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Non-Profit M&A: Benefits and Pitfalls Analyzing Tax, Accounting and Business Aspects of Partnerships With Other NPOs
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WEDNESDAY, FEBRUARY 20, 2013
Presenting a live 110-minute teleconference with interactive Q&A
Michael Peregrine, Partner, McDermott Will & Emery, Chicago
Barry Sagraves, Managing Director, Juniper Advisory, Chicago
Dan McCormick, CEO, McCormick Group, Fripp Island, S.C.
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Non-Profit M&A: Benefits and Pitfalls Seminar
Barry Sagraves, Juniper Advisory LLC
Feb. 20, 2013
Dan McCormick, McCormick Group
Michael Peregrine, McDermott Will & Emery
Today’s Program
Types Of Business Relationships To Consider
[Dan McCormick]
Leading An Organization Into Merger Consideration
[Dan McCormick]
Latest Trends And Events In This Area
[Barry Sagraves]
Legal Issues In M&A, For Non-Profits Generally
[Michael Peregrine]
Financial Impact, Process, Pitfalls In Non-Profit M&A
[Barry Sagraves]
Governance, Due Diligence And Board Responsibility Issues
[Michael Peregrine]
Slide 8 – Slide 12
Slide 60 – Slide 66
Slide 13 – Slide 19
Slide 20 – Slide 37
Slide 38 – Slide 49
Slide 50 – Slide 59
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
TYPES OF BUSINESS RELATIONSHIPS TO CONSIDER
Dan McCormick, McCormick Group
The Collaboration Continuum
The Collaborative Continuum
COMPLEXITY
POTENTIAL BENEFITS
Initiatives
Instruments
Communicate Service- Sharing
Joint Ventures
Shared Governance Merger
MOU/LOA* Contracts Legal Filings
* Memo of understanding/letter of agreement
9
Formal Collaborations Short Of Merger
I. Joint venture
A. Two or more parties form an alliance to create or operate a new venture
together. Each entity bring specialized skills and resources to the table.
II. Shared services
A. Two or more parties agree to meld specific activities or programs into a
single delivery or service system (e.g., accounts receivables and
payables are handled by a centralized center).
III. Shared governance
A. Two or more parties agree to establish an enterprise by melding
resources and, more importantly, equally sharing governance and
strategic decisions.
“More than 100,000 nonprofit groups nationwide will fail within the next two years, including a few "big brand-name
nonprofits.”
- Paul C. Light, professor of public service at New York University
10
Collaboration Continuum (Cont.)
• As the opportunity for potential gain increases, so does the
complexity of the relationship.
• A collaboration can start at any point across the continuum
and does not suggest that it will proceed further.
• A contract for outsourcing, or melding specific budget line
items under a single management system, is a less complex
option but easier to dismantle.
• Sharing cost, oversight, operations management and
governance produces the best long-term relationships and
builds trust.
11
Alternate Forms For Merger And Acquisition
• Merger (A>B=B) or consolidation (A+B=C)
• Consolidation usually cost more because of having to create a new
tax-exempt entity to house the new structure.
• Acquisition of transfer of assets followed by dissolution
• “Alliance,” contract, joint venture, LLC, etc.
• Umbrella entity with subsidiaries (ownership issues)
12
LEADING AN ORGANIZATION INTO MERGER CONSIDERATION
Dan McCormick, McCormick Group
Starting The Exploration
I. Assemble an exploration team
II. Set reasonable expectations
A. Outcome – timing – ultimate relationship
III. Get the parties in a room
A. CEO to CEO – volunteer to volunteer – third-party consultant to
help
B. Informal exploration with no expectation other than determining
real interests
IV. Think about how you are “showing up”
A. Be aware of the dominance of the large and the tyranny of the
small “It’s not the strongest of the species that survives, nor the most intelligent,
but the one most responsive to change.” - Charles Darwin
14
Reasonable Expectations
I. It’s all about your mission and how to advance your impact on
what you are trying to achieve.
II. Formal engagements are entered into for three primary
reasons:
A. To acquire new skills, abilities and capacities or expand
the footprint
B. To develop, with a partner, new skills and abilities that are
impossible or difficult to achieve on your own
C. Preserve resources in a way that allows for impact on your
mission to continue and thrive
15
Assemble An Exploration Team
I. CEO and two volunteer leaders is an optimal make-up of an initial
team.
