In Re HealthSouth Corp. Shareholders Litigation

845 A.2d 1096 (2003)

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In Re HealthSouth Corp. Shareholders Litigation

Delaware Court of Chancery
845 A.2d 1096 (2003)

Facts

HealthSouth, Inc.’s shareholders (plaintiffs) approved a plan that permitted HealthSouth to make loans to its corporate executives to help the executives purchase HealthSouth common stock. Richard Scrushy (defendant) was a HealthSouth executive. In 1999, HealthSouth loaned Scrushy over $25 million dollars, which Scrushy used to buy shares of HealthSouth common stock. In June 2002, Scrushy approached HealthSouth’s board of directors and indicated that he was willing to repay the loan early with HealthSouth stock. After considering the proposal, the board agreed to the transaction and valued Scrushy’s stock based on an average of the stock’s high and low trading prices on July 31, 2002. The parties completed the transaction on August 1, 2002. Less than a month later, the public learned that HealthSouth had been releasing materially misleading financial information such that the stock price had been inflated. Consequently, the stock that HealthSouth accepted from Scrushy as repayment of the loan was severely below the value of the loan. The shareholders subsequently filed a derivative claim against Scrushy under theories of unjust enrichment and equitable fraud. The shareholders moved for summary judgment. Scrushy opposed the motion and argued that a genuine dispute existed as to whether he had actual knowledge of the corporation’s misleading financial information. Notwithstanding significant evidence that Scrushy had a role in a fraudulent scheme orchestrated by the corporate executives, the shareholders argued that actual knowledge was irrelevant for summary-judgment purposes.

Rule of Law

Issue

Holding and Reasoning (Strine, J.)

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