CHAPTER 298

FORMERLY

HOUSE BILL NO. 455

AS AMENDED BY

HOUSE AMENDMENT NO. 1

AN ACT TO AMEND TITLE 29 OF THE DELAWARE CODE RELATING TO CONVERSION TRANSACTIONS OF NOT-FOR-PROFIT ENTITIES.

BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF DELAWARE :

WHEREAS, the rate of transfers of the assets of not-for-profit or charitable healthcare service providers, healthcare insurers, or other entities maintaining plans to provide healthcare services or indemnity therefor, moving to the for-profit sector, whether by sale, joint venture, or other transfers of assets, has increased significantly in the last several years; and

WHEREAS, this phenomenon represents the single most intensive and voluminous conversion of not-for-profit and charitable assets in the history of the United States; and

WHEREAS, the assets available for distribution as the result of a conversion represent public or charitable assets which inure to the benefit of the citizens of this State; and

WHEREAS, in order to protect the public health and welfare, the General Assembly desires to establish standards and procedures for the orderly and proper disposition of public or charitable assets;

NOW, THEREFORE:

BE IT ENACTED BY THE GENERAL ASSEMBLY OF THE STATE OF DELAWARE:

Section 1. Amend Chapter 25, Title 29 of the Delaware Code by designating § 2501 through § 2516 as "Subchapter I. General Powers" and further by designating § 2517 through § 2519 as: "Subchapter II. Consumer Protection".

Section 2. Amend Chapter 25, Title 29 of the Delaware Code by adding thereto a new subchapter III to read as follows:

"Subchapter III. Not-for-profit Healthcare Conversions.

§ 2520. Short Title.

This subchapter may be cited as 'The Not-for-profit Healthcare Conversion Act'.

§2521. Definitions.

As used in this subchapter:

(1) 'Not-for-profit health care entity' includes a not-for-profit hospital, including a corporation or a hospital created under a trust or will, a not for profit healthcare service provider, a not-for-profit nursing home or long term care facility, a not-for profit healthcare insurer, a mutual corporation holding assets in charitable trust for the public benefit, an entity maintaining plans to provide healthcare services or indemnity thereof, and an entity, other than a for-profit entity, affiliated with any of these through ownership, governance, or membership, such as a holding company or subsidiary.

(2) 'Not-for-profit healthcare conversion transaction' includes:

a. the sale, transfer, lease, exchange, optioning, conveyance, affiliation, merger, joint venture, or other disposition of a material amount of the assets or operations of a not-for-profit healthcare entity, made other than in the normal course of business, to an entity or person other than a charity or not-for-profit entity;

b. the transfer of control or governance of a material amount of the assets or operations of a not-for-profit healthcare entity to an entity or person other than a charity or not-for-profit entity;

c. a substantial change or amendment to a certificate of incorporation which materially affects an entity's charitable or public benefit intent, or a disposition of reserves or control of a not-for-profit healthcare entity or of a charitable entity or of an entity holding assets for the public benefit;

d. a change in the composition of the Board of Directors such that, upon the effective date of such change, a majority of directors of the not-for-profit health care entity are affiliated with (or have been elected by directors a majority of whom were or are affiliated with) any single entity or person other than a charity or not-for-profit entity. For purposes of this subsection, a director shall be deemed to be affiliated with such entity or person if such director (i) receives or has received, directly or indirectly, compensation, including income, in any form from such person or entity (or parent, subsidiary or affiliate of such entity), (ii) serves or has served as a director, officer, employee, partner, member or agent of such entity (or of a parent, subsidiary or affiliate of such entity), (iii) is a close family member of such person or is a close family member of any person who serves as an officer or director of such entity (or parent, subsidiary or affiliate of such entity) or (iv) is, directly or indirectly, controlled by such person or entity.

(3) Not-for-profit healthcare insurer' includes a not-for-profit provider of healthcare insurance, including service associations, health service corporations, and physician service organizations or their affiliates.

(4) 'Person' means an individual, partnership, trust, estate, corporation, association, organization, joint venture, joint stock company, limited liability company, or other legal or commercial entity.

(5) 'Public benefit asset' means, as to a not-for-profit healthcare entity that is seeking to engage in a not-for-profit healthcare conversion transaction, that part of the fair market value of the converting entity impressed with a public trust for the public benefit as initially determined by the Attorney General and subject to the approval of the Court of Chancery.

§ 2522. Notice to the Attorney General.

A not-for-profit healthcare entity seeking to engage in a not-for-profit healthcare conversion transaction is required to provide written notice of its intent to enter into the transaction to the Attorney General of the State within one hundred and eighty (180) days prior to the closing date of the proposed transaction.

§ 2523. Establishment of a Foundation.

(a) For proceeds or reserves of not-for-profit healthcare conversion transactions that constitute public benefit assets, there shall be created a new tax-exempt public benefit or charitable organization or foundation pursuant to 26 U.S.C.A. sec. 501(c)(3) or 501(c)(4) of the Federal Internal Revenue Code into which the proceeds or reserves shall be ultimately deposited. Whether or not the public benefit or charitable organization is classified as a private foundation under Section 509 of the Internal Revenue Code, it shall be subject to the restrictions and limitations that apply to private foundations found in Section 4941 through 4945 of the Internal Revenue Code.

(b) The mission of the public benefit or charitable organization or foundation receiving the public benefit assets shall be serving the State's unmet health needs, particularly with regard to medically uninsured and underserved populations.

