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

If you're interested in knowing differences in the ways boards of PE portfolio companies and publicly traded companies function, the publication entitled Private Equity vs. PLC Boards in the U.K.: A Comparison of Practices and Effectiveness (highlighted in this morning's edition of Bowne) is a must read.  The study concludes that boards of publicly traded companies are more effective at compliance and risk management, but that their PE counterparts outshine them when it comes to value creation, commitment of board members and strategic leadership.  The only caveat is that the paper is dated August 2008, before many of the events surrounding the financial crisis unfolded. 

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Recently, I have been asked several questions concerning the responsibility of directors of health care organizations to implement corporate compliance programs and to ensure that patients receive quality care.  For my readers with similar questions, I direct your attention to the three non-binding guidance documents published by the United States Department of Health and Human Services, Office of Inspector General, in collaboration with the American Health Lawyers Association.  These documents do not answer all of the many complex questions that directors face, but nevertheless provide a starting point.

Corporate Responsibility and Health Care Quality:  A Resource for Health Care Boards of Directors;

Corporate Responsibility and Corporate Compliance:  A Resource for Health Care Boards of Directors; and

An Integrated Approach to Corporate Compliance:  A Resource for Health Care Organization Boards of Directors. 

 

 

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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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