(This story was updated at 2:20 p.m. ET.)
Hospital giant HCA Holdings has reached a preliminary agreement to pay $215 million to settle a class action lawsuit filed by shareholders who alleged the company used false and misleading information to sell stock during its 2011 initial public offering.
“The agreements in principle disclosed today to settle class action and derivative lawsuits, if approved by the courts, will conclude the litigation arising from the company's 2011 IPO,” Nashville-based HCA said in a statement Wednesday. “While we believe the allegations were without merit, we also believe that eliminating the risk, cost and distraction of the litigation is in the best interest of our shareholders."
HCA includes about 165 hospitals and 115 freestanding surgery centers in 20 states. The company had operating revenue of $36.9 billion in 2014, according to Modern Healthcare's financial database.
Those behind the 2011 lawsuit alleged that HCA sold more than $4.3 billion of HCA common stock at $30 a share based on a misleading registration statement it filed with the Securities and Exchange Commission.
They allege that the registration statement omitted important facts, including that at the time of the IPO, the company's Medicaid revenue was “suffering from adverse trends,” and that the Medicaid revenue was suffering from declining demand for cardiovascular and other services because of physician attrition and changes in Medicare regulations. They also alleged improper accounting led to HCA overstating its earnings by $790 million.
The registration statement “provided investors with a distorted picture of the company's potential growth and was not indicative of HCA's future operations, according to the lawsuit.
By October 2011, HCA's stock had declined to $18.81 a share, according to the lawsuit.
Kris Kemp, a shareholder at the law firm h3gm, said it doesn't surprise him to hear allegations that a company's registration statements didn't reveal what ultimately happened. Such shareholder lawsuits are common against all types of companies following an IPO, said Kemp, a mergers and acquisitions and securities lawyer who advises boards of directors for public and private companies.
The real question, in such suits, he said, is whether the company had proper accounting controls in place and fulfilled its duty of care in making its projections.
“For an organization the size of HCA, there's a lot of data to collect, a lot of managers who then have to give their views on the data and where that data is trending, and then ultimately a senior manager has to make the call about where the data is likely to be in a year or a couple years from an IPO,” Kemp said. “Inevitably, when you make projections you can be wrong, and sometimes you can be wrong to the benefit of the shareholders or to their detriment.”
Management doesn't have an obligation to get it right, just to show they used reasonable corporate controls, he said.
HCA also announced Wednesday in an SEC filing that it had reached preliminary agreements to settle several shareholder derivative cases also related to the 2011 IPO. Shareholder derivative cases are those in which a shareholder sues a third party, often a company director or officer, on behalf of the company. HCA estimated it would face legal claim costs of about $120 million for the settlements of the shareholder action and shareholder derivative cases.
