Quality Systems Board Independence at Issue

An investment group with a 10% stake in Quality Systems Inc. is seeking shareholder approval for a plan to ensure the independence of the board that oversees the Tustin-based health care systems maker.

Under a proposal submitted Monday by Lawndale Capital Management and its affiliates, 75% of the Quality Systems board, including its chairman, would have to be independent directors. These directors would be required to meet separately from the other directors after every board meeting to discuss “matters as they deem appropriate,” according to a Securities and Exchange Commission filing by Lawndale.

Quality Systems is a developer and provider of management software for medical and dental group practices. Its shares, which have fallen 40% over the last year, dropped 31 cents Tuesday to close at $4.44.

“It should be pretty obvious from the history of Quality Systems’ financial and stock performance what a board lacking in independence and diligence can bring,” said Andrew Shapiro, president of Lawndale Capital.

Sheldon Razin, chairman and chief executive of Quality Systems, said he hadn’t yet had a chance to read the shareholder proposal. Under the Lawndale plan, the chairman would have to be an independent leader elected by the other independent directors.

The proposal “would obviously knock Shelly off the chairmanship, his wife off the board” and would “raise questions regarding Dr. John Bowers, who has been a long-standing customer of the company,” said Shapiro.

The shareholder proposal defines an independent director as someone without familial ties to company officers, or who hasn’t had a financial relationship with Quality Systems over the last five years “other than as a director or shareholder.”

Lawndale and Shapiro requested that the proposal be included in proxy materials for Quality Systems’ annual meeting, expected to be held in September.