Number 11 November 26. 1980

Number 11 November 26. 1980 Michael J. Sabbagh, Commissioner Division ofInsurance 100 Cambridge Street Boston, MA 02202 Dear Mr. Sabbagh: You inform me that a group of individuals in the Commonwealth proposes to organize an insurance company under General Laws chapter 175. section 124 P.D. 12 48, to engage in one line of business specified in section 47 of that chapter, and that it desires to do so by forming a business corporation to act as a promoter in the formation of the insurance company. As a promoter, the corporation will purchase twenty-five percent of the first million dollars and fifteen percent of the second million dollars of original issue stock, thereby satisfying the requirement of section 48, concerning the amount of stock to be purchased by the promoters, organizers, directors and officers of the stock insurance company. You seek my opinion whether a business corporation formed under General Laws chapter 156B may be a "promoter" of a stock insurance company, as that term is used in G.L. c. 175, §48. Specifically, you ask whether the word "person", as used in G.L. c. 175, §48, includes such a business corporation or whether it refers only to natural persons. General Laws chapter 175, section 48, as amended by St. 1966, c. 95. §2, defines a promoter as follows: The word "promoter", as used in this section, shall mean any person who, acting alone or in conjunction with one or more other persons, directly or indirectly takes initiative in founding and organizing any company organized under this section. You properly observe that G.L. c. 4, §7 (23), provides that unless a contrary intention clearly appears, the word "person" in a statute includes corporations. In light of this provision, your question is clearly posited: does the word "person" as used in the statutory definition of promoter include a corporation or does "a contrary intention clearly appear" in G.L. c. 175, §48, thereby making G.L. c. 4, §7 (23) inapplicable? It is my opinion that the word "promoter", as it is used in section 48, refers only to natural persons acting in that capacity. Based upon the literal language of the statute, in conjunction with the legislative purpose of its enactment, it clearly appears that in using the term in section 48, the legislature contemplated that only natural persons would be promoters.' As with the construction of any statutory provision, section 48 must be interpreted "according to the intent of the Legislature ascertained from all its words construed by the ordinary and approved usage of the language, considered in connection with the cause of its enactment, the mischief or imperfection to be remedied and the main object to be accomplished, to the end that the purpose of its framers may be effectuated." Board of Education V. Assessor of Worcester, 368 Mass. 511, 513 (1975), quoting Industrial Fin. Corp. V. State Tclx Comm., 367 Mass. 360, 364 (1975). Following that methodology, I begin with an analysis of the words of the statute itself. The word person is used twice in section 48, once in the definition of 'There is some indication in the General Laws that corporations are not precluded from acting as promoters. See G.L. c. 156B. §9 (o); G.L. c. 175, §30 (a); Productora E Imporladora De Papel v. Fleming. Mass. Adv. Sh. (1978) 3106, 3117; see also American Bar Foundation, Model Business Corporation Act, S4 (1971 & Supps. 1973, 1977). Indeed, the law has not undenaken to define or to catalogue the nature or functions of a promoter. Massachusetts courts have wisely restncted themselves to stating promoters' rights and duties on the facts of a particular case. See, e.g.. Whaler Motor Inn. Inc. v. Parsons, ill Mass. 620, 625-27 (1977) (It is well to proceed modestly, with no hope of finding invariant precepts) Productora E Importadora De Papel v. Fleming, supra. Mass. Adv. Sh. (1978) at 3117; Old Dominion Copper & Co. v. Bigelow. 203 Mass. 159, 178 (1909). The definition of "promoter" contained in section 48, as any person who "directly, or indirectly takes initiative in founding and organizing any company," is as precise as any hazarded by a court. P.D. 12 ,35 "promoter", and once in the first sentence of the section: "Ten or more persons residents of this commonwealth may form a stock company Both the numerical requirement of ten or more persons, and the requirement that those persons be residents of the commonwealth are significant The number of persons required to join in forming an insurance company makes little sense if corporations are counted as persons. Similarly, the use and definition of the term "resident" in chapter 175 suggests that the legislature contemplated that only natural persons be promoters.