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.
(iii) For the purpose of this paragraph, a director or committee member shall be deemed to be a disinterested person only if he is not at the time he exercises his discretion eligible, and has not at any time within 1 year prior thereto been eligible, for selection as a person to whom stock may be allocated, or to whom qualified, restricted, or employe stock purchase plan stock options may be granted under 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 employe stock purchase plan stock options of the insurer or any of its affiliates.
(iv) The provisions of this paragraph shall not apply with respect to any option granted, or other equity security acquired, prior to the date that section 302.1(1)—(3) of the act first became applicable with respect to any class of equity securities of any insurer.
(3) Limitations. As to each participant or as to all participants, the plan shall effectively limit 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 employe stock purchase plan stock options granted, under 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 shall result in an effective and determinable limitation. The 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.
(b) Definitions. Unless the context clearly indicates otherwise, all terms used in this section shall have the same meanings as those in the act and in § 21.1 (relating to definitions). In addition, the following words and terms, as used in this section, have the following meanings:
Plan—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.
Qualified stock option, employe stock purchase plan—The definition in sections 422 and 423 of the Internal Revenue Code of 1954, as amended.
Restricted stock option—The definition in section 424(b) of the Internal Revenue Code of 1954, as amended. For the purpose of this section, however, 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.’’(c) Exercise of an option, warrant, or right. As used in this section, the term ‘‘exercise of an option, warrant, or right’’ does not include any of the following:
(1) The making of any election to receive under any plan an award of compensation in the form of stock or credits therefor, provided that the election is made prior to the making of the award, and provided further that the election is irrevocable until at least 6 months after termination of employment.
(2) The subsequent crediting of the stock.
(3) The making of any election as to a time for delivery of the stock after termination of employment, provided that such election is made at least 6 months prior to any such delivery.
(4) The fulfillment of any condition to the absolute right to receive the stock.
(5) The acceptance of certificates for shares of the stock.
§ 21.33. Securities received by redeeming other securities.
Any acquisition of an equity security, other than a convertible security of right to purchase a security director or officer of the insurer issuing the security shall be exempt from the operation of section 302.1(2) of the act (40 P. S. § 422.1(2)) provided all of the following apply:
(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:
(i) Represented substantially and in practical effect a stated or readily ascertainable amount of such equity security.
(ii) Had a value which was substantially determined by the value of such equity security.
(iii) Conferred upon the holder the right to receive the equity security without the payment of any consideration other than the security redeemed.
(2) No security of the same class as the security redeemed was acquired by the director or officer within 6 months prior to the redemption or is acquired within 6 months after the redemption.
(3) The insurer issuing the equity security acquired has recognized the applicability of paragraph (1) by appropriate corporate action.
§ 21.34. Long-term profits incident to options.
(a) The following provisions apply to long-term profits incident to options:
(1) To the extent specified in subsection (b), the Insurance Commissioner exempts as not comprehended within the purposes of section 302.1(2) of the act (40 P. S. § 422.1(2)) any transaction or transactions involving the purchase and sale, or sale and purchase, of any equity security if such purchase is pursuant to the exercise of an option or similar right acquired more than six months before its exercise, or acquired pursuant to the terms of an employment contract entered into more than 6 months before its exercise.
(2) The profits inuring to the insurer in the transactions may not exceed the difference between the proceeds of sale and the lowest market price of any security of the same class within 6 months before or after the date of sale.
(3) Nothing in this subsection shall be deemed to enlarge the amount of profit which would inure to the insurer in the absence of this section.
(b) Also exempted from section 302.1(2) of the act shall be the disposition of a security purchased in a transaction specified in subsection (a) under 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, as amended, of a person which has acquired its assets, if the terms of the 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.
(c) The exemptions provided by subsections (a) and (b) do not apply to any transaction made unlawful by section 302.1(3) of the act (40 P. S. § 422.1(3)), or by any rules and regulations thereunder.
(d) The burden of establishing the market price of a security for the purpose of this section shall rest upon the person claiming the exemption.
§ 21.35. Acquisitions and dispositions pursuant to mergers and consolidations.
(a) As used in this section, the term ‘‘merger’’ 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.
(b) The following transactions shall be exempt from section 302.1(2) of the act (40 P. S. § 422.1(2)):
(1) The acquisition of a security of an insurer under a merger or consolidation and in exchange for a security of a company which prior to the merger or consolidation owned 85% 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.
(2) The disposition of a security under a merger or consolidation of an insurer which prior to the merger or consolidation owned 85% 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.
