Hospital Corp. of America and American Hospital Supply Corp. could be delisted from the New York Stock Exchange as a result of a provision in their merger agreement that violates NYSE rules.
While no immediate action will be taken to delist either stock, the firms have been warned by the NYSE that if they activate a stock swap agreement prior to their proposed merger, they would violate a Big Board rule requiring a company to get shareholder approval when it issues stock that exceeds 18.5 percent of its outstanding shares.
The provision in the merger agreement, designed to discourage third parties from making competing takeover bids that could disrupt their planned union, calls for American to issue 39 million shares, or 35 percent of its common stock, to HCA, and for HCA to issue 29 million shares of its commmon stock, or 25 percent, to American.
"We have advised Hospital Corp. and American Hospital supply that the proposed issuance of common stock preceding the merger would require shareholder approval under exchange policy," an NYSE spokesman said. "Failure to comply with exchange policy would subject any company to a delisting proceeding."
The share-exchange provision has not been successful in discouraging third parties from making takeover bids for American. Baxter Travenol Laboratories Inc., best known for providing hospitals with intravenous solutions, has made a competing $3.6 billion bid for American.
HCA, the nation's largest for-profit hospital chain, and American, the nation's largest provider of hospital supplies, have postponed their respective stockholder votes on the proposed acquisition of American by HCA because the Baxter bid has received the support of many of American's stockholders.
Baxter is offering $50 a share in cash for half of American's outstanding stock and $50 a share in Baxter stock for the other half. Under terms of the proposed merger between HCA and American, each American share would be converted into 3/4 of a share of a new holding company that would own HCA and American, making the offer worth about $36 a share to American stockholders.
American, which has been critical of Baxter's takeover attempt, said it plans to hold a special board meeting Friday to consider Baxter's latest unsolicited bid. American, which has said it believes a merger with HCA is in the company's best long-run interest, also has said it does not believe Baxter's bid is really worth $50 a share.
Two of American's stockholders have sued the company and its directors for rejecting an earlier Baxter takeover bid. The company has said it believes the lawsuits are without merit.
Baxter, the smallest of the three companies, had revenue of $1.8 billion last year and net income of $29.1 million. HCA had revenue of $4.2 billion and net income of $296.8 million, while American had revenue of $3.5 billion and net income of $237.8 million.
American and HCA both said they will appeal the NYSE delisting action. But the companies are not in immediate danger, because the Big Board has told them that they will not be delisted until the exchange completes its overall review of shareholder listing standards, which is expected to take several months. The companies said they would do their best to maintain their NYSE listings.