^ See G.L. c. 175, §1 . Finally, the statutory limitations on the issuance of options and warrants to promoters also clearly indicate that promoters must be natural persons. The statute requires in the fourth paragraph that any options and warrants issued to promoters cannot be transferred except by operation of law as a result of death or with the prior written approval of the Commissioner. G.L. c. 175, §48. This initial factor is significant because only natural persons are subject to a transfer of property by operation of law as a result of death. In addition, it is an historical fact that corporations have not had formal authority to join in the formation of other corporations. In the absence of a statute expressly so providing, corporations may not be incorporators or original subscribers for stock in another corporation. W. Fletcher, Cyclopedia of the Law of Private Corporations, §85 (perm. ed. rev. vol. 1974), §2827 (perm, ed. rev. vol. 1968). They may not join in partnership with individuals. See, e.g., Walsh v. Atlantic Research Associates, Inc., 321 Mass. 57, 64 (1947); Hosher-Platt Co. v. Miller, 238 Mass. 518, 523 (1921). Consequently, they have not, historically, acted as promoters. See Henn, Law of Corporations, §183 (1970).^ But see generally American Bar Foundation, Model Business Corporation Act §4 (p) and Commentary (1971). Thus statutes, such as G.L. c. 175, §48, which provide for the formation of corporations are not to be construed as authorizing other corporations to become incorporators, unless such an intention on the part of the legislature is clear. Therefore, it seems clear that where section 48 provides that "ten or more persons" may form a stock insurance company, the statute refers only to natural persons. Chapter 175 of the General Laws was first enacted in 1872. The provision that "[t]en or more persons residents of this commonwealth" may join to form an insurance company is essentially unchanged from the original enactment. See Stat. 1872, c. 375, §1. There is no provision in chapter 175 expressly granting to insurance companies the powers only recently given to business corporations. See St. 1969, c. 392. It is thus fair to say, for the reasons set out above, that these words have always referred to natural persons, notwith- standing that G.L. c. 4, §7 (23), has been in effect since 1836. R.S. 1836, c. 2, §6, cl. 13. In my opinion, that remained true in 1966, when the last three paragraphs of section 48 were inserted. These considerations require the ^Indeed, where statutes providing for the formation of corporations require pcrsor« forming the -^"T""''"" '° "?= 'I^")^"''' " is generally held that the term "persons ' refers to individual natural persons. See W. Fletcher. Cyclopedia of the U* of Pnvue Corporations, §82 (perm. ed. rev. vol. 1974). ^-niese were the circumstances concerning corporations formed under G.L. c. 156. "°•*'**'^S'!'?„^«''^^™^".l?^'!'-^ chlScI provides that a corporation could be formed by •three or more persons. When the new B"*'""%f°T~",''°"JJ^ '^'^V. 156B was enacted in 1964 section 12 provided that Three or more natural persons ma> act as incotporalor^ S . 196^ c 723 etlacinroi!. c. 1568'! §12. I. was not un.U 1969 ^^at -T^rations were pcimmed to act ^irKorporaton and freely to join in partnerships. See St. 1969, c. 392. amending G.L. c. 156B §9 (o). and mserung G L c 156B. 9A 126 P.D. 12 conclusion that the word "person", as it appears in the final paragraph of section 48, likewise refers only to natural persons. This follows both from the desireability of according the same meaning to a word that appears more than once in a statute, see Plymouth County Nuclear Information Committee, Inc. V. Energy Facilities Siting Council, 314 Mass. 236, 240 (1978), and from the fact that the amendments increasing the power of business corporations were enacted after the insertion of the final three paragraphs of section 48. That this interpretation is consistent with the legislative purpose may be ascertained by further analysis of the statute and its history. The third paragraph of section 48 provides that: . . . The promoters, organizers, directors and officers of the company shall purchase a total of at least twenty-five per cent of the first million dollars of stock originally issued and a total of not less than fifteen per cent of each additional one million dollars of stock originally issued. Any such stock shall be purchased at the same price and on the same terms as stock offered publicly. Any stock issued to the promoters, organizers, directors or officers of the company shall be held by the person to whom issued for a period of not less than five years. . . . This provision, in effect, requires those most responsible for the success and soundness of the company to have a substantial stake in that success, thereby assuring good faith in their dealings with the company." Plainly, the General Court has concluded that there is special need in the insurance industry for measures designed to insure the responsibility and good faith of those who form, control and operate insurance companies. '' See generally, Elmer v. Commisssioner of Insurance, 304 Mass. 194, 197-98(1939). Granting this premise of section 48, it is evident that the scheme which you have described would seriously imperil the statutory purpose. If a business corporation may hold the shares required to be held by an insurance company's promoters, organizers, directors or officers, then no individual promoter, organizer, director or officer need have the personal stake envisioned by the statute.