SENATE BILL NO. 322

INTRODUCED BY M. WATERMAN, C. CHRISTIAENS, J. COBB, D. HARGROVE, L. SOFT

A BILL FOR AN ACT ENTITLED: "AN ACT PROVIDING THE ATTORNEY GENERAL AUTHORITY TO REVIEW AND APPROVE CONVERSIONS OF NONPROFIT HEALTHCARE ENTITIES TO FOR-PROFIT STATUS; PROVIDING REVIEW ELEMENTS; AUTHORIZING THE ATTORNEY GENERAL TO REQUIRE A NONPROFIT HEALTHCARE ENTITY TO REIMBURSE COSTS OF CONTRACTING FOR REVIEW EXPERTS OR CONSULTANTS; PROVIDING REMEDIES; PROVIDING FOR JUDICIAL REVIEW; AMENDING SECTIONS 35-2-609 AND 35-2-617, MCA; AND PROVIDING AN EFFECTIVE DATE."

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF MONTANA:

NEW SECTION. Section 1. Short title. [Sections 1 through 10] may be cited as the "Nonprofit Healthcare Conversion Transaction Act".

NEW SECTION. Section 2. Definitions. For the purposes of [sections 1 through 10] the following definitions apply:

(1) (a) "Healthcare insurer" means an entity that provides disability insurance, as defined in 33-1-207, including insurance against medical expenses incurred because of bodily injury or disablement caused by sickness or accidental injury.

(b) The term does not include those insurers who provide only wage loss or income protection benefits for persons with disabilities.

(2) "Health maintenance organization" has the meaning provided for in 33-31-102.

(3) "Health service corporation" has the meaning provided for in 33-30-101.

(4) "Hospital" has the meaning provided for in 50-5-101.

(5) "Material amount" means a 40% or greater interest in the assets or operations of a nonprofit healthcare entity. For purposes of [sections 1 through 10], the value of an interest in the assets of a nonprofit healthcare entity is calculated with reference to the fair market value of the assets at the time of disposition.

(6) "Nonprofit" means a public benefit corporation or a religious corporation, as defined in 35-2-114, and includes a mutual benefit corporation to the extent that the corporation holds assets in a charitable trust.

(7)(a) "Nonprofit healthcare conversion transaction" means:

(i) the sale, transfer, lease, exchange, optioning, conveyance, or other disposition of a material amount of the assets or operations of a nonprofit healthcare entity to an entity or person other than another nonprofit; and

(ii) the transfer of control or governance of a material amount of the assets or operations of a nonprofit healthcare entity to an entity or person other than another nonprofit.

(b) The term does not include the investment of funds or other disposition of financial assets of a nonprofit healthcare entity in the ordinary course of its business.

(8) "Nonprofit healthcare entity" means any nonprofit hospital, nonprofit health maintenance organization, nonprofit health service corporation, or nonprofit healthcare insurer, including entities affiliated with any of these through ownership, governance, or membership, such as a holding company or subsidiary. The term includes but is not limited to mutual benefit corporations holding assets in a charitable trust under the laws of this state.

(9) "Person" means any individual, partnership, trust, estate, corporation, association, joint venture, joint stock company, insurance company, or other organization.

NEW SECTION. Section 3. Notice to and approval of attorney general . A nonprofit healthcare entity is required to provide written notice to and obtain the approval of the attorney general prior to entering into any nonprofit healthcare conversion transaction.

NEW SECTION. Section 4. Approval or disapproval -- written notice -- time period -- extension. Within 90 days of filing a written notice as required by [section 3], the attorney general shall notify the nonprofit healthcare entity in writing of a decision to approve or disapprove the proposed nonprofit healthcare conversion transaction. The attorney general may extend this period for an additional 15 days if the extension is necessary to obtain information pursuant to [section 3 or 7].

NEW SECTION. Section 5. Public hearings -- notice. (1) Prior to issuing any written decision pursuant to [section 4], the attorney general may, or if demanded by the applicant, shall conduct one or more public hearings that may be held in the county where the nonprofit healthcare entity's assets that are intended to be transferred are located. At least 14 days prior to the hearing date, the attorney general shall publish written notice of the time and place of the hearing in one or more newspapers of general circulation in the affected community, provide the notice to the county commissioners, and, if applicable, provide the notice to the city council of the city where the nonprofit healthcare entity's assets that are intended to be transferred are located.