II. Set up a meeting with potential partners and ask them to bring the
same type of team
A. Sometimes, volunteer-to-volunteer is a better way to start.
III. Keep the discussion at a very high level
A. Talk about the vision of what might come from a discussion about
a deep formal collaboration or merger
B. Remember, you are seeking agreement to continue to meet and
explore, not to get closure on any concept, principal or
negotiation point.
IV. Don’t expect rip-roaring acceptance of the idea, concept or notion
A. NPOs are fiercely independent.
16
How To Start The Discussion
I. It’s not your neighbor’s collaboration/merger.
A. Our frame of reference is for-profit mergers that we know about or have
experienced.
B. NPO mergers are very different and can be formed to address “your”
critical needs.
1. Legacy concerns can be met.
2. Protection of people and programs can easily be accomplished.
II. Be open to lots of options
A. Think of it as the design of something new, not negotiating to protect
the old
B. It doesn’t have to be competitive or contentious.
“Change is the process by which the future invades our lives.” – Alvin Toffler
17
Why Some Strategic Relationships Fail
I. Leadership changes
II. Condition changes
III. Rarely equal involvement (somebody gives or gets more)
IV. No real lock on long-term commitment
V. It’s more like dating than a true partnership.
“The twenty-first century will be the age of alliances. In these complex times, no organization
can succeed on its own.”
Harvard Business Professor and Author James Austin, The Collaboration Challenge:
18
The Process And Outcomes
I. Design as if the page is blank, and dream of a new state and
structure
II. Explore all primary aspects of the potential new relationship
including branding, governance, functions, constituents and critical
legacy interests
III. Keep key volunteers and influential constituents up to speed as the
design begins to take form
IV. After the design is almost complete, share with your board and
others to “test” for the acceptance of the concept and support
V. Remember, at the end of the day, nothing will change until votes are
in; do not try to integrate prior to achieving the formal new state
19
LATEST TRENDS AND EVENTS IN THIS AREA
Barry Sagraves, Juniper Advisory LLC
Health Care Reform And The Fiscal Crisis
Healthcare Reform – Government Objectives
Expand coverage through new insurance model for the uninsured and under-insured)
Improve quality by implementing a system of rewards and penalties based on select quality measures
Reduce government expenditures by changing the payment system from fee-for-service (DRGs) to pay-for-health (population management)
Healthcare Reform - Implications
Hospitals will face lower revenues and higher costs.
The change in payment from fee-for-service to quality/health-based will drive vertical integration, making physician integration and recruiting increasingly competitive.
Requirements for electronic health records will cause capital and operating costs to increase.
Risk will be transferred from government and other payors to physicians and hospitals.
Hospitals are actively exploring business combination opportunities seeking: − Economies of scale: Access to capital, spreading overhead − Increase in scope: Physician integration, insurance, complexity
21
The Fiscal Crisis Part …
Source: U.S. Treasury Department, Government Spending Records
U.S. Federal Budget Deficit Gross Public Debt As A Percentage Of GDP
0.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
19
62
19
67
19
72
19
77
19
82
19
87
19
92
19
97
20
02
20
07
20
12
Gross Public Debt
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
19
62
19
67
19
72
19
77
19
82
19
87
19
92
19
97
20
02
20
07
Annual Deficit
22
… And Healthcare Is The Culprit
Source: U.S. Treasury Department, Government Spending Records
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
19
62
19
67
19
72
19
77
19
82
19
87
19
92
19
97
20
02
20
07
Annual Deficit
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
19
65
19
67
19
70
19
75
19
80
19
85
19
90
19
95
20
00
20
05
20
08
20
09
20
10
20
11
Defense Social Security Health Services
Federal Spending By Department As A Percentage Of
GDP
U.S. Federal Budget Deficit
23
Slide Intentionally Left Blank
Potential Benefits Of A Transaction
• Economies of scale
• Access to capital/improve credit
• Cover additional geography or scope of activities
• Gain expertise, improve quality
• Financial distress
25
26
Benefits Of Scale For Financing
4.0
5.0
6.0
7.0
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
Aa A Baa BelowBaa
TotalOpera ngRevenue CostofDebt
Revenue and Interest Rates by Rating Category
Source: Moody’s Median Report: Not-for-Profit Healthcare Medians August 25, 2010; Bond Buyer
General Obligation 30-year bond yields June 28, 2011; Modern Healthcare, Not-for-profit
downgrades outnumber upgrades, July 15, 2011
Revenue
($millions)
Required
Yield (%)
Source: Moody’s Municipal Financial Ratio Analysis database (fiscal year 2009 data)
System vs. Stand-Alone Bond Ratings
0%
10%
20%
30%
40%
50%
60%
Aa A Baa Below Baa
Health Care System Stand-Alone
Source: 2011 Citi Growth Study, data based on circa 245 reporting systems, health system data reflects average value of category versus aggregate average
Benefits Of Scale For Operations
-150
-100
-50
0
50
100
150
200
250
300
Operating MarginIncrease
Cost of DebtSavings
Supply ExpenseSavings
Bad Debt ExpenseSavings
CompensationExpense Savings
<$1 B $1-3 B $3-5 B >$5 B
Five-year average annual benefit vs.
