SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
(Amendment No. 4)
Under the Securities Exchange Act of 1934
THE HILLHAVEN CORPORATION
(Name of Issuer)
Common Stock, par value $.75 per share
(Title of Class of Securities)
431576 10 7
(CUSIP Number of Class of Securities)
Scott M. Brown, Esq.
National Medical Enterprises, Inc.
2700 Colorado Avenue
Santa Monica, California 90404
(310) 998-8000
(Name, Address and Telephone Number of Person Authorized
to Receive Notices and Communications)
with a copy to:
Brian J. McCarthy, Esq.
Skadden, Arps, Slate, Meagher & Flom
300 S. Grand Avenue
Los Angeles, California 90071
(213) 687-5070
February 15, 1995
(Date of Event which Requires
Filing of this Statement)
If the filing person has previously filed a statement on Schedule
13G to report the acquisition which is the subject of this
Statement because of Rule 13d-1(b)(3) or (4), check the
following: ___
/ /
Check the following box if a fee is being paid with this
Statement: ___
/ /
CUSIP No. 413576 10 7 Schedule 13D
(1) NAMES OF REPORTING PERSONS
S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS
NATIONAL MEDICAL ENTERPRISES, INC. 95-2557091
(2) CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP:
___
(a)/ /
___
(b)/X /
(3) SEC USE ONLY
(4) SOURCE OF FUNDS*
00
(5) CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) or 2(e) ___
/X /
(6) CITIZENSHIP OR PLACE OF ORGANIZATION
Nevada
: (7) SOLE VOTING POWER
:
: 8,878,147
:
NUMBER OF SHARES BENEFICIALLY : (8) SHARED VOTING
OWNED BY EACH REPORTING :
PERSON WITH : 0
:
:
: (9) SOLE DISPOSITIVE
:
: 8,878,147
:
:(10) SHARED DISPOSITIVE
:
0
(11) AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
8,878,147
(12) CHECK BOX IF THE AGGREGATE AMOUNT IN ROW 11 ___
EXCLUDES CERTAIN SHARES* / /
(13) PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 11
27% -- See Item 5
(14) TYPE OF REPORTING PERSON*
CO
CUSIP No. 413576 10 7 Schedule 13D
(1) NAMES OF REPORTING PERSONS
S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS
NME PROPERTIES CORP. 62-0725891
(2) CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP:
___
(a)/ /
___
(b)/X /
(3) SEC USE ONLY
(4) SOURCE OF FUNDS*
00
(5) CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) or 2(e) ___
/ /
(6) CITIZENSHIP OR PLACE OF ORGANIZATION
Tennessee
: (7) SOLE VOTING POWER
:
: 8,878,147
:
NUMBER OF SHARES BENEFICIALLY : (8) SHARED VOTING
OWNED BY EACH REPORTING :
PERSON WITH : 0
:
:
: (9) SOLE DISPOSITIVE
:
: 8,878,147
:
:(10) SHARED DISPOSITIVE
:
0
(11) AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
8,878,147
(12) CHECK BOX IF THE AGGREGATE AMOUNT IN ROW 11 ___
EXCLUDES CERTAIN SHARES* / /
(13) PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 11
27% -- See Item 5
(14) TYPE OF REPORTING PERSON*
CO
CUSIP No. 413576 10 7 Schedule 13D
(1) NAMES OF REPORTING PERSONS
S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS
NME PROPERTY HOLDING CO., INC. 91-1172506
(2) CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP:
___
(a)/ /
___
(b)/X /
(3) SEC USE ONLY
(4) SOURCE OF FUNDS*
00
(5) CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) or 2(e) ___
/ /
(6) CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
: (7) SOLE VOTING POWER
:
: 2,877,947
:
NUMBER OF SHARES BENEFICIALLY : (8) SHARED VOTING
OWNED BY EACH REPORTING :
PERSON WITH : 0
:
: (9) SOLE DISPOSITIVE
:
: 2,877,947
:
:(10) SHARED DISPOSITIVE
:
0
(11) AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
2,877,947
(12) CHECK BOX IF THE AGGREGATE AMOUNT IN ROW 11 ___
EXCLUDES CERTAIN SHARES* / /
(13) PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 11
8.8% -- See Item 5
(14) TYPE OF REPORTING PERSON*
CO
CUSIP No. 413576 10 7 Schedule 13D
(1) NAMES OF REPORTING PERSONS
S.S. OR I.R.S. IDENTIFICATION NOS. OF ABOVE PERSONS
NME PROPERTIES, INC. 91-0628039
(2) CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP:
___
(a)/ /
___
(b)/X /
(3) SEC USE ONLY
(4) SOURCE OF FUNDS*
00
(5) CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) or 2(e) ___
/ /
(6) CITIZENSHIP OR PLACE OF ORGANIZATION
Delaware
: (7) SOLE VOTING POWER
:
: 2,877,947
:
NUMBER OF SHARES BENEFICIALLY : (8) SHARED VOTING
OWNED BY EACH REPORTING :
PERSON WITH : 0
:
:
: (9) SOLE DISPOSITIVE
:
: 2,877,947
:
:(10) SHARED DISPOSITIVE
:
0
(11) AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
2,877,947
(12) CHECK BOX IF THE AGGREGATE AMOUNT IN ROW 11 ___
EXCLUDES CERTAIN SHARES* / /
(13) PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW 11
8.8% -- See Item 5
(14) TYPE OF REPORTING PERSON*
CO
This Amendment No. 4 (the "Amendment No. 4")
amends and supplements the Statement on Schedule 13D (the
"Schedule 13D"), dated January 31, 1990, Amendment No. 1
of Schedule 13D, dated February 28, 1994, Amendment No. 2
of Schedule 13D, dated December 19, 1994, and Amendment
No.3 of Schedule 13, dated January 25, 1995, relating to
the common stock, par value $.75 per share (the "Common
Stock"), issued by The Hillhaven Corporation, a Nevada
corporation (the "Company"), and is being filed pursuant
to Rule 13d-2 under the Securities Exchange Act of 1934,
as amended (the "Act").
