A1508

An Act concerning dental service corporations and supplementing Title 17 of the Revised Statutes.

Be It Enacted by the Senate and General Assembly of the State of New Jersey:

1. The Legislature finds and declares that:

a. It is in the interest of the subscribers of a dental service corporation and the State of New Jersey that the dental service corporation, under appropriate circumstances, be afforded the ability to modernize its corporate structure, subject to appropriate standards and approval, to meet the evolving oral health care needs of its subscribers, while continuing its current statutory purposes, and at all times maintaining its status as a charitable and benevolent institution as declared in section 32 of P.L.1968, c.305 (C.17:48C-32).

b. Ensuring that the dental service corporation statutes provide the opportunity for a dental service corporation to form a nonprofit parent corporation and make certain distributions to its nonprofit parent corporation in a manner authorized by this act will facilitate increased utilization of 21st century technologies and tools to better address current challenges, improving both the State's health care infrastructure and its readiness to promote oral health. Formation of a nonprofit parent corporation by a dental service corporation, if undertaken, approved, and completed consistent with the provisions of this act, will also promote vital investments and growth in oral health services and diversified businesses for the benefit of its subscribers and the State.

c. Current State law governing dental service corporations does not prescribe a clear path for a dental service corporation to update and improve its corporate structure for the benefit of its subscribers and the State while, at the same time, maintaining its nonprofit status, continuing to adhere to its statutory purposes to provide dental care and promote oral health to meet the needs of its subscribers, and fulfilling the obligations of a dental service corporation.

d. Other states have authorized similarly situated nonprofit dental service corporations to modernize their corporate structures while maintaining their nonprofit legal status and the statutorily prescribed purposes of the entities for the benefit of their subscribers and respective oral health care marketplaces.

e. Because formation of a nonprofit parent corporation authorized pursuant to this act does not constitute a conversion pursuant to section 3 of P.L.1968, c.305 (C.17:48C-3), the existing statutory purposes of the dental service corporation to provide dental care and promote oral health to meet the needs of its subscribers shall continue unabated if the dental service corporation forms a nonprofit parent corporation in the manner authorized by this act.

f. It is also in the interest of the subscribers of a dental service corporation and the State of New Jersey that the important statutory objects and purposes of the dental service corporation continue to be upheld following the formation of a nonprofit parent corporation pursuant to this act; provided, however, that it is appropriate to expand and modernize the objects and purposes of the parent corporation to encourage further innovation as well as improvement and diversification of services.

2. As used in this act:

“Application” means the submission and supporting documentation requesting approval of the formation of a parent corporation filed with the commissioner pursuant to subsection a. of section 3 of this act.

“Board” or “board of trustees” means the board of trustees of the dental service corporation.

“Commissioner” means the Commissioner of Banking and Insurance.

“Dental service corporation” means a corporation organized pursuant to subsection a. of section 2 of P.L. 1968, c.305 (C.17:48C-2).

“Enterprise risk” means any activity, circumstance, event, or series of events involving one or more affiliates of a dental service corporation that, if not remedied promptly, is likely to have a material adverse effect, as determined by the commissioner, upon the financial condition or liquidity of the dental service corporation or its parent corporation and its subsidiaries taken as a whole.

“Entity” means a corporation, limited liability company, partnership, association, joint stock company, business trust, unincorporated organization, or any similar entity.

“Parent corporation” means a New Jersey nonprofit corporation which is the direct or indirect owner of all of the membership interests of a dental service corporation. A parent corporation shall not be qualified as an insurance producer licensed to issue insurance policies, insurance contracts, or dental service subscriptions.

“Subscriber” means the same as defined in subsection b. of section 2 of P.L.1968, c.305 (C.17:48C-2).

“Subsidiary” means an entity of the dental service corporation of which at least 20 percent or more of the ownership interests of the entity are owned, or controlled, directly or indirectly through one or more intermediaries of the parent corporation of the dental service corporation.

“Transaction” means the formation of a parent corporation by a dental service corporation pursuant to this act and any other transactions set forth in the application and approved by the commissioner.

