WellPoint, Health Systems Reach Settlement : Health care: The pact will formally cancel the merger and release both from all legal claims.

After nine months of negotiations and much squabbling, WellPoint Health Networks and Health Systems International formally agreed on terms to call off their $1.6-billion merger that would have created one of the nation’s largest managed health-care companies.

The two companies, both based in Woodland Hills, said Friday that they reached a settlement agreement in which they released each other from all legal claims, including a provision that would have required either company backing out of the deal to pay the other a $50-million breakup fee.

WellPoint’s acquisition of Health Systems had been all but dead since early December when talks broke down amid a nasty public dispute between WellPoint Chairman Leonard D. Schaeffer and Health Systems Chairman Malik M. Hasan over management issues.

Blue Cross of California, which owns 80% of WellPoint’s stock, was also a party to the termination agreement.

The cancellation of the merger does not absolve an obligation by Blue Cross and WellPoint to create a public health-care charity that is tied to Blue Cross’ plan to switch from nonprofit to for-profit status. Under state law, nonprofits that switch to for-profit status are obligated to compensate the public in an amount equal to their total assets.

WellPoint’s acquisition of Health Systems would have provided Blue Cross with the means to create a $3.2-billion charitable foundation that would have helped pay for medical care for California’s needy.

As the merger dissolved, state regulators said that Blue Cross must keep its commitment to fund the charity.

Blue Cross officials have said they intend to meet that obligation and will submit a new proposal to the state on how to fund the foundation.

However, the collapse of the merger raises questions about whether the amount of the charity will remain the same, how it will be funded and how quickly a new plan can be approved.

On Friday, the companies also said that certain major shareholders, including Hasan and Schaeffer, have also reached a settlement regarding the merger and related irrevocable proxies.

The deal, which would have created the nation’s second-largest publicly held managed-care firm, with more than $5.4 billion in revenue, fell apart after the companies went public with allegations that each had reneged on an acquisition agreement reached last March.

WellPoint and Health Systems accused each other of trying to stack the board of the new company with inappropriate people and of attempting to get lucrative payouts for executives and consultants who worked on the deal.

Although the deal reached Friday would seem to end any legal action between the two companies, officials from both firms have said they expect shareholder suits to be filed.

In New York Stock Exchange trading Friday, Health Systems rose 37.5 cents to $32.125 a share and WellPoint was unchanged at $32.125.