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UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF TENNESSEE
NOTICE OF PROPOSED DERIVATIVE SETTLEMENT
PLEASE READ THIS NOTICE CAREFULLY AND IN ITS ENTIRETY. THIS NOTICE RELATES TO A PROPOSED SETTLEMENT AND DISMISSAL OF
THE ABOVE-CAPTIONED DERIVATIVE ACTION (THE ACTION ) AND CONTAINS IMPORTANT INFORMATION REGARDING YOUR RIGHTS. YOUR RIGHTS MAY BE AFFECTED BY THESE LEGAL PROCEEDINGS. IF THE COURT APPROVES THE SETTLEMENT, YOU WILL BE FOREVER BARRED FROM
CONTESTING THE APPROVAL OF THE PROPOSED SETTLEMENT AND FROM PURSUING THE RELEASED CLAIMS.
IF YOU HOLD CHSI COMMON STOCK FOR THE
BENEFIT OF ANOTHER, PLEASE PROMPTLY TRANSMIT THIS DOCUMENT TO SUCH BENEFICIAL OWNER.
Notice is hereby provided to you of the proposed
settlement (the Settlement ) of this stockholder derivative litigation. This Notice is provided by Order of the United States District Court for the Middle District of Tennessee (the Court ). It is not an expression of any
opinion by the Court with respect to the truth of the allegations in the litigation or merits of the claims or defenses asserted by or against any party. It is solely to notify you of the terms of the proposed Settlement, and your rights related
thereto. Capitalized terms not otherwise defined shall have the definitions set forth in a written Stipulation of Settlement, dated November 18, 2016 ( Stipulation ). A link to the Form 8-K filed with the Securities and Exchange
Commission containing the text of the Stipulation may be found on CHSI s website at the Investor Relations page at www.chs.net/investor-relations.
Your rights may be affected by the Settlement of
the action styled In re Community Health Systems, Inc. Shareholder Derivative Litigation, Master Dkt. No. 3:11-cv-00489 (M.D. Tenn.) (the Action ). Plaintiffs Roofers Local No. 149 Pension Fund (the Roofers )
and Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund (the Plumbers ) (on behalf of themselves and derivatively on behalf of CHSI); Wayne T. Smith, W. Larry Cash, John A. Clerico, John A. Fry, William Norris
Jennings, Julia B. North, and H. Mitchell Watson, Jr. (together, Settling Defendants ); and Nominal Party CHSI (together, the Settling Parties ) have agreed upon terms to settle the above-referenced litigation and have signed
the Stipulation setting forth those settlement terms.
On January 17, 2017, at 10:30 a.m., the Court will hold a hearing (the Settlement
Hearing ) in the Action. The purpose of the Settlement Hearing is to determine: (i) whether the terms of the Settlement are fair, reasonable and adequate, including the separately negotiated amount for Plaintiffs Counsel s
attorneys fees and expenses, and should be finally approved; (ii) whether a final judgment should be entered and the Action dismissed with prejudice pursuant to the Stipulation; and (iii) such other matters as may be necessary or
proper under the circumstances.
The Action alleges that the Settling
Defendants breached their fiduciary duties by causing CHSI to engage in improper inpatient-admission practices to maximize reimbursement payments from Medicare and other payor sources. The Action further asserts that CHSI was damaged as a result of
these alleged breaches. The Settling Defendants have denied and continue to deny the claims alleged by Plaintiffs in the Action.
On May 24 and June 21, 2011,
respectively, plaintiffs Plumbers and Roofers filed shareholder derivative actions asserting claims on behalf of CHSI for alleged violations of law, including allegations that CHSI s directors and certain of its officers breached their
fiduciary duties owed to the Company. On September 28, 2011, the Court consolidated the derivative actions and appointed Robbins Geller Rudman & Dowd LLP and Robbins Arroyo LLP as Lead Counsel for Plaintiffs. On November 29, 2011,
the Court further consolidated a derivative action captioned Sweat v. Smith, et al., No. 3:11-cv-00952, with the Plumbers and Roofers actions.
