A Delaware judge may rule this week on whether to force HealthSouth Corp. to convene a shareholder meeting, which could lead the company down a path to bankruptcy, according to one of its board members.
Recently appointed board member Lee Hillman testified at a hearing in Chancery Court in Wilmington, Del., last week that HealthSouth could be forced into liquidation if a judge orders the embattled rehabilitation chain to call a shareholder meeting before the completion of its financial audit.
The Teachers' Retirement System of Louisiana, a pension plan that holds shares in the Birmingham, Ala., company, hopes to oust the majority of HealthSouth directors, who it contends financially rewarded former company officials who have pleaded guilty to fraud in the accounting scandal. The institutional investor asked the court to force HealthSouth to convene a shareholder meeting, which HealthSouth is required to hold every 13 months, according to Delaware's rules for corporations. HealthSouth, incorporated in Delaware, has not held a shareholder meeting in 18 months. A ruling is expected this week.
The federal government alleges HealthSouth inflated earnings by more than $2.7 billion since 1996 to meet Wall Street expectations. Former Chairman and Chief Executive Officer Richard Scrushy was indicted earlier this month on 85 counts of conspiracy, fraud and money laundering for allegedly directing and carrying out the far-reaching scheme (Nov. 10, p. 6).
Hillman, who chairs HealthSouth's audit committee, said in court that if shareholders vote to replace most of the company's board, changes in control provisions of HealthSouth's debt agreements may kick in. If that happened, HealthSouth would have to offer to buy back more than $2 billion in notes and bonds, an event that could set off a rush by creditors, plunging the company into a liquidation, according to published reports.
Last week, Moody's Investors Service withdrew its ratings on HealthSouth's debt, saying it "lacks sufficient information" to maintain the ratings. HealthSouth was unable to make a $344 million convertible bond payment that matured April 1 but remains current in its interest payments. Company officials said last week that HealthSouth would be able to make a $50 million interest payment due in December. HealthSouth said last week it would not file its third-quarter financial statements. The company's last quarterly report was filed on Nov. 14, 2002, for the three months ended Sept. 30, 2002.