Health Systems Discloses 2 Lawsuits by Shareholders

Health Systems International disclosed Friday that it has been hit by two shareholder lawsuits that accuse the company of refusing to seriously consider buyout proposals from two rival health maintenance organizations.

The disclosure comes one day after FHP International dropped its $1.69-billion proposal for Health Systems, corporate parent of Health Net, a large HMO. Earlier this week, Foundation Health, a Rancho Cordova, Calif.-based HMO, withdrew a $1.55-billion buyout proposal.

The shareholder suits, which seek class-action status, were filed in Delaware Chancery Court several days after the first public disclosure of the buyout proposals. Health Systems is headquartered in Woodland Hills but is incorporated in Delaware.

One of the suits, filed Jan. 4, while the FHP and Foundation Health offers were still on the table, cites Health Systems’ public response that the company was “not for sale.”

The suit notes that Health Systems stock rose $8.50 a share, or 39%, to $30.375, on Dec. 30, the day the proposals were made public. After falling sharply on Thursday, Health Systems shares closed Friday at $26, up 75 cents on the New York Stock Exchange.

“By refusing to seriously entertain either of the two buyout proposals . . . the defendants are putting their own interests before the interests of Health Systems’ public shareholders. . . ,” the suit says.

Analysts, however, have said it is unclear whether Health Systems rebuffed the two proposals or whether FHP and Foundation simply got cold feet or withdrew for strategic reasons. Analysts have said FHP officials got pressure from shareholders concerned a buyout would harm future profits.

Health Systems spokesman Don Prial called the suits “unfounded.”

Health Systems’ actions also drew criticism from its largest shareholder, the California Wellness Foundation, which owns 52% of Health Systems’ stock.

“Our positions is that these offers should have been evaluated seriously in an atmosphere of openness,” said John K. Van de Kamp, an attorney for the charitable foundation created in 1992 as part of an agreement with California regulators after Health Net converted from a nonprofit to a for-profit company.

David Olson, another Health Systems spokesman, said the firm was unable to fully evaluate the proposals because “they were withdrawn before we got through the process.”