Haverhill Retirement System v. Richard A. Kerley, et al. and The Providence Service Corporation
Status: Ongoing Case
We serve as co-lead counsel in derivative action relating to a recent acquisition by Providence Service Corporation, alleging an improper financing arrangement by the Providence chairman.
In October 2014, Providence acquired healthcare provider CCHN Group Holdings, Inc. for approximately $400 million. The bulk of the purchase price was funded through cash on-hand and Providence’s credit facility bearing 3-4 percent interest. The remainder of the purchase price, however, as alleged by shareholders, was funded through an unfair financing arrangement, led by the chairman of Providence’s board of directors, Christopher Shackelton. Shackelton is also the founder and managing partner of hedge fund Coliseum Capital Management, which is Providence’s largest stockholder.
The lopsided arrangement included (a) a $65.5 million subordinated note with Shackelton’s hedge fund, Coliseum, bearing interest at between 14 percent and 18.5 percent; and (b) a rights offering of preferred stock “backstopped” by Coliseum, the proceeds of which were used to pay off the subordinated note. As a result of this financing arrangement, Coliseum has received and will receive millions of dollars in interest payments from Providence as well as significantly greater voting power in the company.
The arrangement was subject to a stockholder vote, which we argued was coercive because a “no” vote would have caused Coliseum to receive higher dividends on its preferred stock, resulting in $4 million in additional expenses to Providence each year. Additionally, stockholders received almost no information concerning the facts and circumstances that led to the arrangement they had to vote on.
So far, our litigation efforts have resulted in significant benefits to Providence stockholders,including (a) eliminating coercive elements of a stockholder vote concerning the financing arrangement; (b) implementing corporate governance changes that prohibit Shackelton from participating in certain determinations on behalf of Providence relating to preferred stock held by Coliseum; and (c) disclosure to stockholders of a myriad of previously undisclosed conflicts relating to the Providence board’s decision to enter the financing arrangement. Labaton Sucharow is continuing to pursue its claims for monetary damages.
On May 6, 2016, we filed a second amended complaint, after which Providence’s board appointed a special litigation committee (SLC) to investigate our claims. The court has ordered a stay until January 2017, pending the SLC’s investigation.