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Reducing Shareholder Claims

A staggering percentage of mergers with values north of $100 million are being challenged in court by shareholders.
By: and | September 2, 2014 • 6 min read
09012014_14_d_and_o_courtroom PB

Shareholder derivative litigation continues to be prevalent, and, according to a recent study by Cornerstone Research, there has been a sharp increase in such claims during the past several years.

The trend is marked by the frequency of shareholder challenges to corporate decision-making in merger transactions.

These challenges typically involve assertions that corporate management violated fiduciary duties by failing to maximize shareholder value, failed to properly investigate or value the transaction, failed to adequately negotiate the deal, or failed to disclose the terms of the deal to shareholders.

Until recently, shareholder litigation tended to be seen following very large corporate transactions valued in the billions. During 2008, according to Cornerstone, shareholders filed litigation challenging 54 percent of merger transactions valued over $100 million. This percentage jumped to 86 percent in 2009, and has continued to steadily increase.

In 2013, shareholders filed litigation challenging a staggering 94 percent of all corporate transactions valued over $100 million.

This litigation landscape raises the potential that directors and officers will be exposed to significant liability in virtually every large corporate transaction.

Given the large number of public companies that are incorporated in Delaware, many shareholder actions are filed in the Delaware Chancery Court. In recent years, shareholder cases have become more fragmented, so shareholder litigation tends not to be confined to a single lawsuit in a single jurisdiction as was once often the case.

During 2013, 62 percent of the challenged transactions led to litigation in multiple jurisdictions with a single corporate transaction, on average, leading to five separate lawsuits in multiple jurisdictions.

Shareholder litigation is generally expensive to defend and introduces substantial uncertainties for a corporation and its management, especially when the litigation challenges a pending transaction. In many cases, it also may become necessary for the company to appoint a special litigation committee that, in turn, will engage attorneys and other professionals to independently investigate the factual and legal bases of the claims asserted by shareholders. These efforts also tend to be expensive.

Most shareholder actions are resolved through settlement, and most settlements involve non-monetary relief in the form of additional disclosures by the company or corporate governance changes with the only monetary component of the settlement being the company’s agreement to pay the plaintiffs’ attorneys fees.

The average fee award requested during 2013 was $1.1 million. Settlements involving other monetary payments by the company are not as common, but there are reported cases in recent years of substantial monetary payments in shareholder actions with several cases resolved for payments exceeding $100 million.

Video: The use of “appraisal rights” is increasingly used by shareholders against companies, according to Ivan Presant, M&A partner, Clifford Chance.

This litigation landscape raises the potential that directors and officers will be exposed to significant liability in virtually every large corporate transaction.

Corporate governance statutes in Delaware (and other jurisdictions) have long allowed companies to limit this exposure to shareholder claims by including a provision in the corporate charter that broadly exculpates directors for breach of the duty of care, by indemnifying management at least for the cost of defending such claims, and by purchasing liability insurance.

Recent developments in the law now present additional strategies that a corporation should consider to further limit shareholder litigation risks.

Emerging Strategies to Limit Risk

Recent court decisions have upheld bylaw provisions that restrict shareholder litigation to a single jurisdiction such as Delaware, require shareholder claims to be arbitrated (rather than litigated), prohibit the company from paying the attorneys’ fees of its shareholders, and require an unsuccessful shareholder plaintiff to reimburse the cost of defending the litigation.

The rationale for these decisions is that courts have long enforced procedural restrictions on litigation if the parties have agreed upon them, and a corporation’s charter and bylaws must be treated as an agreement among the corporation and its shareholders.

Since a corporation is generally allowed by corporate governance laws in Delaware (and other jurisdictions) to delegate to its directors the power to adopt, amend or repeal its bylaws, the company’s shareholders are deemed to have agreed to any bylaws adopted by the directors in good faith pursuant to this delegated authority.

“Exclusive Forum” Bylaws

An “exclusive forum” bylaw requires shareholder litigation to be brought only in a specified jurisdiction — typically the corporation’s state of incorporation. This procedural requirement does not restrict what types of lawsuits may be brought by shareholders, only where shareholders properly may be bring them.

Joseph Finnerty III, partner, DLA Piper

Joseph Finnerty III, partner, DLA Piper

This restriction is important because it confronts the inevitable risks associated with multi-jurisdiction shareholder litigation by channeling litigation into a single jurisdiction, thus lowering litigation costs and streamlining the proceedings.

