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Coventry Health Investors Sue Over $5.6 Billion Aetna Buyout

Aetna Inc.’s $5.6 billion takeover of health insurer Coventry Health Care Inc. shortchanges Coventry investors while unfairly enriching the company’s top executive, investors said in a lawsuit.

Aetna, the third-biggest U.S. health plan, agreed last month to pay $42 a share for Coventry, the best performer in New York trading among medical insurers this year. The deal is structured to discourage other bidders and provides $7.6 million in bonuses to Coventry Chief Executive Officer Allen Wise, who didn’t shop around for the highest offer for the insurer, three pension funds said in the suit.

“The board’s sales process was woefully inadequate,” lawyers for the funds, which are Coventry shareholders, said in the Delaware Chancery Court complaint filed yesterday. The funds seek a court order blocking the deal from being completed.

With the Coventry purchase, Hartford, Connecticut-based Aetna joined competitors WellPoint Inc. and Cigna Corp. in making acquisitions over the past year as the U.S. government expands medical coverage. The purchase means 30 percent of Aetna’s revenue will come from federal-backed plans for elderly Medicare enrollees and low-income Medicaid patients, compared with the current 23 percent.

Kristine Grow, a spokeswoman for Bethesda, Maryland-based Coventry, declined to comment on the pension funds’ suit today. Susan Millerick, an Aetna spokeswoman, had no immediate comment on the suit.

‘Lucrative Retirement’

Lawyers for two pension funds based in Michigan and one based in the U.S. Virgin Islands contend that Coventry investors are only getting a 20 percent premium as a result of the deal while shareholders for other insurers that were recently acquired got premiums as high as 43 percent.

Disgruntled Coventry investors contend Wise conducted sale negotiations with Mark Bertolini, Aetna’s CEO, for more than four months before informing his fellow directors, according to court filings. Wise also serves as chairman of Coventry’s board. Aetna wound up offering $42 per share in a cash and stock deal, the suit said.

Wise, 70, wanted to sell the insurer to secure “a timely and lucrative retirement,” shareholders’ lawyers contend in the suit. The CEO stood to receive a $7.6 million bonus if the company was sold in addition to $14 million in retirement payments.

Coventry directors also structured the buyout to discourage other bidders from seeking to buy the insurer by agreeing to a $167.5 million termination fee if the deal fell apart, investors said in the complaint.

The deal adds more than 5 million customers to Aetna’s 36.7 million members, including 250,000 people on Medicare health plans and 930,000 on Medicaid. Coventry provides prescription drug coverage to 1.5 million more Medicare enrollees as well.

The case is Employees’ Retirement System of the Government of the Virgin Islands v. Coventry Health Care Inc., CA No. 7905, Delaware Chancery Court (Wilmington).

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