Structuring Indemnification Provisions in Healthcare Mergers and Acquisitions

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Structuring Indemnification Provisions in Healthcare Mergers and Acquisitions Negotiating Reps and Warranties, Caps and Baskets to Allocate Risk THURSDAY, AUGUST 11, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Thomas H. (Tom) Hawk, III, Partner, King & Spalding, Atlanta Carol K. Lucas, Shareholder, Buchalter Nemer, Los Angeles The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 Structuring Indemnification Provisions in Healthcare Mergers and Acquisitions August 11, 2016 By Carol K. Lucas Buchalter Nemer and Tom Hawk King & Spalding

6 The Context In Which Life Sciences and Healthcare Companies Operate: Applicable Authorities Anti-Kickback Statute (and state equivalents) Stark Law (and state equivalents) False Claims Act (and state equivalents) HIPAA State Law Licensing Medicare and Medicaid Program Requirements (including overpayment rules) State Privacy Laws Billing and Coding/Reimbursement 6

7 REPRESENTATIONS AND WARRANTIES 7

8 General Representations and Warranties Importance of Fundamental Reps due organization authorization capitalization title to assets Financial Statements No Undisclosed Liabilities 8

9 General Representations and Warranties Employment and Employee Benefits Real Estate Environmental Taxes Insurance IP Transactions with Affiliates 9

10 Operational Reps with Healthcare Importance Absence of Changes No undisclosed liabilities Material Contracts Litigation/Investigations Licensing/Permits Subsidiaries Accounts Receivable/Accounts Payable 10

11 Material Contracts Threshold such that regulatory problem contracts are disclosed Any physician and other referral source arrangements (whether written or oral) should be captured and disclosed, regardless of size Payor Agreements Joint Ventures GPOs Material supply contracts Consider whether to require indication of whether a consent or notice is required Marketing contracts 11

12 Litigation/Investigations Broadly defined governmental reviews Sufficient lookback Importance of full disclosure, regardless of materiality (let Buyer evaluate materiality) Capture facts which could lead to litigation or negotiations 12

13 Licensing/Permits Schedule all Full force and effect No adverse facts which could affect validity Certificate of Need Expiration dates 13

14 HEALTHCARE SPECIFIC REPS/WARRANTIES 14

15 General Compliance with Healthcare Laws Compliance with Healthcare Laws. To Company s knowledge, Company is, and at all times during the six calendar years immediately preceding the Closing Date has been, in material compliance with all Healthcare Laws and requirements of Third Party Payor Programs applicable to it, its assets, business or operations. No circumstance exists or event has occurred which could reasonably be expected to result in a material violation of any Healthcare Law or any requirement of any Third Party Payor Program. Healthcare Laws means all applicable federal, state or local laws, statutes, codes, standards, rules and regulations, and guidelines relating to (a) fraud and abuse (including without limitation the following statutes, as amended, modified or supplemented from time to time and any successor statutes thereto and regulations promulgated from time to time thereunder: the federal Anti-Kickback Statute (42 U.S.C. 1320a-7b(b)); the Stark Law (42 U.S.C. 1395nn and 1395(q)); the civil False Claims Act (31 U.S.C et seq.); Sections 1320a-7 and 1320a-7a and 1320a-7b of Title 42 of the United States Code; the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Pub. L. No )); (b) Medicare, Medicaid, CHAMPVA, TRICARE or other Third Party Payor Programs; (c) the licensure or regulation of healthcare providers, suppliers, professionals, facilities or payors; (d) the provision of, or payment for, healthcare services, items or supplies; (e) patient healthcare; (f) quality, safety certification and accreditation standards and requirements; (g) the billing, coding or submission of claims or collection of accounts receivable or refund of overpayments; (h) HIPAA; [(i) the practice of medicine and other healthcare professions or the organization of medical or professional entities; (j) fee-splitting prohibitions; (k) requirements for maintaining federal, state and local taxexempt status of Company; (l) charitable trusts or charitable solicitation laws; (m) health planning or rate-setting laws, including laws regarding certificates of need and certificates of exemption;] (n) certificates of operations and authority; (o) laws regulating the provision of free or discounted care or services; and (p) any and all other applicable federal, state or local healthcare laws, rules, codes, statutes, regulations, manuals, orders, ordinances, statutes, policies, professional or ethical rules, administrative guidance and requirements, as the same may be amended, modified or supplemented from time to time, and any successor statute thereto. 15