Unless otherwise indicated, each capitalized
term used but not otherwise defined herein shall have the
meaning assigned to such term in the Schedule 13D. The
information set forth in the Exhibits attached hereto is
hereby expressly incorporated herein by reference and the
response to each item of this statement is qualified in
its entirety by the provisions of such Exhibits.
ITEM 4. PURPOSE OF TRANSACTION
Item 4 is amended and supplemented as follows:
On February 15, 1995, NME filed a lawsuit
against the Company and certain directors of the Company.
The suit, filed in Los Angeles County Superior Court,
arises from a series of actions recently undertaken by
the Company. A copy of the complaint filed in the suit
is attached hereto as Exhibit 31.
Except as otherwise described in this Item 4,
none of NME, PropCorp, Holding or PropInc has any present
specific plans or proposals that relate to or would
result in any of the following: (i) the acquisition by
any person of additional securities of the Company or the
disposition of securities of the Company, (ii) an
extraordinary corporate transaction, such as a merger,
reorganization or liquidation involving the Company or
any of its subsidiaries, (iii) a sale or transfer of a
material amount of assets of the Company or any of its
subsidiaries, (iv) any change in the present Board of
Directors or management of the Company, including any
plans or proposals to change the number or term of
directors or to fill any existing vacancies on the Board
of Directors, (v) any material change in the present
capitalization or dividend policy of the Company, (vi)
any other material change in the Company's business or
corporate structure, (vii) changes in the Company's
Amended and Restated Articles of Incorporation, Bylaws or
other instruments corresponding thereto or other actions
that may impede the acquisition of control of the Company
by any person, (viii) causing a class of securities of
the Company to be delisted from a national securities
exchange or to cease to be authorized to be quoted in an
inter-dealer quotation system of a registered national
securities association, (ix) a class of equity securities
of the Company becoming eligible for termination of
registration pursuant to Section 12(g)(4) of the
Securities Exchange Act of 1934, as amended, or (x) any
action similar to those enumerated above. NME, PropCorp,
Holding or PropInc may at any time, however, propose any
of the foregoing that it considers desirable.
ITEM 7. MATERIAL TO BE FILED AS EXHIBITS
Exhibit 30 Joint Filing Agreement
Exhibit 31 Complaint filed February 15, 1995
SIGNATURE
After reasonable inquiry and to the best of my
knowledge and belief, I certify that the information set
forth in this statement is true, complete and correct.
Date: February 15, 1995
NATIONAL MEDICAL ENTERPRISES, INC.
By: /s/ Scott M. Brown
______________________________
Scott M. Brown
Senior Vice President and Secretary
SIGNATURE
After reasonable inquiry and to the best of my
knowledge and belief, I certify that the information set
forth in this statement is true, complete and correct.
Date: February 15, 1995
NME PROPERTIES CORP.
By: /s/ Scott M. Brown
___________________________
Scott M. Brown
Vice President
SIGNATURE
After reasonable inquiry and to the best of my
knowledge and belief, I certify that the information set
forth in this statement is true, complete and correct.
Date: February 15, 1995
NME PROPERTY HOLDING CO., INC.
By: /s/ Scott M. Brown
________________________
Scott M. Brown
Vice President
SIGNATURE
After reasonable inquiry and to the best of my
knowledge and belief, I certify that the information set
forth in this statement is true, complete and correct.
Date: February 15, 1995
NME PROPERTIES, INC.
By: /s/ Scott M. Brown
___________________________
Scott M. Brown
Vice President
EXHIBIT INDEX
Exhibit No. Description Page No.
Exhibit 30 Joint Filing Agreement
Exhibit 31 Complaint filed February 15, 1995
EXHIBIT 30
JOINT FILING AGREEMENT
In accordance with Rule 13d-1(f) under the Securities
Exchange Act of 1934, as amended, each of the persons named
below agrees to the joint filing on behalf of each of them
of a Statement on Schedule 13D (including amendments
thereto) with respect to the common stock, par value $.75
per share, of The Hillhaven Corporation, a Nevada
corporation, and further agrees that this Joint Filing
Agreement be included as an exhibit to such filings provided
that, as contemplated by Section 13d-1(f)(l)(ii), no person
shall be responsible for the completeness or accuracy of the
information concerning the other persons making the filing,
unless such person knows or has reason to believe that such
information is inaccurate. This Joint Filing Agreement may
be executed in any number of counterparts, all of which
taken together shall constitute one and the same instrument.
Date: February 15, 1995
NATIONAL MEDICAL NME PROPERTIES CORP.
ENTERPRISES, INC.
By:/s/ Scott M. Brown
By:/s/ Scott M. Brown _______________________
__________________________ Scott M. Brown
Scott M. Brown Vice President
Senior Vice President
and Secretary
NME PROPERTY HOLDING NME PROPERTIES, INC.
CO., INC.
