Question
From:(redacted)
Sent:Wednesday, December 06, 2006 9:15 AM
To:Verne, B. Michael
Subject:Another, different question for you
BackgroundFacts: Company A and Company B are both health insurers, who currently have acontractual joint marketing arrangement whereby Company B sells Company Apolicies (for which Company A bears the risk) to employers in a particularmarket segment in which Company A does not currently compete. Company Breceives a small percentage of the premium as an administrative and marketingfee. However, Company B reinsures the policies and receives approximately 50%of the net premium (after the administrative fee is deducted) for thereinsurance function. Neither Company A nor Company B have any ownership orequity interest in each other's assets or businesses. Their relationship is apurely contractual marketing arrangement.
CompanyA would like to terminate the contract/joint marketing arrangement, includingCompany B's reinsurance role, and Company A would assume all responsibilitiesand risks for contracts with employers when (and presumably if) those contractsare renewed. Company A must pay a penalty to Company B for terminating thecontract. The amount of the penalty is based on the estimated value of futurereinsurance premiums for the contracts that Company B would no longer reinsureand therefore not receive the premium. That penalty payment would almostcertainly exceed $56.7 million and the size of person tests would be met.
Question: Is the payment from Company A to Company Ba reportable transaction?
Myanswer: This situation does not involve voting securities in any way, and doesnot appear to be an acquisition of an asset. Rather, it is payment of a penaltyfor terminating a contract, and the amount of the penalty is based on theanticipated lost revenue stream to Company B. I could not find anything thatwould indicate that such a payment is somehow an acquisition of an asset orother reportable transaction. In this situation, the only thing that Company Ais acquiring is the right to enter a contract independently of Company B. Theonly discussion that I could find of a somewhat analogous situation is theacquisition of executory contracts; although here it is not a right to performunder existing contracts, but rather the right to enter and perform futurecontracts independently. In any event, as I understand it, even where theacquisition of an executory contract is involved, the value of those contractsis zero (the buyer gets the income stream, but that value is offset by theobligation to perform), unless the seller has already performed some of theservices, but the buyer will receive all of the payment/income stream. In thosesituations, the value would be the value of the premium paid (i.e., the valueof the seller's services rendered for which the buyer is receiving thepayment). Thus, even if Company A's payment of the termination penalty wereviewed as an acquisition of Company B's executory contracts, the value would bezero since no premium would be paid -- Company A will receive all of the incomestream and will be obligated for all of the performance (i.e., marketing,principal liability and reinsurance), under those contracts.