McEvoy v. Savings Bank Life Insurance Co. of Massachusetts (Lawyers Weekly No. 12-084-17)

NO. 2017-1961 BLS1
LESLIE V. McEVOY, individually and on behalf of a class of similarly situated persons,
The plaintiff Leslie V. McEvoy alleges that she holds a participating whole life insurance policy issued by the defendant Savings Bank Life Insurance Co. (SBLI).1 In this action, she seeks to enjoin all SBLI’s policyholders from voting on a proposed conversion of SBLI from a stock life insurance company to a mutual life insurance company. The case came before the court on June 27, 2017 on the plaintiff’s motion for a preliminary injunction enjoining the vote until additional disclosures concerning the plan of conversion demanded by her were made to SBLI’s other 480,000 policyholders. In her complaint, the plaintiff alleges that the vote on the plan of conversion is to occur at a Special Meeting of policyholders scheduled for that purpose on June 28, 2017. It appears, however, that voting has actually been underway for weeks. While the meeting was scheduled for 11:00 AM on June 28, 2017, and policyholders present at the meeting who had not previously voted could vote at that time, voting opened on May 19, 2017 and could be accomplished by mail, phone call, or on the internet, so long as the votes were
1 It appears that the plaintiff owns two policies, each in the face amount of $ 1,000, although was is pledged to a division of the State of New Hampshire.
received in time to be counted by the time of the meeting. As a result, the majority of votes cast in this election may well have been received by SBLI management before the annual meeting. In consequence, from a practical perspective a motion brought before the court on the afternoon of June 27th to preliminarily enjoin the vote that was to be completed and tallied the following morning was not timely.
The proposed conversion of SBLI into a mutual insurance company calls for the SBLI shareholders, 30 Massachusetts banks or banks that had acquired Massachusetts banks, to receive $ 57.3 million in return for their shares in SBLI. This sum is to be financed through the issuance of Surplus Notes. While SBLI and its financial advisers have been working for some time on the sale of these Surplus Note to certain financial institutions, at oral argument the court was informed that the closing on that transaction was still two or three weeks away. In theory, therefore, the court could still issue a mandatory preliminary injunction voiding the vote, which would of course preclude any possibility that SBLI could issue the Surplus Notes on the schedule now contemplated, and ordering that revised informational materials be sent to policyholders and a new vote undertaken. The court declines to enter such an extraordinary order and, accordingly, DENIES the motion for a preliminary injunction.
Generally, it is this court’s practice to issue a comprehensive memorandum of decision when addressing a motion for preliminary relief in a case of this nature. However, in this case it appears that speed is more important than a carefully crafted explanation of the court’s reasoning, so that the plaintiff may consider any other opportunities for the relief she requested. Accordingly, what follows is a summary statement of court’s reasoning.
The history of how Louis D. Brandeis originally devised and promoted the establishment of SBLI and it then came to be reorganized on multiple occasions by the Massachusetts Legislature is set out in prior decisions, including Goldstein v. Savings Bank Life Ins. Co. of Massachusetts, 435 Mass. 760 (2002) and, on remand, the Superior Court’s decision on Cross-Motions for Summary Judgment dated July 3, 2008 (Gants, J.) (Goldstein). Its unique status as the only life insurance company previously required to conform to both G.L. c. 175 and G.L. c. 178A has been noted by the SJC. Id. at 770. Indeed, the conflicts inherent in an entity that owes obligations to shareholders and policyholders has been the catalyst for much prior litigation. It appears that more recent events have increased the shareholder banks’ desire to liquidate their interests in SBLI. First, they no longer sell a material number of SBLI policies or annuity contracts and therefore no longer have a business interest in the insurer. More critically, recent adoption of the so-called Basel III capital rules increased the risk weighting for non-publicly traded equity securities owned by banks, like the shares of SBLI, from 100% to 400%. In consequence, SBLI’s bank shareholders must increase the capital held against their investment in SBLI by a factor of four.
