Proposed Exemptions; Provident Mutual Life Insurance Company
(Provident) [Notices] [06/18/2002]
Proposed Exemptions; Provident Mutual Life Insurance Company
(Provident) [06/18/2002]
Volume 67, Number 117, Page 41506-41516
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DEPARTMENT OF LABOR
Pension and Welfare Benefits Administration
[Application No. D-11050, et al.]
Proposed Exemptions; Provident Mutual Life Insurance Company
(Provident)
AGENCY: Pension and Welfare Benefits Administration, Labor.
ACTION: Notice of proposed exemptions.
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SUMMARY: This document contains notices of pendency before the
Department of Labor (the Department) of proposed exemptions from
certain of the prohibited transaction restrictions of the Employee
Retirement Income Security Act of 1974 (the Act) and/or the Internal
Revenue Code of 1986 (the Code).
Written Comments and Hearing Requests
All interested persons are invited to submit written comments or
requests for a hearing on the pending exemptions, unless otherwise
stated in the Notice of Proposed Exemption, within 45 days from the
date of publication of this Federal Register Notice. Comments and
requests for a hearing should state: (1) The name, address, and
telephone number of the person making the comment or request, and (2)
the nature of the person's interest in the exemption and the manner in
which the person would be adversely affected by the exemption. A
request for a hearing must also state the issues to be addressed and
include a general description of the evidence to be presented at the
hearing.
ADDRESSES: All written comments and requests for a hearing (at least
three copies) should be sent to the Pension and Welfare Benefits
Administration (PWBA), Office of Exemption Determinations, Room N-5649,
U.S. Department of Labor, 200 Constitution Avenue, NW., Washington, DC
20210. Attention: Application No. ------, stated in each Notice of
Proposed Exemption. Interested persons are also invited to submit
comments and/or hearing requests to PWBA via e-mail or FAX. Any such
comments or requests should be sent either by e-mail to:
``moffittb@pwba.dol.gov'', or by FAX to (202) 219-0204 by the end of
the scheduled comment period. The applications for exemption and the
comments received will be available for public inspection in the Public
Documents Room of the Pension and Welfare Benefits Administration, U.S.
Department of Labor, Room N-1513, 200 Constitution Avenue, NW.,
Washington, DC 20210.
Notice to Interested Persons
Notice of the proposed exemptions will be provided to all
interested persons in the manner agreed upon by the applicant and the
Department within 15 days of the date of publication in the Federal
Register. Such notice shall include a copy of the notice of proposed
exemption as published in the Federal Register and shall inform
interested persons of their right to comment and to request a hearing
(where appropriate).
SUPPLEMENTARY INFORMATION: The proposed exemptions were requested in
applications filed pursuant to section 408(a) of the Act and/or section
4975(c)(2) of the Code, and in accordance with procedures set forth in
29 CFR part 2570, subpart B (55 FR 32836, 32847, August 10, 1990).
Effective December 31, 1978, section 102 of Reorganization Plan No. 4
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the
Secretary of the Treasury to issue exemptions of the type requested to
the Secretary of Labor. Therefore, these notices of proposed exemption
are issued solely by the Department.
The applications contain representations with regard to the
proposed exemptions which are summarized below. Interested persons are
referred to the applications on file with the Department for a complete
statement of the facts and representations.
Provident Mutual Life Insurance Company (Provident)
Located in Berwyn, PA
[Application No. D-11050]
Proposed Exemption
Based on the facts and representations set forth in the
application, the
[[Page 41507]]
Department is considering granting an exemption under the authority of
section 408(a) of the Act (or ERISA) and section 4975(c)(2) of the Code
and in accordance with the procedures set forth in 29 CFR part 2570,
subpart B (55 FR 32836, 32847, August 10, 1990).\1\
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\1\ For purposes of this proposed exemption, references to
provisions of Title I of the Act, unless otherwise specified, refer
also to corresponding provisions of the Code.
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Section I. Covered Transactions
If the exemption is granted, the restrictions of section 406(a) of
the Act and the sanctions resulting from the application of section
4975 of the Code, by reason of section 4975(c)(1)(A) through (D) of the
Code, shall not apply to (1) the initial issuance, by Provident, of its
common stock (Provident Shares) to the conversion agent (the Conversion
Agent), as stockholder of record, on behalf of any eligible
policyholder of Provident (the Eligible Member), including any Eligible
Member which is an employee benefit plan (within the meaning of section
3(3) of ERISA), an individual retirement annuity (within the meaning of
section 408 or 408A of the Code) or a tax sheltered annuity (within the
meaning of section 403(b) of the Code) (each, a Plan), including a Plan
sponsored by Provident for Provident employees (a Provident Plan); (2)
the exchange, by the Conversion Agent, of Provident Shares for common
stock (Sponsor Class A Shares) issued by Nationwide Financial Services,
Inc. (the Sponsor), or, the receipt of cash (Cash) or policy credits
(Policy Credits) by an Eligible Member, in exchange for such Eligible
Member's membership interest in Provident or in connection with the
merger (the Merger) between Provident and the Eagle Acquisition
Corporation (the Merger Sub), a wholly-owned subsidiary of the Sponsor,
in accordance with the terms of a plan of conversion (the Plan of
Conversion) and merger agreement (the Merger Agreement), adopted by
Provident and implemented pursuant to the Pennsylvania Insurance
Company Mutual-to-Stock Conversion Act, as amended, codified at 40 P.S.
sections 911-A to 929-A (the Conversion Act) and the applicable
provisions of the Pennsylvania Business Corporation Law of 1998.
In addition, if the exemption is granted, the restrictions of
section 406(a)(1)(E) and (a)(2) and section 407(a)(2) of the Act shall
not apply to the receipt and holding, by a Provident Plan, of Sponsor
Class A Shares, whose fair market value exceeds 10 percent of the value
of the total assets held by such Plan.
The proposed exemption is subject to the general conditions set
forth below in Section II.
Section II. General Conditions
(a) The Plan of Conversion, including the Merger Agreement, is
subject to approval, review and supervision by the Commissioner of
Insurance of the Commonwealth of Pennsylvania (the Commissioner) and is
implemented in accordance with procedural and substantive safeguards
that are imposed under the laws of the Commonwealth of Pennsylvania.
(b) The Commissioner reviews the terms of the options that are
provided to Eligible Members of Provident as part of such
Commissioner's review of the Plan of Conversion and Merger, and
approves the Plan of Conversion and Merger following a determination
that such Plan of Conversion is fair and equitable to all Eligible
Members. The New York Superintendent of Insurance (the Superintendent)
may object to the Plan of Conversion if he or she finds that such Plan
of Conversion is not fair or equitable to all New York policyholders.
(c) As part of their separate determinations, both the Commissioner
and the Superintendent concur on the terms of the Plan of Conversion.
(d) Each Eligible Member has an opportunity to vote at a special
meeting (the Eligible Members' Meeting) to approve the Plan of
Conversion and Merger after full written disclosure is given to the
Eligible Member by Provident.
(e) Any determination to receive Sponsor Class A Shares, Cash, or
Policy Credits by an Eligible Member which is a Plan, pursuant to the
terms of the Plan of Conversion, is made by one or more Plan
fiduciaries that are independent of Provident and its affiliates and
neither Provident nor any of its affiliates exercises any discretion or
provides investment advice, within the meaning of 29 CFR 2510.3-21(c),
with respect to such decisions.
(f) After each Eligible Member is allocated a fixed component
equivalent to approximately 20% of Provident Shares, additional
consideration is allocated to Eligible Members based on actuarial
formulas that take into account each policy's contributions to the
surplus and asset valuation reserve of Provident, which formulas have
been approved by the Commissioner.
(g) In the case of an Eligible Member who is entitled to receive
Provident Shares only upon consummation of the Merger, such Provident
Shares are exchanged for Sponsor Class A Shares, Cash or Policy Credits
in accordance with an election made by such Eligible Member.
(h) In the case of a Provident Plan, the independent Plan fiduciary
(the Independent Fiduciary)--
(1) Votes on whether to approve or not to approve the proposed
demutualization;
(2) Elects between consideration in the form of Sponsor Class A
Shares, Cash or Policy Credits on behalf of such Plans;
(3) Reviews and approves Provident's allocation of Sponsor Class A
Shares, Cash or Policy Credits received for the benefit of the
participants and beneficiaries of the Provident Plans;
(4) Votes on Sponsor Class A Shares that are held by the Provident
Plans and disposes of such shares held by the Retirement Pension Plan
for Certain Home Office, Managerial and Other Employees of Provident
Mutual Life Insurance Company (the Home Office Pension Plan), which
exceeds the limitation of section 407(a)(2) of the Act, as soon as it
is reasonably practicable, but in no event later than six months after
the effective date (the Effective Date) of the Plan of Conversion and
Merger;
(5) Provides the Department with a complete and detailed final
report as it relates to the Provident Plans prior to the Effective Date
of the demutualization; and
(6) Takes all actions that are necessary and appropriate to
safeguard the interests of the Provident Plans and their participants
and beneficiaries.