16 Healthcare Permits Healthcare Permits. To Company s knowledge, Company holds, and at all times during the six calendar years immediately preceding the Closing Date has held, all Healthcare Permits necessary for it to own, lease, sublease or operate its assets or to conduct its business or operations as presently conducted (including without limitation, to provide the [describe Company s healthcare services] and to participate in and obtain reimbursement under all Third Party Payor Programs in which the Company participates), except where a failure to hold any such Healthcare Permits would not, in the aggregate, have a Material Adverse Effect. All such Healthcare Permits are, and at all times during the six calendar years immediately preceding the Closing Date have been, in full force and effect and there is and has been no default under, violation of, or other noncompliance with the terms and conditions of any such Healthcare Permit. No condition exists or event has occurred which, in itself or with the giving of notice or lapse of time or both, has resulted or would result in the suspension, revocation, termination, restriction, limitation, modification or non-renewal of any Healthcare Permit, except where such suspension, revocation, termination, restriction, limitation, modification or non-renewal would not, in the aggregate, have a Material Adverse Effect]. No Governmental Authority has taken, or to the knowledge of Company intends to take, action to suspend, revoke, terminate, place on probation, restrict, limit, modify or not renew any Healthcare Permit of Company. As of the Closing Date, Schedule [ ] sets forth an accurate, complete and current list of all material Healthcare Permits. Healthcare Permits means any and all Permits issued or required under applicable Healthcare Laws. Permits means, with respect to any Person, any permit, approval, consent, authorization, license, provisional license, registration, certificate, certification, certificate of need, qualification, operating authority, concession, grant, franchise, variance or permission from, and any other Contractual Obligations with, any Governmental Authority, in each case whether or not having the force of law and applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. 16

17 Accreditation Accreditation. Company has obtained and maintains accreditation in good standing and without limitation or impairment by all applicable accrediting organizations, to the extent prudent and customary in the industry in which it is engaged or required by law (including any foreign law or equivalent regulation), except where the failure to have or maintain such accreditation in good standing or imposition of limitation or impairment would not have, in the aggregate, a Material Adverse Effect. 17

18 Proceedings; Audits Proceedings; Audits. There are no pending (or, to the knowledge of Company, threatened) Proceedings against or affecting Company or, to the knowledge of Company, any Person (including any physician) involved in the delivery of healthcare or medical items, services or supplies, employed or retained by Company, relating to any actual or alleged non-compliance with any Healthcare Law or requirement of any Third Party Payor Program other than those Proceedings that would not, in the aggregate, have a Material Adverse Effect. There are no facts, circumstances or conditions that would reasonably be expected to form the basis for any such Proceeding against or affecting Company [or, to the knowledge of Company, any Person (including any physician) involved in the delivery of healthcare or medical items, services or supplies, employed or retained by Company. There currently exist no restrictions, deficiencies, required plans of correction or other such remedial measures with respect to any Healthcare Permit of Company, or Company s participation in any Third Party Payor Program. Without limiting the foregoing, no validation review, program integrity review, audit or other investigation related to Company or its operations, or the consummation of the [contemplated transaction] (i) has been conducted by or on behalf of any Governmental Authority, or (ii) is scheduled, pending or, to the knowledge of Company, threatened, in each case, other than those that would not, in the aggregate, have a Material Adverse Effect. Proceeding means any investigation, inquiry, litigation, review, hearing, suit, claim, audit, arbitration, proceeding or action (in each case, whether civil, criminal, administrative, investigative or informal) commenced, brought, conducted or heard by or before, or otherwise involving, any Governmental Authority or arbitrator. 18

19 Billing and Coding The Company s method of preparing and submitting bills to any Third Party Payor is and has been complete and accurate, consistent with Medicare and Medicaid program requirements and conforms or has conformed to the applicable American Medical Association s Current Procedural Terminology (CPT), the International Classification of Disease, Tenth Edition (ICD-10), and other applicable coding systems, in each case in all material respects and the method creates accurate claims for reimbursement by Third Party Payors. 19

