Private Equity in Healthcare: Legal Challenges and Best Practices for 2025 with Andrew Bab

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Joining me today is Andrew Bapt, Partner.

And Co Chair of the Healthcare Group.

At Debavoice and Plimpton.

Debavoice and Plimpton is a premier law firm with market leading practices, a global perspective and strong New York roots. The firm is particularly strong, among other things, in private equity.

M and A and healthcare.

Over the course of 2021 to 2024, their M&A team handled more than 680 announced and completed M and A deals with a total transaction value over $1 trillion. Today we're going to talk about facing regulatory shifts and new legal landscape in M and A. Andrew, how are you doing today?

I'm all right, thanks. Good to be here.

Thanks for taking the time to meet up with me live in New York in our studio over here.

Absolutely.

Can we kick things off with a little intro about yourself?

As you mentioned, I'm a partner at the firm of Devores & Plimpton. I have been practicing law for 35 or more years now. I'm an M and a practitioner principally I co chair the healthcare group. I probably do about 60, 70% of my work in the healthcare group. But my practice includes public and private deals, private equity strategics and it's been a great experience working at debavoice and great to be here.

That's a lot of deals over 35 years and you got the healthcare focused on both public private.

Yeah, we try to keep general a DEB voice as much as we can and so and do a lot of different types of work.

Let's get into it. What are the big changes happen regulatory wise? I feel like there's two lenses. There's like a broad holistic view and then looking into the healthcare space, new.

Regulations, the things that people are thinking about these days are perhaps things like antitrust, cross border related regulations, whether that's cfius or sanctions rules or the reverse CFIUS as you know, I mean executive orders and case law on things like DEI programs. And that's something we're seeing that the DEI programs and many companies being unwound and compliance with those rules and those cases is an important factor when you're considering buying another company to see if they're complying and what might need to be done down the road. So it's not so much regulation as it is so far, executive orders and case law. But those are some of the key things that people are focused on more generally.

What's reverse cfius?

So reverse CFIUS is outbound investment rules that are fairly new. What they are is in certain circumstances the government can prohibit or at least require notification of investments outside the United States. Principally in Chinese companies with specialized technology or products, but also in other companies, other non US Companies that have some sorts of relationships with China. Those are just things you have to know about when you're doing deals outside the United States.

Interesting. So you have CFIUS for investments coming in the U.S. reverse CFIUS is investments.

Going out of the U.S. every country has its CFIUS. We call them FDI foreign direct investment Rules. But those are rules by other countries that are in place that may object to or may require approval for investments into that country, into certain industries. And what's happened over the last five years is that many of these rules have been focused or were invented in connection with the desire to protect national security. CFIUS certainly is a national security set of regulations, but over the last five years, we've seen the definition of national security broaden to enormous heights so that it's not just investments in the defense industry or something like that, it's investments in steel. People are talking about how the, the ability to manufacture our own steel is critical to our defense, our national security. Same thing with high tech nanotechnology and those sorts of things, because those are the future of both the economy as well as our actual defense of the nation.

And social media.

And social media as well. Sure.

Yes. They've really broadened the scope of what they consider national security.

They have. Under Trump, we're going to see that used at least. I don't think we're going to see those kinds of regulations relaxed. We're going to see them used to further his policies. You got a country that he wants to pay more to NATO. One can see more aggressive CFIUS enforcement of companies that may want to invest in this country from that country.

Do you think there's areas that would.

Ease up, like tech? I feel like they've been under a lot of constraints, regulatory wise, anti competitive from doing deals. But it seems like a lot of them are showing up to Trump events and advocating.

So the pure regulation, putting aside the cross border Sofia stuff, under Trump, antitrust regulation is going to be relaxed in many ways, not in all ways. We're going to see the antitrust authorities be more willing to talk about remedies when a deal has problems, which Lina Khan and the Biden administration were much less willing to do. So in other words, to divest a piece of the business in order to eliminate the antitrust concerns. It was very hard to get those kinds of remedies so that you can at least move your deal forward. So that's one thing we'll see. The attack, if you will, on private equity and big business that we've seen to some extent from under the last administration. It might be relaxed. That will be good. For instance, the antitrust authorities over the last few years have been focused on among Other things, private equity roll ups. So that where the private equity firm buys a platform in a particular area and then buys more and more of those types of businesses and builds up a larger platform. That had never been an antitrust concern really until Lina Khan got in. And now that was sort of a focus that I think will no longer be a focus under Trump's regime. But who knows? He had used the antitrust laws to kill a number of deals in his first term. I don't think we can expect it to be a much more relaxed situation, but I think there are areas where it'll be lot better and easier for M and A to proceed.

Not a full 180 change, but definitely some anticipated changes and sounds like a little more business like thinking.

So I think it'll be businesslike. I think the discussions with the antitrust authorities will be more transparent. They'll tell you what they need, what the problem is, you'll get it done. Your question was more other regulatory regimes on healthcare may be a problem, but on other areas, tech is a good one, AI is a good one. Regulation will be more relaxed and it will be easier to do deals and it will be easier to run businesses in those areas.

People are backing out of DEI initiatives.

Yeah.

How does that impact M and A?

It does in a couple of ways. I think it's more of a diligence type question and an integration question. And it may be something that you want to put into your draft of the merger agreement. You might want to say that the company is complying with the various cases and executive orders relating to. But I think it's really going to be a question of diligence, making sure compliance is being monitored and you limit your risk.

What was all the buzz last year about amending the Delaware code?

