Lawsuit calls Western and Southern's mutual holding company conversion plan unfair
Western and Southern Life Insurance Co. is facing a potential class action lawsuit that claims its plan to convert to a mutual holding company does not give policyholders fair value for their ownership interests in the new structure.
|The lawsuit alleges that Western and Southern has proposed a "convoluted and hybrid type of reorganization."|
The lawsuit, filed July 6 in the Court of Common Pleas in Hamilton County, Ohio, on behalf of policyholder Stephen Marrara of Arthurdale, W. Va, is seeking national class action status. Those eligible to join the class are any policyholders who were eligible to vote for the mutual holding company conversion plan on June 26, 2000. Eligible policyholders were those with at least $1,000 worth of life insurance coverage with Western and Southern.
A mutual holding company serves as a parent company to a number of subsidiaries. Ownership of the subsidiaries, in turn, is generally split between the mutual holding company and outside investors, with the mutual holding company always maintaining majority control, usually just over 50 percent.
Under Western and Southern's proposed restructuring plan, two new companies would be created: Western-Southern Mutual Holding Co., which would be a non-stock mutual holding company owned by policyholders; and Western-Southern Financial Group, which would be a stock holding company. The present company, Western and Southern Life, based in Cincinnati, would be converted to a stock company, and policyholders would become "members" of the mutual holding company.
The conversion plan still needs approval of the Ohio Department of Insurance. If approved, Western and Southern expects to the complete the conversion by January 2001.
Herb Brown, a spokesperson for Western and Southern, declined to comment on the lawsuit.
"Convoluted and hybrid"
The suit alleges that instead of a demutualization — in which a mutual company owned by policyholders converts to a stock company owned by stockholders, with policyholders getting stock for their ownership interests — Western and Southern has proposed a "convoluted and hybrid type of reorganization" that will provide "little or no compensation for . . . policyholders for this radical and irreversible change in their ownership interests."
The lawsuit argues that the only way Western and Southern policyholders would receive any compensation in the conversion plan is if Western and Southern Holding is liquidated or if the Western-Southern Financial Group has an initial public offering (IPO), which the company says is unlikely in the near future.
Even if there is an IPO, the suit alleges that policyholders would not be able to control how much stock is issued, which could result in investors having a greater economic interest in the company than policyholders, even though policyholders would retain voting interest. William Jacobs, a lawyer with Strauss & Troy in Cincinnati, which filed the lawsuit, says that Western and Southern's board of directors could then have a "wider constellation of interests," in which policyholders' interests may yield to those of investors.
In a mailing sent to policyholders on May 10, 2000, Western and Southern also "opined" that the plan was in the best interest of policyholders, but did not disclose other alternatives — such as a regular demutualization plan — that would have given policyholders fairer compensation rights for their ownership interests, according to the suit.