Shareholders Suing Advocat for Rejecting Covington’s Takeover Proposal

Three times, Covington Investments, LLC proposed to buy out Advocat, Inc. (NASDAQ:AVCA), and three times the skilled nursing operator said ‘no.’ But now some angry Advocat shareholders are suing the company for rejecting Covington’s takeover bids.

In letters sent on Feb. 27, March 22, and April 12, 2012, Covington made proposals to acquire Advocat, eventually writing a public letter dated May 11 complaining that Advocat hadn’t shown any interest—which it owed to its shareholders—in such a transaction. 

The investment firm increased the value of its proposals, reaching $8.50 per share (for $44 million, considering the 12% of shares already owned by Covington affiliates), which it contended represented “extraordinary value” to the operator’s shareholders considering it was a 96% premium above the previous day’s closing stock price of $4.34.


Advocat wrote back to Covington in a letter dated May 11 saying that its board “takes its fiduciary duties very seriously” and that it had decided not to pursue a discussion after thoroughly evaluating the proposal. 

The board determined the proposal was not in the shareholders’ best interests at the time, according to Advocat’s president and CEO, Kelly Gill. 

“The Board believes that stocks in our industry, and Advocat’s stock in particular, are currently undervalued by the market and that the implementation of our strategic initiatives is the best way to enhance value at this time for all shareholders,” Gill wrote in the letter. 


However, the plaintiff alleges in the complaint that Advocat breached its fiduciary duties by rejecting the most recent offer by Covington, claiming the operator “refused to even consider” the proposal. 

The lawsuit has been filed by a local plaintiff law firm Barrett Johnson, according to the Nashville Post, and claims that Advocat’s board has “engaged in misconduct by employing various ‘draconian antitakeover defenses'” in the past.

Written by Alyssa Gerace

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