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CHS Moves to Nix Quorum Spin-off Agreements Amid $9M Quarrel

News  |  By Steven Porter  
   March 20, 2018

Arbitration proceedings between the two companies are pending after multiple disputes erupted over transition agreements signed to coincide with Quorum’s creation.

Community Health Systems (CHS) is seeking early termination of two transition agreements it signed with Quorum Health Corporation in 2016, when CHS spun off 38 hospitals to form Quorum as a separate company.

In a form filed Tuesday with the Securities and Exchange Commission (SEC), Quorum acknowledged the move by CHS, marking the latest episode in a years-long dispute over how financial projections and plans were calculated and arranged in the run-up to the spin-off.

The news comes as Mike Culotta, who has been Quorum’s CFO since the company was formed, prepares to pass the baton to Alfred Lumsdaine at the end of the month.

Related: CHS Gets $425M for Rockwood Health System

On the same day that CHS announced the Quorum spin-off had been finalized, the organizations entered into five-year transition services agreements, which outlined services CHS would provide to Quorum. These services included information technology, payroll, billing, collections, and others, according to the SEC filing.

Within four months, however, Quorum released second-quarter finances that severely underperformed CHS projections, and its stock price tanked, riling investors. From their debut at $16.50 apiece, Quorum shares fell more than 50% by the end of 2016, and they continued to slide in 2017.

Investors complained that CHS used proceeds from the deal to pay down its own debt, while Quorum began paying millions of dollars more than anticipated back to its former headquarters. Irked by what they deemed disturbing and perhaps even unlawful behavior, the investors called for an independent investigation into each organization’s leadership team.

“We believe that either Quorum’s management team is complicit in this cover up or they are guilty of gross mismanagement for their inability to analyze the costs of their own business for months after the spin-off,” R2 Investments LDC—which owned $50 million of bonds and 1.3 million shares of Quorum stock in mid-2016—wrote to the Quorum board on October 12, 2016.

Five months later, the Quorum board replied to R2 Investments with a letter saying an independent investigation “did not produce conclusive evidence of intentional misconduct or fraud by CHS” but did unearth facts that “suggest (at a minimum) several bases for questioning CHS’s operational competence in connection with the planning and execution of the spin-off, and the formulation of financial projections.”

Dispute pending in arbitration

Quorum received a demand for arbitration from CHS on August 4, 2017, pertaining to the two transition services agreements the organizations signed in 2016, according to Quorum’s latest SEC filing.

Steven Porter is an associate content manager and Strategy editor for HealthLeaders, a Simplify Compliance brand.

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