What pre-transactions considerations should potential buyers and sellers in the health care market think about as they prepare to make a deal? What are the key provisions of a non-disclosure agreement and what happens if confidentiality is violated? What are the key aspects of the due diligence process? Wayne Pryor, Managing Director, VMG Health, speaks with Heather Alleva, Associate, Baker Donelson Bearman Caldwell & Berkowitz PC, Michael Schaff, Partner, Wilentz Goldman & Spitzer PA, and Alexander Sharnoff, Vice President and Chief Counsel, Thomas Jefferson University and Jefferson Health, about these questions and more as they discuss how to navigate the deal process. Heather, Michael, and Alexander spoke about this topic at AHLA’s 2022 Health Care Transactions Program in Nashville, TN. Sponsored by VMG Health.
To learn more about AHLA and the educational resources available to the health law community, visit americanhealthlaw.org.
What pre-transactions considerations should potential buyers and sellers in the health care market think about as they prepare to make a deal? What are the key provisions of a non-disclosure agreement and what happens if confidentiality is violated? What are the key aspects of the due diligence process? Wayne Pryor, Managing Director, VMG Health, speaks with Heather Alleva, Associate, Baker Donelson Bearman Caldwell & Berkowitz PC, Michael Schaff, Partner, Wilentz Goldman & Spitzer PA, and Alexander Sharnoff, Vice President and Chief Counsel, Thomas Jefferson University and Jefferson Health, about these questions and more as they discuss how to navigate the deal process. Heather, Michael, and Alexander spoke about this topic at AHLA’s 2022 Health Care Transactions Program in Nashville, TN. Sponsored by VMG Health.
To learn more about AHLA and the educational resources available to the health law community, visit americanhealthlaw.org.
Support for ALA comes from VMG health, a leading national healthcare strategy and transaction advisory firm, providing solutions exclusively for the healthcare industry, their services span, transaction due diligence to coding guidance to physician alignment, VMG health can help move your strategy forward for more information, visit VMG health.com.
Speaker 2:Good morning everyone. My name's Wayne Pryor and I'm a managing director with VMG health. And I have over 20 years of transaction space, primarily primarily in the financial diligence realm. Today's podcast is an overview of the deal process and provides a roadmap through the paper jungle process. As it relates to a transaction, I have three guest speakers with me today. I'm gonna go around the table and have them introduce themselves. Michael, would you like to go first?
Speaker 3:Sure. Welcome everybody. My name is Michael Shaf and I'm a partner at the law firm of lens. Goman in Spitzer. We have offices in New Jersey, New York and in Philadelphia, and I run our corporate and our healthcare and our cannabis practices. And I am a fellow of the, uh, American health lawyer association. And I'm on the fellow chair committee.
Speaker 4:Hey, good morning, everyone. I'm Alex Schoff, I'm vice president chief council for New Jersey operations for Thomas Jefferson university in Jefferson health. And I've been a healthcare attorney for about roughly 20 years and found my way into healthcare through employment and labor law, cuz hospitals employ a lot of people. So that's how that happened. So that was my, uh, gateway into healthcare law. And I'm happy to be here.
Speaker 5:Hi everyone. I'm Heather Oliva. Um, I'm an attorney at baker Donaldson in their healthcare group. I split my time between transactions and regulatory compliance issues all on the provider side. Um, and as it relates to ALA, I'm one of the vice chairs of the women's leadership council at this moment.
Speaker 2:Heather, thanks for that introduction. So as I, as I think through this, we we've kind of outlined various topics here that we're gonna go over. So I'm gonna, I'm gonna hit those high points real quick. And then we're gonna dive in. I have a couple questions for Michael. So the topics that we're gonna kind of go over here, uh, relative to the paper jungle, couple things, pre-transaction considerations that a potential buyer and seller should think as they go to market. Next thing is we're gonna kind of cover what an NDA is, the non-disclosure agreements. Also, we're gonna talk about the letter of intent term sheets. Uh, couple other topics here is basically, as you're thinking about a transaction building out the appropriate acquisition model, we're gonna talk about valuation and fair market value. As you contemplate a potential investment, we're gonna talk about getting into due diligence. What should be done? What kind of diligence should be performed? We're gonna talk a little bit more about typical top types of contract provisions as it comes as, as we talk about, uh, a purchase agreement and also hidden risk of using a boiler plate type provision, as you think about a purchase agreement and then last but not leastly, we're gonna talk about post closing type transaction issues. I guess a couple questions just to kick this off. This goes to Michael, as your client is contemplating a transaction. What kind of pre transaction consideration should we think about or should your client think about?
Speaker 3:Well, the bottom line is they need to know where they're going. Okay. A lot of times they come across and they, they're not sure what they want, but they need to really plan a little bit of ahead as to where they are and what they're looking to do, you know, is the deal doable? Can they do it? Is the, you know, which side are they are? Are they the buyer or the seller? You know, if they're, or is it a joint venture, they need to understand that stuff. They have to look at whether or not their, uh, culture is, is, uh, you know, fits with respect to a, they have to look to see if there are any type of obstacles that may be available with respect to it in concern. But I'll turn that over that Heather, maybe she wants elaborate a little bit on that.