20 Third Party Payor Authorizations Third Party Payor Authorizations. Company holds, and at all times during the six calendar years immediately preceding the Closing Date has held, in full force and effect, all Third Party Payor Authorizations necessary to participate in and be reimbursed by all Third Party Payor Programs in which Company participates, except where a failure to hold such Third Party Payor Authorization would not, in the aggregate, have a Material Adverse Effect. There is no investigation, audit, claim review, or other action pending, or to the knowledge of Company, threatened, which could result in a suspension, revocation, termination, restriction, limitation, modification or non-renewal of any Third Party Payor Authorization or result in Company s exclusion from any Third Party Payor Program. Third Party Payor Authorizations means all participation agreements, provider or supplier agreements, enrollments, accreditations and billing numbers necessary to participate in and receive reimbursement from a Third Party Payor Program, including all Medicare and Medicaid participation agreements. 20

21 Compliance Program Compliance Program. Company has provided or made available to Buyer a copy of its current Compliance Program materials. The Compliance Program is structured in all material respects consistent with the compliance guidance for [applicable provider type] published by the Office of Inspector General of the Department of Health and Human Services for [applicable provider type]. Compliance Program means provider programs of the type described in the compliance guidance published by the Office of Inspector General of the Department of Health and Human Services. 21

22 Corporate Integrity Agreement Corporate Integrity Agreement. Neither Company, nor any owner, officer, director, partner, agent, managing employee or Person with a direct or indirect ownership interest (as that phrase is defined in 42 C.F.R ) in Company is a party to, or bound by, any order, individual integrity agreement, corporate integrity agreement, corporate compliance agreement, deferred prosecution agreement, or other formal or informal agreement with any Governmental Authority concerning compliance with Healthcare Laws. 22

23 No Excluded Individuals Exclusion. Neither Company, nor any owner, officer, director, partner, agent, managing employee or Person with a direct or indirect ownership interest (as that phrase is defined in 42 C.F.R ) in Company, nor any Person (including any physician) involved in the delivery of healthcare or medical items, services or supplies, employed or retained by Company, has been (or, has been threatened to be) (i) excluded from any Third Party Payor Program pursuant to 42 U.S.C. 1320a-7 and related regulations, (ii) suspended or debarred from selling products to the U.S. government or its agencies pursuant to the Federal Acquisition Regulation, relating to debarment and suspension applicable to federal government agencies generally (42 C.F.R. Subpart 9.4), or other applicable laws or regulations, (iii) debarred, disqualified, suspended or excluded from participation in any Third Party Payor Program or is listed on the General Services Administration list of excluded parties, nor is any such debarment, disqualification, suspension or exclusion threatened or pending, or (iv) made a party to any other action by any Governmental Authority that may prohibit it from selling products or providing services to any governmental or other purchaser pursuant to any federal, state or local laws or regulations. 23

24 No Unlawful Payments Overpayments. Company has not (i) retained an overpayment received from, or failed to refund any amount due to, any Third Party Payor in violation of any Healthcare Law or contract; and (ii) except as set forth on Schedule, received written notice of, or has knowledge of, any overpayment or refunds due to any Third Party Payor. Prohibited Transactions. Neither Company, nor any officer, affiliate, employee or agent of Company, directly or indirectly, has (i) offered or paid or solicited or received any remuneration, in cash or in kind, or made any financial arrangements, in violation of any Healthcare Law; (ii) given or agreed to give, or is aware that there has been made or that there is any agreement to make, any gift or gratuitous payment of any kind, nature or description (whether in money, property or services) in violation of any Healthcare Law; (iii) made or agreed to make, or is aware that there has been made or that there is any agreement to make, any contribution, payment or gift of funds or property to, or for the private use of, any governmental official, employee or agent where either the contribution, payment or gift or the purpose of such contribution, payment or gift is or was illegal under the laws of any Governmental Authority having jurisdiction over such payment, contribution or gift; (iv) established or maintained any unrecorded fund or asset for any purpose or made any misleading, false or artificial entries on any of its books or records for any reason; or (v) made, or agreed to make, or is aware that there has been made or that there is any agreement to make, any payment to any person with the intention or understanding that any part of such payment would be in violation of any Healthcare Law or used or was given for any purpose other than that described in the documents supporting such payment. To the knowledge of Company, no person has filed or has threatened to file against Company or its Affiliates an action under any federal or state whistleblower statute, including without limitation, under the False Claims Act of 1863 (31 U.S.C et seq.). 24