By: /s/ Scott M. Brown
By:/s/ Scott M. Brown ______________________
_________________________ Scott M. Brown
Scott M. Brown Vice President
Vice President
EXHIBIT 31
JAMES E. LYONS (Cal. State Bar No. 112582)
ERIC S. WAXMAN (Cal. State Bar No. 106649)
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
300 South Grand Avenue, Suite 3400
Los Angeles, California 90071-3144
(213) 687-5000
Attorneys for Plaintiff
National Medical Enterprises, Inc.
SUPERIOR COURT OF THE STATE OF CALIFORNIA
FOR THE COUNTY OF LOS ANGELES
NATIONAL MEDICAL ENTERPRISES, ) Case No.
INC., a Nevada corporation, )
) COMPLAINT FOR DECLARATORY
Plaintiff, ) AND INJUNCTIVE RELIEF FOR:
)
v. ) (1) BREACH OF FIDUCIARY
) DUTY;
THE HILLHAVEN CORPORATION, a )
Nevada corporation, BRUCE L. ) (2) DECLARATORY JUDGMENT;
BUSBY, CHRISTOPHER J. MARKER, ) and
DOES 1 THROUGH 25, inclusive, )
) (3) INTERFERENCE WITH
Defendants. ) PROSPECTIVE ECONOMIC
) ADVANTAGE
For its Complaint, plaintiff, National Medical
Enterprises, Inc. ("NME"), alleges upon personal knowledge as
to itself and its own actions and upon information and belief
as to all other matters, as follows:
NATURE OF THE ACTION
1. This action arises out of a series of improper
acts taken at the behest of the individual defendants, each of
whom is an officer or director of defendant The Hillhaven
Corporation ("Hillhaven"), for the primary purpose of
entrenching themselves in their lucrative management positions
at the expense of NME and Hillhaven's other shareholders. As
set forth below, each of the acts taken by the defendants is
designed both to dilute NME's position as Hillhaven's largest
shareholder and to deprive Hillhaven's shareholders of the
opportunity to consider business combination or acquisition
proposals made by third parties. By virtue of their
entrenching actions, the individual defendants have placed
their own interests above those of Hillhaven's shareholders in
complete disregard of their fiduciary duties of care and
loyalty. Moreover, the individual defendants have positioned
themselves to commit further breaches absent the intervention
of this Court. Hillhaven is responsible for the acts of the
individual defendants because they purported to act on
Hillhaven's behalf.
2. More interested in preserving their positions
and perquisites than in maximizing shareholder values,
defendants have breached their fiduciary duties in at least the
following ways:
* funding of a purported "grantor trust" with 4.2
million newly-issued shares of Hillhaven common
stock, which places immediate voting rights of
approximately 15% of Hillhaven's common stock
(on an undiluted basis) in the hands of
management even though management has not yet
earned all of those shares under the terms of
Hillhaven's various employee benefit plans;
* registering another 4 million shares of
Hillhaven common stock for use in as of yet
unidentified acquisitions whose primary purpose
will be to place at least another 14% of
Hillhaven's stock (on an undiluted basis) in the
hands of parties friendly to Hillhaven
management; and
* amending Hillhaven's Shareholder Rights Plan to
limit the number of additional Hillhaven shares
that NME can acquire to frustrate NME's ability
to encourage friendly offers for the benefit of
all Hillhaven shareholders.
3. Defendants hastily-adopted defensive measures
are grossly disproportionate to any threat posed to Hillhaven's
corporate policies or effectiveness. The disproportionate
nature of defendants' actions is highlighted by the fact that
Hillhaven's charter and by-laws already provided a powerful
array of state-of-the-art defensive mechanisms, including a
Shareholder Rights Plan and a "supermajority" charter provision
requiring a 66-2/3% vote of shareholders to approve a merger.
Notwithstanding these pre-existing defenses, defendants felt
compelled to take further actions to protect their positions.
As a result of those steps, through its control of
approximately 20% of Hillhaven's common stock and its immediate
ability to place another 14% in "friendly hands," Hillhaven
management is now poised to thwart any third-party business
combination or acquisition proposals no matter how beneficial
to Hillhaven's shareholders.
4. Most of these defensive actions were undertaken
by defendants in response to the recent friendly acquisition
proposal by Horizon Healthcare Corporation ("Horizon") to
acquire Hillhaven at a substantial premium over Hillhaven's
market price and thus were far out of proportion to any
perceived threat posed by the Horizon proposal. Rather than
carefully considering Horizon's offer and exploring Horizon's
announced desire to negotiate, defendants flatly rejected
Horizon's offer. Indeed, defendants deliberately bypassed a
Shareholder Relations Committee previously established by
Hillhaven's Board, which was comprised of Hillhaven's
independent directors and advised by Goldman Sachs & Company,
an independent investment banker. Defendants instead caused
the Board to hastily form a new "Special Committee" on February
5, 1995, which included those directors holding management
positions. That Special Committee, relying on the advice of
Hillhaven's long-time financial advisor, rejected the Horizon
proposal that same day.
5. NME is suffering unique injury as a Hillhaven
stockholder as a result of defendants' breaches. NME's equity
position in Hillhaven has been diluted from 31% to 27% and NME
faces the imminent threat of further dilution if Hillhaven
issues additional stock to pay for acquisitions whose primary
purpose will be to place stock in "friendly" hands. In
addition, NME, which can only sell its block of stock in a
transaction approved by the Hillhaven Board, is being deprived
of the opportunity to sell its stock to Horizon or to another
third party who may propose a transaction which offers even
greater value to Hillhaven's stockholders.
6. By this action, NME seeks declaratory and
injunctive relief to prevent the irreparable harm threatened by
the alleged actions of Hillhaven and the members of its Board.
