Item 8.01 Other Events.
The following disclosures supplement the disclosures contained in the definitive
proxy statement on Schedule 14A (the "Proxy Statement"), dated March 5, 2021,
which was filed by Change Healthcare Inc. ("Change" or "Change Healthcare") with
the U.S. Securities and Exchange Commission (the "SEC") and mailed on or about
March 5, 2021 to Change stockholders of record as of the close of business on
February 26, 2021, in connection with the previously announced proposed
acquisition of Change by UnitedHealth Group Incorporated ("UnitedHealth Group"
and the proposed acquisition, the "Transaction").
Following the announcement of the Transaction, as of the date of this Current
Report on Form 8-K, nine lawsuits challenging the Transaction have been filed.
The first lawsuit, a putative class action captioned Krueger v. Change
Healthcare Inc., et al., was filed in Tennessee Chancery Court, Davidson County,
on February 24, 2021 and voluntarily dismissed without prejudice on March 17,
2021. The second lawsuit, captioned Brash v. Change Healthcare Inc., et al., was
filed in the United States District Court for the Southern District of New York
on March 18, 2021, and amended on March 23, 2021. The third lawsuit, a putative
class action captioned Bushansky v. Change Healthcare Inc., et al., was filed in
the United States District Court for the Northern District of California on
March 19, 2021. The fourth lawsuit, captioned Wilhelm v. Change Healthcare Inc.,
et al., was filed in the United States District Court for the District of
Delaware on March 23, 2021. The fifth lawsuit, captioned Schwartz v. Change
Healthcare Inc., et al., was filed in the United States District Court for the
Eastern District of New York on March 23, 2021. The sixth lawsuit, captioned
Marin v. Change Healthcare Inc., et al., was filed in the United States District
Court for the Eastern District of New York on March 24, 2021. The seventh
lawsuit, captioned Raagas v. Change Healthcare Inc., et al., was filed in the
United States District Court for the District of Delaware on March 25, 2021. The
eighth lawsuit, captioned LR Trust v. Change Healthcare Inc., et al., was filed
in the United States District Court for the District of Delaware on April 6,
2021. The ninth lawsuit, captioned Artis v. Change Healthcare Inc., et al., was
filed in the United States District Court for the Eastern District of
Pennsylvania on April 7, 2021. The operative complaints filed in the pending
lawsuits name Change and Change's board of directors as defendants and allege,
among other things, that the Proxy Statement is materially incomplete and
misleading in violation of Sections 14(a) and 20(a) of the Securities Exchange
Act of 1934 and Rule 14a-9 promulgated thereunder. Change has also received
written demands from purported stockholders relating to the Transaction. We
refer to the foregoing lawsuits and demands collectively as the "Merger
Actions."
Change believes that the Merger Actions are without merit and that supplemental
disclosures are not required or necessary under applicable laws. However, in
order to minimize the risk that the Merger Actions delay or otherwise adversely
affect the Transaction, and to minimize the costs, risks and uncertainties
inherent in defending the lawsuits, and without admitting any liability or
wrongdoing, Change has decided to supplement the Proxy Statement as described in
this Current Report on Form 8-K in order to moot certain claims asserted in the
Merger Actions. Change and the other named defendants deny that they have
violated any laws or breached any duties to Change's stockholders. Nothing in
this Current Report on Form 8-K shall be deemed an admission of the legal
necessity or materiality under applicable laws of any of the disclosures set
forth herein. To the contrary, Change specifically denies all allegations in the
Merger Actions that any additional disclosure was or is required to supplement
the Proxy Statement under applicable law.
Supplemental Disclosures
The following disclosures should be read in conjunction with the disclosures
contained in the Proxy Statement, which should be read in its entirety. To the
extent that information set forth herein differs from or updates information
contained in the Proxy Statement, the information contained herein supersedes
the information contained in the Proxy Statement. All page references are to
pages in the Proxy Statement, and any defined terms used but not defined herein
shall have the meanings set forth in the Proxy Statement.
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The Proxy Statement is hereby amended and supplemented as follows:
1) The following disclosure replaces the first full sentence on page 8. The
modified text is underlined below.
In addition, pursuant to the terms of the Merger Agreement, Change's directors
and executive officers will be entitled to certain ongoing indemnification,
expense advancement and insurance arrangements. In addition, pursuant to the TRA
Letter Agreement (as defined below), certain of Change's directors and executive
officers will become entitled to early termination payments under the 2017 TRA
(as defined below). It is also possible that UnitedHealth Group may seek early
terminations of other TRAs (as defined below). Should UnitedHealth Group seek to
do this, it is possible that other directors and officers could receive early
termination payments under those other TRAs.
2) The following disclosure replaces the last full paragraph on page 40. The
modified text is underlined or struck-through (as applicable) below.
