Attorney General's Opinion

Attorney General, Richard Blumenthal

January 31, 2002

Honorable Denise L. Nappier
55 Elm Street
Hartford, CT 06106

Re: Ownership and Management of Shares Received in Anthem Demutalization

Dear Treasurer Nappier:

You have requested an opinion regarding the ownership and management of approximately 2.2 million shares of Anthem, Inc. stock recently distributed to the State of Connecticut, as a result of the demututalization of Anthem Insurance Company ("AIC"). You raise the question of the State's "ownership of, and, therefore, [your] authority to receive and manage these assets" in light of legal challenges to the State's ownership currently pending.

In November, 2001, AIC, then an Indiana mutual insurance company, was converted from a mutual company to a stock company through a process known as "demutualization." The demutualization was completed in accordance with a plan of conversion approved, after public hearings, by the Commissioner of the Indiana Department of Insurance on October 25, 2001. Under the plan of conversion, eligible statutory members of AIC, as defined by Indiana law, would receive shares of Anthem, Inc. common stock or cash in exchange for their membership in AIC. As part of the plan of conversion, those receiving 30,000 or more shares are restricted by the plan's "Large Holder Sale Program," which limits the amount of stock that Large Holders, such as the State, may sell in any one day until May 2, 2002. The plan of conversion also provides an express process by which disputes with regard to the right to receive consideration are to be resolved, including an administrative review by the Indiana Insurance Commissioner.

The State is designated to receive a total of 2,233,501 shares of stock as the result of three different relationships it had with Anthem Blue Cross/Blue Shield ("Anthem BCBS"), a subsidiary of AIC created in 1997 when Anthem merged with Blue Cross Blue Shield of Connecticut ("BCBS-CT"). Specifically, the State is designated to receive approximately 1,645,773 shares for State group policies for health care benefits for State employees; 587,049 shares as a result of contracts with Anthem BCBS for the HUSKY Medicaid program ("Medicaid Contracts"); and 679 shares as a result of contracts with Anthem BCBS for the State Board of Education and Services for the Blind ("BESB"). You ask for an opinion "with respect to the ownership of these assets and [your] legal authority to sell assets held in the name of the Comptroller," a reference to the stock distributed as a result of the State's group health care policies for state employees.

Indiana's demutualization law provides that membership in a mutual company is determined by the company's articles of incorporation, by-laws and records. Indiana Code 27-15. Pursuant to AIC's articles of incorporation, a person or entity that was a member of Blue Cross Blue Shield of Connecticut prior to its merger with Anthem in 1997 became a member of AIC. Under the articles of incorporation of BCBS-CT, group policyholders, including the State as employer, were deemed members of BCBS-CT, while individuals issued certificates under the group policy were not considered members. Therefore, regarding policies issued prior to the merger with BCBS-CT that were continued under Anthem BCBS, Anthem's plan of conversion designated group policyholders, not individual certificate holders, to be statutory members eligible for distribution of assets in the demutualization.

The State's group health policies with BCBS-CT were in effect at the time of its 1997 merger with Anthem. Therefore, the State is an eligible statutory member, and the State, not the individual certificate holders under those group policies, is entitled to the Anthem, Inc. stock. To our knowledge, individual certificate holders have not asserted any claim of right to this stock under the plan of conversion or before the Indiana Insurance Commissioner.

With regard to the Medicaid Contracts, my office strongly contended -- using the dispute resolution procedures of the plan of conversion -- that the Medicaid Contracts in place prior to the BCBS-CT merger constituted policies within the meaning of the plan of conversion. After review of the State's claim, AIC acknowledged that the State was entitled to eligible statutory member status in connection with the Medicaid Contracts, and this determination was approved by the Indiana Insurance Commissioner. The same conclusion applies to the shares received as to the BESB contracts. Although the federal government ultimately may assert a claim against the State for increased reimbursements from the State in connection with the Medicaid Contracts, this potential claim does not alter the State's ownership of the stock. See 42 C.F.R. Part 430. Only the State is a member of AIC under the plan of conversion and Indiana law, and the federal government to this date has not asserted any ownership interest in the stock. Therefore, we conclude that the State is the owner of the shares issued under the plan despite such potential claims.

You ask whether you have authority to receive and manage the stock in light of the claims currently pending that challenge State ownership. Based on our analysis of the factual background and plan of conversion and on the approval of the distribution by the Indiana Insurance Commissioner, the State is the presumptive owner of the stock. Unless and until a court or administrative tribunal directs otherwise, you have the authority to receive and manage the stock consistent with your statutory and fiduciary duties. We note that on January 18, 2002, the Governor approved the Comptroller's request to establish a "fiduciary agency fund to record the distribution of equity received in connection with the [AIC] demutualization." As a prudential matter, the proceeds from the liquidation of the stock may be maintained in this fund until the legal issues are resolved. Conn. Gen. Stat. § 4-31a.

With regard to your proposed plan for the management of the Anthem, Inc. stock, you state that this fiduciary agency fund must be treated as a "civil list" fund, the assets of which are only eligible for investment in accordance with Conn. Gen. Stat. § 3-31a and the policy guidelines for the short term investment fund established pursuant to Conn. Gen. Stat. § 3-27a. Section 3-31a and the policy guidelines under § 3-27a preclude investments in common stock. Therefore, you propose to commence orderly sale of the stock during the Large Holder Sale Program period. As required by the plan of conversion until the expiration of the Large Holder Sale Program, the unsold shares will be held by the transfer agent. Thereafter, you propose to transfer any remaining shares to the state's custodian. You propose that the proceeds from the sale of stock will be credited to the fiduciary agency fund and invested in the short term investment fund created under § 3-27a. Our opinion is that you have the authority to manage the fiduciary agency fund consistent with the investment requirements of § 3-31a and the short term investment fund guidelines.

We trust this answers your inquiry.

Very truly yours,


Mark F. Kohler
Assistant Attorney General

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