Franklin, Tenn.-based Community Health Systems and Brentwood, Tenn.-based Quorum Health urged a federal judge not to grant class certification in a shareholder lawsuit alleging Quorum's stock was trading at an inflated price after its spinoff from CHS.
Here are four things to know:
1. The lawsuit, filed in 2016 and amended in April 2017, alleges investors were tricked into buying Quorum stock at inflated prices because CHS, Quorum and several company executives failed to disclose that Quorum's goodwill and long-lived assets were impaired prior to the spinoff. The plaintiffs, who seek to represent a class of Quorum shareholders, allege the companies' failure to disclose the impairment charges violated federal securities law.
2. CHS announced plans in August 2015 to spin off 38 hospitals and a management company to form Quorum. Plaintiffs argue CHS and Quorum misled the market into believing Quorum's goodwill was not impaired prior to the spinoff. However, the companies argue that was not the case.
3. CHS and Quorum argue their financial challenges were well publicized prior to the spinoff. They claim the "sustained decrease" in CHS' stock price and the decline in overall financial performance of both companies was public information prior to the spinoff. They further allege analyst reports published prior to the spinoff confirmed the market was aware that the Quorum hospitals were less profitable than the average CHS hospital.
4. CHS and Quorum argue the plaintiffs' motion for class certification should be denied because the spinoff did not affect Quorum's stock price. "A fundamental premise of the fraud-on-the-market theory is that the alleged misrepresentation influenced the market price of the security at issue," states the companies' opposition to the motion for class certification. "The fraud-on-the market theory is unavailing here because there is overwhelming evidence that the alleged misrepresentations did not have price impact."
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