Healthcare Representations And Warranties In The M&A Transaction – Food, Drugs, Healthcare, Life Sciences

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Healthcare mergers and acquisitions can take many shapes and sizes as dictated by various regulatory and commercial issues, but common to all such transactions is a commitment to provide health care representations and warranties to the acquirer. Representations and warranties (R&Ws) are generally highly negotiated aspects of the parties’ agreements, and their health-related parts are often more negotiated than others. A precise examination of these health components is necessary in order to accurately map all regulatory risks in the health care system and to avoid unintentional triggering of exemption obligations or termination rights.

A health F&W review typically includes (1) a review of the scope of health F&W; and (2) consideration of which healthcare R&Ws are applicable to the transaction.

1. Scope of Healthcare R&Ws. It is important that the parties understand and negotiate the scope of healthcare R&Ws. While the acquirer will seek to broaden the scope in order to reduce its risk, the target company will want to limit the scope and often has good reasons to do so. The common ways of addressing the scope are within the health research and development section, including (a) revising the definition of “Health Care Act” (b) adding “knowledge” qualifiers; (c) Include an “Applicable Period” (d) Materiality Characteristics and (e) Disclosures.

(a) Health Laws. The definition of “Healthcare Legislation” will be used throughout the Healthcare and Research section within the Final Agreement and should only include those laws that are relevant to the target company’s business. For example, if the target did not submit claims to federal health programs or entered into agreements with federal health claims, the federal anti-kickback law may not be relevant. The parties can negotiate whether this definition should include local laws and accounting rules or guidelines or industry practice (even if it is not an express law). Laws that may need to be avoided within this definition are those unrelated to health care; B. Occupational health and safety laws that should be limited to employment-specific R&Ws.

Examples of laws typically viewed as healthcare R&W include: False Claims Act, Civil Fines Act, State and State Anti-Kickback Acts, State and State Referral Acts, Medical Business Practice Acts, Beneficiary- Incentive Statute, the Clinical Laboratory Improvement Act, Medicare Prescription Drug, Improvement and Modernization Act of 2003, Food, Drug and Cosmetic Act of 1938, Controlled Substances Act, Health Insurance Portability and Accountability Act of 1996 and its Implementing Rules and Eliminating Kickbacks in the Restoration Act .

(b) knowledge. While the acquirer intends to pursue extensive research and development in the healthcare sector, the target company will want to limit the scope of its representations and warranties in the healthcare sector by attesting only the knowledge of selected persons. This would address whether a non-executive’s knowledge of a violation of the law that was not reported to management should be attributed to the target. Consider the following variations of the same R&W:

Example 1: “The company complied with all health laws.”

Example 2: “To the best of the company’s knowledge, the company has complied with all health laws.”

To the extent that the parties negotiate knowledge into the health research and development departments, they must select which individuals have the knowledge to be attributed to the goal. This usually includes the senior executives and can include board members and managers or other high-level employees. For healthcare R&Ws, it may be useful to include the knowledge of the target’s compliance officers (including its chief compliance officer, data protection officer, and security officer) in the definition of “knowledge”.

(c) Applicable Period. The Applicable Period of Health R&Ws deals with how far back the target company must certify compliance. Consider the following variations of the same R&W:

Example 1: “To the best of the company’s knowledge, the company has complied with all health laws.”

Example 2: “To the Company’s knowledge, the Company has complied with all health laws for the past three (3) years (the” Applicable Period “).”

It would be important for the acquirer to take into account the statutory review periods of the health laws relevant to the target company and to ensure that these review periods are at least covered within the R&Ws. The target company will want to limit these review periods as much as possible, for example to avoid the task of reviewing their historical transactions, especially if there have been changes in their senior executives who may not have the knowledge necessary to adequately confirm this Past.

(d) Materiality Features. It is also important to understand where appropriate materiality qualifiers should be used to address the scope of research and development in the healthcare sector. The target will want to reduce the risk by ensuring that it only validates items that are “material”. For example, the target’s radiation certificate may have expired for 1 day last year, which would technically violate a legal requirement but did not result in a penalty. Consider the following variations of the same R&W:

Example 1: “To the Company’s knowledge, the Company has complied with all health laws for the past three (3) years (the” Applicable Period “).”

Example 2: “To the Company’s knowledge, for the past three (3) years (the” Applicable Period “), the Company has complied with all material health laws in all material respects.”

(e) information. Additionally, in a set of disclosure plans annexed to the definitive agreement, the parties will disclose exceptions to the healthcare R&Ws that will affect the progress of the transaction and the progress of the healthcare R&Ws. This is the way to notify the acquirer if the destination has violated a law or rule in the past, or otherwise fails to confirm a particular R&W. Consider the following variations of the same R&W:

Example 1: “To the Company’s knowledge, for the past three (3) years (the” Applicable Period “), the Company has complied with all material health laws in all material respects.”

Example 2: “To the Company’s knowledge, for the past three (3) years (the” Applicable Period “), the Company has complied with all material health laws except those set out in Appendix 1.1.”

2. Selection of Health R & Ws. The parties should also consider which R&Ws are applicable to the target company’s business and whether the acquirer should provide healthcare R&Ws to the target company. The scope of each of these R&Ws is typically accounted for through the use of Knowledge, Materiality, and Applicable Time Qualifiers as summarized above. Common healthcare R&Ws include the following:

(a) Claims, Processes, and Investigations. The target may be asked to confirm whether they are aware of claims against the target alleging a breach of a health law or whether proceedings or investigations have been initiated against the target that could result in a breach of a health law or impact the business of the goal. In addition, the acquirer can request that the target company confirm that no significant internal compliance investigations are in progress. It would be important that both parties view the other party’s R&W as never being banned, excluded, or otherwise terminated from any federal or state health program.

(b) Permits and Licenses. The Target may be asked to certify that it and its employees and agents hold all necessary permits, license certificates, and other approvals to conduct Target’s business.

(c) Billing and Reimbursement. If the target is filing claims against a third party, the agreement will typically include R&W related to filing those claims and reimbursement procedures, as well as compliance with any overpayment rules. For example, an R&W may indicate that the target’s billing practices comply with all applicable rules and regulations and that the target has paid all known and undisputed refunds, overpayments, discounts, and adjustments.

(d) Privacy and Security. Compliance with data protection and security rules is also important to be specifically addressed in the final agreement. The acquirer may attempt to require a target R&W to comply not only with HIPAA and other privacy and security laws, but also with the target’s privacy and security policies and procedures.

(e) Operational Compliance Practices. In some cases, the acquirer will require that the target company has implemented an effective compliance program that is consistent with all elements of an effective compliance program as established by the Department of Justice or other federal government agency or other selected process.

Health care transactions involve a regulatory maze of health care laws and regulations, which makes negotiating health care research and development complex. Depending on the size of the transaction, the parties may consider taking out R&W insurance to mitigate the risks associated with such transactions and to give the parties greater peace of mind when entering into a deal. Overall, the parties should consult a qualified health advisor to assist in reviewing and negotiating the health-related terms of the final agreement.

This article was originally published in Healthcare Michigan in August 2021.

The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.