HandshakeBecause the healthcare industry is heavily regulated and complex, most healthcare deals involve a sign-then-close structure; that is, they have a period of time between signing the agreement and the closing date. This built-in period after signing the purchase agreement gives the parties time to obtain necessary approvals or perform necessary pre-closing covenants.

Perhaps the most time-consuming and often uncertain of these pre-closing actions is obtaining regulatory and third-party consents and approvals. Federal, state, and local permits, licenses, and certifications – of which healthcare institutions often have many – typically require the issuer’s approval or notice in the event of a sale or change of ownership. Similarly, due diligence will reveal third-party contracts or leases that require the counterparty’s approval to the transaction. Such approvals must be obtained during this pre-closing period.

Many healthcare institutions are tax-exempt, and the transaction procedure and purchase agreement must reflect compliance with state and IRS requirements to maintain that status (e.g., fair market value of purchase price, attorney general approval where required, etc.). Entities with religious affiliations are also prevalent in the healthcare industry, and transactions involving those types of entities may require approvals (e.g., Catholic Church leaders) or post-closing obligations (e.g., charity care).

An often-overlooked aspect of the transaction from the legal side – but a big one for healthcare entities – is the integration of the transaction parties into a single functioning entity. This process takes years, of course, but an integration plan and/or transition services agreement should be agreed upon at or prior to the signing of the purchase agreement. In fact, integration or transition teams should, in most cases, be set up during the due diligence or LOI stage to ensure a smooth process. (Be careful, however, that the seller and buyer teams do not “jump the gun,” or begin to act together, prior to closing, as it might raise anti-trust concerns.)

Additionally, if the transaction (and the relevant antitrust analysis) is relying upon a certain level of financial or clinical integration as part of the deal, there needs to be a clear implementation plan for such integration. Too many deals are closed with the best of intentions on completing clinical integration within a short period of time, but the parties fail to implement the clinical integration. This erodes the legal justification for the deal in many cases as the antitrust concerns are not mitigated with proof of clinic collaboration.

Finally, the legal considerations do not end when the deal closes. Healthcare transactions in particular typically include various future commitments, such as capital expenditure requirements, physician recruitment/medical professional hospital privilege obligations, charity care promises, attorney general enforcement commitments, hospital foundation commitments, and anything else agreed upon in the purchase agreement. Issues relating to the transfer of patient records and corresponding privacy concerns, as well as record retention requirements, usually arise at and after closing. And shortly after closing some federal, state, or local regulatory or contract counterparty notices may still be due with regard to the transaction or change of ownership. Thus, post-closing obligations should be contemplated well in advance of closing but may last years into the future.

See Part 1 and Part 2