Psych Solutions to settle acquisition lawsuits

Agreement to eliminate six of seven cases

CORRECTION: Our initial subhead for this story incorrectly characterized the nature of the planned shareholder re-vote mentioned below. Stockholders will be re-voting on a proposal approved at the 2010 annual meeting to make an additional 900,000 shares of common stock available under the company's equity incentive plan. This vote relates only to the issuance of future shares.

The shareholder lawsuit started popping up less than a day after Psychiatric Solutions announced in May its plan to be acquired by Universal Health Services. Eventually, seven class action complaints lined up to block the deal and related executive payouts.

But in a regulatory filing this week, the Franklin-based company said its accusers have agreed in principle to an agreement that will do away with six of those cases, thus easing the path to completing its $3 billion deal.

The cases — three filed in Tennessee and three in Delaware — include allegations that the company breached is fiduciary duty in connection with the merger by not maximizing stockholder value. They charge Psych Solutions executives with putting their personal interests ahead of stockholders, that those company leaders will receive "improper" payments when the company changes hands, and that they issued a proxy for the company's 2010 annual stockholder meeting that included false and misleading information.

In its quarterly report filed yesterday, Psych Solutions said that, although it denies any wrongdoing or liability related to the allegations, it has entered a settlement to "eliminate the uncertainty, burden, risk, expense and distraction of further litigation." Under the agreement, Psych Solutions will:

  • Provide additional disclosures to stockholders about information including the circumstances surrounding the merger negotiations, its executive performance incentive plan, equity compensation plan,
  • Allow stockholders to re-vote on the proposal it approved at the 2010 annual meeting to make an additional 900,000 shares of common stock available under the company’s equity incentive plan and restrict re-pricing options, and
  • Pay the plaintiffs’ legal fees and expenses.

In return, shareholders must release any and all claims that "have been or could have been made" against Psych Solutions and its leadership related to the merger, merger disclosures and merger-related executive compensation.

The settlement, which is still subject to court approval, will not affect the amount of money stockholders will collect from the merger, according to the filing.

The one outstanding case — Rosniek v. Psychiatric Solutions Inc., et al — is similar in content and still pending in Tennessee District Court. Action in the case has been stayed in favor of the Delaware proceedings, which were set to kick off today. The company plans to "defend the suit vigorously."

UHS’ acquisition of Psych Solutions also is subject to approval by the Federal Trade Commission. On July 28 the FTC asked the companies to submit additional information about the deal, thus adding an additional day period to its review of the mashup.