Qual-Med Sues to Acquire 73% of Health Net : Health Care: The Colorado-based HMO operator says it has ‘an enforceable contract.’ But the foundation that owns the shares denies it.

Qual-Med Inc., stepping up its campaign for control of Health Net, said Monday that it has a deal to buy a majority of California’s second-largest health maintenance organization, but that the nonprofit foundation holding the stock is trying to renege.

Colorado-based Qual-Med, also an HMO operator, said it filed suit last week in Superior Court in Los Angeles, alleging that it has “an enforceable contract� to buy for about $400 million the 73% Health Net stake currently held by the California Wellness Foundation.

The foundation, a charity formed last February when Woodland Hills-based Health Net converted from a nonprofit to a for-profit entity, denies such a deal exists.

If Qual-Med’s allegations are true, it signals that the foundation is willing to peddle its Health Net stock only six months after it acquired the shares. That would seem at odds with restrictions attached to Health Net’s conversion when the plan was approved by state Department of Corporations Commissioner Thomas Sayles.

Qual-Med declined to say whether it has a written contract or to specify who represented the foundation in the negotiations.

John K. Van de Kamp, former state attorney general and now representing the foundation, said he could neither confirm nor deny that the foundation had negotiated a deal with Qual-Med. But he said “no enforceable contract exists.�

Among other conditions set by Sayles for the conversion, the foundation was restricted to selling no more than 20% of its Health Net stock over the next three years. Sayles was unavailable for comment, but Qual-Med noted that its bid is conditioned on his approval.

Roger F. Greaves, Health Net’s chairman and the only company executive on the foundation’s eight-member board, issued a statement blasting Qual-Med’s suit. “Health Net is not for sale, not to Qual-Med, not to anyone,� the statement said.

“We will not be moved by Qual-Med’s bullying tactics, fallacious allegations and outrageous litigation,� Greaves said. He, too, cited Sayles’ restrictions on selling the stock and noted that Qual-Med, as a publicly held concern, had not reported any binding contract to the Securities and Exchange Commission.

Health Net’s conversion to for-profit status capped a yearlong struggle among several groups, including Qual-Med, trying to buy control of the HMO.

The battle included charges by consumer groups and some of the bidders that the price at which Greaves’ group tried to convert Health Net was too low, thus shortchanging the public. When an HMO converts to for-profit status, it must donate an amount equal to its “fair-market value� to a public foundation. (Health Net’s revenue last year totaled $1.1 billion.)

In the end, Sayles approved a conversion plan in which Health Net agreed to fund its foundation with $75 million immediately and an additional $225 million plus interest over 15 years and to provide the foundation with an 80% non-voting stake in Health Net. However, the foundation’s shares become voting stock if they’re sold.

Sayles’ plan also allowed Health Net’s management to buy the remaining 20% stake--with 100% voting rights--for $1.5 million. (The stakes have since changed to 73% for the foundation and 27% to management because additional shares were issued after the conversion.)

Qual-Med claims it has a deal to buy the foundation’s stake in Health Net for $340 million in cash. It also would issue the foundation preferred stock with a face value of $60 million.

Qual-Med apparently is hoping that the foundation will find it more appealing to get that sum immediately rather than waiting for the rest of its funding from Health Net over the next 15 years.

Qual-Med said it also offered last Thursday to buy the 20% stake in Health Net owned by the HMO’s management. In that offer, Qual-Med said it would pay $21 million in cash and issue the executives preferred stock with a $50-million face value.

Health Net’s management has yet to respond to that bid, Qual-Med said. Qual-Med also has been challenging Health Net’s conversion in an effort to clear the way for its own bid.