Speaker 5:Yeah, sure. I mean, I think one thing that's important to think about and to really evaluate is, you know, Michael mentioned it, but cultural compatibility, um, especially, you know, nowadays and there's lots of mergers and acquisitions. We see a lot of them closing and then also failing as well. And one of the things that's not really identified up front is whether the organizations that are coming together have the same mission or the same objectives, even from a profit versus nonprofit standpoint in the healthcare space, um, whether they really can combine their missions and their business objectives together. And if they'll be merging and they'll be keeping people from both entities post closing, will they be able to work together? Um, what their clinicians will, their staff, um, will their other, you know, officers and directors and leaders be able to come together in, um, a, you know, good governance from a good governance perspective, from a clinical perspective, how will they be able to move forward together? And one of the big reasons we see that they don't, um, that mergers and acquisitions either won't close or they'll kind of fail post closing is there was no, you know, cultural evaluation during the diligence process.
Speaker 2:So Alex, any, any other comments you'd like to make relative to just things that you think about from a pre-transaction perspective?
Speaker 4:It's one, one thing that hasn't been mentioned yet is maybe the prior history with that partner, many times, it, it could be a second, third, fourth, try with a particular partner between two entities to try and get it right. So I think it's important when we're considering let's just call it another run with a particular as a hospital system, maybe trying to do a partnership with a, with a physician group, um, to think about lessons learned, to think about why this particular approach or possible approaches are different than what happened in the past or whether the environment, the payer environment has changed or the, you know, modalities of treatment have changed such that a deal that might not have worked five, 10 years ago now has an opportunity sort of taken a big picture, look at things it's important.
Speaker 2:Okay. I think, I think it's very helpful for anybody that as they're contemplating a transaction. I mean, those, those are great things to think about as you're kind of talking to other various parties, I guess, you know, as I, as I think about the transaction process, a lot of times, uh, a couple things that kind of come down the pike as, as people are entertaining, potential transaction is, is an NDA. Uh, I think it'd be great for, you know, for the, for you guys to kind of give a sense of a non-disclosure agreement. Again, is you're working with an opposing, you know, potential target and putting together an NDA. I mean, what I guess maybe Michael, maybe you can kind of give us a sentence. What is an NDA? What are the major provisions that should be included in an NDA as, as you guys, as two parties are trying to work together to, to contemplate a transaction.
Speaker 3:Great. Now the first thing you have to think about is, you know, when we're going through this paper jungle, there's a process. You know, you have to go the documents kind of fall into place with respect to the first one is the non-disclosure agreement. And that's where one party or many cases, both parties have confidential information. And they're concerned that if they shared with the other side and the deal does not happen, um, that their confidential information becomes, could become public and they could end up being at a competitive disadvantage in the future. So the first thing they need to do is before they start sharing that type of information, they need to have some type of confidentiality agreement. And what confidentiality agreement does, it protects their confidential information of the disclosure and the, the recipient needs to agree to certain things. And first thing you really need to do is define what confidential information is. And typically it's, non-public, it's confidential and it's proprietary information of the party that is disclosing it. Okay. And you know, it, it also comes in many different formats. So you have to be careful with respect to it because sometimes it, you can find it by, you know, it's written and provided to the other side. Many times now it's electronic. It even could be oral or through some type of tour facilities or whatever. So you have to be very, very careful with respect to it on the tail side of it is there's a number of things that really aren't confidential and they don't want to, they wanna make sure that those things are excluded from that definition. And those are items like if the recipient had it before the disclosure had given them, then it should not be held and considered confidential information if it's known publicly through other sources, other than by the recipient, you know, and what happens if it's developed or learned by the recipient independent of the disclosure. And, um, also if it's someone provides it to the recipient on a non-ntial basis from a source that is not prohibited. So that's, you know, important to understand and making sure that you understand what's really being protected and things that you try to do is you try to prohibit the recipient from using it, except for specific situations, you try to limit it so they can evaluate the transaction. You don't want them to use it for any other purpose. And you also don't want them to disclose to any third parties issues come up along the way when you're negotiating these deals, including, you know, what happens if a court has a subpoena to the recipient and wants to disclose, wants them to disclose it. So in those instances, you try to build a provision in there that the, you know, the person who's a recipient, um, if they do get a, a is compelled by a court that they provide notice to the disclosure to that they would have sufficient notice, so they can attempt to get a, a protective order. So it's not disclosed. Other issues are how long, a period of time is. It kept confidential. You know, people looked at it and go, why should it ever be disclosed? And there's a couple schools of thought in that. And depending on who you're representing, that, that part of it, you know, where it is, but I try to make sure that it's at least several years. And the question is how long is that confidential information really sensitive and, and, and important. Um, other issues that you deal with in these types of agreements are venue and choice of law. And you'll note throughout these, the paper jungle, that becomes a very big issue because, you know, you know, many times there's parties in different states and, um, they, and there are different size parties, meaning there's a large party and a, and a, a not as, you know, not as significant party on the other side and, you know, going to a state that, that they don't have any contacts with and using laws and, and venue there makes it very, very, uh, costly. So you need to deal with that and understand that and try to negotiate that appropriately.