aggregate average
Organizational scale:
Be
ne
fit
Ove
r A
ve
rag
e
(Basis
Po
ints
)
300 bps
200 bps
100 bps
0 bps
-100 bps
27
0
20
40
60
80
100
120
140
160
180
200
199
4
199
5
199
6
199
7
199
8
199
9
200
0
200
1
200
2
2003
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
Number Of Transactions
Total Q1 Q2 Q3 Q4
Another Merger Wave
Source: Irving Levin Associates
External stimulus:
Healthcare reform
External
stimulus:
Managed care
= 89
Internal stimulus:
Financial leverage
28
Industry Structure Is Remarkably Consistent
40%
49% 52%
55%
35%
40%
45%
50%
55%
60%
65%
Sources: American Hospital Association, Juniper estimates.
Pro
po
rtion
Of H
osp
itals In
Sy
stem
s
Nu
mb
er
Of
Ho
spit
als
, B
y C
ate
go
ry Total:
5,031
4,680 4,582 4,541
29
Precedent Transactions Since 2001
0.30
0.40
0.50
0.60
0.70
0.80
0.90
TV
/Re
ve
nu
e
Revenue Multiple
Mean Median
2.00
3.50
5.00
6.50
8.00
9.50
11.00
TV
/EB
ITD
A
EBITDA Multiple
Mean Median
Source: Irving Levin Associates
Notes: Acute care hospital transactions where data was reported; outliers excluded
Valuation Ratios Have Increased
30
Important Developments In 2012
• Shift from “looking at options” to “finding a partner”
• Academic/tertiary – investor-owned joint ventures
• Duke LifePoint
• Aurora IASIS
• Catholic system mergers
• Ascension – Marian
• Trinity - CHE
• Catholic system “reinvention”
• Dignity
• (Small) moves toward multi-state non-profit systems and
payor-hospital combinations
31
Aurora – IASIS Joint Venture
• Largest non-Catholic Wisconsin consolidator
• Owns 15 hospitals and 190 clinics and other facilities
• Mixed record of success with new facility expansion (Grafton vs. Summit)
• Focused on high growth, urban and suburban markets
• Owned by TPG, a $48 billion private equity firm
• Consists of 18 hospitals, one behavioral health facility and Health Choice, a managed Medicaid plan
Aurora IASIS Health Partners
• Joint venture was created as a response to “rapid and fundamental” changes facing providers.
• Will initially pursue healthcare acquisitions, new construction, management of facilities and development of clinical services
• Initial focus on “new and existing” markets in Wisconsin and northern Illinois
• Launched with announcement of 11,000-square-foot cancer center in Kenosha, where Aurora has a 73-bed hospital
• Other non-profit and investor-owned joint
ventures include:
− Duke LifePoint (MI, NC, VA)
− Integris – HMA (OK)
− Ascension – Capella (TN)
− Ascension Health Care Network (NJ)
− Ascension – LHP (FL)
− University of Florida – HMA (FL)
− Seton – LHP (TX)
− Children’s – Vanguard (PA)
• Provides Aurora with deep pockets to
continue to pursue an aggressive growth
strategy
• Creates new buyer for potential sellers,
allowing them to maximize capital and
price while accessing Aurora’s geographic
synergies
• Strong signal that Aurora’s regional
expansion is just getting under way
32
Whole-Hospital Joint Venture
Capital And Operating Partner (usually for-profit)
Subject Hospital Or Health System
Newco Health System (joint venture)
• Ownership stakes can vary and depend on contributions, but capital partner is usually the majority owner.