Following meetings with financial, actuarial and legal advisors, the plan to convert SBLI to a mutual insurance company wholly owned by its policyholders by having SBLI purchase all shares was adopted by the interested parties as the most expedient means for the shareholders to exit, while permitting SBLI to continue to serve the purpose for which it was founded–providing
secure, low-cost life insurance. The plan was unanimously approved by SBLI’s nine member board of directors. While these directors are elected by the shareholder banks, five of the members are independent. The shareholders then voted to approve the conversion. The plan also had to be approved by the three member Policyholders Advisory Board (PAB), a statutorily mandated body established by the Legislature in connection with a 2010 reorganization of SBLI, whose mission is to protect the interests of policyholders and promote SBLI’s purpose. The current chair of the PAB is a former Massachusetts Commissioner of Insurance. The PAB unanimously approved the plan of conversion in October, 2016, and, following its review of a fairness opinion prepared by the actuarial firm Milliman, Inc. that opined that the conversion was fair to policyholders on an actuarial basis, once again in January, 2017. The plan of conversion still, however, required the approval of the Commissioner of Insurance. See G.L. c. 175, § 19D(2). After nearly four months of review, by letter dated May 25, 2017, the Commissioner also approved the plan, subject to conditions not relevant to the pending motion. Among the findings that the Commissioner was required to make in order to approve the conversion is that the plan is “not prejudicial to the policyholders of such company or to the insuring public.” Id.
With respect to this finding, the Commissioner noted that SBLI management was of the view that participating policyholders and the shareholders have an interest in SBLI’s surplus, while the staff of the Division of Insurance is of the view that only the shareholders have an interest in the surplus. The $ 57.3 million to be paid to the shareholders represented an amount substantially less than the percentage of the surplus that SBLI attributed to the shareholders.
Of particular note to the pending motion, the Commissioner observed that the annual costs of the interest to be paid on the $ 57.3 million of Surplus Notes, plus the creation of reserves necessary to repay the Notes on maturity (something in the nature of a sinking fund), exceeds the
amount of the dividends currently being paid to shareholders. However, because of the new Basel III requirements, pursuant to which the bank shareholders will have to increase their capital in respect of the shares by a multiple of four, their cost of holding SBLI shares will also increase by a factor of four. In consequence, shareholder dividends could be expected to increase by the same factor, an amount which would not violate statutory limitations on dividends that shareholder owned life insurance companies may issue. At that point, the amount of annual dividends paid to the banks would substantially exceed the interest and reserve expenses associated with the new Surplus Notes.
The last step in the plan of conversion is a vote to approve the plan of conversion by the policyholders; a majority of policyholders who vote is required for approval. According to the Chair of the PAB, the Commissioner reviewed and approved the disclosures sent to the policyholders soliciting their votes for the plan of conversion (hereafter referred to as the Notice).
Analysis of the Claims
It is important to note that the issue before the court on this motion for a preliminary injunction is not whether the plan of conversion is good, bad, or indifferent, as it affects the interests of policyholders, including those that have participating policies and receive annual dividends, as well as those that hold policies that do not provide a right to annual dividends. Rather, the question is whether any disclosures in the Notice are materially misleading, either by what they say or omit to say. It is also notable that the plaintiff’s complaint does not allege a breach of fiduciary duty by SBLI Board or the PAB. This case, as presently pled, is solely about the nature of the disclosures.