(i) All Eligible Members that are Plans participate in the
transactions on the same basis as all Eligible Members that are not
Plans.
(j) No Eligible Member pays any brokerage commissions or fees in
connection with the receipt of Sponsor Class A Shares or Policy Credits
or in connection with the implementation of the commission-free
purchase and sale program (the Commission-Free Program).
(k) All of Provident's policyholder obligations remain in force and
are not affected by the Plan of Conversion or Merger.
(l) The terms of the transactions are at least as favorable to the
Plans as an arm's length transaction with an unrelated party.
Section III. Definitions
For purposes of this proposed exemption:
(a) The term ``Provident'' means Provident Mutual Life Insurance
Company and any of its affiliates as
[[Page 41508]]
defined in paragraph (b) of this Section III.
(b) An ``affiliate'' of Provident includes--
(1) Any person directly or indirectly through one or more
intermediaries, controlling, controlled by, or under common control
with Provident. (For purposes of this paragraph, the term ``control''
means the power to exercise a controlling influence over the management
or policies of a person other than an individual.); and
(2) Any officer, director or partner in such person.
(c) The term ``Allocable Provident Shares'' means the number of
Provident Shares determined in accordance with Section 3.1(c) of the
Merger Agreement, representing the total number of Provident Shares
that will be notionally allocated to Eligible Members in accordance
with the Plan of Conversion and the ``Actuarial Contribution
Memorandum'' (for purposes of allocating among Eligible Members the
consideration that is actually to be distributed to Eligible Members in
the form of Sponsor Class A Shares, Cash or Policy Credits). The
Actuarial Contribution Memorandum sets forth the principles,
assumptions and methodologies for the calculation of the Actuarial
Contribution of Eligible Policies, which is the estimated past
contribution of such Eligible Policy to Provident's statutory surplus
and asset valuation reserve, plus the contribution that such policy is
expected to make in the future, as calculated according to the
principles, assumptions and methodologies set forth in the Plan of
Conversion and its exhibits.
(d) The term ``Eligible Member'' means the owner of an ``eligible
policy,'' as provided by the records of Provident and by its articles
of incorporation and bylaws, on the adoption date of the Plan of
Conversion. (An ``Eligible Policy'' is defined as a policy that is in
force on the adoption date.) Provident and any of its subsidiaries will
not be Eligible Members with respect to any policy that entitles the
policyholder to receive consideration, unless the consideration is to
be utilized in whole or in part for a plan or program funded by that
policy for the benefit of participants or employees who have coverage
under that plan or program. Provident may deem a person to be an
Eligible Member in order to correct any immaterial administrative
errors or oversights.
(e) With respect to the conversion of Provident from a mutual life
insurance company to a stock insurance company (the Conversion), the
term ``Policy Credit'' means consideration to be paid in the form of an
increase in cash value, account value, dividend accumulations, face
amount, extended term period or benefit payment, as appropriate,
depending on the policy, or extension of the policy's expiration date.
With respect to the Merger, the term ``Policy Credit'' means
consideration to be paid in the form of an adjustment of policy values
for certain policies under the Plan of Conversion.
(f) The ``Effective Date'' means the date the actual Conversion and
Merger will transpire. It is expected to occur in the latter part of
the third quarter in 2002, however the exact date is not known at this
time.
Summary of Facts and Representations
The Parties
1. Provident, a mutual life insurance company organized under the
laws of the Commonwealth of Pennsylvania, maintains its principal place
of business at 1000 Chesterbrook Avenue, Berwyn, Pennsylvania.
Provident was formed in 1865 and converted to a mutual insurance
company in 1922 pursuant to the Pennsylvania Act of April 20, 1921.
Provident's business is concentrated in life insurance products and it
offers a broad range of life insurance and variable annuity products
and related services to its policyholders. As of December 31, 2000,
Provident and its subsidiaries had approximately $9.2 billion in
assets, with $8.2 billion set aside primarily to pay future
policyholder benefits. Provident had approximately $3.9 billion in
general account assets and $2.8 billion in separate account assets as
of December 31, 2000.
2. As a mutual life insurance company, Provident has no authorized,
issued or outstanding capital stock. Pursuant to Pennsylvania law and
Provident's Articles of Incorporation and By-Laws, Provident's
policyholders, through the purchase of Provident's insurance policies,
acquire both insurance coverage from, and membership rights in,
Provident. The membership rights of policyholders consists principally
of the right to vote in the election of directors of Provident and the
right to share in any residual value of Provident in the event that
Provident were to be liquidated. Each Provident policyholder is
entitled to one vote regardless of the number or size of policies he or
she holds. In this regard, Provident policyholders are entitled to vote
on the Conversion.
3. Provident has a number of subsidiaries and affiliates that
provide a variety of financial services, including investment
management and brokerage services. Provident and its affiliates also
provide a variety of fiduciary and other services to Plans described in
section 3(3) of the Act and to other Plans described in section
4975(e)(1) of the Code, including Plan administration and related
services, investment management services, and securities brokerage and
related services. Many of the Plans to which Provident and its
affiliates provide services are also Provident policyholders.
As of December 31, 2000, Provident had over 1,050 outstanding
policies and contracts held in connection with Plans. These Plans
include defined benefit pension plans, defined contribution plans,
i.e., 401(k) plans, and welfare benefit plans such as group life,
short- and long-term disability, accidental death and dismemberment,
and group health coverage.
Although Provident is not a party in interest with respect to any
of its policyholders that are Plans merely because it has issued an
insurance policy to such Plans, its provision of the foregoing services
to the Plans may cause it to be considered a party in interest under
section 3(14)(A) and (B) of the Act.
4. Besides issuing insurance policies and providing services to
certain client Plans, Provident and its subsidiaries and affiliates
sponsor three in-house Plans which are expected to receive
consideration in connection with the Plan of Conversion described
herein. A description of each of the affected Provident Plans is
summarized in the following table:
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Approximate number Total assets
Name of plan and type of participants (as (as of 12/31/ Coverage
of 12/31/00) 00)
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The Home Office Pension Plan (Defined 2,231 $191,031,805 Actives, Deferred and
Benefit). Retirees.
Savings Plan for Certain Employees, Agents 2,636 $85,655,382 Actives, Separated and
and Managers of Provident Mutual Life Beneficiaries.
Insurance Company (the Savings Plan)
(Defined Contribution: 401(k) & Profit
Sharing).
[[Page 41509]]
Pension Plan for Agents of Provident 1,316 $86,819,283 Actives, Separated and
Mutual Life Insurance Company (the Agents Beneficiaries.
Pension Plan) (Defined Contribution:
Money Purchase).
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EMJAY Corporation is the trustee for the Savings Plan and the
Agents Pension Plan. The Home Office Pension Plan is not required to
have a trustee because all funds are held under insurance contracts
issued by Provident. Investment decisions for each Provident Plan are
made by Provident's Benefits Committee, which serves as the Plan
administrator. Members of the Benefits Committee consist of officers of
Provident.
Provident's Conversion
5. Provident is considering a transaction which would allow for its
conversion from a mutual life insurance company into a stock life
insurance company in accordance with the requirements of the Conversion
Act, as amended and as codified at 40 P.S. Sections 911-A to 929-A. It
is anticipated that, in the Conversion, Eligible Members of Provident,
including Plans, will initially be issued Provident Shares, or for
certain other policyholders, Cash or Policy Credits in respect of the
extinguishment of their membership interests in Provident. Eligible
Members receiving Cash or Policy Credits in the Conversion will be
those for whom the receipt of such consideration is mandatory under the
Plan of Conversion and the Merger Agreement. Provident Shares issued in
the Conversion will be held by the Conversion Agent on behalf of the
Eligible Members.
Immediately following the Conversion, pursuant to the Merger
Agreement, the Merger Sub will merge with and into Provident. In turn,
Provident will become a wholly-owned subsidiary of the Sponsor.\2\
Eligible Members that receive Provident Shares in the Conversion will
exchange those shares for Sponsor Class A Shares or, subject to certain
limitations, Cash or Policy Credits. The Sponsor Class A Shares will be
registered under the Securities Exchange Act of 1934, as amended, and
listed on the New York Stock Exchange.