Speaker 2:And then I, I, maybe, maybe Alex, I can ask you this question or Heather in regards to, like, let's say somehow confidential information gets out. I mean, how, how is this typically, typically ReMed ReMed over time, I guess.
Speaker 4:Well, it, it, it depends on the nature of the information and how it happened. I mean, depend depending on circumstances or perceived circumstances. I mean, it, it could be as, uh, is the word I'm looking for here, as confrontational as, uh, seeking a, uh, you know, immediate relief in court, restraining order, things of that nature there's language in these agreements that explains that, you know, money damages is not an adequate remedy if there is a breach. So, uh, off to court, we go, uh, or, you know, if it, if it's something that's an honest mistake, I, I think a, an open, quick, efficient dialogue is the best way to avoid something like that, and completely destroying a potential relationship at its start. Yeah. It's great point. Yeah. And listen, the other, the other thing to think about with NDAs is what else is in those agreements? Um, they, they will often, you know, include things like non-solicitation clauses, things of that nature. So there could potentially be a cause of action there as well. Uh, if those, if those clauses are ignored.
Speaker 3:Yeah. And the other issue that you really need to be, uh, think about of many NDAs provide standstill provisions. It's a way to get the, the potential seller in this instance, to, uh, you know, to restrict their ability to talk to other potential purchasers. Um, my view is that's typically, uh, premature, and you shouldn't have it in a non-disclosure agreement cuz you haven't even worked out a deal. You don't know what it is and you don't really want to take yourself off the market at that point in time. So you have to understand that and you try to negotiate that later down the line, when, you know, there's really a meeting of a mind to go forward,
Speaker 4:Right on the flip side of that, you know, representing a hospital system. If, if we're dealing with a, a potential partner who's not willing to sign the standstill provision or no shop clause, then I'm managing expectations on my side and I'm explaining to my client, look, you should be prepared that this particular group or entity is shopping a similar deal with other, other competitors of ours. Because that to me is it's not necessarily a red flag. It's not negative, but it just shows that they are, they are, they are open to doing business with others. So, uh, be mindful of that and let's, let's make the best deal we can.
Speaker 2:That's great advice, Heather, any closing comments on this topic?
Speaker 5:Yeah, sure. I mean, I think in terms of the consequences and what happens if something gets out to your initial question is it's one reason to have just a very communicative relationship between the parties. This is not exactly legal, uh, in nature, but the better that the relationships are between the parties, the less likely you're going to be running to court and spending expensive legal fees, litigating an issue as opposed to coming up with a business related solution. Um, and especially if the parties really wanna move forward with the deal, you know, there are ways to kind of come together and resolve, um, an issue of confidential information leaking out as opposed to, you know, making it litigious and kind of destroying the future of the deal.
Speaker 3:Right? Keep in mind that the, these non-disclosure agreements basically open up the door for information and disclosure. So there's a free flow of information between the parties so they can actually figure out if, if this transaction is really meant to be or possibly meant to be
Speaker 2:Agree with you, Michael, a lot of times when information gets out, I, I, I don't think that was the intent somehow just ends to leak out a little bit and depends again, I would agree with everybody on the panel here that typically the best thing to do is, is, is get together and, and kind of talk through these issues and find out exactly if, if there has been any, you know, if, if the opportunity to remedy the situation is just a phone call away.
Speaker 3:One thing you have to be, you have to be aware of. There's some unscrupulous people out there who I completely agree and they try to, you know, get some information and they do it sometimes with the, you know, under the skies of, uh, of trying to do a deal or acquire them, you know? So you have to be careful where it's going.
Speaker 2:No great. That's a great point. Good stuff here. So as we go to the next topic here, uh, as we think about the paper jungle here, the next thing is I think about a transaction going from NDA. And if the two parties want to continue on a lot of times, the next thing that comes up is a letter of understanding or a letter of intent. Um, I'm gonna basically, Heather, why don't you kind of kinda broach this topic real quick? What, what is a letter of intent or a letter of understanding?
Speaker 5:Sure. Um, so you can either have a, a term sheet or a letter of intent. Um, the general idea of both is the same and that's to kind of paper what the main points of the transaction will be to put it down on paper so that both parties know that this is the agreement to which we are striving, um, as we negotiate the rest of the deal documents. Um, and you know, most often in either a term sheet or letter of intent, you'll have a combination of bond binding and non-binding provisions. So the binding provisions, um, will be ones that, you know, these are the things that we're definitively sticking to as we negotiate the rest of the documents, moving forward, non-binding will be, um, things that are included that, um, you know, maybe this, this is the framework of what we wanna get to. Um, but it's not necessarily going to look exactly like this once we negotiate and actually do due diligence and look at the financial positions of the parties, um, have our expensive valuations done and everything like that, that doesn't get done before getting to this point. So they really can look, um, in a variety of different ways and they can be negotiated a variety of different levels. Some letters of intent are negotiated heavily, um, that can, you know, there are pros and cons that can make the drafting process a little bit easier because you've really come to a conclusion on your main points. Um, or, you know, if there are things that are really up in the air, like you're thinking about some type of, um, earn out provisions, you know, while we should always be very careful about earn out provisions. Those are things that need to be based on financial projections and, and due diligence and really strictly understood. So that's maybe not something that you wanna negotiate heavily in the letter of intent, because you want to be able to do full due diligence on the entities, um, before putting that pen to paper there. So there's, you know, kind of different philosophies on where to go. Sometimes it's the client's preference. Um, sometimes it's not. Um, but generally with the end, um, product will be is kind of a roadmap to what the definitive agreement will look like.
