As a new year starts, health care organizations looking to grow or sell their businesses in the upcoming months will need to tackle the key question of which transaction structure is the best fit in light of the competing considerations.
To sort through this question, we will first cover the main types of transaction structures. Then, we will examine the major financial, business and operational considerations that factor into identifying the optimal structure for the contemplated transaction.
Types of transactions
There are three primary means to acquire or sell a business: an asset purchase, a merger or a stock sale (or member substitution in the case of a not-for-profit entity).
Asset purchase: The buyer acquires some or all of the assets of the target entity. In many cases, asset purchase agreements are "cash out" deals that permit the target entity to distribute cash to its owners, and to eventually wind-up operations and dissolve.
- Pros: The buyer is able to acquire specific
assets and often times assume only selected liabilities.
- Cons: CMS regulations may effectively force the buyer to assume responsibility for previously existing regulatory liabilities; the parties may incur additional costs related to taxes; asset purchases may be more labor-intensive than other structures due to the need to obtain consents and create asset schedules.
Merger: Two entities legally combine into a single surviving business that owns the assets, and is responsible for both the pre- and post-transaction liabilities of both entities.
- Pros: Because all assets and liabilities of
both entities are involved, a merger may be more straightforward to
- Cons: Liability considerations may require significant due diligence; the combined entity theoretically has unlimited exposure for pre-transaction liabilities.
Stock sale: A stock sale does not involve the direct transfer of assets. Rather, the shares of the target entity are transferred to the buyer.
- Pros: Stock purchases can minimize tax
consequences, particularly to the target entity's shareholders,
and they often require less documentation and fewer contractual
- Cons: Stock sales can also be significantly complicated by the presence of dissenting shareholders.
Member substitution transaction: The buyer normally becomes the sole member of the target entity, with the power to appoint some or all members to the target entity's board of directors.
- Pros: Member substitutions may minimize the
number of approvals needed, as well as the need to create asset and
- Cons: Unless there is a surviving community foundation of the target entity, there may be little recourse available to the buyer for exposure to pre-transaction liabilities.
Top considerations for health care mergers and acquisitions
Determining of the most beneficial transaction structure requires a careful analysis of a number of factors, including the risk tolerance of the parties. There is no "one size fits all" model, particularly in health care. The choice of which transaction structure is desirable may be determined based on some or all of the following factors:
- The ability to limit exposure for liability for
pre-transaction activities of the target entity. In some
instances, exposure to pre-transaction liabilities may be mitigated
by indemnification provisions or adjustments to the purchase
- Certificate of need ("CON") and licensure
laws. Many, but not all, states require that certain types
of entities obtain a CON in order to operate health care
facilities, and states have numerous laws regulating the operation
of health care facilities. These laws vary greatly from
state-to-state, but they often require either notice or regulatory
approval for an acquisition, change of control or a change of
ownership. The transaction structure may mean that a CON is not
required or that a new license may not need to be issued. Some
transaction structures may result in a more involved,
time-consuming CON and licensure process than other
- Payor issues. Payor matters are of critical
importance in most health care transactions, and must be handled
very carefully. The choice of structure may impact whether payor
consent is necessary under the terms of a payor contract and
significant payor contracts should be reviewed carefully as a
result. Failure to plan accordingly with respect to payor contracts
may result in the buyer having to obtain a new payor contract, lost
reimbursement and/or delayed reimbursement. In some instances,
payors may refuse to recognize provider-based or other special
status, or they may have other arrangements that preclude
recognition of the target entity once affiliated with the
- The necessity of obtaining third-party
consents. In most instances, the buyer will want to retain
certain key contracts (e.g., professional services agreements,
leases for significant properties and clinical arrangements with
other health care providers) which may require consent to assign in
an asset purchase or include change of control provisions requiring
consent for mergers and stock/member substitution transactions. In
some cases, the key contracts may contain an exclusivity or
non-competition provision which, if enforced, could affect the
structure of the transaction.
- Tax considerations. Tax considerations can
significantly affect many transactions. For example, a stock sale
may be advantageous to a target entity's shareholders, but
disadvantageous to a buyer. Similarly, a not-for-profit entity may
readily acquire a taxable entity, but when a for-profit entity
acquires a not-for-profit organization, it must assess a number of
- Debt considerations. A buyer must examine any
restrictive covenants, any ability to refinance on a tax-exempt
basis, and whether acquisition financing is available.
- Human resources considerations. It's
worthwhile for a buyer to minimize workforce disruptions as much as
possible. In addition, many health care organizations may have
collective bargaining agreements that could be affected by the
transaction structure. Employee benefits, seniority, and pension
funding can all be affected. Transactions that will result in the
non-retention of employees may trigger requirements under the
Worker Adjustment and Retraining Notification ("Warn")
Act. Even an asset purchase wherein the buyer plans to terminate
and re-hire employees could trigger notice requirements under the
- Special considerations for not-for-profit entities. Not-for-profit entities may need to closely examine their donor-restricted funds and other assets to ensure that they comply with applicable charitable trust laws. In some states, approval for any transaction involving the sale of all or substantially all of the assets of a charitable organization may require approval from the attorney general of that state.
The factors listed above are just a sampling of considerations in structuring a health care transaction. There are obviously other considerations that can affect structure, as can the weighting among these factors from deal to deal depending on the parties' business objectives. An experienced legal advisor can help you sort through these factors and use your specific goals for the deal to structure the best possible transaction.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.