3. a. A dental service corporation shall not be established as a corporation organized for pecuniary profit and shall maintain its designations as a charitable and benevolent institution pursuant to section 32 of P.L.1968, c.305 (C.17:48C-32). A dental service corporation may form a parent corporation by:

(1) (a) adopting one or more resolutions authorizing the formation of a parent corporation by the affirmative vote of the majority of the votes cast by the board of trustees; and

(b) including within the resolution or resolutions a plan for formation of a parent corporation and the other steps in the transaction, including a proposed amended certificate of incorporation, proposed amended and restated bylaws of the dental service corporation, and a proposed certificate of incorporation and bylaws of the parent corporation. The plan shall include:

(i) the reasons for the formation of a parent corporation; and

(ii) the effect, if any, of formation of a parent corporation on existing subscriber contracts issued by the dental service corporation; and

(2) filing, within 30 days of the board’s adoption of the resolutions, an application with the commissioner, which shall contain:

(a) a true and complete copy of the plan for the transaction and of the minutes of the meeting at which the board approved the transaction;

(b) the name and address of the parent corporation, and its certificate of incorporation and bylaws, each as then in effect;

(c) an informative description of the business intended to be done by the parent corporation and the proposed transaction;

(d) diagrams of the current structure of the dental service corporation and its subsidiaries and the proposed structure of the parent corporation and its subsidiaries immediately following completion of the transaction;

(e) a list of all individuals who are or who have been selected to become directors or executive officers of the parent corporation upon consummation of the transaction, or who perform or will perform functions appropriate to the positions. The list shall, for each individual selected to become a director or executive officer of the parent corporation upon consummation of the transaction, include the principal occupation and all offices and positions held by the selected individual during the past five years, and any conviction of crimes other than minor traffic violations during the past 10 years;

(f) any plans or proposals contemplated by the parent corporation to make any material change in the dental service corporation’s business, corporate structure or management;

(g) information sufficient to demonstrate that the financial condition of the dental service corporation shall meet the solvency requirements pursuant to applicable laws and rules of the State of New Jersey relating to dental service corporations upon consummation of the transaction;

(h) any plans or proposals of the dental service corporation to make any distribution to the parent corporation, including distribution to the parent corporation of the ownership interests of subsidiaries of the dental service corporation; and

(i) a certification that, immediately following the consummation of the transaction, the terms and conditions of subscriber coverage shall remain in full force and effect.

b. If, prior to the approval of an application filed pursuant to paragraph (2) of subsection a. of this section, any change occurs in the facts set forth in the application filed with the commissioner, an amendment setting forth the change, together with copies of all documents and other materials relevant to the change, shall be filed with the commissioner within two business days after the dental service corporation learns of the change.

c. During the 30 days following receipt of the application, the commissioner shall review the application for completeness. If the application is found to be incomplete, the commissioner shall notify the dental service corporation in writing of the specific information required to make the application complete. Additionally, the commissioner may request clarification or explanation of any aspect of the application as necessary to fully evaluate the application. The commissioner shall notify the dental service corporation when the application is deemed to be complete and shall, in the commissioner’s sole discretion, approve or disapprove the application within 120 days from the date the application is deemed complete. The dental service corporation shall have 30 days from a notification of an incomplete application to file the information identified by the commissioner to make the application complete. The commissioner shall have 30 days, from the date on which the dental service corporation makes the responsive filing, to review the supplemental information.

d. The commissioner shall approve an application unless the commissioner finds the application:

(1) is contrary to law;

(2) would be detrimental to the safety or soundness of the dental service corporation; or

(3) would substantially reduce the services to be rendered to subscribers of the dental service corporation.

e. In the event of a disapproval of the application, the commissioner shall inform the dental service corporation of the specific reasons for the disapproval of the application and provide the dental service corporation with an opportunity to cure any deficiencies. Any disapproval shall be subject to judicial review as a final decision of a State administrative agency.

4. a. A parent corporation established pursuant to the provisions of this act shall maintain the dental service corporation’s statutorily prescribed purposes while supplementing those purposes to promote innovation and delivery of diversified services. The purposes of a parent corporation shall be to:

(1) provide affordable and accessible oral health care;

(2) promote the integration of the oral health care system to meet the needs of consumers;

(3) promote innovation and delivery of solutions and diversified services for the benefit of consumers; and

(4) enhance competition in the delivery of oral health care and related products or services.

b. A parent corporation established pursuant to the provisions of this act which owns a dental service corporation shall not be established as a company organized for pecuniary profit and is hereby declared to be a charitable and benevolent institution, and its funds and property shall be exempt from taxation by the State or any political subdivision thereof.