• Governance can also vary, but often are 50/50, with each party holding certain reserve powers.
Hospital(s)
• May use JV vehicle to acquire additional facilities
Capital partner typically holds a management agreement with the joint venture.
Contributes cash to JV
Contributes hospital assets, cash or both to
JV
33
“Buyer Joint Venture”
Capital And Operating Partner (usually for-profit)
Subject Hospital Or Health System
Newco Health System (joint venture)
Target 2
51-80% GP interest (50/50 control)
51-80% of cash
20-49% of cash
Target 3
Target 1
20-49% GP interest
(50/50 control)
34
Upper Peninsula Hospitals
35
Case Study: Marquette General MGH Overview Process Overview
Marquette General Health System
- Largest hospital and only tertiary provider in Michigan’s Upper Peninsula (UP)
- One of the largest rural providers in the country
- ~$300mm in net patient revenue, 315 beds
- Employs 60% of its practicing physicians
- UP remains largely unconsolidated, presenting opportunity for suitor to grow a geographic system around MGH.
Stressed financial position
- 19.9-year average age of plant
- Underfunded pension
- Out-of-the-money interest rate swaps
- Significant outmigration (~$200mm) from UP
Near-term financing issues required a partner willing to retire or assume significant liabilities.
Simultaneous, comprehensive, “fair” approach to market on Nov. 8
- Confidentiality agreement - Instruction letter - Information memorandum - Data room information
Broad participation achieved: - 26 approached - 18 confidentiality agreements - 10 offers (eight for-profit, two non-profit) - Wide range of structures and economic features
Five finalists selected for additional review and negotiations - Management meetings - Reverse due diligence - Revised, second round proposals
Partner selected on Feb. 16
LOI announced March 5
Definitive agreement and closing Aug. 31
36
Case Study: Marquette General (Cont.)
Client objectives - unique - Significant capital investment - Upgrade in medical capability - Symbiosis regarding UP strategy
Excellent market share, good market
Significant deferred capital needs
Highly customized approach and outcome
Largest rural transaction in history
Market-shaping academic joint venture
Suitor Evolution
Simultaneous, comprehensive approach to market - 27 parties approached - 10 initial offers received - No hybrids
Effort to develop medical center partner
Five finalists selected for additional review - Management meetings - Reverse due diligence
Separate meetings to stimulate hybrid - Juniper visits to Durham and Detroit - Duke visits to Marquette
New hybrid partner emerges among second proposals
Quality Capital
Strategy
Capital Quality
Strategy
Characteristics of buyer - typically mutually exclusive Identified suitor that met all MGHS board criteria
Controlled competitive process
37
LEGAL ISSUES IN M&A, FOR NON-PROFITS GENERALLY
Michael Peregrine, McDermott Will & Emery
What’s New
• The dramatic increase in merger activity among non-profit
hospitals is prompting a new set of governance and transaction
issues.
• Unique feature: The renewed popularity of the non-profit/non-
profit collaboration model
• Federal and state charity regulators are taking particular
notice.
39
Unique Timing Issues
• Managing the oversight needs of the board in the context of a
much compressed timetable
• Increased importance of letter of intent and mutual agreement
on core issues
• Elevated importance of ―nondisclosure‖ and ―confidentiality‖
provisions of LOI
• Timing concerns with respect to rapidly consolidating markets
• Consideration of value of experienced project facilitator
40
Slide Intentionally Left Blank
Important Contractual Terms
• Uniqueness of non-profit to non-profit deals with ―cashless‖
consideration
• Critical to articulate governance-related terms
• Special considerations with faith-based parties
• Highly unique considerations when consolidating secular and
faith based parties
• Particular financial terms and conditions (see next slide)
42
Important Contractual Terms (Cont.)
― Access to obligated group membership
― Commitment to future capital expenditures
― Compatibility of IT systems
― Headquarters-related programs and services, allocations
― System/congregation-specific sponsorship fees
― Financial savings and efficiency commitments
43
Important Contractual Terms (Cont.)