(2) At the public hearing, the attorney general must receive written and oral comments from interested persons desiring to make a statement regarding the proposed nonprofit healthcare conversion transaction. The attorney general may accept written comments for a specified time period after each public hearing. The attorney general shall issue a written response to any oral or written comments received in the written notice of approval or disapproval.

NEW SECTION. Section 6. Discretion of attorney general -- review . (1) In making a decision whether to approve or disapprove a proposed nonprofit healthcare conversion transaction, the attorney general shall consider:

(a) whether the nonprofit healthcare entity will receive full and fair market value for the assets or operation that is the subject of the transaction;

(b) whether the proposed nonprofit healthcare conversion transaction will result in a breach of fiduciary duty, as determined by the attorney general, including conflicts of interest related to payments or benefits to officers, directors, board members, executives, and experts employed or retained by the parties; and

(c) whether the nonprofit healthcare conversion transaction will result in private inurement to any person.

(2) In evaluating the nonprofit healthcare conversion transaction, the attorney general is bound by any findings of fact made by the insurance commissioner or the department of public health and human services in administrative proceedings within their jurisdiction to review any action constituting a part of the nonprofit healthcare conversion transaction.

NEW SECTION. Section 7. Retention of experts -- access to records. Within the time periods provided in [section 4], the attorney general may

retain, at the expense of the nonprofit healthcare entity, actuaries, accountants, attorneys, or other experts that may be reasonably necessary to assist the attorney general in reviewing the proposed nonprofit healthcare conversion transaction. The nonprofit healthcare entity shall provide the attorney general and any experts retained under this section access to documents and records reasonably necessary to evaluate and review the proposed nonprofit healthcare conversion transaction.

NEW SECTION. Section 8. Public records. All documents and records, excluding any proprietary or confidential information, submitted to the attorney general by any person, including a nonprofit healthcare entity providing notice under [section 3], in connection with the attorney general's review of the proposed nonprofit healthcare conversion transaction are public records to the extent required by all provisions of applicable state law. The work product and the final analysis and conclusions submitted to the attorney general by any experts pursuant to [section 7], excluding any proprietary or confidential information, are public records.

NEW SECTION. Section 9. Remedies. (1) A nonprofit healthcare conversion transaction entered into in violation of the notice, review, or approval requirements of [sections 1 through 10] is voidable.

(2) The attorney general may initiate proceedings in the district court of the first judicial district or the judicial district for the county in which the nonprofit healthcare entity's assets that are intended to be transferred are located to secure a declaration that the nonprofit healthcare conversion transaction is void and to recover any assets transferred in violation of [sections 1 through 10].

(3) Proceedings to declare a nonprofit healthcare conversion transaction void may be brought against any entity that was a party to the transaction or a successor in interest to a party to the transaction that received any charitable assets as a result of the transaction.

(4) This section may not be construed to limit the common-law authority of the attorney general to protect charitable trusts and charitable assets in this state. These remedies are in addition to, and not a replacement for, any other civil or criminal actions that the attorney general may take under common or statutory law, including rescinding the nonprofit healthcare conversion transaction, granting injunctive relief, or a combination of these and other remedies available under law.

NEW SECTION. Section 10. Judicial review. (1) A party to a nonprofit healthcare conversion transaction aggrieved by any act, determination, or order or any other action of the attorney general pursuant to [sections 1 through 10] may appeal to the district court for the first judicial district, Lewis and Clark County. The court shall conduct its review by trial de novo, except when all parties, including the attorney general, stipulate that the review may be confined to the record. Portions of the record may be introduced by stipulation into evidence in a trial de novo by the parties.

(2) The filing of an appeal pursuant to this section stays the application of any order or other action of the attorney general to the appealing party.

Section 11. Section 35-2-609, MCA, is amended to read:

"35-2-609. Limitations on mergers by public benefit or religious corporations. (1) Except as provided in subsection (4) or without the prior approval of the district court for the judicial district in which the corporation's registered office is located, in a proceeding of which the attorney general has been given written notice, a public benefit corporation or religious corporation may merge only with:

(a) a public benefit corporation or religious corporation;

(b) a foreign corporation that would qualify under this chapter as a public benefit corporation or religious corporation;

(c) a wholly owned foreign or domestic business or mutual benefit corporation, if the public benefit corporation or religious corporation is the surviving corporation and continues to be a public benefit corporation or religious corporation after the merger; or

(d) a business or mutual benefit corporation, provided that:

(i) on or prior to the effective date of the merger, assets with a value equal to the greater of the fair market value of the net tangible and intangible assets, including good will, of the public benefit corporation or the fair market value of the public benefit corporation if it were to be operated as a business concern are transferred or conveyed to one or more persons who would have received its assets under 35-2-725(1)(e) and (1)(f) had it dissolved;

(ii) it shall return, transfer, or convey any assets held by it upon condition requiring return, transfer, or conveyance in case of merger, in accordance with the condition; and

(iii) the merger is approved by a majority of directors of the public benefit corporation or religious corporation who are not and will not become members or shareholders in or officers, employees, agents, or consultants of the surviving corporation.