Speaker 3:Right? Uh, many times, uh, the letter of intent, there's some due diligence that has already taken place through the non-disclosure agreement and, and the disclosure of information. And then what you try to do is lay out the basics of a deal. You know, the material terms, what the schedule's going to be, is this, you know, how's it structured? Is this asset sale? Is it a stock or membership interest sale? Is it some type of joint venture or joint operation arrangement? Um, is there, um, what's the price? How do you determine price? Is it a fixed price? You know, a formula price, how is all that work? What are the payment terms? You know, what about collateral? Will there be collateral? How's that all gonna work now here is probably an appropriate spot to have the no shop or the standstill provision that we've mentioned earlier. You know, what about the non-solicitation, you know, that Alex talked about, you know, now maybe a time that you have to be careful if the deal doesn't happen, can they hire our employees? You know, what's going on there? Is there any type of breakup fee associated with it? You know, if there a large enough transaction, they have to deal with hard Scott Rodino filing, or potentially who's gonna pay the cost of that. Cause the filing fees are significant. You know, what about publicity? How is that gonna work? You know, other issues that you try to deal with in the, you know, when's the closing date gonna be? Are there contingencies? And again, it's the same issue and choice of law and venue and that type of stuff. And, um, you know, again, what confidentiality is gonna be there, will there be a need of a business associate agreement depending on the information that's being provided? So there's a whole, you know, a lot of issues that need to be addressed, some of them, because it's not the definitive agreement, you know, you, you don't go into a lot of details in it, but at the end of the day, the more you go into details, the less there is to negotiate later, you know, if you're gonna have a deal or not now. Um, so I'll defer to Alex on that.
Speaker 4:And I mean, that's a great, you're bringing out some great points, Michael, because from my perspective, there's a, there's a whole separate purpose for this letter of intent beyond what we all know we're using it for to capture those elements of the deal and to, to go off to the races in terms of preparing definitive agreements. Um, for me, I found the other use of the letter of intent as I use it as a blueprint to figure out who I need within the system, the health system, who do I need in those different divisions to get this deal done in terms of approval, are there real estate components? Are there financial, you know, financing components, um, it components are there additional physician contracting components. So when I see all of those things in the letter of intent, I'm sort of creating a separate list off to the side of all the operating divisions within the health system and the leaders within those divisions that I'm going to need to call upon to help me get this deal done. So it, it, it sort of becomes the roster of the deal team to me.
Speaker 3:And hopefully it's outside council
Speaker 4:Outside council is all over at Michael beginning, middle and end, no doubt.
Speaker 3:And sometimes,
Speaker 4:And sometimes more than one, sometimes more than one, you have to do it.
Speaker 5:But to that point, I mean the roster can also include different types of outside council. So, you know, you need real estate specialists, you know, you're gonna have antitrust issues, cuz there's payer contracts involved. If there are employee issues, you might need employment specialists who know about the warrant act. Um, if there will be big layoffs and things like that. So you can kind of build the team off of there as well, right? From an outside, outside
Speaker 3:Per the bottom line is who, who's your team? How do you go forward? And that's a, you know, a step in the right direction.
Speaker 2:Great step. One of the other topics that was on our agenda here was basically the type of transaction models stuff. Um, you know, there there's many implications. When I think about healthcare, I think about corporate laws of medicine, I think about a lot of different contractual type issues. I think about tax structuring, all that good stuff. Do you wanna hit upon the, the, the, the, the, the type of transaction models that are out there as it pertains to healthcare?
Speaker 4:Well, it's it, it's tough to, to give you a quick answer to that. But what we tried to do in our presentation were focused on a few. We, we were really focused on hospital and physician group or large and small physician group transactions. So, you know, we sort of covered the, the, the big ones that are, that are, that are close at hand, and we don't necessarily get into what's in Vogue right now, which are some of the private equity ventures and things of that nature. Um, but for purposes of this discussion, it's, you know, things like, uh, physician PSAs, physician service agreements, which are, uh, akin to almost like a franchise and those seem to be popular because it's, it gives the ability of a, uh, independent practice. They don't have to sell their practice, but they basically structure themselves through an annual budget and a series of contracts with a hospital system. So from the outside, looking in, they're branded, like they're a, they're a larger system practice, but in fact, they haven't sold, they haven't been acquired. So it's an, that's the PSA model. It's an opportunity, uh, to get together and do that and have the ability to unwind it, um, without rebuilding from scratch. Um, so that's one, um, you know, another can be just a full acquisition. I mean, we're all our folks, you know, many of the folks who are coming to see us at the conference are familiar with the acquisition. Um, but, um, you know, I'll bounce it over to Michael, Michael, what are, what are some of the, uh, some of the deals that are taking shape with some physician practices in, in your world these days?