THE PARTIES
7. Plaintiff, NME, is a Nevada corporation with its
headquarters located at 2700 Colorado Avenue, Santa Monica,
California. The principal business of NME is the operation of
domestic and international hospitals. NME remains Hillhaven's
largest stockholder. In addition to holding 8,878,147 shares
of Hillhaven common stock, representing approximately 27% of
the common shares outstanding, NME owns 35,000 shares of
Hillhaven Series C Preferred Stock and 63,402 shares of
Hillhaven Series D Preferred Stock (together, the "Preferred
Stock"), which constitutes all of Hillhaven's outstanding
Series C and Series D Preferred Stock. While in December 1994
NME held 31% of Hillhaven's outstanding common stock, NME's
position has been diluted to 27% of Hillhaven's outstanding
common stock as a result of defendants' actions.
8. Defendant, Hillhaven, is a Nevada corporation
with its principal place of business at 1148 Broadway Plaza,
Tacoma, Washington 98402. Hillhaven was formed in January 1990
through the spin-off by NME of substantially all of NME's
domestic, long-term care operations in a dividend distribution
to its stockholders (the "Spin-off"). Today, Hillhaven
operates nursing centers, pharmacies and retirement housing
communities. There are approximately 32.8 million outstanding
shares of Hillhaven common stock.
9. Hillhaven's Board of Directors consists of Bruce
L. Busby, Christopher J. Marker, Walter F. Beran, Dinah
Nemeroff, Jack O. Vance, Donald S. Burns, Maris Andersons and
Peter de Wetter. Mr. de Wetter serves on the Board of
Directors of NME and Mr. Andersons is an executive officer of
NME.
10. The individual defendants are two members of
Hillhaven's eight-member Board of Directors who are also
members of Hillhaven's senior management:
a. Mr. Bruce L. Busby has been a director and
the Chief Executive Officer of Hillhaven since April 1991 and
Chairman of Hillhaven since September 1993. As of May 31,
1994, Mr. Busby was the beneficial owner of over 510,000 shares
of Hillhaven, including options to purchase an aggregate of
16,326 shares of common stock granted pursuant to the 1990
Stock Incentive Plan and vested options to purchase an
aggregate of 152,764 shares of common stock granted pursuant to
Hillhaven's Performance Investment Plan. In addition, Mr.
Busby held 464,657 additional unvested options granted under
the Performance Investment Plan. For the 1994 fiscal year, Mr.
Busby was paid a salary of $417,308, a bonus of $226,914 and
other compensation of $45,818.
b. Mr. Christopher J. Marker has been a
director and the President of Hillhaven since December 1989.
As of May 31, 1994, Mr. Marker was the beneficial owner of over
340,000 shares of Hillhaven common stock including options to
purchase an aggregate of 13,397 shares of common stock granted
pursuant to the 1990 Stock Incentive Plan and vested options to
purchase an aggregate of 120,938 shares of common stock granted
pursuant to the Performance Investment Plan. In addition, Mr.
Marker held 369,179 additional unvested options granted under
the Performance Investment Plan. For the 1994 fiscal year, Mr.
Marker was paid a salary of $358,077, a bonus of $210,000 and
other compensation of $48,859.
c. The fictitious defendants herein are being
sued pursuant to the provisions of California Code of Civil
Procedure Section 474. NME is informed and believes and upon
that ground alleges that each fictitious defendant was in some
way responsible for, participated in or contributed to the
matters and things of which NME complains herein, and in some
fashion has legal responsibility therefor. When the identity
of such fictitious defendants and the exact nature of such
persons' responsibility for, participation in and contribution
to the matters and things herein alleged is ascertained, NME
will seek to amend this Complaint and all proceedings herein to
set forth the same.
11. Together, as of May 31, 1994, Hillhaven's
executive officers and directors, other than Messrs. Andersons
and de Wetter, were the beneficial owners of approximately 1.3
million shares comprising approximately 4% of Hillhaven's
outstanding common stock.
HILLHAVEN'S PREEXISTING EXTENSIVE ARRAY OF DEFENSIVE MECHANISMS
12. The grossly disproportionate nature of
defendants' actions is highlighted by the ample defense
mechanisms Hillhaven already had in place to deter hostile
takeovers. At the time of the Spin-off, Hillhaven adopted an
arsenal of anti-takeover devices designed to (i) discourage
certain kinds of transactions that may entail an actual or
threatened change in control and (ii) encourage any potential
acquiror of Hillhaven to consult with the Hillhaven Board
before setting the terms of a business combination or tender
offer involving Hillhaven. Any doubt about the effectiveness
of those devices was dispelled by Hillhaven's Information
Statement filed with the Securities and Exchange Commission in
connection with the 1990 Spin-off, in which Hillhaven admitted
that this array of anti-takeover devices is "likely to have the
effect of impeding an acquisition of control of New Hillhaven
in a transaction not approved by New Hillhaven's Board of
Directors or by NME."
