The public foundation that owns 73% of Health Net reneged on a deal to sell its stock to Qual-Med Inc. for $400 million after an unidentified third party told the foundation that it might buy the stock, according to a lawsuit filed by Qual-Med.
The suit contends that the deal also fell apart after the foundation's board of directors approved a verbal pact with Qual-Med, an agreement Qual-Med maintains is binding even though a written contract was never signed.
Qual-Med did not identify the third party, but asserted in the suit that the mysterious party is still "in the process of negotiating" the purchase of the foundation's stake in Woodland Hills-based Health Net, the second-largest health maintenance organization in California behind Kaiser Permanente.
Eric S. Waxman, a lawyer representing Qual-Med, declined to elaborate beyond the complaint. The suit was filed July 31 in Superior Court in Los Angeles and was first announced a few days later by Qual-Med, a Colorado-based HMO operator.
Qual-Med says in its suit that it had an agreement to buy the stake held by the California Wellness Foundation, a public foundation created when Health Net converted from nonprofit to for-profit status in February.
The foundation denies that any deal existed. John K. Van de Kamp, a lawyer representing the foundation and a former California attorney general, also said "the board never voted to execute and deliver a signed agreement to Qual-Med."
He acknowledged that the foundation has "received several expressions of interest" for its Health Net stake, but declined to identify them or to comment on whether negotiations are taking place. He also said the foundation has a fiduciary responsibility to consider any offer that would enhance its endowment because it would help the public.
"We have left the door open to talk to anybody," Van de Kamp said. He noted, however, that any sale would still have to be approved by the state Department of Corporations, as part of several conditions stemming from Health Net's conversion six months ago.
When Health Net converted, it formed the foundation, paid it $75 million cash and agreed to pay it an additional $225 million plus interest over 15 years, and ceded 80% of the HMO's stock to the foundation. Through the issuance of additional shares, the foundation now owns 73%. The remaining 27% is owned by Health Net's management.
Health Net's conversion plan also restricts how soon either the foundation or management can sell its shares. The conversion was approved by Department of Corporations Commissioner Thomas Sayles after several other bidders, including Qual-Med, made rival offers for Health Net.
Despite Sayles' decision, Qual-Med has continued trying to acquire Health Net and has been busy in court. With the help of Skadden, Arps, Slate, Meagher & Flom, a New York law firm renowned for its work in the huge corporate takeover battles of the 1980s, Qual-Med first filed suit earlier this year to overturn Health Net's conversion. That case is pending.
In its latest suit, Qual-Med contends that on July 10, a verbal agreement was reached for Qual-Med to buy the foundation's stake in Health Net for $340 million in cash and preferred stock with a face value of $60 million.
Two days later, the foundation's executive committee approved the deal, and on July 20 the foundation's directors approved it, the suit claims. The foundation then said it would deliver a written contract for signing by July 27, the complaint says.
The suit does not say what the vote by the eight-member board of directors was, or which directors voted. Health Net Chairman Roger F. Greaves, who also is the only Health Net executive on the foundation's board, said he has been excluded from nearly all of the foundation's board meetings because of potential conflicts of interest.
In any case, the suit alleges that the foundation never delivered the signed papers. It also asserts that Qual-Med learned that the foundation, on July 24, heard of the third party's interest in the Health Net stake--and that the foundation had "solicited the bid" from the anonymous suitor.