When the company is incorporated in Delaware, such a provision may ensure that the corporation is able to avail itself of a well-developed body of Delaware corporate law applied by a judiciary well versed in such matters. An “exclusive forum” provision cannot properly prevent shareholders from asserting claims, but it can ameliorate costly duplicative litigation.

The Delaware Court of Chancery recently upheld exclusive forum bylaws that were unilaterally adopted by the boards of Chevron and FedEx.

The Chancery Court rejected arguments that the forum selection bylaws were invalid because they were adopted unilaterally by the board without shareholder consent, and concluded that the board was properly delegated the power to adopt bylaws with shareholders’ full knowledge.

Following the decision, a state court in New York dismissed a shareholder lawsuit by enforcing a provision in the company’s bylaws that required the litigation to be filed only in Delaware.

Such bylaws have become increasingly common. Prior to the Chancery Court decision, over 250 public companies had adopted exclusive forum bylaws. Immediately following the decision, another 150 companies adopted similar bylaws.

Arbitration Bylaws

Another potentially cost-reducing bylaw is an arbitration bylaw. This requires any dispute brought by a shareholder to be resolved through binding and final arbitration.

Eric Connuck, of counsel, DLA Piper

Eric Connuck, of counsel, DLA Piper

Arbitration can limit costs and improve the quality of dispositions through the use of an expert arbitrator and simplified and streamlined dispute resolution procedures.

Courts in Massachusetts and Maryland recently upheld bylaw provisions that required shareholder claims to be arbitrated and precluded the arbitrator from ordering the company to pay attorneys’ fees to shareholders’ counsel.

These decisions relied upon the principle that where the corporate charter allows the board to unilaterally adopt, amend or repeal the company’s bylaws, the shareholders are presumed to have consented to the company’s bylaws — regardless of whether the shareholders in fact have even seen them. This conclusion was applied in these recent decisions to both sophisticated and “ordinary” shareholders alike.

Fee-Shifting Bylaws

Fee-shifting bylaws allocate risks in intra-corporate litigation by requiring an unsuccessful shareholder to reimburse defense costs to the company and its management.

Fee-shifting bylaws have the potential to deter litigation, but also may discourage meritorious claims due to the chilling effect of the potential for an award of attorneys’ fees being imposed against an unsuccessful shareholder.

As a result, fee-shifting bylaws are controversial but also have the greatest potential to discourage shareholder lawsuits by creating an economic disincentive to filing marginal claims.

Fee-shifting bylaws have recently been upheld by the Delaware Supreme Court and were held to be enforceable so long as they were adopted through appropriate corporate procedures and were not enacted for an improper purpose. The Delaware Supreme Court recognized such a bylaw may inevitably deter litigation, but ultimately concluded that an intent to deter litigation is not necessarily an improper purpose.

With shareholder litigation so prevalent, corporate management and risk managers must prepare for the inevitable costs of litigation.

By shaping the rules of the game, companies have at their disposal additional risk management tools that have the potential to greatly reduce costs and deter unnecessary litigation.

As the courts continue to uphold these measures and they become more and more successful, corporate boards should be willing to adopt these and potentially other defensive bylaws to manage shareholder litigation risk.

Joseph Finnerty III is a partner specializing in securities and business litigation at DLA Piper. Eric Connuck of counsel at the law firm, focusing on complex commercial matters.
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Rooting Out Fraud

Settlements of False Claims Act litigation reach into the billions, as the law incentivizes whistleblowers to report suspected company fraud.
By: | September 2, 2014 • 3 min read

On May 6, Florida-based Baptist Health System Inc. was the latest in a long line of organizations to resolve a federal lawsuit accusing it of violating the False Claims Act (FCA).

Baptist Health System agreed to pay $2.5 million to resolve allegations in the case brought by a former patient referral coordinator at the health care center’s neurology practice, a lawsuit that was partially joined by the federal government.


Although health care organizations are often the focus of FCA litigation, the law, which encourages whistleblowers to expose an organization’s fraudulent practices, affects all organizations.

“Everybody thinks that it’s a health care issue, but it’s not,” said Keith Lavigne, senior vice president, professional risk, ACE USA. “The law affects any company or entity interacting with the government. … It doesn’t discriminate by industry so everyone has to adhere to this act.”

In fiscal 2013, the U.S. Department of Justice (DOJ) recovered $3.8 billion in settlements and judgments from civil cases involving fraud under the FCA. The prior fiscal year, the amount was $4.9 billion. Since January 2009, total recoveries under the FCA totaled $17 billion.