On March 15, 2012, Plaintiffs filed a Verified Amended Consolidated Shareholder Derivative Complaint for Breach of Fiduciary Duty,
Corporate Waste and Unjust Enrichment ( Amended Consolidated Complaint ) (Dkt. No. 50). The Amended Consolidated Complaint alleged that Defendants breached their fiduciary duties by causing CHSI to adopt an unlawful
inpatient admissions policy to enable CHSI to artificially inflate reimbursement payments from Medicare, Medicaid and other payer sources, resulting in damages to the Company. Amended
Consolidated Complaint, 2-7, 45-85.
Defendants filed a Motion to Dismiss the Amended Consolidated Complaint ( Motion to Dismiss ) (Dkt. No. 53). In the Motion to Dismiss, Defendants argued, among other things, that the Amended Consolidated Complaint failed to adequately
plead futility of demand. Defendants also argued that the facts pleaded in the Amended Consolidated Complaint failed to state any actionable claim for relief. On July 13, 2012, Plaintiffs filed an Opposition to the Motion to Dismiss
( Opposition ) (Dkt. No. 58).
On June 13, 2013, the Court, the Honorable John T. Nixon presiding, conducted a hearing
on the Motion to Dismiss. Thereafter, on September 27, 2013, the Court issued an Order denying in part and granting in part the Motion to Dismiss ( September 27, 2013 Order ) (Dkt. No. 87). More particularly, the Court ruled that
Plaintiffs had adequately pleaded demand futility under Delaware law on their fiduciary duty claim, but not on their gross mismanagement, corporate waste, or unjust enrichment claims.
On October 14, 2013, Defendants filed a Motion for Reconsideration of Order Granting in Part and Denying in Part Motion to Dismiss
( Motion for Reconsideration ) (Dkt. No. 89), which Plaintiffs opposed on October 30, 2013 (Dkt. No. 95). The Court denied the Motion for Reconsideration on December 22, 2014 (Dkt. No. 140). In particular, the
Court held that Defendants have not presented sufficient grounds to reconsider its [the Court s] decision to deny Defendants Motion to Dismiss with respect to Plaintiffs breach of fiduciary duties claim. Order (Dkt.
On November 10, 2014, the Court, the Honorable Joe B. Brown, United
States Magistrate Judge, presiding, conducted an Initial Case Management Conference. Following the Conference, the Court issued an Order establishing a pre-trial schedule. Dkt. No. 136. Thereafter, the parties began to engage in a vigorous
As discovery progressed, the parties served written discovery on each other, as well as issued
subpoenas to third parties, and have briefed at least seven discovery-related issues for the Court. As of today, Plaintiffs have collected and reviewed approximately 2.7 million pages of documents and have deposed 39 witnesses, including most
of the Settling Defendants, CHSI s top executives and numerous hospital-level representatives. Similarly, Defendants obtained over 10,000 pages of documents from Plaintiffs and have deposed representatives from both Roofers and Plumbers.
Finally, with an expert discovery period fast approaching, the Settling Parties engaged numerous expert witnesses who had begun to compile and review materials in anticipation of drafting their respective reports.1
On or about November 10, 2014, the Court also directed the
parties to explore private resolution of the Action through mediation. The parties agreed to participate in a mediation before the Honorable Layn R. Phillips, United States District Judge (Ret.). The Court directed pre-mediation discovery, which
included CHSI s production of all documents that the Company and its affiliates had provided to the Department of Justice in connection with related Government subpoenas. The parties then participated in an in-person mediation session before
Judge Phillips on April 17, 2015. This April 2015 mediation was unsuccessful.
While the parties pushed forward with the litigation
and discovery, the Settling Parties continued to talk about resolution with the help of Judge Phillips. After months of discovery and, nearing the discovery cut-off set by the Court, the Settling Parties engaged in a second in-person mediation
session with Judge Phillips on September 9, 2016. While the Settling Parties did not
reach an agreement to settle the Action at that session, the Settling Parties continued negotiations with the assistance of Judge Phillips in parallel with ongoing discovery. These efforts
culminated with the Settling Parties agreeing to settle this Action for a $60 million payment from the Settling Defendants insurance carriers and the Company agreeing to adopt meaningful corporate governance reforms relating to the issues
raised by this Action, subject to the negotiation of the terms of the Stipulation of Settlement and approval by the Court. The Settling Parties further agreed that $40 million of that settlement payment should be payable to the Company, and $20
million should be payable to counsel for the Plaintiffs as attorneys fees and expenses, subject to Court approval.
