Critic to Be Nominated Co-Chair of Tustin Medical Software Firm

The chairman of Quality Systems Inc., in an agreement aimed at heading off a showdown with dissident shareholders, plans to nominate one of his strongest critics as co-chairman, according to a regulatory report filed Monday.

Chief Executive and Chairman Sheldon Razin, who also could relinquish his CEO title six months after a candidate is chosen to take his place, will recommend that Ahmed Hussein be elected lead director as well as co-chairman at the Tustin medical software company.

In the lead director position, Hussein would head up separate executive board sessions that involve only independent directors. Hussein, a businessman with offices in New York and Egypt, owns 18.5% of the company’s stock. He revealed the details of the agreement Monday in a report filed with the Securities and Exchange Commission.

Among the other items outlined in Hussein’s filing is a plan under which Razin could step down as chairman after two years “or such longer period as the board requests.” In a statement Friday, Hussein had said he felt it was important for Razin to continue as chairman “both now and into the foreseeable future.”

Corporate governance experts see the accord, in which Quality Systems also agreed to hand four of seven board seats to dissident shareholders, as a significant event, even though it occurred at a small company with a market capitalization of $44.3 million.

The shareholders’ ability to negotiate a complete change in corporate control is unusual for a company of any size, said Patrick McGurn of Institutional Shareholder Services, a Bethesda, Md., shareholder advocacy group that advises money managers on their proxy votes.

“That is a twist. It’s more common that they give them a seat” or two, not a majority on the board, McGurn said.

The company also agreed to most of the corporate changes sought by Lawndale Capital Management, a San Francisco money management firm that owns 9.99% of Quality Systems’ stock.

The number of changes agreed to by the company--adopting new independence guidelines for the board and its committees, as well as terminating a poison-pill plan--was also significant, said Rosemary Lally, the editor of Corporate Governance Highlights, a weekly newsletter published by nonprofit Investor Responsibility Research Center in Washington, D.C.

“Just the fact that they were willing to take all of this on at one time is groundbreaking,” Lally said.

The accord follows months of heated disagreements involving Razin, the company’s founder, and dissident shareholders.

The agreement also calls for a verbal truce of sorts between the sparring shareholders and Razin, stipulating that any news releases or publicly filed documents will avoid negative characterizations of one another.

Razin and Lawndale Capital manager Andrew Shapiro had lobbed criticisms and accusations at one another in news releases, conference calls and SEC filings over the last six months. At one point, Razin told Shapiro he was “harassing” the company and Shapiro portrayed the company’s board as “grossly deficient in the most basic corporate governance knowledge.”

Both Shapiro and Hussein had proposed their own slates of director candidates after saying they were concerned that Quality Systems’ board was not independent enough from management.

As part of the agreement, Hussein’s three candidates and one of Shapiro’s will be included on the company’s slate of nominees.

On Monday, Lawndale Capital said it is withdrawing its shareholder proposals, which were scheduled to be voted on at Quality Systems’ September annual meeting. Shapiro called the accord “a victory for all shareholders and the company.”

Razin didn’t immediately return calls seeking comment.

The dispute focused on a central issue in most corporate governance battles, the question of who truly controls a company, said Gary Lutin, a former investment banker who recently advised a group of analysts studying corporate governance at National Presto Industries.

In Quality Systems’ case, Razin was dedicated to the interests of the company but didn’t involve shareholders in the decision-making process, he said.

Quality Systems’ stock, which has moved up nearly 73% so far this year, did not trade Monday. The shares closed Friday at $7.13, up 44 cents.