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\2\ Provident states that because Pennsylvania law does not
provide for demutualizations structured as reverse triangular
mergers or permit the direct merger of a stock company into a mutual
company, it would not be possible for the insurer to become a
wholly-owned subsidiary of the Sponsor through the merger of the
Merger Sub with and into Provident without the prior conversion of
Provident from a mutual company to a stock company under
Pennsylvania law. As a result, Provident explains that it is
necessary for Provident to convert from a mutual insurance company
to a stock corporation under Pennsylvania law before the Merger Sub
can merge with and into Provident. In addition, Provident states
that because it holds non-transferable licenses and policy form
approvals necessary for the operation of its business, and for other
substantial business reasons, Provident must be the surviving entity
in any merger.
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6. Provident represents that at present, it can increase its
capital primarily through earnings contributed through its operating
businesses, through the issuance of surplus notes, or by divestiture of
all or a portion of interests in subsidiaries or other investments.
However, Provident explains that none of these methods may provide a
long-term source of capital to allow the insurer to develop new
businesses or provide greater stability and protection for its
policyholders. Therefore, Provident believes that its proposed
Conversion and affiliation with the Sponsor will be in the best
interests of its policyholders (including its Plan policyholders)
because it will--
Help assure the continuity of Provident's life insurance
and other business, enhance Provident's competitiveness, and generate
significant opportunities for improved financial performance;
Provide Provident with greater flexibility to obtain
capital as compared to the current mutual life insurance structure, and
significantly enhance Provident's ability to become a financially-
stronger organization with greater resources to back its obligations to
policyholders;
Provide Provident with increased flexibility to fund the
growth of existing product lines, expand into new product lines, and
take advantage of investment and acquisition opportunities;
Benefit both short-term and long-term interests of
Provident, its policyholders, employees, the communities in which
Provident does business, and other groups that will be affected by the
transaction; and
Allow Provident to become affiliated with a larger
enterprise with significant financial strength.
Moreover, Provident states that the Conversion and Merger will not,
in any way, change premiums or reduce benefits, values, guarantees, or
other policy obligations of Provident to its policyholders. Also,
Provident represents that it will continue to pay policyholder
dividends as declared.
7. Accordingly, Provident requests an administrative exemption from
the Department which, if granted, will permit
(1) the initial issuance, by Provident, of Provident Shares to the
Conversion Agent, as stockholder of record, on behalf of any Eligible
Member, including any Eligible Member which is a Plan, including a
Provident Plan \3\; (2) the exchange, by the Conversion Agent, of
Provident Shares for Sponsor Class A Shares issued by the Sponsor, or,
the receipt of Cash or Policy Credits, in exchange for such
policyholder's membership interest in Provident or in connection with
the Merger between Provident and the Merger Sub, a wholly-owned
subsidiary of the Sponsor, in accordance with the terms of the Plan of
Conversion and the Merger Agreement, adopted by Provident and
implemented pursuant to the Conversion Act and the applicable
provisions of the Pennsylvania Business Corporation Law of 1998.
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\3\ Provident represents that it is aware that the Sponsor Class
A Shares would constitute ``qualifying employer securities'' within
the meaning of section 407(d)(5) of the Act, and that section 408(e)
of the Act would apply to such distributions. Nevertheless,
Provident has specifically requested that the exemption apply to the
receipt of Sponsor Class A Shares by any of the Provident Plans, if
applicable, regardless of the ability by such Plan to utilize
section 408(e) of the Act. (The Department, however, expresses no
opinion herein on whether the Sponsor Class A Shares would
constitute a ``qualifying employer security'' within the meaning of
section 407(d)(5) of the Act and whether section 408(e) of the Act
would apply to such distributions.) Provident believes that this
expanded type of exemptive relief will provide the greatest
flexibility for Wilmington Trust, the independent fiduciary for the
Provident Plans, to select suitable types of consideration.
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Provident represents that the receipt of the demutualization
consideration pursuant to the Plan of Conversion by an Eligible Member
which is a Plan may be viewed as a prohibited sale or exchange of
property between the Plan and Provident in violation of section
406(a)(1)(A) of the Act. Moreover, Provident states that the
transaction may also be construed as a transfer of plan assets to, or a
use of plan assets by or for the benefit of, a party in interest
[[Page 41510]]
in violation of section 406(a)(1)(D) of the Act.
In addition to the above, Provident is requesting that the
exemption apply, for a period of up to 6 months following the Effective
Date, to the holding, by the Home Office Pension Plan, of Sponsor Class
A Shares whose fair market value exceeds 10 percent of the Provident
Plan's assets, in violation of sections 406(a)(1)(E) and (a)(2) and
407(a)(2) of the Act.\4\
The proposed exemption includes a number of conditions that protect
Eligible Members that are Plans, which are consistent with the
conditions proposed under prior demutualization exemptions granted by
the Department. Generally, the conditions rely on the safeguards
provided under Pennsylvania insurance law to protect the interests of
all policyholders, including those that are Plans, in connection with
the Conversion and Merger. Among the safeguards is the requirement that
distributions to Eligible Members that are Plans pursuant to the
exemption must be on terms no less favorable to the Plans than Eligible
Members that are not Plans. In this regard, Eligible Members that are
Plans must participate in the Conversion on the same basis as Eligible
Members that are not Plans.
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\4\ Section 406 (a)(1)(E) of the Act prohibits the acquisition
by a plan of any employer security which would be in violation of
section 407(a) of the Act. Section 406(a)(2) of the Act states that
no fiduciary who has authority or disrection to control the assets
of a plan shall permit the plan to hold any employer security if he
[or she] knows that holding such security would violate section
407(a) of the Act. Section 407(a)(1) of the Act prohibits the
acquisition by a plan of any employer security which is not a
qualifying employer security. Section 407(a)(2) of the Act provides
that a plan may not acquire any qualifying employer security, if
immediately after such acquisition, the aggregate fair market value
of such securities exceeds 10 percent of the fair market value of
the plan's assets.
In addition to the above, section 407(f) of the Act, which is
applicable to the holding of a qualifying employer security by a
plan other than an eligible individual account plan, requires that
(a) immediately following its acquisition by a plan, no more than 25
percent of the aggregate amount of stock of the same class issued
and outstanding at the time of acquisition is held by the plan; and
(b) at least 50 percent of the stock be held by persons who are
independent of the issuer. Provident has confirmed that to the best
of its knowledge, none of the Sponsor Class A Shares which will be
issued to the Provident Plans will violate the provisions of section
407(f) of the Act.
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In addition, to represent the interests of the Provident Plans with
respect to such activities as voting and the election of
demutualization consideration, Provident has retained Wilmington Trust
Company (Wilmington Trust), to act as the Independent Fiduciary.
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\4\ Section 406(a)(1)(E) of the Act prohibits the acquisition by
a plan of any employer security which would be in violation of
section 407(a) of the Act. Section 406(a)(2) of the Act states that
no fiduciary who has authority or discretion to control the assets
of a plan shall permit the plan to hold any employer security if he
[or she] knows that holding such security would violate section
407(a) of the Act. Section 407(a)(1) of the Act prohibits the
acquisition by a plan of any employer security which is not a
qualifying employer security. Section 407(a)(2) of the Act provides
that a plan may not acquire any qualifying employer security, if
immediately after such acquisition, the aggregate fair market value
of such securities exceeds 10 percent of the fair market value of
the plan's assets.
In addition to the above, section 407(f) of the Act, which is
applicable to the holding of a qualifying employer security by a
plan other than an eligible individual account plan, requires that
(a) immediately following its acquisition by a plan, no more than 25
percent of the aggregate amount of stock of the same class issued
and outstanding at the time of acquisition is held by the plan; and
(b) at least 50 percent of the stock be held by persons who are
independent of the issuer. Provident has confirmed that to the best
of its knowledge, none of the Sponsor Class A Shares which will be
issued to the Provident Plans will violate the provisions of section
407(f) of the Act.
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Pennsylvania Law Procedural Requirements for Conversions
8. The Conversion Act establishes an approval process for the
demutualization of a life insurance company organized under
Pennsylvania law. In this regard, a plan of demutualization must be
approved by the board of directors of the converting company, by the
Commissioner, and by a vote of the Eligible Members of the converting
company.