On November 2, 2016, the CHSI Board,
exercising its business judgment, unanimously approved the Settlement and its terms as being in the best interest of CHSI and its stockholders.
The principal terms, conditions and other
matters that are part of the Settlement, which is subject to approval by the Court, are summarized below. This summary should be read in conjunction with, and is qualified in its entirety by reference to, the text of the Stipulation, which has been
filed with the Court and is available at a link on CHSI s website at the Investor Relations page at www.chs.net/investor-relations.
In connection with the Settlement of the Action, Settling Defendants insurance carriers shall pay $60,000,000 (the Settlement
Payment ) to the Company. In addition, the CHSI Board shall adopt and maintain for at least four (4) years the corporate governance measures specified herein within thirty (30) days after judicial approval of the proposed Settlement
by the Court. CHSI acknowledges and agrees that the Settlement Payment and corporate governance policies set forth herein confer substantial benefits upon CHSI and its stockholders. CHSI also acknowledges that the commencement, prosecution, and
settlement of the Action were material and substantial factors in
the Company s ability to receive the Settlement Payment and in the Company s decision to adopt, implement, and maintain the corporate governance reforms set forth below:
Nominated Directors. CHSI s Governance and Nominating Committee shall work with plaintiffs corporate governance expert to secure the names of six mutually acceptable candidates for election to the Board who have no prior
connection to the Company, its directors, or to its senior officers. The candidates shall be additional independent directors and will have expertise and experience with accounting issues and compliance. The Board shall then select two of these
candidates to recommend for election at the next shareholders meeting.
(a) The procedure for identifying and nominating
(i) The designee of the Governance and Nominating Committee together with plaintiffs corporate
governance expert, shall establish an objective set of criteria to be utilized in conducting the canvassing efforts detailed below;
(ii) Each individual or entity holding more than at least 1% of CHSI s common stock for a period of no less than one
year, other than individuals who are current employees of CHSI, shall be jointly contacted by a representative of both CHSI and plaintiffs corporate governance expert for the purpose of requesting that such shareholder(s) provide the name(s)
of prospective candidates for the Board;
(iii) An appropriate review, including background information and interviews of
prospective candidates, shall be conducted with respect to all candidates who express their consent to being considered and to serving as a director. No less than six candidates deemed qualified by the designated representative of CHSI and
plaintiffs corporate governance expert shall be sent to the Governance and Nominating Committee for review;
The Governance and Nominating Committee shall identify two candidates from those submitted for review, based on the business judgment of the committee s members and input from plaintiffs corporate governance expert;
(v) In the event that fewer than two candidates are nominated, the process
detailed in I.1.(a) above shall be repeated sequentially and two additional candidates shall be sent to the Governance and Nominating Committee for review and the Governance and Nominating Committee shall select from the candidates until both
positions are filled;
(vi) Once the candidates are identified by the Governance and Nominating Committee, the Board
shall, subject to its fiduciary duties, nominate the candidates for election to the Board or, if no shareholders meeting is scheduled in the next ninety (90) days, the Board shall elect the candidates to fill any Board vacancies until
such meeting is held and the candidates can be voted upon by shareholders;
(vii) If, during the four years that this
Agreement is in force, either of the two shareholder-nominated directors is no longer able to serve on the Board, or the Board in exercise of its business judgment can no longer nominate such director(s), the process described in
I.1.(a)(i)-(vi) above shall be repeated for the selection of a replacement director.
Director. The Board shall designate one of the independent directors as the Lead Director.
to the duties of all Board members, the Lead Director shall be responsible for the following functions:
Seeking input from all directors as to the preparation of the agendas for CHSI Board and committee meetings.
the Board as to the quality, quantity and timeliness of the flow of information from CHSI s management that is necessary for the directors to effectively and responsibly perform their duties.
(c) Assisting CHSI s officers along with the Board of Directors Audit
and Compliance Committee in assuring compliance with and implementation of all applicable state and federal healthcare laws, including but not limited to, Medicare and Medicaid laws, rules and regulations, and for revisions to CHSI s policies,
procedures and practices for compliance with and implementation of same.
(d) Developing the agenda for, and moderate
executive sessions of, the Board and act as principal liaison between the Board and management on sensitive issues.