“As in previous years, the largest recoveries [in fiscal 2013] related to health care fraud, which reached $2.6 billion,” according to the DOJ. “Procurement fraud [related primarily to defense contracts] accounted for another $890 million — a record on that area.”

Other significant fraud recoveries included a $45 million settlement with Japan-based Toyo Ink S.C. Holdings Co. Ltd. and its affiliates related to allegations it misrepresented the country of origin on customs documents, and a $10 million settlement with Education Holdings Inc. (formerly The Princeton Review Inc.) related to allegations the company fabricated attendance records on tutoring funded by a federal grant.

Lavigne said the number of actions filed due to the FCA’s whistleblower provisions has escalated from about 380 cases in 1987 to 846 cases in 2013. Individuals who file civil suits are eligible to receive up to 15 percent to 30 percent of the recovery.

“It’s an amazing incentivizing of the workforce,” he said, noting the fraudulent activities most often found are inflating bills for services and fabricating procedures.

Health care organizations have been disproportionately affected by the FCA because of several government initiatives to crack down on fraud and abuse in that sector, he said.

Those initiatives include the Health Care Fraud Prevention and Enforcement Action Team, started in 2009 by the U.S. Department of Health and Human Services and the DOJ; the Medicare Fraud Strike Force, launched in 2007; and $350 million set forth as part of the Patient Protection and Affordable Care Act to fight fraud and abuse.

The ACA’s expansion of third-party audits by Recovery Audit Contractors (RAC) increases the exposures — and compliance requirements — of health care organizations, Lavigne said.

It’s a burden, a cost and a distraction, he said. And it requires organizations to develop comprehensive self-audit programs.

A compliance program should include internal monitoring and auditing, implementing and enforcing compliance and practice standards, designating ownership of the process, conducting training, and responding to reported offenses, he said.

“If they are not looking at it, they are neglecting their enterprise risk management,” Lavigne said. “If an institution doesn’t have a robust compliance program set up, it’s a real risk.”


In the Florida case, a January 2012 lawsuit filed by the whistleblower alleged the neurology practice at Baptist Health System Inc. intentionally misdiagnosed patients in order to bill Medicare for expensive treatment and medications.

The health center was accused of actively trying to cover up the alleged fraud when it became aware of it, rather than inform government authorities.

Kirk Chapman, a partner at Milberg LLP, which represented Verchetta Wells, the whistleblower, said the case is an example of how the FCA “empowers Americans to help fight fraud on the government and American taxpayers, no matter how big or small the fraud may be.”

The case involved Milberg as well as the DOJ and Middle District of Florida U.S. Attorney’s office.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at
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Sponsored: Healthesystems

The Next Wave of Workers’ Comp Medical Cost Savings

Reducing WC claims costs in one area often inflates them in another.
By: | August 4, 2014 • 6 min read

Managing medical costs for workers’ compensation claims is like pushing on a balloon. As you effectively manage expenses in one area, there are bound to be bulges in another.

Over the last decade, great strides have been made in managing many aspects of workers’ compensation medical costs. Case management, bill review and pharmacy benefits management are just a few categories that produce significant returns.

And yet, according to the National Council on Compensation Insurance (NCCI), medical costs remain the largest percentage of workers’ comp expenses. Worse still, medical costs continue to be the fastest growing expense category.

Many medical services are closely managed through provider negotiations, bill review, utilization review, pharmacy benefits management, to name a few. But a large opportunity for medical cost containment remains largely untouched and therefore represents a significant opportunity for cost savings.

Ancillary medical services is a term used to describe specialty or supplemental health care services such as medical supplies, home health care, durable medical equipment, transportation and physical therapy, etc.

According to Clifford James, Vice President of Strategic Development at Healthesystems in Tampa, Fla., modernizing the process for managing ancillary medical services presents compelling opportunities for cost savings and improved patient care.

Source: 2014 Healthesystems Ancillary Medical Services Survey

“The challenge of managing these types of medical products and services is a cumbersome and extremely disconnected process,” James said. “As a result, it represents a missing link in an overall medical cost management strategy, which means it is costing payers money and patients the most optimal care.”

James singled out three key hurdles:

Lack of transparency

As the adage goes, you can only manage what you can measure.

Yet when it comes to the broad range of products and services that comprise ancillary benefits, comprehensive data and benchmarking metrics by which to gauge success are hard to come by.