The parties have not provided the court with any case that addresses the standard to apply in assessing the disclosures that should be made to policyholders when a stock insurance company is converted to a mutual company. The parties have both relied on a Superior Court decision—Silverman v. Liberty Mut. Ins. Co., 13 Mass. L.Rptr. 303 (2001) (Gants, J.)—to define the standard. That case, however, addressed the demutualization of an insurance company. In consequence, in that situation the policyholders clearly owned all of surplus and held voting rights, both of which they would be conceding in a demutualization. This case presents the reverse situation, further complicated by the unique structure of SBLI. Policyholders will be acquiring all voting rights and full ownership of any surplus available for distribution to equity holders on liquidation. The policyholders will obviously not receive any cash in this transaction, nor will they be required to pay for the shares that will be acquired by SBLI, although the value of the entity which they will then own will certainly be affected by the amount paid to the departing shareholders. Nonetheless, Silverman provides a useful guide. There Justice Gants wrote:
A mutual insurer has a duty to provide its policyholders with full and honest disclosure of material facts relating to a transaction that requires policyholder approval. .. .An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. . . . The standard contemplates a showing of substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information available.” (Internal citations and quotations omitted.)
It is, perhaps, worthy to note that this description of the law of disclosure was borrowed from securities cases in which the person receiving the disclosure was truly an investor primarily concerned with a monetary return on the investment. Here, the recipients of the information are policyholders who purchased a life insurance policy (or annuity contract) specifically designed to
be low cost and secure, in the sense that if a claim was made for insurance benefits or redemption it would be paid. Only those policyholders that owned participating policies had any expectation of dividends (which would be modest), and no expectation that SBLI would ever be liquidated and the policyholder receive some part of surplus.
With these standards in mind, the court turns to the areas of disclosure in the information sent to policyholders soliciting their votes (hereafter the Notice) that the plaintiff alleges were materially misleading.
The NOLs
The plaintiff’s first claim of “egregiously” misleading disclosure involves so-called NOLs. SBLI has $ 219 million in Net Operating Losses (NOLs) that could be used to offset future profits of the company for federal income tax purposes. SBLI management’s financial forecast assumes that SBLI will be in a position to begin making use of these NOLs, subject to certain restrictions, in 2021. The Notice discloses that: “If the Internal Revenue Service . . . determines that the Conversion constitutes a change of control . . . SBLI’s ability to utilize these NOLs will be limited.” The Notice went on to explain that SBLI believes that the Conversion would not constitute a change in control, but the IRS might take a different position. The Notice fairly disclosed the value of the NOLs to SBLI and that the conversion places them at risk. The Notice appropriately takes no position on the likelihood of IRS audit in the years 2021 and subsequent when SBLI hopes to begin to be able to make use of the NOLs or the ultimate outcome of any dispute with the IRS concerning “change of control” and how that would limit SBLI’s to use the NOLs to offset taxable income. It appears that the plaintiff’s real argument as it relates to the NOLs is not the disclosure, but rather whether the conversion is too risky because this contingent asset might be forfeit. That risk is, however, is sufficiently disclosed.
The Piper Jaffray Fairness Opinion
The plan of conversion calls for the shareholders to receive $ 500 for each Class A share (the voting shares, of which there are only one for each shareholder) and $ 128 for each Class B share. As part of the conversion process, the shareholders received a fairness opinion from the investment banking firm Piper Jaffray to the effect that the plan was fair to shareholders. The Piper Jaffray opinion was not included in the Notice sent to the policyholders. The Notice provided a copy of the Milliman opinion, which addresses the fairness of the conversion to the policyholders from an actuarial point of view.
The plaintiff argues that the failure to include the Piper Jaffray opinion was materially misleading because Piper Jaffray arrived at a number of values for a Class B share, one of which was based on a discounted cash flow analysis that yielded share values of $ 85.10 to $ 92.87. However, another version of the cash flow analysis provided values of $ 174.64 to $ 191.30. Under the Piper Jaffray analyses any changes in operational results that result in changes in cash flow produce very substantial changes in projected share values because Piper Jaffray was using discount rates of 14% to 18% based on a capital asset pricing model which was undoubtedly affected by the SBLI’s modest size, as well as the completely illiquid nature of a share of SBLI stock. This court questions whether a discounted cash flow analysis of after-tax cash flows theoretically available to equity holders of SBLI is particularly useful to a shareholder or a policyholder.2 However, from a policyholder’s perspective it would have little to do with a
2 Piper Jaffray noted that the illiquidity of an investment in SBLI “is the result of SBLI’s unique ownership structure, in which ownership is restricted to Massachusetts-chartered savings banks and acquirers thereof. Based on academic research, institutional studies, market, examples of discounts on illiquid securities, and Piper Jaffray’s professional experience, Piper Jaffray has applied an illiquidity discount of 30%, and such discount is incorporated in the numerical results for all of the valuation methodologies enumerated below.”