Following such discussion, the Board met in executive session, without Change
management present. Mr. Lance noted that, during an recent update call he had
with Messrs. Wichmann and Rex on or about December 8, 2020, Mr. Wichmann
expressed interest in speaking with Mr. de Crescenzo about a potential
post-closing employment role for Mr. de Crescenzo at UnitedHealth Group.
Mr. Lance reported that he told Mr. Wichmann that UnitedHealth Group should not
discuss this topic with Mr. de Crescenzo or other members of Change management
until the Board provided its consent for UnitedHealth Group to do so. The Board
then discussed the topic and determined that, based on the progress that the
parties had made in negotiations on key transaction terms thus far (principally,
price and provisions related to transaction certainty), the Board was prepared
to provide its consent to UnitedHealth Group to reach out to Mr. de Crescenzo
regarding potential post-Closing employment with UnitedHealth Group, provided
that the Board would receive regular updates regarding the material terms of any
such proposed arrangements with Mr. de Crescenzo or other members of Change's
senior management team. It was further determined that Mr. Lance would convey
this approval to Mr. Wichmann at their next regularly-scheduled call, on
December 18, 2020, so long as no negative developments on the progress of the
transaction occurred before such meeting.
3) The following disclosure replaces the first full sentence on page 41. The
modified text is underlined or struck-through (as applicable) below.
During the weeks of December 14 and December 21, representatives of Simpson
Thacher and Sullivan & Cromwell continued to negotiate and exchange drafts of
the Merger Agreement, including provisions relating to (i) the termination fee
payable by Change to UnitedHealth Group under certain circumstances, (ii) the
pre-Closing restrictions on Change's operation of its business, (iii) the
treatment of Change employee equity awards in the Merger and (iv) the proposed
treatment, in connection with the consummation of the Merger, of certain tax
receivable agreements between Change and/or its subsidiaries, on the one hand,
and certain investment funds affiliated with Blackstone (such funds, the "TRA
Letter Agreement Parties") current or former stockholders of Change, on the
other hand (such tax receivable agreements, which are filed as Exhibits 10.2
through 10.7 to Change's Form 10-K for the fiscal year ended March 31, 2020, the
"Applicable TRAs"). In particular, UnitedHealth Group sought to negotiate the
treatment of certain investment funds affiliated with Blackstone (such funds,
the "TRA Letter Agreement Parties") under the TRAs to which the TRA Letter
Agreement Parties are parties (such TRAs, which are filed as Exhibits 10.3, 10.4
and 10.5 to Change's Annual Report on Form 10-K for the fiscal year ended
March 31, 2020, the "Applicable TRAs"). Each TRA provides Change (or its
subsidiary) with the option to terminate such TRA prior to its normal expiration
date upon a "Change of Control" (as defined therein), and the proposed
acquisition of Change by UnitedHealth Group will constitute a Change of Control
under each TRA. In order to terminate a given TRA prior to its normal expiration
date, Change (or its subsidiary) must make a termination payment to the
counterparties thereunder. Each TRA contains a formula for computing the size of
the termination payment. The formula terms require Change (or its subsidiary) to
make certain determinations and assumptions (e.g., determinations about the
value of certain of the Change party's tax assets and assumptions regarding the
Change party's taxable income) and apply the appropriate discount rate for the
termination payment. UnitedHealth Group requested that the TRA Letter Agreement
Parties agree on the method of calculating the termination payments under the
Applicable TRAs concurrently with the execution of the Merger Agreement. The
purpose of doing so was to provide UnitedHealth Group with greater certainty as
to the termination payments that would be owed should UnitedHealth Group choose
to terminate the Applicable TRAs in connection with the Closing.
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4) The following disclosure replaces the first full paragraph on page 57. The
modified text is underlined or struck-through (as applicable) below.
The following table sets forth a summary of the Projections and certain
historical financial information for comparison purposes. Dollar totals are in
millions and fiscal years end on March 31. The Projections reflected Change's
acquisition, on May 1, 2020, of 100% of the ownership interest in eRx Network
Holdings, Inc. (as disclosed in Change's Current Report on Form 8-K filed on
May 4, 2020) and Change's acquisition, on June 1, 2020, of 100% of the ownership
interest in each of PDX, Inc., National Healthcare Information Network, Inc. and
Freedom Data Systems, Inc. (as disclosed in Change's Current Report on Form 8-K
filed on June 1, 2020), each as further described in Note 4 to Change's
Quarterly Report for the period ended December 31, 2020 filed on February 4,
2021. The Projections for fiscal years 2021 through 2023 with respect to
"Solutions Revenue", "Adjusted EBITDA" and "Unlevered Free Cash Flow" (the "LRP
Projections") were prepared by management as part of the Board-approved LRP,
independent of Change's evaluation of the proposed transaction with UnitedHealth
Group. The Projections for fiscal years 2024 through 2030 with respect to
"Solutions Revenue", "Adjusted EBITDA" and "Unlevered Free Cash Flow" are not
part of the LRP but were prepared by management and approved by the Board as
extrapolations of the LRP Projections for purposes of the valuation analyses
conducted by Goldman Sachs. The Tax Attribute Projections (as defined in Note 4
below) with respect to "Net Impact to Cash Flows from Tax Attributes" were
prepared by management in the ordinary course, independent of Change's
evaluation of the proposed transaction with UnitedHealth Group. Change provided
a portion of the LRP Projections (but not any of the other Projections) to
UnitedHealth Group in connection with UnitedHealth Group's evaluation of the
proposed transaction.