Speaker 3:Yeah. You know, there's a lot of private equity dollars coming into healthcare, so there's all different types of issues. And, um, anyone who's done a, a, uh, private equity deal with a physician practice, you know, one of the first things you have to look at is the state corporate practice of medicine, corporate practice of dentistry, or whatever healthcare, uh, area you're involved with. So it creates, uh, differences in how you structure these types of transactions. So as, as part of it, again, it all goes back to the due diligence, you know, what's going on here? What are the state laws associated with it? What are the federal laws associated with it? And, uh, those are really big. Um, there's still a lot of hospitals who are getting involved with respect to, you know, affiliating with medical practices. And then you, there's a whole number of different types of ancillary services that are very valuable, you know, uh, with respect to, you know, healthcare, including, you know, uh, software vendors, you know, um, you, electronic health records, all different types of areas that, that, uh, you know, every time you turn around, there's another transaction, you know, uh, where there's dollars being invested in other types of businesses as all these different businesses integrate going forward to be able to give a better quality of care. So, um, I guess, you know, that's where I'm seeing it.
Speaker 4:Yeah. Yeah. And I mean, way to, to your initial question, you know, when we're looking at, for example, joint operating agreements, that that's an opportunity to provide those things to a smaller group. And I say, provide by a hospital system to a group without private equity because the hospital system has already made the investments. So this is, you know, typically a contract between, you know, two groups, a larger and smaller, or a hospital system and a group, and you can take advantage of economies, a scale you can take advantage of integrated health delivery and all the it structures behind it has to be, you know, from a regulatory perspective, it has to pass musts, but it's a way to provide those resources on a contract basis. Um, so it's a contr really a contractual joint venture that's one way. And then the other I'd mention is the, uh, the, the tried and true clinical co-management agreements, which is, again, I'm gonna be hospital system centric on these. Um, but that's a way for a, a physician group or a number of physician groups, um, to join with a hospital division that has needs to improve clinical outcomes, quality efficiency. And in essence, you create a structure for administrative services. You include a bonus, uh, that's payable upon the achievement of certain outcomes, certain benchmarks, everything has to be subject to fair market value set in advance. Um, and I think most importantly, there has to be a beginning, a middle, and an end of that process, you have to show improvement. Otherwise it begs the question, particularly from regulators, what are you paying them for? If things aren't improving, and if they've improved, you need to move on to some other metric or the deal needs to sunset, and you need to find something else to improve.
Speaker 2:Yeah, that makes sense. We've talked about the NDA, we've talked about the letter intent again, if the parties continue on through this process, you know, the letter of intent has, has been established. It worked out some of the kinks here, the, the next, when I think about a, a potential transaction in migrating to close of the transaction, the next thing that kind of takes place is the diligence process. Uh, Heather, I, I don't know if you want to hit upon, you know, the diligence process, what typically takes place in their, you know, what a seller's looking at, or we're willing to provide versus what a, buyer's wanting to get their hands around from that perspective. Maybe just talk about the diligence process and the various work streams that kind of take place in order for a potential buyer to get comfortable with, with the potential acquisition and kind of moving, uh, forward and, and, and getting to a purchase agreement.
Speaker 5:Sure. So the, the diligence process is really the opportunity for the parties to kind of get to know each other better. I guess it's kind of like the dating phase of the relationship. So it's about sharing information. That's pertinent to the deal pertinent to the post-closing relationships and evaluating whether before you close, um, this is actually in the best interests of each of your organization. So, um, you know, it's gonna be mostly focused on the buyer evaluating the seller, but that's not to say that there aren't things that the seller will wanna evaluate about the buyer as well. Um, particularly with respect to contractual relationships and, and important business related aspects that need to be in line post-closing. Um, but you know, the typical diligence that we think about is the buyer requesting information from the seller and in a healthcare deal, you'll have, you know, the same elements that another deal would have in terms of finances. You'll wanna be looking at financial statements, um, AR deposits, bank accounts and all of those good things, but you'll also wanna be looking at, um, the, the financials with respect to clinical initiatives. So if there are Medicare cost reports, um, if there are, you know, statistics on inpatient versus outpatient numbers of procedures, um, and things like that, that's also gonna be important for the buyer to evaluate, um, whether or not the seller's business is, um, profitable is successful and how it will mesh, uh, post-closing with the buyer's existing entities or assets, um, from a clinical perspective. This is also, it's also important to kind of look at clinical initiatives moving forward, not just the hard metrics, but what are, what are the clinical initiatives going on at the ground? What service lines do they have, you know, especially in, in a hospital deal, there might be a number of service lines, how can they combine, how can things come together? Um, and this is another aspect where I, I mentioned at the beginning of the, of the podcast, but another place where you can undertake a cultural evaluation and, um, actually talk to people on the ground. So managers, clinical leaders, what's important to the organizations, um, what are their workflows look like? How do they schedule procedures? How do they staff facilities and will all of the policies and procedures at the two, you know, currently separate entities be able to come together, um, at the post closing entity, whether it's an acquisition or a co-management agreement or a joint venture, however they're going to be coming together, what operations would need to combine, um, or work well together at a minimum, and how will they be able to do that? So, you know, there's a lot of information sharing there's data rooms, where the buyer and seller uploading documents. There's lots of us outside council and associates in back rooms, clicking through documents, but it's all for the purpose of getting to know each other better and making that final decision of, you know, can we really come together and close this deal and be successful moving forward?
