Health Management Associates’ Board Sued Over Proxy Fight

Health Management Associates Inc.’s directors are improperly trying to strong-arm investors into rejecting a bid to replace the hospital operator’s board, a shareholder alleged in a lawsuit.

Health Management directors are wrongfully refusing to drop provisions tucked into lender agreements covering the company’s $3.5 billion in debt that call for accelerated payment if the board is removed, lawyers for a Florida pension fund said in the Delaware Chancery Court complaint. Glenview Capital Management LLC, which owns 14.6 percent of Health Management’s shares, began soliciting proxy votes earlier this year to oust the board over the firm’s financial performance.

“HMA’s incumbent directors are threatening their own stockholders that their exercise of the shareholder franchise to select new directors would trigger acceleration of so much debt that the company may not be able to survive,” the pension fund said in the suit, filed today.

Health Management, which hired investment bank Morgan Stanley and the law firm of Weil, Gotshal & Manges LLP to review strategic alternatives, is seeking a chief executive officer to replace Gary Newsome, who said on May 28 he would leave. That has spurred speculation the company, which runs 71 hospitals, may be bought as the industry faces pressure to consolidate under the 2010 health-care law.

MaryAnn Hodge, a spokeswoman for Naples, Florida-based Health Management, declined to comment on the complaint.

Hospital M&A

Hospital operators are gearing up for an influx of new customers in 2014, along with cuts to Medicare funding, under President Barack Obama’s Affordable Care Act. Dallas-based Tenet Healthcare Corp. agreed last month to buy hospital chain Vanguard Health Systems Inc. for about $1.8 billion as it seeks to grow in new markets.

Health Management, the fifth-largest hospital operator by market value, set up takeover defenses in May after claiming in a U.S. Securities and Exchange Commission filing that New York-based Glenview, founded by hedge fund manager Lawrence Robbins, sought to buy as much as $2.2 billion worth of stock, about a 75 percent stake at the time.

Glenview officials responded in their own filing that they had “no present intention or future plan” to purchase that much stock.

Debt Agreements

As part of those defenses, Health Management officials contend provisions of the company’s 2011 debt agreements allow the notes to be called if the current board is removed. Those provisions also only can be altered by directors who put them in place, according to the suit filed by the town of Davie, Florida’s police pension plan.

While the board has the power to disable those debt provisions, it refuses to do so, the pension fund said in the filings. Health Management officials are improperly using the provisions to pressure investors into voting against ousting directors, according to the complaint.

HMA’s directors and officers “are privately advising analysts and investors that the economic risk” posed by the debt provisions should persuade stockholders to oppose Glenview’s proxy solicitation, according to the suit.

Delaware Judge

In March, Delaware Chancery Judge Leo Strine ruled that directors of SandRidge Energy Inc., an oil and natural-gas producer, couldn’t use similar debt provisions to influence investors’ proxy votes in a board fight.

Glenview officials have nominated eight directors for Health Management’s board and urged that outside consultants Alvarez & Marsal Inc. serve as the company’s interim managers. The hedge fund is soliciting proxy votes from fellow investors to replace all directors.

Lawyers for the Florida pension fund are asking Strine to bar Health Management’s board from using the debt provisions to help fend off the bid to oust directors.

The case is Town of Davie Police Officers’ Pension Plan v. Dauten, CA 8742, Delaware Chancery Court (Wilmington).

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