• Interim conduct of business
• Role of representations and warranties
• Post-closing dispute resolution process
• Covenant enforcement rights and funding mechanism
• Termination rights
• Feasibility (or not) of ―unwind‖/break-up mechanism
44
Critical Approvals
• Informed board approval/closing resolution
• H/S/R
• State approval under formal or courtesy process
• Membership approvals
• Special religious sponsorship approvals
• Input/approvals of key vendors and lenders
45
Special For-Profit Partnering Considerations
• Reasonableness/fair market value
• Bid process/consideration of alternatives
• IRS joint venture standards
• Appreciation of role in joint venture governance and
management
• Fiduciary out/unwind/buy-sell provisions
• Enforcement provisions
46
Post-Closing Considerations
• Reporting to the attorney general
• Assuring compliance with post-closing covenants
• Responsiveness to potential parent-subsidiary fiduciary duties
• Re-orienting mission focus of new directors
• Addressing merger-related conflicts of interest
47
Unique Regulatory Considerations
• Increased antitrust enforcement at state and federal level
(early compliance is KEY)
• Increased review process (formal, informal) at the state
attorney general level
• Statutory conversion review and approval process
• Uncertain resolution of parent/subsidiary fiduciary duty status
• Increased focus on ―fiduciary out‖
• Recent judicial decisions re: ―walkaway‖
48
Looking Ahead
• When the ―merger music‖ stops playing (perhaps by early
2014), the non-profit healthcare sector will be consolidated
into a much smaller number of larger, economically stronger
charitable organizations.
• This will, in and of itself, create new regulatory (e.g.,
antitrust, charitable tax exempt status, compliance),
corporate structure and governance challenges that will need
to be addressed by leadership and the board.
49
FINANCIAL IMPACT, PROCESS, PITFALLS IN NON-PROFIT M&A
Barry Sagraves, Juniper Advisory LLC
Typical Transaction Issues
• Governance
• Size, structure and representation of the new board
• Reserve powers and block voting by the sponsoring organizations
• People
• Management roles
• Employee roles, benefits and seniority
• Strategy/fit
• Alignment of missions and objectives
• Service mix and locations
• Medical staff integration and alignment
• Transaction structure
• Legal and financial structuring
• Value, either for purchase consideration or board seats
• Disposition of liabilities, indemnification and covenants
• Communicating with key stakeholders — value of using a PR firm
51
Education And Objective-Setting
• Create a shared “baseline” of knowledge and perspective among the
board
• Major topics to cover:
• Healthcare reform, scale, access to capital
• Physician alignment
• Risk-based revenue models
• Potential transaction structures and issues
• Individual interviews with each board member
• Answer any remaining questions
• Provides opportunity to air views that may be difficult to raise in
a group setting
• Comments are unattributed and “off the record”
• Reach agreement on the Board’s preliminary objectives for a
transaction
52
Potential Transaction Structures No Ownership Change Whole Hospital Joint Venture Consolidation Merger Outright Sale
• Joint venture • JOA • ACO • Asset sales • Affiliations • Restructure or reorganize • Divest non-core assets
• Sale of 51% to 80% of equity • Continued participation in
ownership and governance of the JV entity
• Cash transaction • Equity recapitalization
• Combination of two entities into a new company
• Cashless transaction
• Combination of two entities, in which one acquires all of the assets and assumes all of the liabilities of the other
• Cashless transaction
• Sale of 100% of assets or equity • Sometimes accomplished via
pre-paid lease • “New” investor owned – non-
profit hybrids emerging • Cash transaction
• No change in ownership • No change in control
• Partial change in control • Partial change in ownership
• Partial change in control • Partial change in ownership
• Change in control • Change in ownership
• Change in control • Change in ownership
Pros • Shared local control • Strong partner with capital
access • Management • Scale
Pros • Local control • Scale • Difficult transaction
Pros • Local input • Scale
Pros • Maximize cash value • Local foundation • Straightforward • Access to capital, management,
scale
Cons • Minority shareholder • Inability to change partner • Investment risk
Cons • Difficult to negotiate • Difficult transaction • Sometimes not “enough”
Cons • Shared or lost control • No economic consideration
Cons • Loss of local control • For-profit • Finality, shift in mission
Juniper client example: Methodist/San Antonio Advocate/Chicago Methodist/Peoria, Ill. Marquette General/Michigan
53
Transaction Process Prepare to approach market
Marketing strategy and prospective
partner list
Internal due diligence
Prepare information memorandum
Establish procedures
Weeks, cumulative
15 - 18 13 - 16 30 23 - 26 9 - 11
DEFINITIVE
AGREEMENT PREPARATION
17 - 20
INITIAL
PROPOSALS
FINAL
PROPOSALS
SELECT
PARTNER
LETTER OF
INTENT
GOVERNMENT
APPROVAL(S)
4 6 - 8
APPROACH
MARKET
• • • • • • • •
III.
