Tag: M&A

Categories
Health Law Highlights

Corporate Transparency Act and Health Care Providers

From AHLA, by Christopher Conn and Patrick Dunbar:

The Corporate Transparency Act (CTA), effective from January 1, 2024, mandates domestic and foreign legal entities operating in the U.S. to report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), with certain exemptions. This is to regulate “shell” companies often associated with illicit activities. Health care providers, unless exempt, will also need to comply with these disclosure requirements.

Two types of reporting companies exist under the CTA: domestic and foreign. Domestic entities are those created by filing organizational documents with a secretary of state, while foreign entities are organized under foreign laws but conduct business in the U.S. Health care providers organized as partnerships, sole proprietorships, or other entities not typically required to file with state governments may avoid being classified as a reporting company.

If classified as a reporting company, health care providers must identify their “beneficial owners” and report this information to FinCEN. A beneficial owner under the CTA is a person or entity that exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of the reporting company.

Non-exempt reporting companies must file beneficial ownership information (BOI) reports with FinCEN, containing specific information about the company, its beneficial owners, and its applicants. Timing requirements for these disclosures vary based on the date of entity formation and changes to previously disclosed information.

The CTA imposes civil and criminal penalties for willful failure to report, or intentionally providing false or fraudulent BOI. Health care providers must ensure disclosure consistency across multiple regulatory and licensing bodies. They should also be aware of the administrative challenges posed by the CTA, including determining beneficial ownership and timely reporting of BOI updates.

Categories
Health Law Highlights

Overlooking Executive Comp Packages Puts M&A Deals at Risk

From Bloomberg Law, by Ian Sherwin (Reed Smith):

  • Compensation and Motivation: Understanding the compensation structures and philosophies of a target company is crucial in M&A transactions. This includes executive compensation, which can be a significant cost, involving base salary, bonuses, severance entitlements, and health and welfare programs. It’s also subject to various tax, securities, corporate, and employment-related rules and regulations.
  • Transaction Structures: The nature of the transaction, whether it’s an acquisition or a merger, impacts compensation-related decisions. For private companies, disclosure concerns are minimal, but public companies have significant disclosure obligations. For carve-outs, considerations include potential employment termination and re-hiring by the acquirer, who bears the cost of severance, and the form of consideration for equity awards.
  • Severance and Bonuses: Severance protections can help maintain employee performance during a transaction. The value and duration of severance can vary based on seniority and job level. Transaction and retention bonuses can also be used to motivate and retain key employees. The former encourages employees to complete the transaction, while the latter incentivizes them to stay through certain milestones.
  • Covenants: Buyers often set restrictions on what the target can do between the signing and closing of a transaction. These include changes to benefit plans, compensation, hiring or termination of employees, and equity awards. Targets often seek post-closing employment-related covenants, such as guaranteed compensation and benefit levels, and continued participation in severance programs.
  • Sections 280G and 4999: Golden parachute rules (Sections 280G and 4999 of the Internal Revenue Code) are a major focus in most transactions. If triggered, a 20% excise tax could apply to certain service providers, and the target may lose a compensatory tax deduction. Mitigation strategies can include reasonable compensation analyses, valuing non-competition agreements, and shifting compensation to the current tax year. Private companies may opt for a shareholder cleansing vote to avoid these issues.
Categories
Health Law Highlights

Up and Up and Up: Accounting for Supply Cost Inflation in Due Diligence

From VMG Health, by Johnny Zizzi, CPA, and Melissa Hoelting, CPA:

  • Inflation-Adjusted Financial Analysis: In periods of high inflation, traditional financial metrics may not accurately depict a company’s performance. It is essential to adjust financial analysis for inflation, especially in the healthcare sector where supply costs have been significantly rising. Businesses must assess their ability to maintain profitability and manage costs in the face of these increases.
  • Cash to Accrual Impacts: Converting financial statements from cash to accrual accounting can significantly impact the quality of earnings, particularly when dealing with supply cost inflation. This process becomes more complex with rising costs, necessitating a financial due diligence team to ensure accurate and comprehensive analysis.
  • Robust Forecasting and Scenario Analysis: Given the uncertainties around inflation and supply chain disruptions, robust forecasting and scenario analysis are crucial for businesses to proactively manage the financial impact of rising costs. This approach can help companies adjust pricing strategies, negotiate better contracts, and implement cost-cutting measures to maintain profitability.
  • Net Working Capital Analysis: High inflation impacts a company’s balance sheet, affecting both assets and liabilities. Advisors must align the timing of cash flows associated with assets and liabilities to mitigate liquidity risks stemming from supply cost inflation. Transactions may shift towards a shorter lookback period to set the price/earnings-to-growth (PEG) in times of rising prices.
  • Conclusion: In the dynamic world of healthcare M&A, understanding historical spend normalization, cash-to-accrual conversions, and the impact of supply cost inflation is critical. The rise in inflation places a significant level of complexity on financial due diligence, highlighting the need for inflation-adjusted financial analysis, transition from cash to accrual accounting, robust forecasting, and vigilant net working capital management.