Any manager of a nonprofit health facility involved in a sale, merger or other affiliation knows that undergoing such complicated transactions can become a major distraction from the day-to-day task of running the facility. A particularly unfamiliar and time-consuming part of the transaction is gaining approval by the California Attorney General’s Office (“AG”). Prepared buyers and sellers who know what to expect from the process will be better equipped for success and avoid a potential roadblock to closing.
As brief background, California Corporations Code §§5914-5925 gives the AG the authority to approve, deny or condition any sale or change of control of a nonprofit general acute care hospital, or other “health facility” (as the term is defined in California Health & Safety Code § 1250) with a fair market value in excess of $3 million. Corresponding regulations in Title 11 California Code of Regulations § 999.5 list all information the seller must include in the notice of the transaction submitted to the AG for approval (“Notice”). (While the legislature currently is considering amendments to §§ 5914-5925, we do not expect any changes to impact the suggestions presented in this advisory.)
The AG’s directive when reviewing a Notice is to protect the interest of all public beneficiaries of a charitable organization. This requires, among other things, examination of any factors indicating self-dealing, improper use or diversion of charitable funds, and protection of the public interest. For this reason, preparation of the Notice is a significant undertaking that must include extensive data on factors ranging from the health facility’s fair market value and charity care spending to the search for a buyer and compliance with law.
This list of general tips, although by no means exhaustive, can serve as a helpful starting point for any health facility considering the need to navigate the AG notice and approval process:
1. Set realistic time expectations. Upon receipt of the Notice, the AG has 60 days to respond to the applicant, but may extend this period to 105 days. As part of the Notice, you must submit the final transaction agreement signed by all parties (“Definitive Agreement”), so this document must be completed first.
2. Dedicate sufficient resources to preparing the Notice. The Notice generally contains a large volume of materials that will fill at least several large three-ring binders, and must also be provided in a digital format, such as PDFs copied on a CD. The Notice will not be deemed received until substantially all required information is submitted.
3. Don’t be ensnared by Health & Safety Code sections 1260 and 1260.1. These complicated prohibitions caution the board of directors of the health facility to exclude directors and management from the negotiating team if they will receive compensation of any kind from the buyer in the future.
4. Focus on a clear “sales” process. Fairness is the key to any bidding process. The AG will want to ensure that all interested buyers have been treated alike and received equal access to information. This ensures the parties to a transaction did not manipulate the market value and that maximum value was obtained from the competing offers.
5. Know what to expect for AG conditions. The AG’s web site posts its most recent decisions granting conditional consent to nonprofit hospital transactions. Although the AG develops additional unique conditions to address its specific concerns arising from a transaction, past decisions show the conditions most buyers can expect the AG to enforce for five to 10 years after the transaction:
6. Communicate with the AG’s office. The AG not only enforces the laws applicable to charitable organizations, but also makes itself available as a helpful and solution-oriented resource to assist charitable organizations with fulfillment of their legal obligations. Health facilities should utilize the AG’s office as a valuable resource to facilitate information exchange and understanding. In an ideal transaction where both buyer and seller commit to open communication with the AG, the parties are much more likely to reach a solution all parties can agree on and close without delay.