Want to cash in on an HMO conversion? You may have to wait awhile.
About 30 former officers and executives of Health Net, the precursor of Woodland Hills, Calif.-based Health Systems International, are still wrangling for stock they were issued when the plan converted to for-profit status in 1992.
The state Department of Corporations later ordered the stock rescinded, on the grounds that it diluted the value of a charitable foundation Health Net set up as a requirement for conversion.
In the latest round of this battle, the California Court of Appeals recently upheld a 1995 lower court decision throwing out a suit by the Health Net officers and executives seeking return of the rescinded stock.
The disputed stock-now roughly 3 million HSI shares-is currently worth about $70 million, according to HSI spokesman David Olson. That represents 18% of the foundation's holdings of more than $430 million, he said.
Corporations Commissioner Keith Paul Bishop said the appeals court "has upheld actions taken by the Department of Corporations to preserve the state's ability to exercise oversight over the HMO industry."
The appeals court's decision "enhances the ability of the department to ensure that consumers benefit when HMOs convert from nonprofit to for-profit status," Bishop said. "It underscores the seriousness with which the department views the conversion process and reaffirms our flexibility to ensure protections are in place for the greater public benefit."
Nearly all the executives who brought the suit have left the company, Olson said. He called the dispute "corporate archaeology." But the matter is not laid to rest. The Health Net Trust, which brought the suit on behalf of the former executives in 1994, said it will appeal to the state Supreme Court.
The dispute began at the time that Health Net established a not-for-profit charitable foundation, the California Wellness Foundation, as a requirement of its conversion to for-profit status in 1992. The foundation received about $300 million in stock, or 80% of Health Net's equity, representing the "fair charitable value" of Health Net at the date of its conversion, according to the appeals court decision.
At the same time, Health Net "negotiated with the DOC the right to issue equity-based incentives (of Health Net stock) to retain or attract skilled executive managers after the conversion." Health Net then issued the incentives, which resulted in the foundation's holdings falling to about 73% of the converted Health Net's equity, according to the court decision.
On March 17, 1993, the DOC notified Health Net that the stock issued to the 30 officers and executives violated the terms of the conversion plan. The DOC ordered Health Net to rescind the stock or face revocation of the conversion.
Although Health Net protested, it complied with the DOC's order. The executives then sued the department. The trial court dismissed the suit.
The appeals court said the executives had no right to sue the department because they had not exhausted their administrative remedies.
The court disagreed with the executives' arguments that "pursuing these remedies would have caused irreparable harm*.*.*.*namely, negative publicity and damage in the marketplace to themselves as well as the adverse effects of revocation, including destruction of the foundation's funding and shareholder lawsuits."