First, the Plan of Conversion, including the Merger, must be
approved by an affirmative vote of not less than two-thirds of the
converting company's board of directors. Then, the Plan of Conversion,
including the Merger, must be approved by the Commissioner who will
approve it if, after holding a public hearing, he or she determines
that the Plan of Conversion complies with all provisions of
Pennsylvania law and is fair and equitable to the company and the
policyholders. The policyholders of the mutual life insurance company
generally must also approve the Plan of Conversion and the Merger. The
Conversion Act provides that the policyholders eligible to vote on the
Plan of Conversion are ``Eligible Members'' of the mutual life
insurance company. Before the Conversion and the Merger can become
effective, the Plan of Conversion must be put to a vote of the eligible
members of the converting company. Under the Conversion Act, the
eligible members must be provided with notice of the meeting of
policyholders called for the purpose of voting whether to approve the
demutualization plan, and the Plan of Conversion must be approved by a
vote of not less than two-thirds of the votes of the insurer's eligible
members voting thereon in person, by proxy or by mail.
9. Consistent with the requirements of Pennsylvania law, the Plan
of Conversion adopted by Provident provides for Provident to file an
application with the Commissioner under Section 803-A of the Conversion
Act to reorganize as a stock life insurance company. The Commissioner
will hold a hearing on whether the terms of the demutualization comply
with the Conversion Act after giving written notice to Provident and
other interested persons. The Plan of Conversion also provides for
Provident Eligible Members to be able to comment on the Plan of
Conversion at the hearing, for the Eligible Members to vote on the Plan
of Conversion at the Eligible Members' Meeting and for Provident to
provide notice to its Eligible Members of both the public hearing and
the Eligible Members' Meeting.
The Conversion Act explicitly permits the Commissioner to employ
staff personnel and to engage outside consultants to assist him in
determining whether a demutualization plan meets the requirements of
the Conversion Act and any other relevant provisions of the
Pennsylvania law. In the case of the proposed demutualization, the
Commissioner has retained an actuarial firm, Tillinghast Towers
Perrins, and is expected to hire an accounting firm, legal advisers and
an investment banking firm as consultants.
A decision by the Commissioner to approve a demutualization plan
pursuant to the Conversion Act is then subject to judicial review in
Pennsylvania courts.
In addition to the Pennsylvania regulatory requirements, Provident
has agreed to file a copy of the Plan of Conversion with the
Superintendent.\5\ The Plan of Conversion may also be subject to review
by the Superintendent, who may raise objections if the Plan of
Conversion is deemed to be unfair or inequitable to New York
policyholders. If the Superintendent opines unfavorably on the Plan of
Conversion, Provident, as a practical matter, would either amend the
Plan of Conversion or work out a satisfactory solution with the
Superintendent. If the Superintendent were to require changes
unacceptable to the Commissioner, Provident would have to work with
both regulators to arrive at a satisfactory solution.
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\5\ Specifically, section 1106(i) of the New York Insurance Law
[Section 1106(i)] authorizes the Superintendent to review the
demutualization plan of a foreign life insurer licensed in New York
and to specify the conditions, if any, that the Superintendent would
impose in order for the foreign insurer to retain its New York
license following its demutualization. In this regard, Section
1106(i) requires that a foreign life insurer licensed in New York
file with the Superintendent a copy of the demutualization plan at
least 90 days prior to the earlier of (a) the date of any public
hearing required to be held on the plan of reorganization by the
insurer's state of domicile and (b) the proposed effective date of
the demutualization.
If, after examining the plan of demutualization, the
Superintendent finds that the plan is not fair or equitable to the
New York policyholders of the insurer, the Superintendent must set
forth the reasons for his findings. In addition, the Superintendent
must notify the insurer and its domestic state insurance regulator
of his findings and his reasons for such findings and advise of any
requirements he considers necessary for the protection of current
New York policyholders in order to permit the insurer to continue to
conduct business in New York as a stock life insurer after the
demutualization.
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Provident's Plan of Conversion was adopted by its Board of
Directors on December 14, 2001. Provident expects the Eligible Members'
Meeting will occur in the latter part of the third quarter for the 2002
calendar year, with
[[Page 41511]]
notice of such meeting having been mailed at least 30 days prior to the
scheduled meeting date to approximately 1,050 Plan policyholders which
are Eligible Members. Approximately 316,317 Eligible Members will be
eligible to vote on the Plan of Conversion and each Eligible Member
will be entitled to only one vote, regardless of the number or size of
the policies owned. Further, Provident's hearing on the Plan of
Conversion is expected to be held on May 23, 2002 in King of Prussia,
Pennsylvania. As for the actual Conversion and Merger, Provident
expects these events will transpire during the latter part of the third
quarter of 2002.\6\ Provident expects these events should occur within
three months of approval of the Plan of Conversion by the Commissioner.
If the Conversion and Merger are not completed by December 31, 2002,
the Merger Agreement may be terminated. If the Merger Agreement is
terminated, the Conversion and Merger will not take place.
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\6\ However, the Department notes that the Merger and Plan of
Conversion must take place five business days after the Eligible
Members' Meeting. At such meeting, Eligible Members have the
opportunity to vote for or against the Conversion and Merger. Notice
of the Eligible Members' Meeting cannot be sent to Eligible Members
until issuance of an order from the Commissioner approving the Plan
of Conversion. The Department also notes that if the subject
exemption is not received prior to the Effective Date of the Plan of
Conversion, Provident will, subject to the Commissioner's approval,
either pay consideration to such Eligible Members or delay payment
of such consideration and place said amount in an escrow or similar
arrangement subject to terms and conditions approved by the
Commissioner.
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Distributions to Eligible Members
10. Provident's Plan of Conversion provides for Eligible Members to
ultimately receive Sponsor Class A Shares, Cash, or Policy Credits as
consideration for giving up their membership interests in the mutual
company, which interests are extinguished as a result of the
demutualization. For this purpose, an Eligible Member is essentially a
policyholder whose name appears on the insurer's records as owner of an
eligible policy on the date the Plan of Conversion is adopted. As
stated above, any determination to receive Sponsor Class A Shares, Cash
or Policy Credits by an Eligible Member which is a Plan, pursuant to
the Plan of Conversion, will be made by one or more Plan fiduciaries
which are independent of Provident and its affiliates. In this regard,
neither Provident nor its affiliates will exercise any investment
discretion or provides ``investment advice,'' within the meaning of 29
CFR 2510.3-21(e), with respect to such decisions.\7\
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\7\ ``The proceeds of the demutualization will belong to the
Plan if they would be deemed to be owned by the Plan under ordinary
notions of property rights. See ERISA Advisory Opinion 92-02A,
January 17, 1992 (assets of plan generally are to be identified on
the basis of ordinary notions of property rights under non-ERISA
law). It is the view of the Department that, in the case of an
employee welfare benefit plan with respect to which participants pay
a portion of the premiums, the appropriate plan fiduciary must treat
as plan assets the portion of the demutualization proceeds
attributable to participant contributions. In determining what
portion of the proceeds are attributable to participant
contributions, the plan fiduciary should give appropriate
consideration to those facts and circumstances that the fiduciary
knows or should know are relevant to the determination, including
the documents and instruments governing the plan and the proportion
of total participant contributions to the total premiums paid over
an appropriate time period. In the case of an employee pension
benefit plan, or where any type of plan or trust is the
policyholder, or where the policy is paid for out of trust assets,
it is the view of the Department that all of the proceeds received
by the policyholder in connection with a demutualization would
constitute plan assets.'' See ERISA Advisory Opinion 2001-02A,
February 15, 2001.
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11. It is anticipated that the following steps will occur on or
prior to the Effective Date:
(a) The Sponsor will make a capital contribution in Cash to the
Merger Sub in an amount equal to the excess of (x) the total amount of
Cash and Policy Credits that are to be paid or credited to Eligible
Members in the transactions, over (y) the total amount of Cash and
Policy Credits to be paid or funded by Provident from its surplus as it
existed prior to the Conversion and Merger. The amount to be paid or
funded by Provident from its surplus as it existed prior to the Merger
will, when added to the amount paid or payable by Provident in respect
of costs and expenses incurred in connection with the Conversion and
the Merger, be equal to not more than 10 percent of the value of
Provident as of the Effective Date without taking into account any
diminution resulting from such costs and expenses.
(b) Provident will convert to a stock company. Immediately
following the Conversion and under the terms of the Plan of Conversion,
the Conversion Agent will vote the Provident Shares in favor of the
Merger.
(c) The Merger Sub then will merge with and into Provident, with
Provident as the surviving corporation. The Provident Shares evidenced
by the global certificate will be extinguished. In exchange therefor,
Eligible Members will be entitled to receive Sponsor Class A Shares,
Cash, or Policy Credits.