(c) The board of directors of the foundation shall consist of nine (9) to fifteen (15) members who shall be broadly representative of the community's diversity and shall include persons with knowledge, expertise and skills in investment and asset management, healthcare finance, not-for-profit administration, delivery of healthcare services, and of health care consumer issues. Each member of the board of directors shall be appointed by the Governor, by and with the consent of the Senate, from a list of qualified persons who have been nominated by the Community Advisory Committee established in subsection (d), below. The directors shall elect a chairperson. The directors shall have the authority to adopt bylaws for the foundation in consultation with the Community Advisory Committee. After the directors have finalized the formation of the foundation and the adoption of bylaws, the State shall transfer the public benefit assets to the foundation.

(d) A Community Advisory Committee shall be formed to nominate candidates for the foundation’s board of directors. The initial Community Advisory Committee shall be comprised of nine members, one selected by each of the following organizations: the Delaware State Chamber of Commerce, the Medical Society of Delaware, the Delaware Community Foundation, the Delaware Nurses' Association, the Delaware AFL-CIO, the Delaware Healthcare Association, the United Way of Delaware, the Delaware State Senate, whose member shall be selected by the President Pro Tem of the Senate, and the Delaware House of Representatives, whose member shall be selected by the Speaker of the House. The Advisory Committee shall elect a chairperson. Members of the Community Advisory Committee shall be appointed within sixty (60) days after the State receives public benefits assets from any not-for-profit health care conversion transaction. The foundation may expand the Community Advisory Committee and provide for additional appointments through its by-laws. The Community Advisory Committee's criteria for nominating board members shall ensure an open recruitment process for the directors. The Community Advisory committee shall nominate at least 30 residents of Delaware for the initial board of directors. At no time shall the Community Advisory Committee nominate one of its own members for appointment to the Board of Directors of the Foundation. In addition to nominating persons for consideration of appointment, the Community Advisory Committee shall also work with the foundation’s board of directors to develop and improve the foundation's mission, certificate of incorporation and by-laws, and shall provide ongoing guidance to the board concerning community needs and other issues relating to the activities of the foundation.

(e) The State Treasurer shall open and maintain an escrow account for the benefit of the foundation for the receipt of any public benefit assets. During the interim time period from when the State receives public benefit assets until they are transferred to the foundation, the State Treasurer shall invest any funds that are part of the public benefit amount in a manner that will protect the principal balance of the public benefit assets.

(f) The certificate of incorporation of the foundation shall provide that the directors shall be appointed to the board for a term of three (3) years except as provided herein. The term for each board position shall be staggered by thirds so that the first term for a board position may be one (1), two (2) or three (3) years and shall be determined by lot. No individual may serve more than two (2) terms consecutively, except for the initial members whose terms are one (1) or two (2) years who may serve three (3) consecutive terms. Notwithstanding any other law to the contrary, directors of the foundation shall be prohibited from holding over their term once expired even if their successors have not been duly elected and qualified. The directors shall receive no compensation for their service on the board of the foundation other than reimbursement for reasonable expenses related to their service. No elected official may serve as a director of the foundation.

(g) The not-for-profit public benefit or charitable organization or foundation receiving the public benefit assets, its directors, officers, and management shall be and remain independent of the for-profit company or mutual corporation and its affiliates. No person who is an officer, director, or member of management of the not-for-profit corporation submitting the plan for the proposed healthcare conversion transaction, at the time the plan is submitted, or at the time of the agreement or transaction, or thereafter, shall be qualified to be an officer, director or member of management of the not-for-profit public benefit or charitable organization or foundation receiving the charitable assets.

(h) The not-for-profit public benefit or charitable organization or foundation receiving the public benefit assets shall establish formal mechanisms to avoid conflicts of interest and to prohibit grants benefiting the for-profit corporation, the board of directors and management of the for-profit corporation.

(i) The foundation shall have the power to enter into any contract, acquire, lease, sell, hold or dispose of any assets in accordance with the purposes of this Act; to employ, retain or enter into contracts with persons in connection with the management and operation of the foundation; to bring or defend, pay, collect, compromise or arbitrate any legal action by or against the foundation; to deposit withdraw, invest, pay, retain and distribute the foundation’s funds in accordance with this Act; to purchase, hold, sell, lease, exchange, receive or otherwise acquire or dispose of securities in the name of the foundation; to open, maintain and close bank accounts, and draw checks or other orders for the payment of moneys; and to authorize any officer, director employee or other agent of the foundation to act for and on behalf of the foundation in all matters incidental to the forgoing.

(j) The charitable organization or foundation receiving the public benefit assets shall provide the Attorney General, the Governor, and the General Assembly with an annual report of its charitable activities related to its use of the public benefit assets received. The annual report shall be a public document.

(k) Nothing in this subchapter shall be construed to limit the common law authority of the Attorney General to protect the charitable trusts and assets held for the public benefit in this State. Nothing in this subchapter shall be construed as a replacement for any other civil or criminal actions, which the Attorney General may take either under the common law or statutory law, seeking injunctive relief, or other available remedies.

(l) Nothing in this subchapter shall be construed to supersede, restrict or otherwise limit the powers, duties, and authority of the Insurance Commissioner pursuant to Title 18 of the Delaware Code, or any other provisions relating to the regulation of insurers, hospitals, or other health care corporations. ".

Section 3. If any provision of this Act or the application thereof to any person or circumstance is held invalid, such invalidity shall not affect other provisions or application of the Act which can be given effect without the invalid provisions or application, and to that end the provisions of this Act are declared severable.

Approved June 30, 2004