The 2019 novel coronavirus (COVID-19) pandemic continues to have a significant effect on American lives and businesses. The healthcare industry is no exception, and private equity funds and other strategic buyers that invest in the healthcare industry should be aware of key COVID-19-related trends and considerations regarding the acquisition or sale of healthcare businesses. McGuireWoods lawyers are assisting private equity clients in a significant number of buy-side and sell-side transactions in the healthcare industry and are standing by to advise on COVID-19 key trends and considerations in acquisitions, including the following:
- Diligence Considerations. Legal diligence has changed rapidly to address the unique issues healthcare companies face as a result of COVID-19. Understanding any governmental relief that a company has accepted — as well as how the pandemic has impacted its operations and relationships with employees, landlords, vendors, customers, lenders and other key third parties — plays a key role in fully appreciating the legal risks associated with buying or selling a business in the current environment, and how to best manage risk and avoid unintended consequences as a buyer or seller. For example, participation in specific governmental programs (e.g., the Paycheck Protection Program) may drive transaction structures and timing. It may also impose additional reporting and auditing risk on healthcare businesses that must be understood and tracked. In addition, sellers may have effectively suspended vendor payments that may complicate obtaining contractual consents and add risk to the relationship. McGuireWoods advises healthcare clients on COVID-19 matters and brings that depth of experience directly to clients as they diligence targets and prepare companies for sale.
- Valuation and Purchase Price Adjustments. Many buyers and sellers are revisiting pre-COVID-19 valuations but, beyond enterprise value impact and adjustments to the timing (up-front vs. post-closing) and form (cash vs. equity) of payment, the pandemic is having a key impact on customary purchase price adjustments, including calculations of cash, debt and working capital (including targets and components). Among other things, buyers and sellers are actively negotiating how various types of governmental relief — including Paycheck Protection Program loans, accelerated/advanced Medicare payments and deferrals of social security and other taxes — as well as items like deferred compensation, rent and capital expenditures and swings from the trailing 12-month averages for items like accounts payable, accounts receivable, inventory and paid time off, should be fairly treated within the complex negotiations surrounding purchase price adjustments. McGuireWoods regularly advises clients on these matters and understands the significance they may have on the bottom-line purchase price for buyers and sellers.
- Representations, Warranties and Indemnities. Managing legal risk as both a buyer and a seller is intimately connected to having appropriate representations and warranties and related disclosures. Multiple standard representations and warranties are regularly modified as a result of COVID-19, including tax, absence of changes, material contracts, compliance with law, employment, data privacy, customers and suppliers and insurance. For transactions that utilize representations and warranties insurance, there is an increase in exclusions related to COVID-19 and the parties need to consider how to manage these exclusions via indemnities or other risk allocation methods. Similarly, in certain areas of governmental relief, such as with Paycheck Protection Program loans and Provider Relief Funds, there is an increasing trend in line item indemnities for seller risks related to the associated certifications and compliance with terms and conditions. Having advisers who understand legal risk and market norms in this rapidly changing environment is key to providing appropriate protection to a buyer and price certainty to a seller.
- Closing Risk. Non-simultaneous sign and close transactions require specific interim agreements and closing conditions to manage COVID-19 risk between signing and closing. The specific elements of a non-simultaneous sign and close, including the likely period of time between signing and closing, will be heavily negotiated and put pressure on both buyers and sellers to carefully consider the business and economic uncertainty driven by COVID-19 and allocate risk via covenants, closing conditions and termination provisions. There also is an increasing trend of buyers and sellers moving simultaneous sign and close transactions to delayed closing transactions with the inclusion of a closing condition related to the financial health of the target company as a tool to bridge the gap between poor seller financial performance driven by COVID-19, with the buyer’s continued costs associated in pursuing a transaction on an uncertain target. Considering these and other trends and tools can be helpful in maintaining relationships between targets and buyers during these uncertain times, as well as managing closing risk.
- Post-Closing Risk. Buyers and sellers should pay careful attention to the size, structure and use of any post-closing payments, including escrows, holdbacks, sellers’ notes and earnouts. Buyers may want to consider specific COVID-19-related escrows to cover the indemnities discussed above. There are also unique benefits and risks to buyers and sellers driven by COVID-19 regarding post-closing payments, and these should be considered and balanced when determining an appropriate structure of consideration. In particular, healthcare companies should consider the federal and state fraud and abuse risks associated with any contingent payments.
In addition to the key trends noted above, acquisitions and sales of distressed entities are increasing in frequency and that trend is likely to continue as the pandemic persists. There are a unique set of considerations related to the acquisition or sale of a distressed entity, impacted by the stage and degree of distress. These considerations include fraudulent transfer, fairness and solvency opinions, fast pacing due to tightness of liquidity, limited indemnity structures and, in some cases, more formal processes resulting from bankruptcies.