c. The parent corporation of a dental service corporation shall be expressly excluded from accounting, reporting, investing, and other provisions enumerated in P.L.1968, c.305 (C.17:48C-1 et seq.) and P.L.1970, c.22 (C.17:27A-1 et seq.), except to the extent that this act expressly provides otherwise.

d. A parent corporation may pursue businesses, assets, or operations through one or more of its insurance subsidiaries and non-insurance subsidiaries. The subsidiaries of the parent corporation shall be permitted to pay dividends or distributions to the parent corporation, a subsidiary thereof, or both. Distributions from the dental service corporation shall be subject to the applicable provisions of section 5 of this act.

e. No parent corporation shall:

(1) merge or consolidate with another entity resulting in the parent corporation becoming a for-profit entity;

(2) redomesticate to another state;

(3) transact business in this State as a dental service corporation or other risk-bearing entity;

(4) convert into a corporation organized for pecuniary profit; or

(5) underwrite or participate in the underwriting of an offering of securities of the parent corporation.

5. a. Notwithstanding the provisions contained in the “New Jersey Nonprofit Corporation Act,” P.L.1983, c.127 (C.15A:1-1 et seq.), a dental service corporation may from time to time pay one or more distributions to its parent corporation, which may include the distribution to its parent corporation of ownership interests of subsidiaries of the dental service corporation, consistent with the provisions of subsection c. of section 4 of P.L.1970, c. 22 (C.17:27A-4) and this section.

b. In determining whether a dental service corporation’s surplus is reasonable in relation to the dental service corporation’s outstanding liabilities and adequate for its financial needs, the following factors shall be considered:

(1) the number of subscribers of the dental service corporation;

(2) the nature and extent of the dental service corporation’s reinsurance program, if any;

(3) the quality, diversification, and liquidity of the dental service corporation’s investment portfolio;

(4) the adequacy of the dental service corporation’s surplus and reserves; and

(5) the quality of the dental service corporation’s earnings and the extent to which the reported earnings include extraordinary items.

c. No dental service corporation shall pay any extraordinary distribution to its parent corporation until:

(1) 30 days after the commissioner has received notice of the declaration thereof and has not within the period disapproved the payment; or

(2) the commissioner has approved the payment within the 30-day period. A dental service corporation may declare an extraordinary distribution, provided that payment of the extraordinary distribution is subject to this subsection. For purposes of this section, an extraordinary distribution includes any distribution of cash or other property, whose fair market value together with that of other distributions made within the preceding 12 months exceeds the greater of 15 percent of the dental service corporation's surplus as of December 31 next preceding, or the net income from operations of the dental service corporation, not including realized capital gains, for the 12-month period ending December 31 next preceding.

d. Except for extraordinary distributions paid pursuant to subsection c. of this section, all distributions to its parent corporation shall be declared or paid by a dental service corporation only from earned surplus. For purposes of this subsection, “earned surplus” means unassigned funds, as reported on the dental service corporation’s annual statement as of December 31 next preceding, less unrealized capital gains and revaluation of assets.

6. a. The parent corporation shall file an annual enterprise risk report by April 1 of each year. The report shall, to the best of the parent corporation’s knowledge and belief, identify the material risks among the parent corporation and its subsidiaries that could pose enterprise risk to the dental service corporation.

b. In addition to the powers which the commissioner has under section 28 of P.L.1968, c.305 (C.17:48C-28) relating to the examination of a dental service corporation, the commissioner shall have the power to examine any dental service corporation and its affiliates to ascertain the financial condition of the dental service corporation, including the enterprise risk to the dental services corporation by the parent corporation, or by any entity or combination of entities which are subsidiaries of the parent corporation, or by the parent corporation on a consolidated basis.

c. The commissioner shall also have the power to order any dental service corporation to produce the records, books, or other information papers in the possession of the dental service corporation or its affiliates as shall be necessary to ascertain the financial condition of the dental service corporation or to determine compliance with subsection a. of this section. In the event the dental service corporation fails to comply with the order, the commissioner shall have the power to examine the affiliates to obtain the information. In addition, to determine compliance with this section, the commissioner may order any dental service corporation to produce information not in the possession of the dental service corporation if the dental service corporation can obtain access to that information pursuant to contractual relationships, statutory obligations, or other methods. In the event the dental service corporation cannot obtain the information requested by the commissioner, the dental service corporation shall provide to the commissioner a detailed explanation of the reason that the dental service corporation cannot obtain the information and the identity of the holder of the information.

