Universal Health Services Inc. may cite any documents produced in a books-and-records action to support a motion to dismiss expected derivative litigation over the company s alleged practice of committing patients to mental institutions against their will, the Delaware Court of Chancery ruled on Thursday.
Vice Chancellor Sam Glasscock III said the King of Prussia, Pennsylvania-based hospital management company could adopt a so-called incorporation provision over the objections of a UHS stockholder who argued the measure would give the company an unfair advantage in defending derivative claims.
The concerns raised by the plaintiff here are not frivolous, Glasscock wrote in a nine-page memorandum opinion. On balance, however, I find that the interests of judicial and litigants economy outweigh the potential detriment to which the plaintiff points.
The City of Cambridge Retirement System, a pension fund and UHS investor, filed its Section 220 action in April, after BuzzFeed published an online investigation last year detailing alleged abuses by UHS.
According to the article, the company used free wellness examinations to trick patients into believing that they were suicidal and then committed the patients to mental institutions until their insurance benefits ran out. In February, UHS revealed that it was the subject of numerous government investigations, including a probe by the U.S. Department of Justice s criminal fraud section.
UHS, which operates hundreds of health care facilities in the United States and abroad, has flatly denied any wrongdoing.
The company rebuffed Cambridge s initial demand for documents as too broad, countering with an offer to produce a smaller set of records if the plaintiff agreed to a provision stating that a complaint in any subsequent litigation be deemed to incorporate by reference the entirety of the book-and-records inspection.
The incorporation provision would allow UHS to cite to any of those documents in support of a motion to dismiss forthcoming litigation.
Cambridge refused and instead filed its Section 220 action, seeking to compel inspection without agreeing to the incorporation provision. The incorporation provision, it said, ran contrary to Delaware corporate law and would open the door to gamesmanship and improper dismissal by UHS directors.
Plaintiff is entitled to enforce its Section 220 rights, without unreasonable restrictions found nowhere in the statute and that operate unfairly to allow defendants to cherry-pick and produce a select universe of documents favorable to the company s defense, incorporate all such documents into any subsequent derivative complaint, and successfully transform a motion on the pleadings into a one-sided summary judgment motion without the benefit of full discovery, the fund said in its complaint.