*^ Nor is the corporate promoter's stake in the insurance company an adequate substitute for the personal interest of individuals. This is so because a corporation acts through individuals, and the individuals through whom it acts may have no personal stake in the success of the insurance company. Moreover, a business corporation cannot give undivided attention to making a success of the insurance company, for it is obliged to answer to its shareholders. It is true that the insurance company's individual promoters, organizers, directors and officers have well defined legal duties to the company. 'No similar requirements are to be found in chapter 156B, the Business Corporations Law. ^A complementary provision may be found in G.L. c. 175, §49. requiring the Commissioner of Insurance to satisfy himself that the incorporators of an insurance company are "of good repute and intend in good faith to operate the company . ' ' ^To put the worst case, suppose that a group of individuals promotes a business corporation, and capitalizes it by the sale of shares to the public. Suppose next thai this corporation nominally acts as a promoter in concert with the same individuals to form a stock insurance company, and that it purchases all of the requisite shares. In that case, only the shareholders in the business corporation have a substantial money stake in the success of the company; the individuals most responsible for promoting the company need have no money stake at all. Worse, they will look to their promoters' fees for their compensation, rather than to a speedy return on investment in a healthy insurance company. P.D. 12 P7 but the very premise of section 48 is that these duties are not sufficient assurance of individual good faith and responsibihty. My conclusion is reinforced by consideration of the context of section 48 in the overall statutory scheme. One objection to construing section 48 to treat corporations as promoters is the consequence of that construction in light of the merger provisions of chapter 175. General Laws chapter 175, section 193S. provides that an insurance holding company may be merged into its domestic insurance subsidiary if at least eighty per cent of its assets are committed to its subsidiary's insurance business. Thus, in the case that you have stated, a business corporation formed for the sole purpose of promoting a stock insurance company could be merged into the insurance company upon its formation. If the business corporation were the only promoter holding shares in the insurance company, its merger into the company would eliminate the only promoter, organizer, director or officer with the "personal" stake contemplated by the statute. This result is clearly inconsistent with the statutory requirement that stock issued to promoters, organizers, directors or officers "be held by the person to whom issued for a period of not less than five years, unless the commissioner shall approve a prior transfer, in writing." G.L. c. 175, §48. I do not mean to say that such a result would necessarily follow on the construction advanced; it is enough to say that chapter 175 does not clearly provide for such an eventuality. This is significant because the act which added the final three paragraphs of section 48 also amended section 19A to require that the corporation resulting from a merger comply with part of the amended section 48, but not with the provisions concerning promoters. St. 1966, c. 95, §2. Had the legislature contemplated the possibility that a corporation could act as a promoter, it would have made specific provisions in the same statute for the situation hypothesized. Although there has been movement recently toward removing disabilities of business corporations to act as incorporators and partners, see Henn, Law of Corporations §183 (1970), there is no evidence in chapter 175 to suggest that the legislature has intended to remove such disabilities with respect to insurance companies. On the contrary, the movement in that chapter has been toward establishing greater individual responsibility for the affairs of insurance companies. See generally Clark, The Regulation of Financial Holding Com- panies, 92 Harv. L. Rev. 787, 814-48 (1979); Clark, The Soundness of Financial Intermediaries, 86 Yale L. J. 1, 10-25, 77-85 (1976). In short, it would be egregious to alter the traditional meanings of words in that chapter because of events in a diverging area of corporation law. For the foregoing reasons, it is my opinion that a corporation may not be a promoter of a stock insurance company for the purposes of General Laws, chapter 175 section 48. Very truly yours, FRANCIS X. BELLOTTI Attorney General 128 P.D. 12