5) Each reference to "Net Impact to Cash Flows from Tax Attributes" included in
the Proxy Statement (including in the table on page 57) is replaced with a
reference to "Tax Attribute Projections", as these two terms are synonymous.
6) The following disclosure replaces Note 4 on page 58. The modified text is
underlined or struck-through (as applicable) below.
"Net Impact to Cash Flows from Tax Attributes" means the aggregate net cash flow
impact of tax attributes of Change, and is comprised of net operating losses,
which have been incurred or are expected to be on November 30 in respect of the
then-current fiscal year (e.g., incurred on November 30, 2020 in respect of the
fiscal year ending March 31, 2021), and payments under the tax receivable
agreements filed as Exhibits 10.2 through 10.7 to Change's Form 10-K for the
fiscal year ended March 31, 2020 TRAs, which payments are made on July 15 in
respect of the most recently completed fiscal year (e.g., payments made on
July 15, 2021 in respect of the fiscal year ending March 31, 2021). Change has
historically generated tax losses from its operations (i.e., net operating
losses), which can be carried forward and utilized against future taxable income
to lower Change's tax payments in future years. In general, until the TRAs
expire, 85% of the future tax savings from a portion of these net operating
losses, as well as other tax attributes, such as amortization on certain
intangibles, must be paid to current or previous stockholders of Change under
the TRAs (as defined below). The "Tax Attribute Projections" reflect the
expected reduction in taxes owed by Change generated by these existing, as well
as future projected, net operating losses and other tax attributes, net of
expected payments under the TRAs with respect thereto. As a hypothetical
example, if Change had net operating losses that were expected to save Change
$100 in future taxes, but Change owed $85 in future TRA payments on account of
such losses, then the "Tax Attribute Projections" from such net operating losses
would be $15.
7) The following disclosure replaces the first paragraph under the section
entitled "Interests of Change's Executive Officers and Directors in the Merger"
on page 58. The modified text is underlined below.
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In considering the recommendation of the Board that you vote to approve the
Merger Proposal, you should be aware that, aside from their interests as Change
stockholders, Change's directors and executive officers have interests in the
Merger that are different from, or in addition to, the interests of Change
stockholders generally, which may create potential conflicts of interest. These
. . .
Item 9.01 Financial Statements and Exhibits.
As disclosed above, the TRA Letter Agreement is filed as Exhibit 10.1 to
Change's Current Report on Form 8-K filed on January 6, 2021. The TRA Letter
Agreement includes Annex I (Amortization Schedule) and Annex II (Net Operating
Loss Schedule), though such annexes were not included in the as-filed version of
the TRA Letter Agreement. Such annexes are filed as Exhibits 99.1 and 99.2,
respectively, to this Current Report.
(d) Exhibits
Exhibit
No. Description
99.1 Annex I (Amortization Schedule) to the TRA Letter Agreement.
99.2 Annex II (Net Operating Loss Schedule) to the TRA Letter Agreement.
Forward-Looking Statements
This communication contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 with respect to the financial
condition, results of operations and businesses of Change Healthcare. Some of
these statements can be identified by terms and phrases such as "anticipate,"
"believe," "intend," "estimate," "expect," "continue," "could," "should," "may,"
"plan," "project," "predict" and similar expressions. Change Healthcare cautions
readers of this communication that such "forward looking statements," including
without limitation, those relating to the timing of the proposed merger and
Change Healthcare's future business prospects, revenue, working capital,
liquidity, capital needs, interest costs and income, wherever they occur in this
communication or in other statements attributable to Change Healthcare, are
necessarily estimates reflecting the judgment of Change Healthcare's senior
management and involve a number of risks and uncertainties that could cause
actual results to differ materially from those suggested by the "forward looking
statements."