7. Upon any dissolution of a parent corporation in accordance with N.J.S.15A:12-2 through N.J.S.15A:12-7, the parent corporation shall adopt a plan of dissolution in accordance with N.J.S.15A:12-8. The plan shall provide that any assets of the parent corporation remaining after the discharge of all liabilities and obligations, if any, shall be distributed also in accordance with N.J.S.15A:12-8.

8. a. Documents, materials, or other information in the possession or control of the Department of Banking and Insurance that are obtained by or disclosed to the commissioner or any other person in the course of an examination or investigation in connection with this act, and all information reported pursuant to sections 3, 5, and 6 of this act shall:

(1) be proprietary and contain trade secrets;

(2) be confidential by law and privileged;

(3) not be subject to P.L.1963, c.73 (C.47:1A-1 et seq.);

(4) not be subject to subpoena; and

(5) not be subject to discovery or admissible in evidence in any private civil action.

The commissioner is authorized to use the documents, materials or other information in furtherance of any regulatory or legal action brought as a part of the commissioner’s official duties. The commissioner shall not otherwise make the documents, materials or other information public without the prior written consent of the dental service corporation or parent corporation to which it pertains unless the commissioner, after giving the dental service corporation and its affiliates who would be affected thereby notice and opportunity to be heard, determines that the interest of the subscribers or the public will be served by the publication thereof, in which event the commissioner may publish all or any part in a manner as may be deemed appropriate.

b. Neither the commissioner nor any person who received documents, materials or other information while acting under the authority of the commissioner or with whom the documents, materials or other information are shared in connection with this act shall be permitted or required to testify in any private civil action concerning any confidential documents, materials, or information subject to subsection a. of this section.

9. a. The provisions of this act shall be severable; and if any phrase, clause, sentence, or provision is deemed unenforceable, the remaining provisions of this act shall be enforceable.

b. The provisions of this act shall be liberally construed to effectuate its purposes.

10. This act shall take effect immediately.

STATEMENT

This bill permits dental service corporations to establish nonprofit parent corporations.

Current law does not provide a mechanism for a dental service corporation (DSC) to update its corporate structure. Other states with similar laws have supplemented their statutes to enable DSCs to reorganize in this manner. It is the sponsor’s intent to supplement the “Dental Service Corporation Act of 1968” to ensure that a DSC can continue to provide affordable dental care to its subscribers and promote competition in the dental service market that has evolved significantly since the act’s passage in 1968, in a manner which provides transparency and consumer protection. The bill continues to impose all statutory requirements on a DSC under the act, while also facilitating and increasing the DSC’s utilization of modern technologies and tools to better address current challenges to the State's oral health infrastructure.

The bill stipulates that a DSC seeking to form a nonprofit parent corporation must make an application to the Commissioner of the Department of Banking and Insurance which shall include a plan for the formation of the nonprofit parent corporation, including resolutions, diagrams of the proposed structure, a list of the directors or executive officers, plans or proposals to make material changes to the DSC’s business, documentation demonstrating compliance with all solvency requirements, and plans or proposals to make any distributions. The bill requires the commissioner to review the application for completeness and, if found complete, the commissioner has the sole discretion to approve or disprove the application within 120 days. The bill provides for procedures in the event of a disapproval, including the opportunity to cure deficiencies and seek judicial review.

Under the bill, the parent corporation is required to maintain the DSC’s statutorily prescribed purposes. The parent corporation’s purpose is to provide affordable and accessible oral health care, promote the integration of the oral health care system to meet the needs of consumers, promote the innovation and delivery of solutions and diversified services for the benefit of consumers, and enhance competition in the delivery of oral health care and related products and services. The parent corporation is prohibited from being organized for pecuniary profit and is required to be a charitable and benevolent institution. Although the parent corporation may have subsidiaries, from the bill prohibits conversion to a for-profit entity, re-domestication in another state, the transaction of business in this State as a risk-bearing entity, including as a DSC, and the underwriting of an offering of securities.

Lastly, the bill allows a DSC to make distributions to the parent company consistent with provisions of existing law. It further imposes specific requirements on the DSC and parent corporation related to enterprise risk reporting to identify material risks within the insurance holding company system that could adversely affect the DSC.