12. In order to determine the amount of consideration to which each
Eligible Member is entitled (combinations of different forms of
consideration will not be permitted), each Eligible Member will be
allocated a number of Provident Shares equal to the sum of (a) a fixed
minimum number of shares \8\ and (b) an additional number of shares
based on actuarial formulas that take into account each policy's
contributions to the surplus and asset valuation reserve of Provident,
which formulas have been approved by the Commissioner. As noted above,
upon consummation of the Merger, the Provident Shares that are
allocated to those policyholders who are entitled to receive stock will
be exchanged for Sponsor Class A Shares, Cash or Policy Credits in
accordance with the terms of the Merger Agreement.
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\8\ The fixed component of consideration will equal the quotient
of: (A) 20% of the total number of Allocable Provident Shares
divided by (B) the total number of Eligible Members, provided that
any resulting fractional number of Provident Shares shall be rounded
to the nearest whole number of Provident Shares. Determination of
Allocable Provident Shares depends upon the ``Sponsor Final Stock
Price'' which, as defined in the Merger Agreement, means ``the
volume weighted average of the sales prices of the Sponsor Class A
Shares as published by Bloomberg Professional Service for the 15
consecutive Trading Dates ending on the fifth Trading Day
immediately preceding the Closing Date.'' The aggregate purchase
price is also subject to a ``collar'' adjustment based on
fluctuations in the stock price of the Sponsor Class A Shares and an
adjustment related to the amount of assets to be allocated to a
``closed block'' of assets for the benefit of certain dividend
receiving policies. Thus, the total number of shares allocated to
the fixed component will not fully be determined until the Closing
Date of the Merger and such total may be subject to further
regulatory approval.
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Consideration Payable to Eligible Members
13. Under the Plan of Conversion, certain Eligible Members will
receive Cash or Policy Credits in respect of the extinguishment of
their membership interests in the Conversion. The remaining Eligible
Members will be issued Provident Shares in respect of their membership
interests in Provident. With respect to the Merger, the Provident
Shares will be extinguished and, in exchange therefore, Eligible
Members will be entitled to receive Sponsor Class A Shares, Cash, or
Policy Credits.
Eligible Members who own the following types of policies will be
required under the Plan of Conversion to receive Policy Credits in
exchange for their membership interests in Provident: a policy that is
an individual retirement annuity contract (the IRA) within the meaning
of section 408(b) or 408A of the Code or a tax sheltered annuity
contract (the TSA) within the meaning of section 403(b) of the Code; or
a policy that is an individual annuity contract that has been issued
pursuant to a Plan qualified
[[Page 41512]]
under sections 401(a) or 403(a) of the Code directly to the Plan
participant; or a policy that is an individual life insurance policy
that has been issued pursuant to a Plan qualified under section 401(a)
or 403(a) of the Code directly to the plan participant. These
policyholders are collectively referred to as ``Policy Credit
Recipients.''
Also, with respect to the Conversion, certain Eligible Members will
be required to receive consideration in the form of Cash in exchange
for their membership interests in Provident. Said policyholders are
collectively referred to as ``Cash Recipients.'' A Cash Recipient is a
policyholder whose address for mailing purposes as shown on Provident's
records is located outside the United States; or whose address for
mailing purposes as shown on Provident's records on the Effective Date
is an address at which mail is undeliverable or deemed to be
undeliverable in accordance with guidelines approved by the
Commissioner; or to whom Provident determines in good faith to the
satisfaction of the Commissioner that it is not reasonably feasible or
appropriate to provide consideration in the form that such Eligible
Member would otherwise receive.\9\
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\9\ The Policy Credit Recipients and the Cash Recipients are
hereinafter collectively referred to as ``Mandatory Consideration
Recipients.''
---------------------------------------------------------------------------
Eligible Members that own group annuity contracts designed to fund
benefits under a retirement plan which is qualified under section
401(a) or section 403(a) of the Code (including a plan covering
employees described in section 401(c)) that do not affirmatively elect
to receive Sponsor Class A Shares or Cash in the Merger will receive
Policy Credits (Qualified Plan Recipients). All other Eligible Members
will have the option to receive Cash rather than Sponsor Class A Shares
in the Merger.\10\ It is possible that not all Eligible Members opting
to receive Cash or Policy Credits will receive Cash or Policy Credits.
Instead, the aggregate amount of Cash and Policy Credits available will
be limited. If elections for Cash and Policy Credits are over-
subscribed, available Cash and Policy Credits first will be paid or
credited to Mandatory Consideration Recipients and then will be paid or
credited sequentially to Optional Consideration Recipients, starting
with electing Eligible Members entitled to receive the smallest amount
of consideration and continuing to electing Eligible Members receiving
the largest amount of consideration at which all Optional Consideration
Recipients at that level of consideration can be paid with the
available funds. No Eligible Member will receive a combination of Cash
or optional Policy Credits and Sponsor Class A Shares.
---------------------------------------------------------------------------
\10\ Optional Cash Recipients and Qualified Plan Recipients are
together referred to herein as ``Optional Consideration
Recipients.''
---------------------------------------------------------------------------
Each Provident Share issued in the Conversion to an Eligible Member
(other than an Optional Consideration Recipient) will be exchanged for
one Sponsor Class A Share on a one for one exchange in the Merger. The
amount of Cash or value of Policy Credits received by each Mandatory
Consideration Recipient or Optional Consideration Recipient in the
Conversion or Merger will be based on (x) the number of Sponsor Class A
Shares such Eligible Member would have received if such Eligible Member
had received Sponsor Class A Shares in the Merger and (y) the average
market value of such Sponsor Class A Shares for the 15 consecutive
trading days ending on the fifth trading day immediately preceding the
Effective Date.
Limitation on Consideration and Effect on Existing Policies
14. The amount of Cash and Policy Credits that may be paid or
credited pursuant to the Plan of Conversion and the Merger Agreement,
in the aggregate, will not exceed (x) the total amount paid or credited
that will be funded out of Provident's surplus as this surplus existed
prior to the Merger, with certain limitations not relevant for purposes
of this request, and (y) additional amounts paid or credited with funds
supplied by the Sponsor as a capital contribution to the Merger Sub.
These additional amounts cannot exceed 20 percent of the value of
Provident as of the Effective Date, determined without taking into
account any diminution resulting from costs or expenses paid or payable
by Provident in connection with the Conversion and Merger, but
including amounts paid or credited out of Provident's surplus pursuant
to clause (x) above.
Under the current terms of the Merger Agreement, the amount of Cash
or Policy Credits that may be paid or funded with Cash supplied by the
Sponsor is further limited so that no more than 20 percent of the total
number of Eligible Members receiving consideration provided or funded
by the Sponsor (including Eligible Members receiving Sponsor Class A
Shares) will receive Cash or Policy Credits. The parties to the Merger
have agreed to waive this limitation if the Internal Revenue Service
issues certain tax rulings.
The Closed Block (the Closed Block)
15. Pursuant to the Plan of Conversion, Provident will, for
policyholder dividend purposes only, operate the Closed Block for the
benefit of individual policies paying ``experience-based policy
dividends''. For accounting purposes only, assets of Provident will be
allocated to the Closed Block in an amount that produces cash flows
which, together with anticipated revenue from the Closed Block policies
and contracts, are expected to be sufficient to support the Closed
Block policies, including, but not limited to, provisions for payment
of claims and certain charges and taxes, and to provide for
continuation of dividend scales payable for 2001, if the experience
underlying such scales (including the portfolio interest rate)
continues, and to allow for appropriate adjustments in such scales if
such experience changes. Assets in the Closed Block remain as general
account assets of Provident and are fully subject to the claims of
creditors of Provident, like any general account assets.
Commission-Free Program
16. Under the terms of the Plan of Conversion, the Sponsor will
establish the Commission-Free Program within 90 days after the
Effective Date which will continue for at least 90 days thereafter. The
Commission-Free Program will provide any shareholder holding fewer than
100 Sponsor Class A Shares the opportunity to either sell all of such
shareholder's shares or to buy additional shares necessary to increase
such shareholder's shares to 100, in either case, at the prevailing
market prices but without paying brokerage commissions, mailing
charges, registration fees, or other administrative or similar
expenses.