Speaker 3:Yeah. Get, you know, the bond, wine, Wayne due diligence, it's all about disclosure. You know, if you lay it all out, you're, you're setting it out. And when you're the seller with respect to these types of transactions, if you disclose it, then you will not have post closing liabilities, which is another big issue. So, um, at the end of the day, I tell my clients, lay it all out, set it out, let them ask questions, because if you disclose it, they can't come back into your pocketbook and, and, and reach for dollars back.
Speaker 2:No, I think that that's great. That's great information. Great, great advice to folks here. So as, as people are closing down on their diligence, you're getting more comfortable with the potential target. The next thing to do is kind of plan on moving forward. I, I would imagine with a purchase agreement, uh, coming up with a closed date and, and kind of migrating in that direction, I guess, as I think about a purchase agreement here and maybe Alex or Michael, you guys can talk about this. Talk to me a little bit about key provisions within a purchase agreement that I, I should expect when I either put one together or develop one. If I'm either on the buy side or the side,
Speaker 3:Heather, you wanna take that.
Speaker 4:So key provisions, I mean, out, out of the gate, you know, beyond the obvious, you know, the purchase price, who's buying it, who's controlling it. Um, it's what you're not buying. I mean, that's the first thing I'm thinking about what types of assets and liabilities are you leaving behind? Um, there's a, there's a laundry list here, Wayne. So I'm gonna try and be brief.
Speaker 2:I just hit the high points. I think you're looking for the high points here. Yeah, no, maybe you could talk a little bit more about the reps and warranties indemnification clauses, just real high points as it pertains to the purchase agreement. And
Speaker 4:Just trying to sure, sure. So, I mean, from a practical perspective, you wanna know at the end of the day, and you wanna be able to communicate to leadership succinctly, who's got control of the assets when you've purchased it, and who's got control of the operations and who doesn't. And there has to be clear set boundaries for what the staff who are coming over and what the leaders who are quote coming over as part of that acquisition, because it may be, you know, we're mentioning purchasing agreement, but there may be peripheral agreement such as staffing services, agreement, transitional services, agreements, management agreements, and what have you. So I, you know, I think from, from a high point, looking down, um, the attorneys on the deal wanna be able to really simplify to leadership who's in control and who has the ability to perform X deliverables. You wanna be able to identify them who does what and when, and there's also the, the unwind provisions and the successors and assigns. Um, you know, we, we can connect with Heather A. Little bit about that. Um, but there is, there, there are any number of let's let's call them exit clauses, unwind clauses. So you want leadership to be a, have an understanding general understanding of the parameters of the deal beyond how you financed it, how you purchased it and what you have, because it's, it's, it can be surprising that what you, what you may have had in negotiations during the letter of intent, there could have been some, some negotiation away from particular items. So that's another portion of what I'll call socializing the deal, which is when, when you're socializing it and presenting it operationally to either a governance committee or a board, um, you really need to be able to distill that 60 page agreement into a one to two page resolution. And to do that, you have to be able to describe what I just said, what have you got, what does it do? And who's in charge of it.
Speaker 5:And then in terms of, you know, the actual definitive agreement itself, you know, we've talked about identifying the assets, you know, what's, what's included and what's not in the deal and the purchase price, how much everyone's paying for it, as well as the payment terms, like timing and manner of payment. Um, one important thing that stems from due diligence, we haven't spoken much to are reps and warranties. So, uh, the reps, you know, there are buyer and seller reps and warranties, but again, like diligence, you know, a lot of it is coming from the seller side and the seller is essentially promising to the buyer that they're business operates in a particular way. So we currently are in good standing. Um, we have authority to enter into this deal. We're not violating laws or contracts to which we're parties, um, by entering into this deal. Um, and in the healthcare space, a very big portion of the reps and warranties is essentially, um, repping that you are in compliance with all healthcare related laws that apply to the business. So that can be fraud and abuse, kickback, and stark. That can be, um, HIPAA requirements that can be Emala requirements to the extent that our hospital's involved. Um, it can be, you know, medical record related requirements, all of those good things. And, and if there is a disclosure that needs to be made. So, you know, if you're buying a smaller physician practice, perhaps they haven't conducted a security risk assessment as required under HIPAAs can be expensive and not every practice has done it. So maybe they'll disclose, um, on a schedule to a rapid warranty where they provide more information, um, and how they're perhaps not in strict compliance with that HIPAA requirement. And so that can lead the parties to kind of negotiate possible changes to the deal. Um, maybe a reduction in the purchase price by the amount that the buyer will have to pay post-closing to do that risk assessment. It's really the opportunity for the seller to disclose any place where there may be not in compliance. So that afterward they're not, you know, there, there will be, um, uh, potential indemnity claims. And so, you know, even if there was a misstated or omitted fact during diligence, there, isn't gonna be a claim for the buyer to make under the definitive agreement, unless there are reps and warranties that address those potential issues. Um, and so indemnifications I'll just cover quickly is, is another important element. And that covers what, um, a party to an agreement can recover from a breaching party. So the easy example is if a seller, um, violates a rep. So they've said that they're in compliance with a certain law and they're not, and now someone's coming after the buyer, how much money can the buyer recover from the seller? And so the indemnities there might be caps, um, on the amount of damages they can collect from the seller. There could be baskets or essentially are minimum thresholds to be able to bring an indemnity claim. There can be all these other complex procedures, but that's the, the meat of it right there. Um, and so the reps and warranties become a very important and kind of legally section of the document where, um, you're really protecting yourself post closing for things that might be unforeseeable, but could happen