13. These anti-takeover devices adopted at the time
of the Spin-off include:
(a) a series of "super-majority" provisions in
its charter requiring the affirmative vote of the holders of at
least 66 2/3% of the voting power of all of the then-
outstanding shares of voting stock (i) to approve any merger of
Hillhaven and certain other corporate transactions (unless
approved by a majority of the Hillhaven Board and a majority of
its "continuing directors") and (ii) to amend certain anti-
takeover provisions of its charter and by-laws;
(b) a Shareholder Rights Plan (the "Rights
Plan") containing "flip-over" rights triggered if a holder of
20% or more of the shares completes a merger or certain other
transactions without the prior approval of "continuing
directors" and (ii) "flip-in" rights triggered if a person
acquires 30% or more of the shares. The Rights Plan, which was
designed to deter takeover proposals not approved by the
Hillhaven Board, presents a potential acquiror with the
possibility that the Hillhaven stockholders will be able to
dilute such acquiror's equity interest to a substantial degree
by exercising the Rights issued under the Rights Plan to buy
additional Hillhaven stock (or, in the case of the exercise of
"flip-over" rights, stock of the acquiror) at a substantial
discount in the event the acquiror engaged in a merger or other
transaction specified in the Rights Plan;
(c) a "staggered board" charter provision that
divides the Board into three classes of directors, each
comprising approximately one-third of the Hillhaven directors
who serve staggered terms. This classification of directors
has the effect of making it more difficult for stockholders to
change the composition of the Board. At least two annual
meetings will generally be required to effect a change in a
majority of the Board;
(d) a "super-majority" charter provision
providing that directors may be removed only by the affirmative
vote of at least 66 % of the voting power of all shares of all
classes or series of Hillhaven's capital stock entitled to vote
generally in the election of directors. This provision, when
coupled with the provision of the charter authorizing only the
Hillhaven Board to fill vacant directorships, precludes
stockholders from removing incumbent directors except upon a
substantial affirmative vote and filling the vacancies created
by such removal with their own nominees;
(e) a "limitation of liability" charter
provision that excuses the directors and officers of Hillhaven
for damages for breach of fiduciary duty in certain
circumstances;
(f) a "no written consent" charter provision
which provides that stockholder action can be taken only at an
annual or special meeting of stockholders, except in the case
of stockholder action taken by unanimous written consent of
stockholders in lieu of a meeting;
(g) an "advance notice" charter provision
requiring stockholders to give advance notice of business in
accordance with its bylaws, which requires at least 90 days
advance notice of business to be brought before an annual
meeting of stockholders;
(h) a "board vacancy" charter provision
permitting the Hillhaven Board to fill any Board vacancy
including any created by the Board's own expansion of the
number of directors;
(i) a "blank check" charter provision
authorizing the Hillhaven Board to issue a series of preferred
stock that could, depending on the terms of such series, impede
the completion of a merger, tender offer or other takeover
attempt; and
(j) a "state takeover law" charter provision
making the Nevada Control Shares Acquisition Statute explicitly
applicable to Hillhaven, with certain modifications. This
statute provides that an acquiring person obtains voting
rights in control shares only to the extent conferred by a
vote of stockholders. Thus, the statute can have a significant
anti-takeover effect since persons who purchase stock of a
company in amounts exceeding certain levels cannot be
guaranteed that they will be able to vote their shares. In
addition, Hillhaven has availed itself of the Nevada Business
Combination Statute which provides considerable protection
against non-negotiated acquisitions. For example, if a person
acquires 10% or more of a company's shares without first
obtaining board approval, such person is precluded from
completing a merger and certain other transactions with such
company for three years.
14. These defensive mechanisms are more than ample
to deter a hostile takeover and force anyone considering an
acquisition of Hillhaven to pursue a friendly deal by
negotiating the terms of any acquisition with Hillhaven's
Board. Defendants, however, are not interested in any
acquisition of Hillhaven, friendly or otherwise. Thus, in late
1994, defendants engaged in a series of actions designed to
further entrench themselves by increasing management's voting
control over the company, diluting the voting power of NME's
block of stock and making Hillhaven less attractive to
potential suitors.
DEFENDANTS' IMPLEMENTATION OF THEIR ENTRENCHMENT SCHEME
15. Commencing no later than December 5 and 6, 1994,
at a board meeting, defendants began to implement their
entrenchment scheme. Among other actions, the Board approved
the registration of up to 4 million shares of Hillhaven's
common stock to be issued in connection with future
acquisitions. Undisclosed by defendants to their fellow
directors at the board meeting was the true purpose of
defendants' acquisition program. Rather than seeking to create
value for Hillhaven's shareholders, defendants intended to use
future acquisitions as a vehicle to place Hillhaven stock in
"friendly hands" and dilute NME's voting power. Thus, among
other things, defendants did not disclose to the Board their
plans to pursue a series of smaller acquisitions so as to avoid
using shares constituting more than 20% of Hillhaven's
outstanding stock and, thereby, avoiding the need for approval
of the acquisitions by Hillhaven's shareholders. Also
undisclosed at this board meeting was defendants' true intent
in creating the grantor trust -- the concentration in
management's hands voting rights to another 15% of Hillhaven's
common stock. Being unaware of management's true purpose, the
Board acted favorably on management's recommendations to issue
the additional shares.
DEFENDANTS ARE FORCED TO ACCELERATE THEIR SCHEME
16. Subsequent to the December board meeting, two
events occurred that forced defendants to accelerate their
scheme. On December 21, 1994, NME filed an amendment to its
Schedule 13D with the Securities and Exchange Commission. This
filing, which was also sent to Hillhaven, disclosed NME's
intent to review its alternatives with respect to its
investment in Hillhaven. Then, on January 12, 1995, Mr.
Barbakow, Chairman of NME, informed Mr. Busby that Horizon had
expressed an interest in making a business combination proposal
involving Hillhaven. Mr. Barbakow had suggested to Horizon's
Chairman that he speak directly to Mr. Busby.
17. Faced with this expression of interest and
concerned that NME might support an acquisition proposal from
Horizon offering fair value to Hillhaven's shareholders,
defendants took immediate action to preserve their positions at
the expense of Hillhaven's shareholders. To start with, Mr.