Independent Fiduciary
17. As stated above, Wilmington Trust will serve as the Independent
Fiduciary for all of the Provident Plans in connection with the
implementation of Provident's Plan of Conversion. Generally, such
transactions over which Wilmington Trust will exercise investment
discretion may result in the acquisition, holding or disposition of
Sponsor Class A Shares by the Provident Plans. Wilmington Trust states
that it is familiar with the Department's independent fiduciary
requirements and has acknowledged and accepted such duties,
responsibilities and liabilities to act on behalf of the Provident
Plans. In return for services rendered, Wilmington Trust
[[Page 41513]]
will be compensated by either Provident, a successor, or an affiliate.
Wilmington Trust was founded in 1903 and its home state is
Delaware. As of December 31, 2001, Wilmington Trust had approximately
$7.3 billion in banking assets and $24.6 billion in assets under
management. Wilmington Trust maintains its primary focus on asset
management and trust services and is also a specialty provider of
corporate financial services on an international scale. Since 1942,
Wilmington Trust has provided trustee, custodial, and administrative
services for all types of qualified and non-qualified employee benefit
plans, and currently has approximately 1,000 employee benefit plans
under management.
Wilmington Trust represents that it is independent of Provident and
its affiliates. In this regard, Wilmington Trust asserts that it has no
business, ownership or control relationship, nor is it otherwise
affiliated with Provident and its affiliates. Further, Wilmington Trust
represents that while it either directly or through its affiliates may
provide one or more banking, trust or other customary services to
Provident or its affiliates from time to time, it derives less than one
percent of its annual income from Provident and its affiliates.
As the Independent Fiduciary for the Provident Plans, Wilmington
Trust will be required to (a) vote on whether to approve or not to
approve the proposed demutualization; (b) elect between consideration
in the form of Sponsor Class A Shares, Cash or Policy Credits on behalf
of such Plans; (c) review and approve Provident's allocation of Sponsor
Class A Shares, Cash or Policy Credits received for the benefit of the
participants and beneficiaries of the Provident Plans; (d) vote on
Sponsor Class A Shares that are held by the Provident Plans and dispose
of such stock held by the Home Office Pension Plan, which exceeds the
limitation of section 407(a)(2) of the Act, as soon as it is reasonably
practicable, but in no event later than six months after the Effective
Date of the Plan of Conversion; and (e) take all actions that are
necessary and appropriate to safeguard the interests of the Provident
Plans and their participants and beneficiaries. In addition, Wilmington
Trust will provide the Department with a complete and detailed final
report as it relates to the Provident Plans prior to the Effective Date
of the demutualization. Finally, Wilmington Trust states that it has
conducted a preliminary review of Provident's Plan of Conversion and it
sees nothing in the Plan that would preclude the Department from
proposing the requested exemption.
18. In summary, it is represented that the proposed transactions
will satisfy the statutory criteria for an exemption under section
408(a) of the Act because:
(a) The Plan of Conversion will be implemented in accordance with
procedural and substantive safeguards that are imposed under
Pennsylvania law and will be subject to review and supervision of the
Commissioner and the Superintendent.
(b) The Commissioner will review the terms and options that are
provided to Eligible Members of Provident as part of such
Commissioner's review of the Plan of Conversion and Merger and the
Commissioner will approve the Plan of Conversion and Merger following a
determination that such Plan is fair and equitable to Eligible Members
(including Eligible Members that are Plans).
(c) The Superintendent will object to the Plan of Conversion if he
or she finds that such Plan is not fair or equitable to New York
policyholders.
(d) As part of their separate determinations, both the Commissioner
and the Superintendent must concur on the terms of the Plan of
Conversion.
(e) In the case of an Eligible Member that is a Plan, one or more
independent Plan fiduciaries will have an opportunity to vote to
approve the terms of the Plan of Conversion (or to comment on such
Plan), and will be solely responsible for all such decisions after
receiving full and complete disclosure from Provident.
(f) The Plan of Conversion and Merger will help assure the
continuity of Provident's life insurance and other business, will
enhance the competitiveness of Provident and will generate significant
opportunities for improved financial performance.
(g) The proposed exemption will allow Eligible Members that are
Plans to receive Sponsor Class A Shares, Cash or Policy Credits, in
exchange for their membership interests in Provident and neither
Provident nor any of its affiliates will exercise investment discretion
or provide ``investment advice,'' within the meaning of 29 CFR 2510.3-
21(c), with respect to such decisions or options given.
(h) Each Eligible Member will have an opportunity to determine
whether to vote to approve the terms of the Plan of Conversion and
Merger and will also be solely responsible for any decisions that may
be permitted under the Plan of Conversion regarding the form of
consideration to be received in the demutualization.
(i) All Plans that are Eligible Members will participate in the
transactions and on the same basis as Eligible Members that are not
Plans.
(j) No Eligible Member will pay any brokerage commissions or fees
in connection with the receipt of Sponsor Class A Shares or Policy
Credits or in connection with the implementation of the Commission-Free
Program.
(k) The demutualization will not, in any way, change premiums or
reduce policy benefits, values, guarantees or other policy obligations
of Provident to its policyholders.
FOR FURTHER INFORMATION CONTACT: Ms. Anna M. N. Mpras of the
Department, telephone (202) 693-8565. (This is not a toll-free number.)
Chiquita Processed Foods 401(k) Retirement Savings Plan (the 401(k)
Plan) and the Chiquita Savings and Investment Plan (the Savings Plan;
collectively the Plans)
Located in New Richmond, WI and Cincinnati, OH, respectively
[Application Nos. D-11063 and D-11064]
Proposed Exemption
Based on the facts and representations set forth in the
application, the Department is considering granting an exemption under
the authority of section 408(a) of the Act and section 4975(c)(2) of
the Code and in accordance with the procedures set forth in 29 CFR part
2570, subpart B (55 FR 32836, 32847, August 10, 1990).\11\ If the
exemption is granted, the restrictions of sections 406(a), 406(b) and
407(a) of the Act and the sanctions resulting from the application of
section 4975 of the Code, by reason of section 4975(c)(1)(A) through
(E) of the Code, shall not apply, effective March 19, 2002, to (1) the
acquisition and holding by the Plans of certain new warrants (the
Warrants) to purchase new common stock (the New Common Stock) issued by
Chiquita Brands International, Inc. (the Employer), a party in interest
with respect to the Plans; and (2) the subsequent exercise of the
Warrants, as directed by participants in the Plans, provided that the
following conditions were met:
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\11\ For purposes of this proposed exemption, references to
provisions of Title I of the Act, unless otherwise specified, refer
also to corresponding provisions of the Code.
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(a) The Plans had little, if any, ability to affect the negotiation
or confirmation of either the Plan of Reorganization of Chiquita (the
Original POR) filed by the Employer on November 28, 2001 under Chapter
11 of Title 11 of the United States Code (the Bankruptcy Code), the
First Amended Plan of Reorganization of Chiquita (the First Amended
POR),
[[Page 41514]]
subsequently filed under the Bankruptcy Code by the Employer on January
18, 2002, or the Second Amended Plan of Reorganization of Chiquita (the
Second Amended POR), subsequently filed under the Bankruptcy Code by
the Employer on March 7, 2002.
(b) The acquisition and holding of the Warrants did not occur until
the Second Amended POR had been confirmed.
(c) The Plans acquired the Warrants automatically in connection
with the Employer's bankruptcy proceedings and without any unilateral
action on their part.
(d) All shareholders, including the Plans, were treated in a like
manner with respect to the issuance of the Warrants.
(e) The Warrants represented less than 25 percent of the assets of
either Plan.
(f) Any decision to exercise the Warrants acquired by the Plans in
connection with the Employer's bankruptcy will be made by the
participants in accordance with the terms of a warrant agreement (the
Warrant Agreement), as well as in accordance with the Plan provisions
for individually-directed investment of participant accounts.
(g) The Plans did not pay any fees or commissions in connection
with the receipt of the Warrants, nor will the Plans pay any fees or
commissions in connection with the holding or exercise of the Warrants.
(h) The trustees of the Plans (the Trustees) will not allow
participants to exercise the Warrants held by their individual accounts
in the Plans unless the fair market value of the New Common Stock
exceeds the exercise price of the Warrants.
EFFECTIVE DATE: If granted, this proposed exemption will be effective
as of March 19, 2002.
Summary of Facts and Representations
1. The Employer is a New Jersey corporation maintaining its
principal place of business in Cincinnati, Ohio. The Employer is an
international marketer, producer and distributor of fresh fruits,
vegetables and processed foods sold under the ``Chiquita'' and other
brand names.
2. The Plans, which are sponsored by the Employer, are defined
contribution plans that provide for participant-directed investments.
Participants in the Plans may direct the investments of their accounts
into a variety of funds, including the Employer's common stock fund.
