Haverhill Retirement System v. Richard A. Kerley, et al. and The Providence Service Corporation
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. On June 22, 2017, the parties agreed to a $10 million settlement, subject to court approval.
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.
Our litigation efforts resulted in significant benefits to Providence stockholders. This included extensive, supplemental disclosures that the Court of Chancery commented revealed “truly striking information about conflicts at the director level, at the significant stockholder level, at the management level, at the legal counsel level, [and] at the investment banker level . . . [that] dramatically changed the total mix of information” available to stockholders. Additionally, Coliseum agreed to significantly lower the cash dividends payable on its preferred stock from $4 million to $1 million in the event stockholders voted “no.”