[Transaction]
II.
[Marketing]
Select partner
Evaluate final proposals
Further negotiate terms
Select preferred partner
Initial proposals
Contact potential partners
- Confidentiality agrmt.
- Instruction letter
- Information memo
Request proposals
Select Phase Two
participants
Refined proposals
Procedures for Phase Two
Company visits and
management presentations
Solicit final proposals
OPTIONS
ASSESSMENT
0
•
Letter of intent
Business agreement on key
economic and noneconomic
terms
Period of exclusivity
Contingent on
- Confirmatory due diligence
- Definitive agreement
- Appropriate corporate and
governmental approvals
Definitive agreement
Binding agreement on
substantially all business and
legal terms
Often contingent only on
government approval
Closing
Resolve conditions to
closing
Obtain state and
federal approvals
I.
[Assessment]
Options assessment
Comprehensive analysis of mission,
financial, and business situation
Comparison of the pros and cons of
various potential alternatives
Establish board’s objectives and criteria for
potential transaction
Board decisions – stop or proceed
54
Slide Intentionally Left Blank
Asset Sale Vs. Membership Substitution
Asset sale
• Cash purchase price
• Proceeds to successor
foundation
• “Pick and choose” assets and
liabilities
• Reps, warranties,
indemnification, escrows
• Fairness based on valuation
and/or process
Membership substitution
• Usually no purchase price
• Like a corporate stock merger
• (Almost) all assets and
liabilities included
• Helpful to have successor
foundation, with or without
assets
• Demonstrating “fairness” less
straightforward
56
Potential Pitfalls
• Mismatched expectations: “Merger” vs. “takeover”
• Lack of clarity regarding objectives
• Poor/unclear communication
• Liabilities:
• Swaps
• Pension
• Lack of preparation for gaining approvals
• Attorney General
57
Not Just Healthcare: Is Education The Next Area For Consolidation?
• Extremely fragmented
• Government-funded and/or supported
• Broad usership across economic spectrum
• Capital-intensive and labor-intensive
• Public, non-profit and government ownership
58
The Issues Appear Similar …
• Seismic demographic shifts
• Revenue and cost pressure
• Medicare/Medicaid/insurance subsidies
• Grant and loan guarantee programs
• Inflexible cost bases (tenure, unions, capital)
• Outdated(?) business models
• Increasing questions about relevance of major
components:
• Inpatient acute care
• Traditional four-year university
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GOVERNANCE, DUE DILIGENCE AND BOARD RESPONSIBILITY ISSUES
Michael Peregrine, McDermott Will & Emery
Basic Considerations
• Non-profit hospital boards considering a merger or other
change of control transaction will be held to a higher standard
of care, as part of the deliberative process.
• This applies regardless of the type of transaction model.
• Specific review obligations may differ, depending upon
whether one is pursuing non-profit or for-profit parties.
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Basic Considerations (Cont.)
• Regulators and the courts often view complex and challenging
transactions such as change of control as imposing ―special
obligations‖" on the governing board of the participating non-
profit.
• In such circumstances, enhanced ―special scrutiny‖ will be
applied to help ensure that the board and executive leadership
have acted appropriately in considering the transaction.
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Slide Intentionally Left Blank
A 10-Point Checklist Form: Informed Conduct
#1: What’s prompting the proposal?
#2: Where did the proposal come from? Is there legal feasibility?
#3: What are my basic review obligations?
#4: Is there a simpler way to achieve the goal?
#5: How will the board be positioned to review the proposal?
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A 10-Point Checklist Form: Informed Conduct (Cont.)
#6: What kind of information should I be looking at?
#7: What are my evaluation criteria?
#8: Is this the same deal?
#9: Do I understand the risks?
#10: Am I ready to make an informed decision?
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Special Factors
• Timing of board analysis - from the very beginning
• Board/negotiating team communications
• Clearing possible board, executive and advisor-level conflicts
• Ability to rely on advice of executives and consultants (with
limitation)
• Avoiding excessive deference
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