Verity Health System – Court Approves Amended KEIP as SGM Sale Delays Threatened to Leave Key Employees Out of the Money

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November 8, 2019 – The Court hearing the Verity Health System (“VHS”) case approved the Debtors’ amended key employee incentive plan (the “KEIP”) [Docket No. 3565] to allow for asset sale delays and keep KEIP employees within the scope of the plan.

The Debtors' motion [Docket No. 3240] stated, “The first stage occurred relatively quickly and concluded on February 28, 2019, when the Debtors closed the sale of O’Connor Regional Hospital (‘OCH’) and Saint Louise Regional Hospital (‘SLRH’) to Santa Clara County. In contrast, the second stage has continued longer than originally envisioned at the outset of these cases. Specifically, on or about May 2, 2019, the Court entered an order authorizing the Debtors to sell their Remaining Hospitals St. Francis Medical Center, St. Vincent Medical Center, St. Vincent Dialysis Center, Seton Medical Center and Seton Coastside to Strategic Global Management, Inc. (‘SGM’ and the ‘SGM Sale’). The closing of the SGM Sale, however, has been delayed by the California Attorney General’s review of the SGM Sale (the ‘AG Review’). This delay, in turn, has prejudiced the Amendment Employee’s recovery under the KEIP in a manner that was not envisioned when the KEIP was approved in the fall of 2018.

Specifically, the approved KEIP was structured to incentivize management-level employees of individual hospitals with a bonus that includes a payment up to 15% of a manager’s compensation based upon the timing of closing of a sale. Management who worked at the hospitals sold to Santa Clara County have already received their maximum KEIP bonuses. In contrast, the seven management-level Amendment Employees who have continued to tirelessly work for the Remaining Hospitals throughout the past year, who remain critical to preserving going-concern value of the Debtors, and who had no role in the delay in the sale of their hospital, stand to lose all or a significant portion of the KEIP bonuses tied to sale closing, unless the KEIP is amended. In fact, unless the KEIP is amended, the Amendment Employees will at most receive a sale bonus equal to 3% of their salary if their respective Remaining Hospital(s) are sold before December 31, 2019, and $0 if the sale closes later. Such a result would be inequitable in that it would punish the seven managers who have actually worked longer to provide benefit to creditors of the estate. To address this inequity and to properly incentivize the Amendment Employees to perform through a 2019 closing, the Debtors, utilizing their business judgment through a proposed amendment to the KEIP (the ‘Amendment’) that modifies the ‘trigger’ date for the 15% bonus from March 31, 2019 to December 31, 2019 for the Amendment Employees.”

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