(2) At least 20 days before consummation of any merger of a public benefit corporation or a religious corporation pursuant to subsection (1)(d), notice, including a copy of the proposed plan of merger, must be delivered to the attorney general.

(3) Without the prior written consent of the attorney general or of the district court in a proceeding in which the attorney general has been given notice, a member of a public benefit corporation or religious corporation may not receive or keep anything as a result of a merger other than a membership in the surviving public benefit corporation or religious corporation. The court shall approve the transaction if it is in the public interest.

(4) A public benefit corporation or a religious corporation that is considered a nonprofit healthcare entity, as defined in [section 2], is subject to the provisions of 35-2-617 and [sections 1 through 10]."

Section 12. Section 35-2-617, MCA, is amended to read:

"35-2-617. Sale of assets other than in regular course of activities. (1) A corporation may sell, lease, exchange, or otherwise dispose of all or substantially all of its property, which may include the good will, other than in the usual and regular course of its activities on the terms and conditions and for the consideration determined by the corporation's board if the proposed transaction is approved as required by subsection (2).

(2) Unless this chapter, the articles, the bylaws, or the board of directors or members, acting pursuant to subsection (4), require a greater vote or voting by class, the proposed transaction to be authorized must be approved:

(a) by the board;

(b) by the members by two-thirds of the votes cast or a majority of the voting power, whichever is less; and

(c) in writing by any person or persons whose approval is required by a provision of the articles, as authorized by 35-2-232, for an amendment to the articles or bylaws.

(3) If the corporation does not have members, the transaction must be approved by a vote of a majority of the directors in office at the time the transaction is approved. In addition, the corporation shall provide notice, in accordance with 35-2-429(3), of any directors' meeting at which approval is to be obtained. The notice must also state that the purpose or one of the purposes of the meeting is to consider the sale, lease, exchange, or other disposition of all or substantially all of the property or assets of the corporation and must contain or be accompanied by a copy or summary of a description of the transaction.

(4) The board may condition its submission of the proposed transaction and the members may condition their approval of the transaction on receipt of a higher percentage of affirmative votes or on any other basis.

(5) If the corporation seeks to have the transaction approved by the members at a membership meeting, the corporation shall give notice to its members of the proposed membership meeting in accordance with 35-2-530. The notice must state that the purpose or one of the purposes of the meeting is to consider the sale, lease, exchange, or other disposition of all or substantially all of the property or assets of the corporation and must contain or be accompanied by a copy or summary of a description of the transaction.

(6) If the board needs to have the transaction approved by the members by written consent or written ballot, the material soliciting the approval must contain or be accompanied by a copy or summary of a description of the transaction.

(7) (a) Except as provided in subsection (7)(b), a public benefit corporation or religious corporation shall give written notice to the attorney general 20 days before it sells, leases, exchanges, or otherwise disposes of all or substantially all of its property if the transaction is not in the usual and regular course of its activities unless the attorney general has given the corporation a written waiver of this subsection.

(b) A public benefit corporation or a religious corporation that is considered a nonprofit healthcare entity, as defined in [section 2], is subject to the provisions of [sections 1 through 10].

(8) After a sale, lease, exchange, or other disposition of property is authorized, the transaction may be abandoned, subject to any contractual rights, without further action by the members or any other person who approved the transaction in accordance with the procedure set forth in the resolution proposing the transaction or, if no procedure is set forth, in the manner determined by the board of directors."

NEW SECTION. Section 13. Codification instruction. [Sections 1 through 10] are intended to be codified as an integral part of Title 50, chapter 4, and the provisions of Title 50, chapter 4, apply to [sections 1 through 10].

NEW SECTION. Section 14. Saving clause. [This act] does not affect rights and duties that matured, penalties that were incurred, or proceedings that were begun before [the effective date of this act].

NEW SECTION. Section 15. Effective date. [This act] is effective July 1, 1999.

- END -