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Oct. 5 — Preparation, due diligence and negotiating the ultimate agreement are three crucial steps to getting deals done in the health-care industry.
Three highly experienced transactions attorneys Oct. 5 took a wide audience on a journey through that territory, offering tips on the best way to steer clients through the deal process.
Obamacare ushered in a new era of transactional activity in the health-care industry. Providers are merging, affiliating and otherwise joining together to improve quality and take advantage of new value-based payment modes. Since January, over 400 transactions have been proposed or completed, according to transactions attorneys and financial analysts consulted by Bloomberg BNA.
“Stay organized,” Brett Friedman, at Ropes & Gray in New York, advised. A deal may be in the offing, but there is a lot of work to be done before negotiations between the parties begin.
Lawyers advising on deals first should identify the members of the deal team and the “political considerations” each brings to the table. Oftentimes, their priorities aren't in full alignment, Friedman said.
Prepare timelines and task lists, identify the people responsible for each aspect of the transaction and set the schedule of events, he said. Make sure the deal team and management “think of the future while planning the present,” John O. Chesley, a partner in Ropes & Gray's San Francisco office, added.
If the acquiring organization and its target are likely to have an ongoing relationship once the deal is completed, the tone set at this early stage can be important, Chesley said.
The tone also is important to build trust between the entities, Michael B. Lampert, of Ropes & Gray in Boston, said. Develop a regular communication channel to ensure everyone involved is fully informed, he said.
“The is the prologue for post-transaction conduct,” Lampert said.
The first document in the deal usually is a confidentiality agreement, Friedman said. He characterized this early writing as a “proxy for the deal” that gives each party a fairly clear picture of how the other means to go on.
Although confidentiality agreements contain a lot of boilerplate and standard clauses, Friedman advised deal attorneys to think carefully about them. Initial documents may contain language that could bind the parties even if the deal eventually falls through, such as employee nonsolicitation provisions.
Friedman also said to treat exclusivity clauses with care. Is the transaction one where the parties wanted to be locked into dealing with each other before they have really started shopping, he asked.
Chesley advised attorneys to be aware that other laws, including the Health Insurance Portability and Accountability Act and securities laws, may limit—or specifically allow—the type of information the parties can share prior to a deal's completion.
There are various types of deals for the parties' consideration, from a stock or asset purchase to a loose affiliation to a full-out merger, the attorneys added.
Attorneys also should take into account tax and regulatory considerations during the preparation stage, Friedman said. Valuation of a company's assets can include both tangibles, like buildings and equipment, and intangibles, like goodwill. Determining the fair market value is key, though.
Because health care is a highly regulated industry, it is necessary to ask at an early stage whether state or federal agency approval will be required. If so, attorneys should help determine what the parties must do to acquire government OKs.
A deal also may have to be structured to comply with a state's corporate practice of medicine doctrine. And antitrust considerations will arise if the parties are in the same geographic or product markets.
The letter of intent usually is the final document created at the preparation stage. It usually isn't binding, though some of its terms may bind the parties, such as a confidentiality clause or an exclusivity clause.
It is “critical” to delineate clearly what provisions will be binding, Friedman said. Sellers lose leverage upon signing a letter of intent, he said.
It will be difficult to ask for additional terms later along the deal timeline, so “make sure this is the deal” the company wants, Friedman said.
Diligence is about identifying risks and developing strategies to minimize them, Lampert said. Neither a buyer nor a seller wants to be caught unprepared.
“Reverse due diligence” by sellers may be every bit as important as the review conducted by an acquiring entity, he noted. For example, a nonprofit entity contemplating a sale to another party will want to ensure that the acquirer is willing and able to carrying on its charitable mission.
Reverse due diligence, or self-diligence, also is important if the terms of the deal call for noncash consideration, or if the parties will have an ongoing relationship after the deal is done, Lampert said.
Companies that engage in self-diligence can stave off future problems, Lampert added. As an additional benefit, self-diligence builds confidence—both on the seller's part, because it then will be able to be transparent in negotiations, and on the buyer's part, because it can rely on what the seller is saying.
An important area for due diligence in health-care transactions involves Stark (physician self-referral) law compliance. This is a great area in which to use checklists, Lampert said, because it should be fairly easy to determine if a provider like a hospital has signed contracts with the physicians who practice there that disclose the physicians' compensation packages.
But Lampert said good due diligence will inquire into what the contracts don't show. For example, an examination of accounts payable data might show payments that weren't reflected in the contracts.
A technical noncompliance with the Stark law may be corrected under the law's self-disclosure provision. But an acquiring entity should know whether the target put the process in the works before or while the deal is pending. The process can take up to two years, and “will almost certainly become the buyer's problem,” Lampert said.
Due diligence also should uncover the state of the seller's regulatory compliance programs, Lampert said. Those conducting the review should ask whether the organization has put itself at risk of a lawsuit under the federal False Claims Act, known as a qui tam suit.
Look at employee terminations, severance packages and exit interviews to see if any employees were let go for complaining about potential noncompliance problems, he said.
A seller also can require a buyer to return reimbursement overpayments to government payers before a deal is complete, but only if it knows about them, Lampert said.
There are numerous considerations that go into drafting the definitive agreement between the parties, Chesley said. The key issues to be addressed in the document include:
Interim management agreements need special attention, Chesley said, because they might require regulatory approval or give rise to tax consequences, depending on the deal.
The final agreement also will include the closing conditions, address attorney-client privilege issues and joint defense arrangements, set out how change-of-ownership notices will be handled and state how the parties will comply with certain legal requirements, such as disclosures required of tax-exempt organizations and pension filings with the Pension Benefit Guaranty Corporation, Chesley said.
Bloomberg Law presented the webinar, Tips and Tricks for Managing the Unique Elements of Health Care Transactions.
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