Factors that could cause Change Healthcare's actual results to differ materially
from those expressed or implied in such forward-looking statements include, but
are not limited to, the occurrence of any event, change or other circumstances
that could give rise to the termination of the Merger Agreement; the inability
to complete the proposed merger due to the failure to obtain stockholder
approval for the proposed merger or the failure to satisfy other conditions to
completion of the proposed merger, including that a governmental entity may
prohibit, delay or refuse to grant approval for the consummation of the
transaction; risks related to disruption of management's attention from Change
Healthcare's ongoing business operations due to the transaction; the effect of
the announcement of the proposed merger on Change Healthcare's relationships
with its customers, operating results and business generally; the risk that the
proposed merger will not be consummated in a timely manner; exceeding the
expected costs of the merger; Change Healthcare's ability to retain or renew
existing customers and attract new customers; macroeconomic and industry trends
and adverse developments in the debt, consumer credit and financial services
markets; uncertainty and risks related to the impact of the COVID-19 pandemic on
the national and global economy, Change Healthcare's business, suppliers,
customers, and employees; Change Healthcare's ability to connect a large number
of payers and providers; Change Healthcare's ability to provide competitive
services and prices while maintaining its margins; further consolidation in
end-customer markets; Change Healthcare's ability to effectively manage costs;
Change Healthcare's ability to effectively develop and maintain relationships
with channel partners; a decline in transaction volume in the U.S. healthcare
industry; Change Healthcare's ability to timely develop new services and the
market's willingness to adopt new services; Change Healthcare's ability to
maintain access to its data sources; Change Healthcare's ability to maintain the
security and integrity of its data; Change Healthcare's ability to deliver
services timely without interruption; Change Healthcare's ability to make
acquisitions and integrate the operations of acquired businesses; government
regulation and changes in the regulatory environment; economic and political
instability in the U.S. and international markets where Change Healthcare
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operates; risks related to international operations; the ability of outside
service providers and key vendors to fulfill their obligations to Change
Healthcare; litigation or regulatory proceedings; Change Healthcare's ability to
protect and enforce its intellectual property, trade secrets and other forms of
unpatented intellectual property; Change Healthcare's ability to defend its
intellectual property from infringement claims by third parties; changes in
local, state, federal and international laws and regulations, including related
to taxation; Change Healthcare's reliance on key management personnel; Change
Healthcare's ability to manage and expand its operations and keep up with
rapidly changing technologies; our adoption of new, or amendments to existing,
accounting standards; losses against which Change Healthcare does not insure;
Change Healthcare's ability to make timely payments of principal and interest on
its indebtedness; Change Healthcare's ability to satisfy covenants in the
agreements governing its indebtedness; Change Healthcare's ability to maintain
liquidity, and other risks. For a more detailed discussion of these factors, see
the information under the captions "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Change
Healthcare's most recent Annual Report on Form 10-K filed with the Securities
and Exchange Commission (the "SEC") on June 4, 2020, and in Change Healthcare's
most recent Quarterly Report on Form 10-Q filed with the SEC on February 4,
2021.
Change Healthcare's forward-looking statements speak only as of the date of this
communication or as of the date they are made. Change Healthcare disclaims any
intent or obligation to update any "forward looking statement" made in this
communication to reflect changed assumptions, the occurrence of unanticipated
events or changes to future operating results over time.
Additional Information and Where to Find It
This communication may be deemed solicitation material in respect of the
proposed acquisition of Change Healthcare by UnitedHealth Group. In connection
with the proposed merger transaction, Change Healthcare has filed with the SEC
and furnished to Change Healthcare's stockholders the Proxy Statement and other
relevant documents. This filing does not constitute a solicitation of any vote
or approval. Stockholders are urged to read the Proxy Statement and any other
documents to be filed with the SEC in connection with the proposed merger or
incorporated by reference in the Proxy Statement because they contain important
information about the proposed merger.
Investors can obtain free of charge the Proxy Statement, which was filed with
the SEC on March 5, 2021, and other documents filed with the SEC at the SEC's
website at https://www.sec.gov. In addition, the Proxy Statement and Change
Healthcare's annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 are
available free of charge through Change Healthcare's website at
https://ir.changehealthcare.com. as soon as reasonably practicable after they
are electronically filed with, or furnished to, the SEC.
The directors, executive officers and certain other members of management and
employees of Change Healthcare may be deemed "participants" in the solicitation
of proxies from stockholders of Change Healthcare in favor of the proposed
merger. Information regarding the persons who may, under the rules of the SEC,
be considered participants in the solicitation of the stockholders of Change
Healthcare in connection with the proposed merger is set forth in the Proxy
Statement and the other relevant documents filed with the SEC. You can find
additional information about Change's executive officers and directors in its
Annual Report on Form 10-K for the fiscal year ended March 31, 2020 and in its
definitive proxy statement filed with the SEC on Schedule 14A on July 16, 2020.
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