Busby sought to deceive Horizon by falsely expressing an
interest in a proposal by Horizon to acquire Hillhaven. Mr.
Busby spoke with Mr. Elliott, Chairman of Horizon, and assured
him that he would review any Horizon proposal with his
directors. However, aware that he had no desire to ever
consider Horizon's offer and determined to avoid the heightened
standards by which directors are judged when taking actions in
the face of a merger proposal, Mr. Busby urged Mr. Elliott not
to put anything in writing.
THE HASTILY CONVENED JANUARY 16, 1995 BOARD MEETING AND
HILLHAVEN'S DISPROPORTIONATE RESPONSE
18. Although Hillhaven's Board already had a
regularly scheduled meeting set for January 19, 1995,
defendants were desperate to act before Horizon submitted a
written offer. Thus, immediately after speaking with Horizon's
Chairman, Mr. Busby quickly called a special meeting of the
Board to be held on short notice on January 16 at an airport
hotel in Los Angeles. During the meeting, defendants took the
incredible position that there was no proposal from Horizon to
consider. Moreover, in taking that position, defendants failed
to disclose to the Board that Mr. Busby specifically asked
Horizon not to put anything in writing.
19. Having misled the Board regarding Horizon's
interest, Hillhaven management then caused the Board to take a
number of actions designed to entrench management and which
serve no legitimate business purpose.
A. THE PURPORTED GRANTOR TRUST OF HILLHAVEN
20. At the January 16 Special Meeting, the Board
took action to implement the funding of a purported grantor
trust of Hillhaven. To fund the trust, Hillhaven utilized
4.2 million newly issued shares of its common stock -- an
amount representing approximately 15 percent of Hillhaven's
voting stock. Although the Board had previously considered and
approved the concept of a grantor trust, the Board was never
informed of defendants' primary intent to use the trust as an
anti-takeover device to provide management with immediate
voting rights to shares approximating 15% of Hillhaven's
outstanding common stock -- shares which under Hillhaven's
employee benefit plans, might not vest for several years.
21. Hastily implemented, the purported grantor trust
of Hillhaven, fails to satisfy the fundamental grantor trust
principles established by the Internal Revenue Code of 1986, as
amended (the "Code") and the Internal Revenue Service. Under
the grantor trust rules set forth in sections 671 et seq. of
the Code, a trust will be treated as a "grantor trust" and the
grantor will be treated as the owner of the trust assets only
where the grantor has retained (i) a reversionary interest in
the trust, (ii) a power to control the beneficial enjoyment or
administration of the trust assets, or (iii) a power to revoke
the trust. This purported grantor trust, however, fails to
satisfy any of these significant prerequisites as a grantor
trust of Hillhaven for Federal income tax purposes. It is
apparent, therefore, that the trust is a sham and has no
purpose other than to attempt to place a large block of voting
stock into the hands of Hillhaven's management.
B. THE UNNECESSARY AND UNREASONABLE AMENDMENT TO
HILLHAVEN'S RIGHTS PLAN
22. At the January 16 Special Meeting, the Board
rushed to amend its Rights Plan. So great was defendants' need
to push through this change they did not even have time to list
it as an item of business on the Board's agenda. This action
also was not a reasonable response to any threat to Hillhaven's
corporate policies or effectiveness.
23. There is no doubt that the amendment to the
Rights Plan is targeted directly at NME. As disclosed in
Hillhaven's press release, "as a result of the amendment, NME
will not be permitted to acquire additional Hillhaven shares
unless its ownership interest represents under 30% of all
Hillhaven shares, in which case, NME can buy up to just under
30% of Hillhaven common shares." The press release further
announces that "the amendment was adopted by its Board of
Directors in light of NME's recent announcement that it is
exploring various alternatives with respect to its ownership
interest in Hillhaven."
24. The unreasonableness of the amendment of the
Rights Plan is obvious in light of the fact that a simple
inquiry of NME would have elicited the answer that NME had no
intention of acquiring any additional shares of common stock.
DEFENDANTS FURTHER BREACH THEIR DUTIES BY FAILING TO
ADEQUATELY CONSIDER HORIZON'S JANUARY 25 PROPOSAL
25. In light of the defendants' actions and in
order to provide the opportunity contained in the Horizon offer
to all Hillhaven shareholders, NME entered into a letter
agreement with Horizon. Dated January 25, 1995, that letter
agreement provides that if prior to consummating a transaction
but within 12 months of the date of the letter agreement there
is a merger, consolidation or other transaction with any party
other than Horizon (an "Other Transaction") in which NME
receives consideration for any of its shares of Hillhaven
common stock equal to or greater than $27.50 per share, then
Horizon shall be entitled to receive (and NME shall cause
Horizon to receive) upon consummation of an Other Transaction
an amount equal to the greater of (i) $5 million or (ii) 50% of
the consideration received by NME in excess of $29 per share of
Hillhaven common stock. The letter agreement provided that
nothing in the letter agreement shall be construed to impose
any requirement or restriction on NME with respect to its right
to acquire or dispose of any shares of common stock from or to
any party or to vote any shares of common stock.
26. On January 25, 1995, Mr. Elliott, on behalf of
Horizon, submitted a written business combination proposal to
Hillhaven (the "Transaction"). In the Transaction,
stockholders of Hillhaven would receive $28 in value of shares
of common stock in a newly formed holding company ("Newco") for
each outstanding share of common stock, and stockholders of
Horizon would receive one share of Newco common stock for each
outstanding share of Horizon common stock. The $28 per share
value represented a 35% premium to the New York Stock Exchange
closing price of the Hillhaven shares on December 20, 1994, the
day NME filed its 13D disclosing its intention to reevaluate
its investment in Hillhaven shares. In addition, as part of
the Transaction, each outstanding share of Hillhaven's Series C
and Series D Preferred Stock held by NME would be redeemed in
an amount equal to its liquidation preference of $1,000 per
share in cash, plus any accrued and unpaid dividends, whether
or not declared, to the date of redemption.