policyholder’s principal concerns: will SBLI be able to pay any claims, issue a dividend if the policy is participating, or redeem the policy if it is a whole life policy.
According to SBLI, the Commissioner recommended against inclusion of the Piper Jaffray opinion in the Notice. The court can understand why. While a shareholder bank voting in favor of the plan of conversion must have support for its decision, because it has fiduciary obligations to its own shareholders, it is unclear how this information will materially assist a policyholder in addressing the impact of the conversion on policyholders’ interests. The PAB withheld its final approval of the plan until it received an opinion from Milliman, one of the largest actuarial firms in the world, that the conversion was fair to policyholders from an actuarial point of view.
The Costs of the Surplus Note
The plaintiff complains about a failure to disclose the costs to SBLI of the Surplus Notes. Frankly, the court does not fully understand the plaintiff’s argument in this respect. The Notice includes pro formas that assume completion of the conversion and clearly show that $ 57.3 million of Surplus Notes will be issued and that they will bear interest at 6% a year, which is a rate in excess of that which management asserts it will have to offer to sell the Notes. The pro formas also reflect approximately $ 6.5 million of transaction related expenses. It is self-evident that the Notes will have to be repaid on maturity.
The court does believe that the Notice could have been more clear in comparing the annual cost associated with the debt service on the Notes and the creation of a reserve (similar to a sinking fund) to repay the Notes on maturity with the current amount of the dividends being paid to the shareholders, which is much less. The assumption that makes the conversion
attractive to policyholders, and was important to the Commissioner, is that the SBLI Board, which is controlled by the shareholders, will vote to increase the dividends as a consequence of the very substantial increased capital requirements that the banks will incur with respect to their SBLI shares as a result of Basel III. It seems that this is the most relevant information that a policyholder, at least a participating policyholder hoping for dividends, would want. The court believes that this could have been more clearly stated in the Notice, but does not find what is stated materially misleading.
The Dilution of Participating Shareholders Interest in Surplus
The plaintiff argues that the Notice should disclose that participating policyholders will suffer dilution of their dividend rights. The court finds that this argument is simply in error. There is nothing in the conversion that will transform non-participating policies into policies that will be entitled to dividends.
The Quoted Passage from Goldstein
The plaintiff argues that it was misleading to quote a passage from Goldstein which reads: “this Court declares as a matter of law that the precise percentage of original surplus that is attributable to stockholder equity is 37.5 percent.” The quote is found in that part of the Notice that describes SBLI’s historic method of accounting for its surplus following a 1992 reorganization. There, the Notice explains that beginning with the 2001 financial statements, the amount of surplus attributable to the shareholders has been based on the assumption that the shareholders’ interest in the surplus following the 1992 reorganization was 37.5% or approximately $ 39.5 million. The Notice comments that this assumption was “affirmed” by that
statement from the Goldstein opinion quoted above. The use of the word “affirmed” is perhaps a bit much, but it is not materially misleading. Moreover, the plaintiff has not argued that $ 57.3 million is more than the shareholders’ interest in the surplus. For its part, the Division of Insurance believes that the shareholders would be entitled to all of the surplus if SBLI liquidated. Arguably, a plan of conversion that allowed the shareholders to withdraw all of their ownership in the surplus on the sale of their shares to SBLI would be fair from a monetary point of view.