The Savings Plan, formerly known as the ``United Brands Company Savings
and Investment Plan,'' was adopted by the Employer effective January 1,
1986. As of December 21, 2001, the Savings Plan had total assets of
approximately $34,521,487 and 989 participants. Of the total assets,
the Savings Plan held 1,285,537 shares of Employer common stock (the
Old Employer Common Stock) which represented approximately 2.27% of the
fair market value of the assets of the Savings Plan and was allocated
to the individual accounts of 557 participants. Putnam Fiduciary Trust
Company, a trust company having its principal place of business in
Boston, Massachusetts, serves as the trustee for the Savings Plan.
The 401(k) Plan was formed, effective April 1, 1999, as the result
of a merger of the American Fine Foods 401(k) Plan and the Stokely USA,
Inc. Retirement Savings Plan into the Friday Canning Corporation 401(k)
Savings Plan. As of December 21, 2001, the 401(k) Plan had total assets
of approximately $37,521,487 and 2,624 total participants. Of the total
assets, the 401(k) Plan held 199,515 shares of the Old Employer Common
Stock which represented about 0.32% of the fair market value of the
assets of such plan and was allocated to the accounts of 283
participants. UMB Bank, N.A., a trust company having its principal
place of business in Kansas City, Missouri, serves as the trustee for
the 401(k) Plan.
3. The Plans are administered by the Chiquita Brands International,
Inc. Employee Benefits Committee (the Benefits Committee) appointed by
the Board of Directors of the Employer. Since the participants in the
Plans direct the investment of their accounts, neither the Benefits
Committee, nor the Trustees, exercise investment discretion over the
assets involved in the transactions that are described herein.\12\
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\12\ The Department notes that ERISA's general standards of
fiduciary conduct applied to the decision to offer Old Employer
Common Stock as an investment option under the Plans. In this
regard, section 404(a)(1) of the Act requires that a fiduciary
discharge his or her duties in regards to the plan solely in the
interest of the participants and beneficiaries, and with the care,
skill, prudence and diligence under the circumstances then
prevailing that a prudent man acting in a like capacity and familiar
with such matters would use in the conduct of an enterprise of a
like character and with like aims.
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4. The Savings Plan previously allowed participants to defer up to
12% of compensation and provides for matching and discretionary
Employer contributions. The Savings Plan was amended to comply with
recent tax law changes in February 2002. As part of the amendment
process, the Savings Plan was amended to allow participants to defer up
to 15% of compensation.
The 401(k) Plan also was amended to comply with recent tax law
changes. The 401(k) Plan allows participants to defer up to 15% of
compensation and also provides for matching and discretionary employer
contributions.
5. On November 28, 2001, the Employer filed, with the Bankruptcy
Court, the Original POR under the Bankruptcy Code, along with its
petition. Under the Original POR, holders of shares of Old Employer
Common Stock were entitled to receive shares of New Common Stock and
Warrants to purchase additional shares of New Common Stock. The Old
Employer Common Stock was to be cancelled on the Effective Date of the
reorganization. The Effective Date would be a business day selected by
the Employer after the Original POR was confirmed by the Bankruptcy
Court and certain material conditions to the effectiveness of the
Original POR had been satisfied. Namely, the approval of such POR in
the Bankruptcy Court and the execution of an amended finance facility
by Chiquita Brands, Inc., a wholly owned subsidiary of the Employer,
which employs some Plan participants and also owns Chiquita Processed
Foods. As holders of the Old Employer Common Stock, the Plans were
entitled to receive shares of New Common Stock and the Warrants on the
Effective Date, or as soon as reasonably practicable thereafter, under
the Original POR.
6. On January 18, 2002, the Employer filed the First Amended POR
with the Bankruptcy Court primarily to reflect actual distributions to
the Employer's common and preferred shareholders. After the filing of
the Chapter 11 case, up until January 2002, the Employer's preferred
shareholders had been able to convert their owned shares of Employer
preferred stock (the Employer Preferred Stock) to shares of Old
Employer Common Stock. As a result, the Employer could not determine
exact distributions to each class, because the numbers of outstanding
shares of the Employer Preferred Stock were changing daily. However,
the Bankruptcy Court entered an order prohibiting the conversion at the
option of the holder of the Employer Preferred Stock into shares of Old
Employer Common Stock after January 8, 2002. As a result of this
prohibition, the Employer was able to set the distributions and filed
the First Amended POR with the Bankruptcy Court to show accurate stock
distributions.
7. On March 7, 2002, the Employer filed the Second Amended POR with
the Bankruptcy Court. The Second Amended POR was confirmed by the
Bankruptcy Court on March 8, 2002,
[[Page 41515]]
and became effective on March 19, 2002.
The major change in the Second Amended POR was the modification of
certain releases in the Original POR and the First Amended POR. In this
regard, in the Original POR and First Amended POR, holders of equity
and claims who were entitled to receive distributions under the POR
were deemed to release certain claims against certain parties relating
to transactions in securities, the Employer, the POR and the Chapter 11
case. In the Second Amended POR, the releases by holders of equity were
limited to claims in respect of the distributions that would be
received as a result of such POR.
In addition, under each POR, all holders of Old Employer Common
Stock would be entitled to receive their pro rata share of the New
Common Stock and the Warrants. Moreover, the Old Employer Common Stock
would be cancelled and extinguished.
8. On March 19, 2002, the Effective Date of the Second Amended POR,
approximately 40 million shares of New Common Stock, including 800,000
shares of New Common Stock that were subject to delayed delivery were
issued or issuable pursuant to the Second Amended POR. Of these,
approximately one million shares of New Common Stock, as well as
13,333,333 Warrants, were distributed to the Plans and the other
shareholders of the Old Employer Common Stock and Employer Preferred
Stock and preference stock. Based on the number of shares of Old
Employer Common Stock held by the Plans as of March 19, 2002, the Plans
received 10,086 shares of New Common Stock (the Plans did not contain
Employer Preferred Stock or preference stock). Of the New Common Stock
issued to the Plans, 1,416 shares were allocated to the 401(k) Plan and
8,670 shares were allocated to the Savings Plan.
In addition to shares of New Common Stock, approximately 168,114
Warrants were issued to the Plans. The Warrants represented less than
25 percent of each Plan's assets. Of the Warrants distributed, 23,604
Warrant shares were transferred to the 401(k) Plan and 144,510 Warrant
shares were transferred to the Savings Plan and allocated, on March 20,
2002, to the individual accounts of the affected participants. Any
fractional shares of New Common Stock and Warrants were converted
through market sales into cash, which in turn, was subsequently
allocated to the participants' accounts.\13\
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\13\ The cash equivalent of the fractional shares to which the
participants of the Savings Plan were entitled, after applying
certain conversion rates, was distributed to the Savings Plan on
March 27, 2002. The cash was allocated to the participants'
accounts, after settling with the transfer agent, on May 1, 2002.
Similarly, the 401(k) Plan received the cash equivalent to which its
participants were entitled, after applying certain conversion rates,
on April 30, 2002, and the cash was allocated to the participants'
accounts on the same date. The Employer had anticipated that the
cash would be distributed to the Plans during the week of April 12,
2002 and allocated to participants as soon as administratively
practicable thereafter. However, due to administrative
complications, the cash distributions and allocations were not
accomplished until the dates set forth above.
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The Second Amended POR also authorized the adoption of a new stock
option plan, and the issuance thereunder of options for the purchase of
up to 5,925,926 shares of New Common Stock. If all such options and all
Warrants are exercised, the Employer will have issued and outstanding
59,259,259 shares of New Common Stock.
Because of the relatively small amount of Old Employer Common Stock
in the Plans, it is represented that the participants, although
entitled to vote, had little, if any ability to negotiate the terms of
the Original POR, the First Amended POR or the Second Amended POR.
9. The Warrants are exercisable for 13,333,333 shares of New Common
Stock. Thus, each Warrant entitles the holder to purchase one share of
New Common Stock during the period commencing on March 19, 2002 and
ending on the seventh anniversary of the Effective Date of the Second
Amended POR. The Warrants are presently listed on the New York Stock
Exchange (the NYSE). Participants in the Plans are not entitled to
invest in additional Warrants.
The exercise price for the Warrants has been set at a price per
share that is equal to the ``Solvency Value.'' The Solvency Value is
the value per share of the New Common Stock that, when multiplied by
the number of shares of New Common Stock distributed to holders of old
subordinated debenture claims against the Employer (and after adding
such amount to the $250 million face amount of new senior notes to be
issued to holders of old senior note claims and old subordinated
debenture claims), will equal the amount of old senior note claims and
old subordinated debenture claims for principal, plus unpaid interest
on such principal through March 19, 2002, the Effective Date of the
Second Amended POR. As stated in the Warrant Agreement, the exercise
price of each Warrant is $19.23 per Warrant share.
