In re Community Health Systems, Inc. S’holder Derivative Litig.

Landmark Corporate Governance Reforms Achieved in Community Health Systems

After more than five years of hard-fought litigation, on January 17, 2017, the Honorable Kevin H. Sharp of the United States District Court for the Middle District of Tennessee approved the settlement of In re Community Health Systems, Inc. S’holder Derivative Litig. The settlement provides for a $60 million cash payment to Community Health and the implementation of pervasive corporate governance reforms.

The settlement resolves allegations that Community Health’s directors and officers breached their fiduciary duties by developing and condoning a policy in which patients were systematically steered into medically unnecessary inpatient admissions when they should have been treated as outpatients. These fraudulent billing practices violated Medicare and Medicaid regulations and caused Community Health to artificially inflate reimbursement payments, ultimately resulting in the company being forced to pay more than $98 million to resolve federal and state investigations into its Medicare compliance practices.

The action was filed in 2011 by plaintiffs Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund and Roofers Local No. 149 Pension Fund. After defeating defendants’ motion to dismiss and motion for reconsideration, Robbins Geller and co-counsel pursued vigorous and expansive discovery, ultimately reviewing and analyzing over 2.5 million pages of documents and deposing 35 percipient witnesses to develop the evidence necessary to support plaintiffs’ claims.

Just days before the end of fact discovery, defendants agreed to settle the action by (i) paying $60 million to Community Health; and (ii) causing the company to agree to adopt corporate governance reforms designed to directly address the underlying compliance concerns raised in the action. The $60 million payment represents the largest shareholder derivative recovery ever in the Sixth Circuit and equates to more than 60% of the $98 million Community Health was required to pay to settle the government’s allegations regarding the company’s improper Medicare compliance practices. The governance reforms obtained are equally extraordinary and include shareholder nomination of two independent directors, the appointment of an independent director as the Board’s Lead Director, a requirement that the Board’s Compensation Committee consist solely of independent directors, the establishment of insider trading controls, the adoption of a political expenditure disclosure policy, and the implementation of an automatic clawback provision to recover compensation improperly paid to the company’s CEO or CFO.

“The landmark corporate governance reforms achieved are a huge step forward for Community Health and its shareholders,” commented Robbins Geller partner Benny C. Goodman III. In commending Robbins Geller attorneys at the final approval hearing, Judge Sharp concurred with Goodman’s assessment, stating: “I think y’all have done a great job pulling this [settlement] together. It was complicated, it was drawn out, and a lot of work clearly went into this [case]. . . . I appreciate the work you all did on this.” The judge further lauded the settlement as providing “benefit to the shareholders” that went “above and beyond money.”

Robbins Geller attorneys Darren J. Robbins, Benny C. Goodman III, Randall J. Baron, Travis E. Downs III, Erik W. Luedeke and Juan Carlos Sanchez, serving as co-lead counsel, obtained this settlement on behalf of shareholders.

In re Community Health Systems, Inc. S’holder Derivative Litig., No. 3:11-cv-00489, Order Approving Derivative Settlement and Order of Dismissal With Prejudice (M.D. Tenn. Jan. 17, 2017).