25 Research No Experimental Procedures. Neither Company, nor or any officers, employees or agents of Company, has performed or permitted, nor do they have knowledge of, the performance of any Experimental Procedures involving patients in any of the Company s facilities since No institutional review board operates or has operated at any of the Company s facilities. Experimental Procedure means any human research project or study in which the data obtained are derived in any way through observation of, treatment of, manipulation of behavior of, or interviewing of, human subjects, except for the following: (a) gathering existing data in an anonymous form (e.g., review of existing medical records without recording identities of the subjects); (b) non-interventional observation of human behavior in a natural setting; (c) use of human tissues and specimens which are obtained for other purposes (e.g., anonymous use of tissues such as blood left over from clinical use); and (d) anonymous questionnaires which do not involve questions which, when answered, could lead to the identity of the subject; provided, however, that the exceptions described above are not applicable if they involve vulnerable populations, such as children, mentally or emotionally impaired subjects or prisoners. 25

26 Patient Credit Balances The Company manages amounts due to patients and the corresponding patient credit balances in a manner consistent with [applicable jurisdiction] s Unclaimed Property Statute. 26

27 Indemnities in Healthcare M&As Indemnity definition: An obligation by one person to hold another harmless from and against defined losses, liabilities and claims. 27

28 Indemnities in Healthcare M&As What losses are included? Direct Consequential Third party claims Attorneys fees and costs (reasonableness qualifier?) Diminution in value (apply the multiple) Lost profits 28

29 Indemnities in Healthcare M&As What does it cover? Representations and Warranties Covenants (i.e., conduct of the business between signing and closing) Transaction expenses Payor claims for pre-closing overpayments Taxes Indebtedness Specific issues identified in diligence Excluded liabilities Instead of specific list, may cover pre-closing operations of the business 29

30 Indemnities in Healthcare M&As Who is included? Indemnitees Buyer, officers, directors, owners, agents, representatives Indemnitors Asset transaction: Company and owners Equity transactions: Sellers Generally selling equity holders have joint and several liability Address with an Indemnity Agreement among them that apportions liability May be limited to individual responsibility for title, for example 30

31 Indemnities in Healthcare M&As Procedures? First Party Claims Notice and dispute procedure Third Party Claims Control of defense (does it void limitations in Agreement?) Right to settle or compromise Circumstances requiring consent of other party (injunctive relief, criminal liability) Set off rights Earn-outs Is earn out exclusive source? Timing Escrow Is escrow exclusive source? Timing-partial release during escrow period? 31

32 Indemnities in Healthcare M&As Survival of Reps and Warranties Limitation usually set: 12 months, 24 months for standard reps Intermediate: ERISA Health care Fundamental reps generally survive for full statute of limitations What are fundamental? Organization Title Tax Environmental 32

33 Caps, Baskets and Other Limitations Baskets Threshold for indemnification claims Generally aggregate, but there may be sub-baskets Large deals:.5% to 1% Smaller deals higher True deductible vs. tipping basket Intermediate reps may or may not be subject to basket or may have separate basket Fundamental reps generally not subject to basket Calculation of baskets-double counting? 33

34 Caps, Baskets and Other Limitations Caps For standard reps, 10-15% of purchase price In smaller deals may be up to 100% of purchase price For fundamental reps may be up to 100% of purchase price Entire stated purchase price or only cash at closing? 34

35 Caps, Baskets and Other Limitations Other Limitations Insurance Proceeds Materiality scrape -double or single (i.e., both determination of breach and calculation of damages, or only calculation of damages)? Obligation to mitigate Buyer s knowledge of inaccuracy of representation prior to closing Purchase of less than 100% Knowledge parties definition Exclusive remedy Fraud and intentional representation voids all limitations Ability to supplement schedules between signing and closing 35

36 Strategies for Avoiding Pitfalls and Resolving Contract Disputes Clearly define all material terms Use Reps and Warranties with specific and precise language, so that its clear what is covered and what is not Avoid earn outs 36

37 Avoid Overlap, To The Extent Possible Overlapping coverage of noncompliance by different reps with different survival periods and varying deductibles and caps can lead to disputes Sole subject limitations Preamble to disclosure cross-references? 37

38 Transparency By Buyer of issues discovered during diligence of parties can discuss remediation process By Sellers of issues identified in diligence No gotchas Address it in agreement directly 38

39 Client Participation Important for client to carefully read indemnity provisions and understand them Client reads reps and warranties 39

40 Pre-Closing Disclosure to Government Timing challenges Can provide a mechanism for parties to jointly work through the issues Stark issues overpayments 40