The plaintiff makes a number of arguments that appear to assert mismanagement of SBLI. Whether those complaints are valid cannot inform the question of whether the Notice is materially misleading. If the conversion succeeds, the policyholders will have voting control over SBLI and can replace management.
* * *
In sum, the court finds that the plaintiff is not likely to succeed on the merits of her claim that: “The Notice prominently and falsely states to Policyholders that ‘the premiums, benefits, values, guarantees and dividend rights of your insurance policies or annuity contracts WILL NOT be reduced, changed, or affected in any way as a result of the Conversion.’” It appears to this court that this statement read in the context of the entire Notice is not materially misleading. The policies will not be affected. The policyholder claims will be superior to claims made under the Surplus Notes. Dividend rights afforded participating policyholders are also not directly affected, although undoubtedly indirectly affected by the future profitability of SBLI, but as to that, the expenses and risks associated with the issuance of the Notes are generally disclosed.
Irreparable Injury
To succeed on a motion for a preliminary injunction, the moving party bears the burden of showing: (1) a likelihood of success on the merits of its claim; (2) that it will suffer irreparable harm if injunctive relief is not granted; and (3) that its harm, if injunctive relief is denied, outweighs any harm that would be suffered by the party enjoined, if the injunction issued. See Boston Police Patrolmen’s Ass’n, Inc. v. Police Dept. of Boston, 446 Mass. 46, 49-50 (2006); Packaging Indus. Group. Inc. v. Cheney, 380 Mass. 609, 616-617 (1980).
In this case, weighing the harm that would be inflicted on not only SBLI, but also potentially on all of the 480,000 other policyholders of SBLI, if the injunction issues, against plaintiff’s alleged harm, suggests to the court that it would be highly improvident to enter an injunction effectively delaying this transaction for an indefinite period, if not putting the entire conversion at risk. The court does not yet know whether the policyholders voted to approve the plan of conversion. If they did not, the motion is moot. If they did, the costs of vacating the results of the vote, revising the Notice, and beginning the process anew could be enormous. In addition to which, further delay could well increase the interest rates required to place the Surplus Notes in the current environment of generally rising interest rates (the Federal Reserve Bank increased rates again only two weeks ago). Potentially, an injunction could make institutional investors now interested in buying the Notes wary.
It appears to the court, that most purchasers of SBLI policies are primarily concerned with the premium cost and security of their policies, rather than their interest in SBLI’s surplus in the unlikely event of SBLI’s liquidation. Eliminating the bank shareholders, who are not policyholders and no longer market SBLI policies or annuity contracts, but nonetheless have
voting control over SBLI and fiduciary duties to their own constituencies will be beneficial to policyholders. SBLI could then be managed exclusively for the benefit of the policyholders that will own it. The court cannot help but note that the only plaintiff in this case owns only two $ 1,000 policies, one of which she pledged. Given the nature of the allegedly misleading statements about which the plaintiff complains and the potential of undoing this transaction that most policyholders may well find favorable (even if the Piper Jaffray opinion were attached to the Notice), or, at least, making it far more costly, the court declines to enter the extraordinary relief requested.
Moreover, the underlying theme of the plaintiff’s complaint is that this conversion was intended to unfairly further the interests of the shareholders at the expense of the policyholders. While there is no claim for breach of fiduciary duty against the SBLI Board asserted, that is the underlying subtext. All of the shareholders who will be receiving cash for their shares are Massachusetts banks or acquirers of Massachusetts banks. If the conversion results in the unlawful transfer of value from the policyholders to the shareholders, there are other claims that could, at least in theory, be asserted.
The court finds that the potential harm that would arise from the entry of a preliminary injunction undoing the vote and undoubtedly the issuance of the Surplus Notes outweighs the potential irreparable harm that would result from its entry.
For the foregoing reasons, the plaintiff’s motion for a preliminary injunction is DENIED.
Mitchell H. Kaplan
Justice of the Superior Court
Dated: June 30, 2017

Full-text Opinions