FINMA Decision in the Matter of KPT

In January 2012 FINMA announced that it sanctioned a Swiss insurance company and its directors for their improper behaviour relating to an employee participation program in connection with a contemplated merger with another Swiss health insurance carrier. This article discusses the cause for this decision and its legal foundations.

By Stefan Breitenstein (Reference: CapLaw-2012-3)

With decision dated 6 January 2012 (Press Release of FINMA dated 11 January

2012) the Swiss Financial Markets Supervisory Authority FINMA (FINMA) closed its administrative investigation started in 2010 against KPT Versicherungen AG (KPT Insurance), a Swiss insurance company, and its board members by finding serious violations of fiduciary duties. The decision related to the fixing of the repurchase price of company shares forming part of an employee participation program in connection with a contemplated merger with another Swiss health insurance carrier as well as mandate agreements with board members. In both cases FINMA held that rules relating to conflicts of interests were not sufficiently observed. As a result, FINMA banned two former board members for four years from acting in a high level function in the financial sector and ordered the disgorgement of illegal profits. Further, FINMA appointed an official administrator for the purpose of assuming the functions of the board of directors and for duly selecting new board members. The day-to-day operation of the insurance company and its solvency were not affected by the decision.

The FINMA decision related to a typical corporate self-dealing case, the facts of which can be summarized as follows. KPT Insurance is part of the KPT Health Insurance Group. At the top of the group are the KPT Insurance Cooperative and the KPT Health Insurance Cooperative. They hold together 100% of KPT Holding AG (KPT Holding) which, in turn, holds 91% of KPT Insurance and 100% of two health insurance companies as well as a number of auxiliary service companies. 9% of KPT Insurance was held by a management participation plan in the form of a foundation. Under this management participation plan the board members, the executives and employees of KPT Insurance could purchase shares for a price of CHF 28 in 2006 and CHF 40 in 2007. The twelve top persons held 27.7% of the plan shares, the remaining plan shares were held by 350 employees. As late as in spring 2010, members of the board purchased plan shares at favourable terms. In summer 2010, KPT Group agreed on a merger with another Swiss health insurance carrier whereby, as a pre-condition of the merger, the 9% minority stake held by the management participation plan had to be repurchased by KPT Holding. Based on external valuations, the board of KPT Insurance fixed the purchase price for the plan shares at CHF 600. According to press reports, this would have led to a payout to board members, executives and employees of CHF 50 million in the aggregate. The proposed transaction would have generated gains of 2,000% respectively 1,400% in four respectively three years. According to press reports, the former chairman of the board would have made a gain of CHF 1.2 million. This deal caused widespread concern in the industry and prompted FINMA to intervene by stopping the repurchase and launching an investigation.

As a health insurance carrier, KPT Group has two supervisors. The part of the group that provides for the Swiss compulsory health insurance program is supervised by the Swiss Federal Social Insurance Department while the part of the group that offers compulsory private insurance programs is supervised by FINMA in its capacity as regulator for insurance companies. As a requirement to obtain and continuously hold an insurance licence, the board of directors and the executives of an insurance company as well as the company itself must ensure proper business conduct (einwandfreie Gewähr). This broad and open notion applies not only to insurance companies but also to banks and other FINMA licensed financial companies. By applying this broad notion, FINMA and its predecessors have developed a considerable case law which requires licensed companies and their board members and executives not only to comply with special financial regulations but also with general principles of corporate and contract law including rules and principles regarding conflicts of interests and self-dealing.

FINMA held that the board of directors of KPT Insurance seriously violated its fiduciary duties:

  • By approving the repurchase of plan shares. FINMA, in particular, argued that the board members still purchased plan shares in spring 2010 when the proposed repurchase, as part of the merger, was already contemplated. Accordingly, FINMA held that the board not only seriously violated its fiduciary duties when fixing the repurchase price but also when buying plan shares immediately prior to the proposed merger;
  • by authorizing payments to board members in addition to regular board fees and bonuses under mandate agreements without that additional services were actually provided;
  • by using technical reserves for financing the repurchase of plan shares; and
  • by providing a loan to KPT Holding to effect the repurchase.

The decision of FINMA is not yet published and the chairman of the board has, according to press reports, announced to appeal against the decision before the Swiss Federal Administrative Court. Only when the decision of FINMA is published and has become final, a detailed review of the reasoning of FINMA and the broader implications on the financial industry can be made.