Juvan's Health Law & Private Equity Report : Corporate & Health Care Lawyer & Attorney : Jayne Juvan : Benesch Friedlander Law Firm : Private Equity, Corporate Governance

In Miller v. McDonald, No. 06-10166 (Bkrtcy. Ct. D. Del. Apr. 9, 2008) (available online under the opinions section), an opinion recently released by the United States Bankruptcy Court for the District of Delaware involving a health care company, the court concluded that fiduciary duties apply not only to directors, but also officers, including a company’s general counsel. While the conclusion is well supported by case law, the opinion serves as an important reminder of the strength of the fiduciary duties owed by directors and officers and that courts will not allow such individuals to check their responsibilities at the door. The opinion emphasizes the necessity of implementing strong internal controls and that a court will frown upon directors and officers who fail to put systems of checks and balances in place. 

Facts

The facts of Miller are particularly egregious. World Health, Inc. (“World Health”), the debtor in the case, was in the business of providing healthcare staffing services to hospitals and health systems nationally. The company went public on February 20, 2003, and, during 2003 and 2004, used $38 million raised in a series of private placement transactions to acquire eight companies. World Health thereafter obtained secured debt from CapitalSource Finance, LLC to refinance existing indebtedness and obtain additional liquidity. These transactions included a term loan in the amount of $7,500,000 and a revolving credit facility with a $37,000,000 cap. World Health also pledged assets to secure debt obligations due to certain sellers in connection with the acquisitions.

Despite the company’s rapid growth, red flags began to appear, signaling the company’s inescapable demise. For example, in May 2005, World Health issued a press release announcing changes to financial results. On August 16, 2005, announcements of both the discovery of fraudulently reported financials and the abrupt resignation of the company’s president and chief financial officer “for health and family reasons” sent shockwaves. Only a few days later, on August 24, 2005 came the announced the “discovery” of approximately $22 million in debt and the engagement of a professional services firm in connection with a turnaround. The Bristol Investment Fund, Ltd. issued a notification of default on the terms of convertible debentures and related warrants to purchase common stock and demanded payment of over $6 million. In early 2006, the Internal Revenue Service (“IRS”) filed liens against the property owned by a California subsidiary. The IRS alleged that the outstanding tax liability exceeded $4,000,000. A securities class action lawsuit was filed, and World Health filed a Chapter 11 petition for bankruptcy, later converted to a Chapter 7. 

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The decline of deal activity during the first quarter of 2008 weighed heavily on the shoulders of many in the health care industry.  Just a few months back, I attended iiBIG's Investment and M&A Opportunities in Healthcare Forum, and the news from the street was sobering - deal activity was down, even in the health care space, and the pain inflicted by the credit crunch took center stage.  Despite the somber tone, one message (an obvious message to many, I'm sure) still left a glimmer of hope - health care, more than most industries, is somewhat recession proof, leading many analysts to believe that there may be an uptick in deal activity in the months that lie ahead. 

An article recently released from Reuters, which examines data published by Irving Levin Associates, suggests that these analysts may be correct and that some of the bleeding in the health care sector has subsided, at least temporarily.  Unlike most of the headlines of stories in leading publications such as the New York Times (from the Dealbook: "Hedge Fund Manager Describes Rock Bottom," and we can't forget the stories of bloodletting and the images of the MIT grad standing on the street corner with a sign begging for work), the article's title is positive, upbeat, and hopeful ("Second Quarter Health Care M&A Strongest In Years According To New Report From Irving Levin Associates, Inc."). 

The article boasts that, "based on preliminary figures, a total of $85.5 billion was committed to fund the second quarter's M&A activity, a 209% increase over the prior quarter's $27.7 billion. It is also a 25% increase over the $68.3 billion spent in Q2:06 and a 39% increase over the $61.3 billion spent in Q2:07. Despite the slow-down in global M&A, activity in the health care industry is robust and on the rise."

No, you're not seeing things - the article really says that health care M&A activity is robust and on the rise.  And I promise - the article was just written and reports 2008 data - not 2007 (yes, I double checked)!!

****** 

As an aside, I can't help but to note another positive article published today - the so called silver lining to the skyrocketing gas price crisis.  Indeed, an Associate Press article entitled "As Gas Prices Go Up, Auto Deaths Drop" states that "Professors Michael Morrisey of the University of Alabama at Birmingham and David Grabowski of Harvard Medical School said they found that for every 10 percent increase in gas prices there was a 2.3 percent decline in auto deaths. For drivers ages 15 to 17, the decline was 6 percent, and for ages 18 to 21, it was 3.2 percent."  

 

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