27. In the January 25 Transaction proposal, Mr.
Elliott offered to meet with Mr. Busby "to discuss the many
strategic, operational and other benefits that the combined
entity can realize through its proposed transaction." In
addition, Mr. Elliott stated that he was "ready to discuss
[Horizon's] proposal with you and your advisors at any time or
to make a presentation to your Board of Directors." In a
letter to Hillhaven, dated February 2, 1995, as a further sign
of his desire to discuss Horizon's proposal, Mr. Elliott
reiterated his willingness "to be flexible with respect to the
terms" of his proposal, signaling that Horizon would consider
increasing its offer.
28. The market viewed the Horizon transaction with
significant favor. Indeed, following the disclosure of
Horizon's offer, Hillhaven's stock rose $3.375 per share from
$22.875 to $26.25 -- a 14.75% increase. While the market
responded favorably to the Horizon transaction, defendants did
not.
29. Recognizing that the market was reacting
favorably to the Horizon proposal, the defendants were fearful
that the Shareholder Relations Committee, which was comprised
of independent directors advised by an independent investment
banker, might conclude that the best interests of Hillhaven s
shareholders required management to pursue discussions with
Horizon. Thus, defendants determined to bypass the independent
Shareholder Relations Committee. Accordingly, at the February
5, 1995 Board meeting, defendants recommended the formation of
a "Special Committee." Unlike the Shareholder Relations
Committee, the "Special Committee" included the management
directors of Hillhaven management. However, Messrs de Wetter
and Andersons were excluded. Moreover, while Goldman Sachs had
previously advised the Shareholder Relations Committee, the
"Special Committee" was advised solely by Hillhaven's longtime
financial advisor. Not surprisingly, on that same day --
February 5, 1995 -- the "Special Committee" rejected Horizon's
offer without any attempt to even explore Horizon's indication
that it was prepared to increase its offer.
THE IRREPARABLE HARM TO NME AND
HILLHAVEN'S PUBLIC STOCKHOLDERS
30. As a result of defendants actions and the pre-
existing charter requirement that provides for a 66 percent
supermajority vote by shareholders to approve a merger,
Hillhaven management has set the stage to give itself a virtual
blocking position over any third-party acquisition proposal no
matter how beneficial to Hillhaven's shareholders. This
blocking position arises because management: (i) currently
owns 4% of Hillhaven's common stock; (ii) has obtained by
virtue of the purported grantor trust voting rights to
approximately another 15% of Hillhaven's common stock (on an
undiluted basis); and (iii) has the ability because of the
shelf registration of 4 million shares now and possibly as much
as 2.5 million more shares later to place just under 20% of
Hillhaven common stock in friendly hands without having a
shareholder vote.
31. NME is being deprived of an opportunity to sell
its block of common stock as well as its Preferred Stock as a
result of Hillhaven's defensive measures designed to entrench
Hillhaven's management. In addition, NME's equity position is
being diluted as a result of defendants illegal acts of
entrenchment and NME faces additional dilution if defendants
plan to issue additional stock to third parties friendly to
management is not enjoined.
32. NME, as well as the other stockholders of
Hillhaven is being harmed by the defendants' taking measures
which have no legitimate business purpose and which are
intended to (i) make Hillhaven completely impervious to any
acquisition proposals and (ii) to increase management's voting
control over the company with the intended result of diluting
NME.
33. Unless this Court grants preliminary and
permanent injunctive relief, NME will be irreparably harmed.
FIRST CAUSE OF ACTION
(Breach of Fiduciary Duty of Loyalty Against all Defendants)
34. Plaintiff repeats and realleges each of the
preceding paragraphs as if fully set forth herein.
35. The director defendants are fiduciaries owing a
duty of loyalty to all of the stockholders of Hillhaven. That
duty includes but is not limited to the obligation to consider
and fairly evaluate all offers for control of Hillhaven from
third parties and not to put self-interests and personal
considerations of directors of Hillhaven ahead of Hillhaven's
stockholders. This duty also bars the director defendants from
taking defensive actions unless they can demonstrate (i) that
they have undertaken a good faith and reasonable investigation
and concluded that Horizon's merger proposal poses a threat to
corporate policy and effectiveness, and (ii) that their
responsive actions are reasonable in relation to the threat
posed.
36. The numerous defensive measures taken by the
Board are each unreasonable and grossly disproportionate to any
threat posed by NME or Horizon. Thus, the defendants have
breached their fiduciary duties.
37. NME has no adequate remedy at law.
SECOND CAUSE OF ACTION
(Manipulation of Corporate Machinery Against All Defendants)
38. Plaintiff repeats and realleges each of the
preceding paragraphs as if fully set forth herein.
39. The numerous defensive measures taken by the
Board constitute an illegal and inequitable manipulation of the
corporate machinery of Hillhaven, the effect and intent of
which is to entrench the director defendants by
disenfranchising all Hillhaven stockholders.
40. The defendants, in violation of their fiduciary
duties, have manipulated the corporate machinery for no
legitimate corporate purpose, but rather to give themselves
absolute veto power over any business combination or
acquisition proposals.