(3) The acquisition of a security of an insurer pursuant to a merger or consolidation and in exchange for a security of a company which prior to such merger or consolidation held over 85% 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) The disposition of a security under a merger or consolidation of an insurer which prior to the merger or consolidation held 85% or more of the equity securities of all other companies involved in the merger or consolidation according to their book value 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.
(c) Notwithstanding subsection (a), if an officer, director or stockholder makes 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 6 months during which the merger or consolidation took place, the exemption provided by this section shall be available to that officer, director or stockholder to the extent of the purchase and sale.
§ 21.36. Deposit or withdrawal of equity securities.
Any acquisition or disposition of an equity security involved in the deposit of the security under, or the withdrawal of the security from, a voting trust or deposit agreement, and the acquisition or disposition in connection therewith of the certificate representing the security, shall be exempt from the operation of section 302.1(2) of the act (40 P. S. § 422.1(2)), if substantially all of the assets held under the voting trust or deposit agreement immediately after the deposit or immediately prior to the withdrawal, as the case may be, consisted of equity securities of the same class as the security deposited or withdrawn, provided that this section does not apply to the extent that there shall have been either a purchase of an equity security of the class deposited and a sale or any certificate representing an equity security of the class, or a sale of an equity security of the class deposited and purchase of any certificate representing an equity security of the class (otherwise than in a transaction involved in the deposit or withdrawal or in a transaction exempted by another provision of the regulations under section 302.1(2) of the act within a period of less than 6 months, which includes the date of the deposit or withdrawal.
§ 21.37. Conversion of equity securities.
(a) Acquisition and disposition. For the purpose of this section, an equity security may not be deemed to be acquired or disposed of upon conversion of an equity security if the terms of the equity security converted require the payment or entail the receipt, in connection with such conversion, of cash or other property (other than equity securities involved in the conversion) equal in value at the time of conversion to more than 15% of the value of the equity security issued upon conversion.
(b) Exemption. Any acquisition or disposition of an equity security involved in the conversion of an equity security which by its terms or pursuant to the terms of the insurer’s charter or other governing instruments, is convertible immediately or after a stated period of time into another equity security of the same insurer, shall be exempt from the operation of section 302.1(2) of the act. This exemption, however, shall not apply to the extent that there shall have been either of the following:
(1) A purchase of an equity of the class convertible (including any acquisition of or change in a conversion privilege) and a sale of any equity security of the class issuable upon conversion.
(2) A sale of any equity security of the class convertible and any purchase of any equity security issuable upon conversion (otherwise than in a transaction involved in the conversion or in a transaction exempted by any other provision of the regulations under section 302.1(2) of the act within a period of less than 6 months including the date of conversion.
(c) Convertible securities. For the purpose of this section, an equity security shall be deemed convertible if it is convertible at the option of the holder or of some other person or by operation of the terms of the security or the governing instruments. The period of 6 months in subsection (a) shall include the date of conversion.
§ 21.38. Transactions involving sale of subscription rights.
(a) Definitions. The following words and terms, when used in this section, have the following meanings, unless the context clearly indicates otherwise:
Beneficiary security—A security registered pursuant to section 12 of the Securities Exchange Act (15 U.S.C.A. § 77l), to the holders of which a subscription right is granted.
Subscription right—Any warrant or certificate evidencing a right to subscribe to or otherwise acquire an equity security.
Subscription security—A security which is the subject of a subscription right.(b) Exemptions from section 302.1(2) of the act (40 P. S. § 422.1(2)). Any sale of a subscription right to acquire any subject security of the same insurer shall be exempt from the provisions of section 302.1(2) of the act, to the extent prescribed in this section, if any of the following occur:
(1) The subscription right is acquired, directly or indirectly, from the insurer without the payment of consideration.
(2) The subscription right by its term expires within 45 days after the issuance thereof.
(3) The subscription right by its terms is issued on a pro rata basis to all holders of the beneficiary security of the insurer.
(4) A registration statement under the Securities Act of 1933 (15 U.S.C.A. § 77a et seq.) is in effect as to each subject security, or the applicable terms of any exemption from such registration have been met in respect to each subject security.
(c) Exception. Notwithstanding anything contained in this section to the contrary, if a person purchases subscription rights for cash or other consideration, a sale by such person of subscription rights otherwise exempted by this section will not be so exempted to the extent of such purchases within a 6-month period preceding or following the sale.
§ 21.39. Qualified or restricted stock options; acceptance of general tender offers.
The disposition of an equity security acquired under a qualified or restricted stock option by means of the acceptance of a tender offer made to all stockholders of the company generally shall not be considered the sale of an equity security for the purposes of section 302.1(2) of the act (40 P. S. § 422.1(2)).
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