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Health Law

Tammy Scelfo Quoted in Ambulatory Advisor

Tammy Scelfo, Partner, was recently quoted in Richard Romero’s article Protect Yourself in a Transaction with an Acquisition Agreement, featured by the Ambulatory M&A Advisor. Click here to see the original article as it appears on the Ambulatory M&A Advisor’s website.

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The stress of the transaction of an urgent care can take a toll on the buyer and the sellers, running the risk of important issues falling through the cracks and harming the new owners of the establishment in the end.  According to several healthcare transaction lawyers, there is a document that is used near the end of the transaction that helps the buyer and seller understand where potential risks may land, how risk can be handled, and basically binds the transaction as a whole.  The Ambulatory M&A Advisor and lawyers involved with said transactions discuss the importance of an acquisition agreement document and why you need a well worded document to keep your transaction secure for both parties involved.

Tammy Scelfo, Partner at Allen and Gooch practicing in healthcare and other commercial transactions, explains that an acquisition document is your road map to a closing and your protection post-closing.  Scelfo explains that one of the most important aspects of the document is that it gives the parties the right to conduct due diligence, which is critical in any acquisition, but particularly so in a healthcare transaction given how heavily regulated the healthcare industry is and the severe nature of the penalties that can be assessed.

“A well-structured agreement should provide in addition to a clear road map of how the parties are to get from pre-closing matters, such as due diligence, to closing, but also how liabilities are handled after the closing should any arise.  To address this, the agreement should contain reps and warranties, as well as indemnity agreements,” Scelfo says.

“The acquisition agreement is vital; it’s your protection; it’s what you rely on; and it’s what gives a party its remedies against the other party if there has been a breach of a rep or warranty or an unexpected liability arises post-closing.”

Todd A. Rodriguez, partner and Co-chair of the health law group of FoxRothchild LLP explains that the acquisition document is typically the final and binding representation of the deal.

“You might have a letter of intent.  You might have a term sheet. You might have various ancillary documents; but the acquisition or purchase agreement, is the final culmination.  It’s  the final and binding incarnation of the transaction,” Rodriguez says.

Drafting your Document

Rodriguez says it’s important that the document clearly reflects what each party’s duties and responsibilities are, and the timeline for the transaction.  According to Rodriguez, a typical acquisition agreement will state what the purchase price is, when the purchase price is to be paid, how the purchase price is to be allocated among the assets being acquired.

“It depends on how the transaction is structured, but the purchase price may be allocated among various assets and the parties need to agree on that allocation so that both parties consistently report that allocation for tax purposes,” Rodriguez says.

If the purchase price is to be paid in a lump sum, if it’s to be paid in installments, whether there will be a promissory note, whether the purchase price will be paid by electronic transfer, bank check etc;   all of this information is involved in the acquisition agreement.

“Also, an important aspect is the timeline for the acquisition. Very often you want to build in a due diligence period so that both parties can conduct their pre-transaction due diligence on the other party.  Typically, the purchaser wants to make sure that there are no known or latent liabilities out there like legal judgments, liens on any of the assets being acquired.  You want to build in a due diligence period and you also want to clearly spell out what happens if any problems are discovered during due diligence,” Rodriguez says.

According to Rodriguez, when drafting such a document one must consider these questions should a negative surprise arise:  Can the parties walk away?  Is there an opportunity to cure any of those issues before a party walks away?

Alice G. Gosfield, owner of Alice G. Gosfield and Associates PC, a law practice in Philadelphia that focuses exclusively on healthcare, says that another key factor in the drafting of an acquisition agreement is the inclusion of indemnification.

“The buyer is going to want the seller to indemnify for any kinds of liabilities that can possibly arise after the asset purchase.  Lawyers spend time arguing over the indemnification. Indemnification basically means, if somebody else makes a claim against the buyer for which he suffers some damages or expense, cost or liabilities, then he gets to turn around and look to the seller to make them whole for the damage that they have suffered.  It basically requires the seller to open its pocketbook to make the buyer whole for the seller’s prior misdeeds or inaccuracies,” Gosfield explains.

Rodriguez adds that some of the issues that can arise are liabilities related to inaccuracies in representations and warranties that the seller is making about the business.

“For example, if the seller is representing in the agreement that there are no pending lawsuits against the business; and after the transaction, the buyer finds out there was a pending lawsuit and the buyer ends up incurring some costs, they would seek indemnification from the seller in that circumstance,” Rodriguez says.

“You want to spell out what the indemnification applies to, the caps on the indemnification.  This is something that should be clearly expressed in the agreement.”

Scelfo adds that you get reps and warranties to back up the investigation you have done from the seller that says everything is in compliance.  At this point is when you have them indemnify you in the event that is proven to be false.

Gosfield also says that restrictive covenants is also key to include in your acquisition agreement.

“Often, depending on what is being sold, if you are an urgent care center, one of the reasons that you have business is because you are located in a place that is viable.  The buyer is going to say, “I don’t want you going out and setting up something that competes with me.”  So for some period of time, the buyer will prevent the seller from starting an urgent care center with someone else within a defined geographic scope,” she says.

Gosfield adds that the enforceability of these restrictive covenants is on a state-by-state basis.

Take Cover

Scelfo says that there are many pitfalls that can be involved in a transaction, primarily a stock sale, and the acquisition agreement is the way to protect oneself on the tail end of the transaction.  She explains that when trying to protect your newly acquired company, a specific team should be assembled to ensure all of your bases are covered.

“When you are involved in the acquisition of an urgent care clinic or any other healthcare facility, or you’re selling a facility; you need to compile a team that involves a healthcare specific attorney, and whatever consultants are necessary to deal with valuations, and are able to conduct the particular types of due diligence investigations that are needed,” Scelfo says.

According to Scelfo, in transactions the biggest pitfalls are that there are so many regulations that apply and that could potentially cause there to be very significant penalties, potentially even jail time if they are not complied with.

“If you are the purchaser buying the stock in a facility and you haven’t conducted a thorough enough evaluation of their billing practices and coding, their methods of operations to see if they run afoul of any of the healthcare regulations, you could find yourself on the tail end of the deal closing and then finding out you are liable because you now own that company and that company conducted the business that resulted in the violation, even though it happened before your time of ownership,” Scelfo says.

“You need protection on the front end by investigating, you need protection on the back end by requiring the indemnity obligation.”

Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.