The problem begins with an antiquated approach to coding medical services that was developed in the 1970s. The coding system falls short in today’s modern health care environment due to its lack of product and service level detail such as consistent units of measure, quantity and descriptors.

As a result, a meaningful percentage of ancillary benefits spending is coded as “miscellaneous,” which means a payer has little to no visibility into what product or service is being delivered — and no way to determine if the correct price is being applied or if the item is even necessary or appropriate.

Source: 2014 Healthesystems Ancillary Medical Services Survey

“It’s a big challenge. Especially when you consider that for many payers, it’s difficult to determine exactly what they are spending, or identify what the major cost drivers are when it comes to ancillary services,” James said. And when frequently over 20 percent of these types of services are billed as miscellaneous, payers have zero visibility to effectively manage these costs.

Measurement and monitoring

Often, performance that is monitored is given the most attention. Therefore, ancillary programs that are closely monitored and measured against objective benchmarks should be the most successful.

However, benchmarks are hard to determine because multiple vendors are frequently involved using disparate data and processes. There isn’t a consistent focus on continuous quality improvement, because each vendor operates off of their own success criteria.

“Leveraging objective competitive comparisons breeds success in any industry. Yet for ancillary services there is very limited data to clearly measure performance across all vendors,” James said. “And for payers, this is a major area of opportunity to promote service and cost containment excellence.”

Source: 2014 Healthesystems Ancillary Medical Services Survey


If you ask claims executives about their strategies for improving the claims management process, a likely response may be “workload optimization.” The goal for some is to enable claims professionals to handle a maximum case load by minimizing administrative duties so they can leverage their expertise to better manage the outcome of each case.

But the path towards “workload optimization” has many hurdles, especially when you consider what needs to be coordinated and the manual way it frequently is done.

Ancillary benefits are a prime example. For a single case, a claims professional might need to coordinate durable medical equipment, secure translation services, arrange for transportation and confirm the best physical therapy plan. Unfortunately they often don’t have the needed time, or the pertinent information, in order to make quick, yet informed, decisions about the ancillary needs of their claimants.

In addition there is the complexity of managing multiple vendor relationships, juggling various contacts, and accessing multiple platforms and/or making endless phone calls.

SponsoredContent_HES“We’ve been called the ‘industry integrator’ by some people, and that’s accurate. We are delivering a proven platform connecting payers with providers and vendors on the ancillary medical benefit front. It’s never been done before.”
– Clifford James, Vice President of Strategic Development, Healthesystems

Modernizing the process

To the benefit of both payers and vendors, Healthesystems offers Ancillary Benefits Management (ABM).

The breakthrough ABM solution consists of three foundational components — a technological platform, proprietary medical coding system and a comprehensive benefits management methodology.

The technological platform integrates payers and vendors with a standardized architecture and processes. Business rules and edits can be easily managed and applied across all contracted vendors. All processes – from referral to billing and payment – are managed on a single platform, empowering the payer with a centralized tool for managing the quality of all ancillary providers.

But when it comes to ancillary products, the critical and unique challenge Healthesystems had to solve is the antiquated coding system. This was completed by developing a highly granular, product-specific coding system including detailed descriptions and units of measure for all products and services. This coding provides payers with the clearest understanding of all products and services delivered including pricing and all the necessary utilization metrics.

“We bring the highest level of transparency and visibility into all ancillary products and services,” James said, adding that the ABM platform uses an extensive preferred product coding system 15 times more detailed than any other existing system or program.

This combination of sophisticated technology, proprietary coding system and benefit management methodology revolutionizes the ancillary category. Some of the benefits include:

  • Crystal-clear transparency
  • A more detailed and comprehensive view into ancillary products and services
  • An automated process that eliminates billing discrepancies or resubmittals
  • Integrated and consistent processes
  • Strategic program management

Taken together, the system leapfrogs over the existing hurdles while creating entirely new opportunities. It’s a win for vendors and payers, and ultimately for patients, who receive the optimal product or service.

“We’ve been called the ‘industry integrator’ by some people, and that’s accurate,” James said. “We are delivering a proven platform connecting payers with providers and vendors on the ancillary medical benefit front. It’s never been done before.”

To learn more about the Healthesystems Ancillary Benefits Management solution visit:

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Healthesystems. The editorial staff of Risk & Insurance had no role in its preparation.

Healthesystems is a leading provider of Pharmacy Benefit Management (PBM) & Ancillary Benefits Management programs for the workers' compensation industry.
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