41. Plaintiff has no adequate remedy at law.
THIRD CAUSE OF ACTION
(Breach of Duty of Care Against all Defendants)
42. Plaintiff repeats and realleges each of the
preceding paragraphs as if fully set forth herein.
43. The director defendants are obligated to conduct
the affairs of Hillhaven with due care. By rejecting Horizon's
offer and adopting the amendment to the poison pill and other
entrenchment devices without first informing themselves of all
reasonably available material information, the defendant
directors breached their duty of care.
44. Hillhaven's Articles of Incorporation insulate
the director defendants from liability in damages for
violations of the duty of care. Absent preliminary and
permanent injunctive relief, defendants' gross negligence can
never be fully remedied.
45. Plaintiff has no adequate remedy at law.
FOURTH CAUSE OF ACTION
(Breach of Duty of Disclosure Against all Defendants)
46. Plaintiff repeats and realleges each of the
preceding paragraphs as if fully set forth herein.
47. The director defendants are under a fiduciary
duty to disclose fully, fairly and without misrepresentation
all material information to the stockholders of Hillhaven. The
director defendants breached their duty of disclosure by:
(a) failing to disclose that a primary purpose
of establishing the grantor trust and issuing 4.2 million
shares to fund the trust was to provide management with
additional votes in order to make it more likely that under
pre-existing "supermajority" provisions management would be
able to block merger proposals and certain other transactions
that management opposed.
(b) giving Hillhaven's stockholders the
misleading impression that the purpose of the funding of the
grantor trust is to (i) obtain a more favorable rating from
rating agencies and banks and (ii) to fund the trust because a
number of other public companies have created grantor trusts to
fund their employee pension plans;
(c) failing to disclose that the so-called
grantor trust cannot qualify as a grantor trust of Hillhaven;
and
(d) failing to inform Hillhaven's stockholders
that management intends to have effective voting control of
approximately 1/3 of Hillhaven common stock.
48. Plaintiff has no adequate remedy at law.
FIFTH CAUSE OF ACTION
(Interference With Prospective Economic Advantage Against All
Defendants)
49. Plaintiff repeats and realleges each of the
preceding paragraphs as if fully set forth herein.
50. As set forth above, defendants have engaged in a
scheme to dilute NME's stock ownership interests in Hillhaven
and to undermine NME's ability (and the ability of Hillhaven's
other shareholders) to sell its shares at a $28 value or an
even higher value.
51. Given that NME can only sell its stock as a
block in a transaction which is approved by the Hillhaven
Board, Hillhaven's hostile and draconian response to Horizon's
proposal has the effect of frustrating NME's ability to sell
its stock as a block.
52. Each of the defensive measures, which were
wholly unnecessary in light of the extensive anti-takeover
arsenal already in place, is an intentional act designed to
disrupt NME's ability to sell its stock to Horizon or to any
other potential acquiror of Hillhaven. But for the actions of
the defendants, NME would have retained a 31% voting interest
in Hillhaven and could have been paid a premium, along with the
other Hillhaven stockholders, for its stock.
53. None of defendants' acts can be justified as
furthering any legitimate business interest of Hillhaven.
54. Accordingly, NME has suffered damages in an
amount which has yet to be determined.
55. In light of defendants' deliberate, malicious
and willful disregard of NME's rights, NME is entitled to
punitive and exemplary damages in an amount to be determined at
trial.
SIXTH CAUSE OF ACTION
(Declaration that Purported Grantor Trust Is Not A Grantor Trust)
56. NME repeats and realleges each of the preceding
paragraphs as if fully set forth herein.
57. As shown above, contrary to the express
declarations of the trust, the purported grantor trust cannot
qualify as a grantor trust of Hillhaven for Federal income tax
purposes.
58. The purported grantor trust serves no legitimate
business purpose and is designed primarily to place voting
power into the hands of Hillhaven management.
59. Because the grantor trust transaction was
improperly created, the transaction should be declared null and
void.
60. Plaintiff has no adequate remedy at law.
WHEREFORE, NME demands judgment and preliminary and
permanent relief, including injunctive and declarative relief,
in its favor as follows:
A. A declaratory judgment that the defendants have
breached their fiduciary duties by (i) not obtaining all
material information about the Horizon merger proposal that was
reasonably available to determine whether a transaction with
Horizon would provide the best value reasonably available to
the stockholders of Hillhaven; (ii) not negotiating actively in
good faith with Horizon; (iii) manipulating the corporate
machinery; (iv) undertaking a series of steps to entrench
themselves; and (v) failing to disclose material information
and making false and misleading statements to Hillhaven's
stockholders.
B. An order preliminarily and permanently enjoining
Hillhaven, its officers, directors, agents, servants, employees
and those persons who act in concert or participation with them
who receive actual notice thereof, from erecting any defensive
barriers (including, but not limited to, further issuances of
stock) to a merger, tender offer or any proposed change of
control transaction at a price that is the highest reasonably
and immediately available to the stockholders of Hillhaven;
C. An order requiring Hillhaven to correct its
misstatements and omissions;
D. Damages, including punitive damages on NME's
Fifth Cause of Action;
E. An award to NME of the costs and disbursements
of this action, including reasonable attorneys' and experts'
fees;
F. An order requiring that (i) the grantor trust
transaction be rescinded and that any and all Hillhaven shares
issued to the trust be returned to Hillhaven and cancelled and
(ii) any shares issued to the grantor trust not be voted; and
G. Granting such other further relief as this Court
may deem just and proper.
/s/James E. Lyons
James E. Lyons
SKADDEN, ARPS, SLATE, MEAGHER & FLOM
DATED: February 15, 1995
