Shareholder’s Suit May Stall FHP Takeover : Merger: The chairman of TakeCare in Northern California rejected a higher offer in favor of a lower bid by the Fountain Valley health maintenance organization, the suit alleges.
Shareholders with a 22% stake in a Northern California health maintenance organization have filed a lawsuit that could complicate the company’s plan to be taken over by rival FHP International Corp. in Fountain Valley.
The lawsuit alleges that the chairman of TakeCare Inc., an HMO based in Concord, engineered the board’s rejection of a takeover offer in favor of a lower acquisition bid by FHP. That way, the suit alleges, TakeCare Chairman Jack R. Anderson would be able to convert his stock to cash.
The suit, filed Monday in Delaware Chancery Court, contends that Anderson breached his fiduciary duties by maneuvering behind the scenes to ensure that FHP’s bid was accepted by the board over an allegedly superior, all-stock bid by United HealthCare Corp. of Minnetonka, Minn.
TakeCare spokesman David Briere refuted the allegations, saying, “We feel the suit is without merit, and a majority of the board have approved proceeding with FHP.”
FHP, which is also named as a defendant in the suit, would not comment.
FHP announced Jan. 10 that it has agreed to buy TakeCare for $829 million, or $62 a share, with 35% of the acquisition price in cash, 15% in common stock and 50% in convertible preferred stock. The takeover would create one of the largest HMOs in the West.
The acquisition would allow FHP, which has 851,000 members, to expand its Medicare market into Northern California and Colorado, where TakeCare is already successful. TakeCare has 742,000 members.
The suit alleges that TakeCare’s board voted 5 to 3 to accept the FHP bid on Jan. 5, shortly after rejecting an offer from United of 0.85 share of United common stock for each share of TakeCare. At that day’s closing price, the United offer was worth $64.70 a share--$2.70 more than FHP’s winning bid.
The suit alleges that Anderson went to extraordinary lengths to persuade reluctant board members to support the FHP transaction, including promising to award the company’s president, R. Judd Jessup, a $5-million bonus, allegedly 10 times his salary, on completion of the FHP takeover. The suit alleges that the board was not told about the bonus before it was promised.
The suit contends that Jessup, who is a member of the board, favored the United bid at a Dec. 18 directors meeting, but on Jan. 5 voted for the FHP proposal. When questioned by two dissenting board members, Russell Ayres III and Richard M. Johnston, Jessup said, “I cannot vote against my chairman,” the suit contends.
The bidding process, the suit alleges, was “single-mindedly directed by Anderson from the outset to deliver TakeCare to whatever bidder will allow Anderson to convert a substantial portion of his TakeCare holdings to cash.”
When a board member at the Dec. 18 board meeting suggested hiring an investment bank to evaluate the two bids, Anderson said that he would personally select the bidder and that TakeCare would hire an investment bank only in the final stages to “rubber stamp” the transaction, the suit alleges.
The suit also contends that United asked the directors for permission to raise its bid shortly after the Jan. 5 board meeting. The board rejected that request before signing its agreement with FHP on Jan. 9, the suit alleges.
Plaintiffs include the investment firms United Vanguard Fund Inc., United Funds, United New Concepts Fund Inc., United Continental Income Fund Inc. and Waddell & Reed Funds Inc. Growth Fund. Among them the firms own roughly 525,000 shares of TakeCare’s common stock, or about 4% of outstanding shares.
Other plaintiffs include The Hillman Foundation Inc., which is described as a not-for-profit corporation based in Pittsburgh. The Hillman Foundation and four affiliated organizations that are also plaintiffs own 2.3 million TakeCare shares, an 18% stake.
Also named as defendants besides FHP and TakeCare are the five board members who voted for the FHP offer: Anderson, Jessup, Richard Burdge Sr., George E. Bello, and Robert W. Jamplis.
The suit asks the court for a preliminary injunction to block the FHP buyout of TakeCare. It alleges that a so-called lockup provision in the agreement that would give FHP $25 million if the transaction is not consummated is an illegal impediment to competing bids.