Speaker 3:At the end of the day, the purchase agreement. When we talk about the paper jungle, that's a lot of paper, okay. It's typically somewhere between 40 and 80 pages, long single space, you need to sometimes have magnifying glasses, but at the end of the day is, you know, that's a big one and you need to be very careful as you go through that. And there's where you try to protect, make sure that, um, that things are disclosed. And again, as I indicated earlier, you know, the dis disclosure and the due diligence is very important. Um, Heather mentioned the schedules. It's really important to make sure the schedules are complete, you know, based on my experience, a lot of times people are, are, um, not really focused on these schedules. And, uh, and a lot of times the schedules show up at the closing and people don't have time to look at it. So my recommendation for anyone who is selling a business, made sure you fill that out, make sure you complete it, made sure you spend a lot of time on that, because that could make sure that the buyer can't come back into your pockets and take their money back. And if you're the seller, I mean, a buyer just made sure that you've actually read those, those schedules made sure you understand it, make sure you ask questions. Don't close the day you get the schedules. Um, that's something that, uh, is, is, is, you know, getting you ready for a big problem in the future, and you'll have no recourse against the, the seller in the future. If it turns out that there's something in the schedule that you had never seen before. So just be careful
Speaker 5:I can add to that. That definitely, if you're a buyer you don't wanna be closing on schedules that you haven't read. I recently, uh, closed a deal where we had schedules come in the night before disclosing brand new issues. That sounded alarmingly like kickbacks. Um, luckily we had the whole next day to kind of figure it out and they got added into the indemnities. And
Speaker 3:You noticed, she said, luckily she had the whole next day, day,
Speaker 2:Hours
Speaker 5:Entire day. Yeah. So we, we were able to protect our client because just three days ago, I got an email with a, Hey, do you recognize this name? And it was an OIG alert, um, with a, a guy who was involved in the disclosure and he is now going to jail. So there are some issues that our client has to deal with. Post-closing um, that we almost didn't see cuz the schedules came in the day before. So definitely read them. That's
Speaker 2:A great example. That's a great example. Have wow. I, I, I kinda run the, you know, from a financial diligence perspective, a lot of times I'm brought in to do like the settlement of the networking capital. And I can't tell you how many times, if I'm engaged separately just to, to, to, to basically settle the working in capital where you go into the agreements. And, and again, I, I, I'm not sure what the intent of the parties were, but a lot of times the, the, the language is very vague. There's no schedule attached to kind of get a sense of what, you know, how they initially came up with the peg arrangement to begin with, but you kind of have to work through these issues and stuff. And it, it just seems to me if people took the time on the front end and did it right, really define something, make sure there's a supporting schedule that outlines how they derive the peg things again, as, as the transactions closed already. And as you're trying to settle the, these, these various post-closing transaction type issues, it goes a long way. If, if people just take the time on the front end, so you don't have these issues on the back end. So I, I can generally, uh, I'm, I'm kind of on the same page with you guys from that perspective. Um, I'm gonna step back a little bit. We we've kind of walked through the various key items as, as we think about the, the paper trail relative to a transaction. I was gonna ask Mike list questions for you in regards to just controlling the process and managing expectations, starting from the front end here with the NDAs and the Lois and the purchase agreements. And what, what are the things that a potential, whether you're on the buy side or sell side, you should think about in regards to just kind of controlling the temple of the process and managing expectations?
Speaker 3:Well, it's kind of like any relationship communications, the key you need to make sure your client understands where it is many times when you're representing someone who's on the sales side, they've never done it before. So it's important to sit there and, and lay out the process. So it's not a surprise to them and they're not shocked by it. You know, they, you know, typically, especially if it's a smaller business being acquired by a larger business, you know, it's a different culture as Heather and Alex both said, and they, they don't know what to expect and where to go. And if you explain these things to them in advance, it makes the process go better. You know? So that's the first thing that I think you need to do. You also need to make sure that you have your team in place and you coordinate, make sure that, that they know what, where it is periodically. You should have meetings within your team, you know, because a lot of times you're from different places and you just need to coordinate that so that nothing gets missed. As you know, when you have four different parties working on something, a lot of times, you know, things can easily get lost in, in the, in the, in the process. So you need to communicate, you need to have checklists. It's very important to go forward in that regard.
Speaker 5:And as outside counsel, I'm a big, big fan of, um, scheduled periodic set meetings with even your own client to establish timelines. And what are realistic expectations, particularly in the healthcare side, when you're relying on government approvals and you can't guarantee how quickly you'll be able to get them, it's important to be communicating that because everyone wants to blame the lawyers and there might not be anything, um, that can be done about the timing of the government agency, reviewing whatever application or license needs to go through. And there's only so much we can do so upfront communication is best to avoid those issues, um, which then sometimes result in fights when the bills come out. So<laugh> periodic communication is great.