10. All shareholders of Old Employer Common Stock, including the
Plans, were treated in a similar manner with respect to the their
acquisition and holding of the Warrants. No participant in the Plans
paid, nor will pay, any fees or commissions in connection with the
acquisition, holding, or exercise of the Warrants.
With respect to the exercise of the Warrants, the Trustees will
follow the direction of the participants in accordance with the
procedures set forth in the Warrant Agreement and established by the
Benefits Committee. In this regard, the Trustees will not allow
participants to exercise the Warrants held in such participants'
individual accounts in the Plans unless the fair market value of the
New Common Stock exceeds the exercise price of the Warrants. In
addition, the shares of New Common Stock received upon the exercise of
the Warrants (or cash in lieu of fractional shares) will be credited to
participants' accounts. Moreover, the Benefits Committee is considering
implementing a procedure whereby participants will be required to
exercise at least 100 Warrant shares at any one time. If a participant
does not own at least 100 Warrants, such participant will be required
to exercise all of the Warrants held in his or her account at that
time.
With respect to the sale of the Warrants, the Trustees will also
follow the direction of the participants in accordance with procedures
established by the Benefits Committee. All such sales will occur on the
open market and in the 100 share increments described above. Following
a sale transaction, the proceeds will be allocated to each affected
participant's account in the Plans.\14\
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\14\ Because the Warrants are listed on the NYSE, the Department
has determined that no exemption is necessary with respect to sales
of such securities, on the open market, to non-parties in interest,
at the direction of participants. In this regard, if the Warrants
are sold through an exchange in an ordinary ``blind transaction''
where neither the buyer nor the seller (nor the agent of either)
knows the identity of the other party involved, no prohibited
transaction will have occurred in violation of the Act (see ERISA
Advisory Opinion 85-18A, April 23, 1985).
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11. The Employer represents that it analyzed the impact of each POR
on the Plans. In particular, the Employer states that it analyzed the
prohibited transaction implications of the automatic exchange of the
Old Employer Common Stock held by the Plans for the Warrants.
Accordingly, the Employer has requested exemptive relief from the
Department with respect to the acquisition and holding by the Plans of
the Warrants as well as with respect to the subsequent exercise of the
Warrants by the participants in the Plans. If granted, the exemption
would
[[Page 41516]]
be effective as of March 19, 2002, which is the date the Warrants were
issued to the Plans.
12. The Employer represents that the shares of New Common Stock
that were acquired by the participant accounts in the Plans in
conjunction with the issuance of the Warrants, would constitute a
``qualifying employer security'' within the meaning of section
407(d)(5) of the Act and that the acquisition and holding by the Plans
of such stock would be statutorily exempt under section 408(e) of the
Act.\15\ However, the Employer notes that the Warrants are ``employer
securities,'' as defined in section 407(d)(1) of the Act (as securities
issued by an employer of employees covered under a plan or an affiliate
of such employer), but are not ``qualifying employer securities.''
Therefore, the Employer asserts that in the absence of an
administrative exemption, the acquisition and holding of the Warrants
by the Plans or the subsequent exercise of the Warrants, as directed by
the Plan participants, would violate sections 406(a), 406(b) and 407(a)
of the Act.
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\15\ Similarly, the Employer represents that the acquisition and
holding by the participant accounts in the Plans of the Old Employer
Common Stock would constitute a ``qualifying employer security.''
The term ``qualifying employer security'' means an employer
security which is ``stock,'' a ``marketable obligation,'' or an
``interest in a publicly-traded partnership,'' under section
407(d)(5) of the Act.
In relevant part, section 408(e) of the Act provides that
sections 406 and 407 of the Act shall not apply to the acquisition
or sale by a plan of qualifying employer securities (as defined in
section 407(d)(5)(1) if such acquisition is for adequate
consideration (or in the case of a marketable obligation, at a price
not less favorable to the plan than the price determined under
section 407(e)(1)), (2) if no commission is charged with respect
thereto, and (3) if--(A) the plan is an eligible individual account
plan (as defined in section 407(d)(3), or (B) in the case of an
acquisition by a plan which is not an eligible individual account
plan, the acquisition is not prohibited under section 407(a) of the
Act.
In this proposed exemption, the Department expresses no opinion
herein on whether the exchange of the Old Employer Common Stock for
the New Common Stock by the individual accounts of affected
participants in the Plans satisfied the terms and conditions of
section 408(e) of the Act.
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13. In summary, it is represented that the transactions have
satisfied or will satisfy the statutory criteria for an exemption under
section 408(a) of the Act because:
(a) The acquisition and holding of the Warrants by the Plans
occurred in connection with the Employer's bankruptcy proceedings,
pursuant to which all shareholders of the Old Employer Common Stock
were treated in the same manner, thereby allowing certain affected Plan
participants the ability to maximize the return on their shares of Old
Employer Common Stock.
(b) The Plans had little, if any, ability to affect the negotiation
and confirmation of either the Employer's Original POR, the First
Amended POR or the Second Amended POR with respect to the bankruptcy
proceedings.
(c) The Warrants were issued to the Plans automatically in
connection with the Employer's bankruptcy proceedings and without any
unilateral action on the part of the Plans.
(d) The Plan participants did not pay, nor will pay, any fees or
commissions with respect to the acquisition, holding, or exercise of
the Warrants.
(e) All shareholders, including the Plans, were treated in a like
manner with respect to the issuance of the Warrants.
(f) The Warrants represented less than 25 percent of the assets of
either Plan.
(g) Any decision to exercise the Warrants acquired by the Plans in
connection with the Employer's bankruptcy will be made by the Plan
participants, in accordance with the terms of the Warrant Agreement, as
well as in accordance with the Plan provisions for individually-
directed investment of participant accounts.
(h) The Trustees will not allow participants to exercise the
Warrants held by their individual accounts in the Plans unless the fair
market value of the New Common Stock exceeds the exercise price of the
Warrants.
Notice to Interested Persons
The Employer will provide notice of the proposed exemption to all
interested persons, including participants and beneficiaries who
receive the Warrants, the Trustees, and the Benefits Committee, by
first class mail within 10 days of the date of publication of the
notice of proposed exemption in the Federal Register. The notice will
include a copy of the proposed exemption, as published in the Federal
Register, and a supplemental statement, as required pursuant to 29 CFR
2570.43(b)(2), which will inform interested persons of their right to
comment on and/or to request a hearing with respect to the proposed
exemption. Comments regarding the proposed exemption and requests for a
public hearing are due within 40 days of the date of publication of the
notice of pendency in the Federal Register.
FOR FURTHER INFORMATION CONTACT: Ms. Anna M.N. Mpras of the Department,
telephone (202) 693-8565. (This is not a toll-free number.)
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption
under section 408(a) of the Act and/or section 4975(c)(2) of the Code
does not relieve a fiduciary or other party in interest or disqualified
person from certain other provisions of the Act and/or the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
section 404 of the Act, which, among other things, require a fiduciary
to discharge his duties respecting the plan solely in the interest of
the participants and beneficiaries of the plan and in a prudent fashion
in accordance with section 404(a)(1)(b) of the Act; nor does it affect
the requirement of section 401(a) of the Code that the plan must
operate for the exclusive benefit of the employees of the employer
maintaining the plan and their beneficiaries;
(2) Before an exemption may be granted under section 408(a) of the
Act and/or section 4975(c)(2) of the Code, the Department must find
that the exemption is administratively feasible, in the interests of
the plan and of its participants and beneficiaries, and protective of
the rights of participants and beneficiaries of the plan;
(3) The proposed exemptions, if granted, will be supplemental to,
and not in derogation of, any other provisions of the Act and/or the
Code, including statutory or administrative exemptions and transitional
rules. Furthermore, the fact that a transaction is subject to an
administrative or statutory exemption is not dispositive of whether the
transaction is in fact a prohibited transaction; and
(4) The proposed exemptions, if granted, will be subject to the
express condition that the material facts and representations contained
in each application are true and complete, and that each application
accurately describes all material terms of the transaction which is the
subject of the exemption.
Signed at Washington, DC, this 13th day of June, 2002.
Ivan Strasfeld,
Director of Exemption Determinations, Pension and Welfare Benefits
Administration, U.S. Department of Labor.
[FR Doc. 02-15320 Filed 6-17-02; 8:45 am]
BILLING CODE 4510-29-P
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