Speaker 4:The, the, the challenge for the in-house council in terms of the meetings, I mean, very quickly, the, the team that you had for the letter of intent, it was much smaller than the team. You have to get the entire deal done once it gets going. And you're having these periodic meetings. Once the definitive agreement is signed to the point, you're getting to close, you're, you're finishing up some of the due diligence. All these things are happening, but your team members are just as busy as you are. They're not gonna make it to every meeting. So as inhouse council, I I've gotta plan extra meetings because I need to go back to whoever didn't make it to the meeting that was scheduled. So it's, it's sort, you know, not hurting cats cuz they're, you know, hurting sheep, they're all kind of going in the same way, but just getting yet getting and keeping everyone up to speed, uh, being mindful of those deadlines. It it's, it's always more time than you schedule for and anticipate, I find
Speaker 2:One last question here, I guess again, again, I appreciate everyone's time. Uh, I think these are some great pointers for anybody that's contemplating a transaction. So last point here again, I'll leave this to Heather discuss key post-closing considerations that a potential buyer or seller should think of as they've, uh, acquired a potential, uh, asset here. What, what are the, the key post-closing considerations one you think about?
Speaker 5:I mean there are a number that could vary per transaction as well. Um, but I think in the healthcare space you'll often see, um, some transitional issues and transition services. Um, you might have the parties to, you know, the agreement are still kind of working together. Post-closing even if operations really have shifted to one party's control, um, you may need, um, whether it's it, you know, technological assistant, and you're still working on integrating the electronic medical records from the different entities or something like that, or it's, you know, training or, or clinical assistance to kind of meet the patient demands immediately. Post-closing um, there's often a lot of like transitional services that are occurring there. Um, it integration is also a big one and we haven't really talked about it too much so far. That's something that should be addressed during the deal process, cuz it can be very expensive to integrate, um, electronic medical record systems and other it, and it can take a really long time. So post-closing even if you know, the deal is done and you know, who's paying for the integration of the it and all of that good stuff. That's usually something that's going to be, um, continuing on post closing for a while and might require, um, legal assistance if there are still, you know, um, data storage related agreements or other types of contracts with it vendors. So that's kind of gonna be an ongoing issue, um, protocols and standardization as well. So you might be kind of combining your policies and procedures that's stuff that usually goes beyond closing as well. Um, but might need legal review or might need medical staff review depending on the policies and procedures. So it's, it's really good to have an integration plan in place before closing so that you don't close and just kind of say like, all right, everybody off to the races, let's go. Um, there's still going to be things from an operational level that are together, um, and being implemented. And it's important to kind of have a plan in place once your transaction checklist has been kind of closed off, not to mention that there will also be regulatory approvals post-closing most likely. So, you know, depending on the type of deal, your Medicare enrollment change might not be due for 90 days. Post-closing so that's something you'll need to be keeping in touch with the operations folks and, and legal as well. Um, payer contracts, depending on the transaction, it might just be a post-closing notice instead of a pre-closing consent. So you might be dealing with getting those notices out there. Um, there's a lot of things that kind of like linger in the 30 to 90 day area. And so sometimes it's useful to continue having your periodic meetings until you at least get to the end of those checklists. Um, but an integration plan is key for the ops people on the ground, um, for, you know, six months, a year, however long it takes to finish up those, um, combinations,
Speaker 2:Great stuff, Michael or Alex, any other final comments?
Speaker 4:Sure. Just sort of, sort of tagging on to Heather's comments from, from the in-house council perspective, it's always good to create a closing memo to the file of all of those elements that really need to live on post closing, whether it's capital commitments, um, certain, certain restrictions on hiring or transfer of employees who, who have been part of the staffing of the deal, the kinds of things that may get lost in the shuffle as operations continue and the leaders who you worked with to create the deal have moved on to other projects. They may not be so mindful in some of those conditions we needed to get the deal done and related to that or any commitments to the government that we might have, whether it's charity care, indigent care payments, things of that nature that need to stay in place promises that were made need to be promises kept. So closing memos typically where I, where I keep that referred to it, whenever questions come up a year or two later about, uh, modifying the business that we purchased. So just a thought,
Speaker 2:Michael, any final comment,
Speaker 3:Keep in mind that you know, many of your clients haven't been through this process before. So when you talk about the paper jungle, it's overwhelming to them. When they start seeing all the papers flying and all the emails, et cetera, going back and forth. So it's important to speak with them, get them aware of it, get them braced for it, because if you take them one at a time, it won't be as bad as it seems. So at the end of the day is take your time. Don't be pressured by people wanting to turn a process or turn a, a, a document quickly, but take them one step at a time and we will work out well.
Speaker 2:All right, we're at the top of the hour, I really wanna thank our guest panelists for their time and all their insights. Um, I think that's it. Thanks everyone.
Speaker 5:Thank
Speaker 6:You for listening. If you enjoyed this episode, be sure to subscribe to ALA speaking of health law, wherever you get your podcasts to learn more about ALA and the educational resources available to the health law community, visit American health law.org.