There were a few cases last year in Delaware. They were in response to three cases really that put into question some very common practices. The most significant of those was the Molis case which held that very common provisions that you see in all sorts of shareholder agreements, like veto rights that were granted to a shareholder might violate Delaware 141, which says that it is the board that has the duty and obligation and right to manage the business and affairs of the company. The court did say you can put those kinds of rights, if you want, into the certificate incorporation. You can't put it into a contract, a shareholder's agreement between the shareholder and the company. There are literally hundreds of thousands of shareholder agreements that do this. But it really threw a wrench into how we practice in this area. The other piece of this that was a challenge was that activists, when they settle with a company, very often will also enter into sort of these shareholder agreements, which gives the activist could be veto rights, could be a right to appoint a director, whatever it is, which also came into question, which, if they did come into question, would make it difficult to settle with an activist. So there was a lot of concern about this. Delaware just jumped into action. They amended the statute. Say yes, yes, you can. As long as the provisions in the shareholders agreement are not contrary to law or inconsistent with what you could have put into a certificate of incorporation, you can do. It doesn't mean that the fiduciary duties of the board in agreeing to those things is waived in any way. It overruled the most challenging piece of the Mullis case. That's one of the cases the other two are, I can talk about. They're a little less significant. One is interesting, the Crispo case. There has been on the books a New York case called Con Edison, which held that shareholders don't have the party beneficiary rights. They don't have a right to seek a lost premium from a buyer who fails to close a transaction. Nor does the company have the right to seek that unless you contract for it. People have put in many agreements, Con Edison language which allows shareholders to be deemed third party beneficiaries for that purpose. The Crispo case in Delaware, which arose, frankly, out of the attempt by Elon Musk to get out of his deal to buy Twitter. And one of the shareholders of Twitter sued. And then when Musk decided to go forward with the deal, the shareholder sought a fee from the company, saying, hey, look, it was because of me. And the court ruled, no, you're not a third party beneficiary. Look at the whole regime under Con Edison. The Delaware legislature amended the statute. But you can put provisions in the agreement that allow for the shareholders to be third party beneficiaries and to seek those kinds of damages for lost premium. What's the effect of that? The effect is probably people are more focused on it than they were that it gets negotiated now where in the past it had not gotten a lot of attention.

I can see why this upsets Musk on the Mullis one. Can we go back to that? I just want to make sure I understand that one. If you can maybe give me an idea of, like, how does that actually affect the current landscape for shareholder agreements and board responsibility?

The effect of the amendment is to restore what was common practice. Those amendments aren't going to result in many changes because it's really just restoring what people have done in the past and overruling the sea change that was in the Mola's case. And so, for instance, let's say I'm a Delaware corporation, I have a significant shareholder, I may have an agreement with that shareholder. They come to that shareholder in order to do certain things. He has a right of veto to say veto a change of the business, the lines of business. Just as an example, what the Molis case said is no, you can't do that. That's unenforceable because you are constraining the right of the board to manage the company in its best judgment. But that's the way we've done these things for decades. It was a real eye opener.

That's what I'm wondering is there? I said that's the change that they made, I guess what's like the net impact from that? Do you see more people sort of running away from Delaware as a place to incorporate?

When moas came out, when Activision Blizzard came out, when Crispo came out, people were starting to say, hey, is Delaware the best jurisdiction to incorporate in? Should we run to Nevada, which has been marketing there corporate law pretty vociferously, or Texas as well? Musk was particularly upset about not this case, the Crispo case. I didn't like it. But the cases that held that his multi billion dollar pay package were invalid got him a little annoyed. He said we gotta go to Nevada. And I believe he has moved X to Nevada. And Meta is also looking to potentially move, which was a little surprising to us. There was a lot of noise. But Delaware is still by far the best place to incorporate. The experience they've had dealing with these issues. Chancery Court focused directly on these issues. The flexibility of the statute, the intelligence sophistication of the legislature. I mean for the legislature to have been able to in such short order overrule this case because it recognized the damage it could do to the market and to corporations that are incorporated in Delaware was pretty impressive. There were a lot of criticisms. They're doing it too fast. They're doing too fast. But what they're doing is returning to the status quo, which had worked for decades. We generally would be surprised to see an exodus from Delaware, but Meta has said they're planning to reincorporate and there have been some other companies as well.

Interesting. We talk healthcare. What's going on in the healthcare world?

Oh my God. It depends on which day you ask me. There is A lot going on in the healthcare world. One of the things that we're seeing quite a bit of is the growing state intervention into health care transactions. We've seen statutes being passed in California, in Massachusetts, in Washington, Oregon and another 30 states. Most of those tend to give the regulators the right to notification of a deal involving a health care company in their state. And maybe they have the right, like the OCA statute. OHCA statute in the Office of Healthcare Affordability in California was created two years ago. Now it's a whole new bureaucracy. And what their job is supposed to be is to look at potential deals. They get time, like 90 days to look at them and decide whether they want to perform a constant efficiency review, a review of who these companies are on the market, what the effect of the transaction might be in terms of cost, quality of care and access of care. Access to care. And they're not supposed to be able to block deals, but they can delay them. They can cause lots of costs and expenses. But there are some statutes that actually do give the regulators or the attorney general the ability to block healthcare deals in the state. California has tried unsuccessfully so far to pass one, but who knows whether it'll come back? And part of the problem with those kinds of statutes is that not only do they particularly for private equity, but for others as well. Are you going to put your money into California, California Healthcare Company? If it's completely possible that you won't be able to get out because you can't sell the company without getting this approval, and the attorney general decides that they don't want to give the approval. That's a big risk to take, particularly for a PE firm who is looking for a particular horizon. Few three to five years and then out.

So we're seeing increased regulation at the state level where they want notification about these deals. They want to understand the effect of the transaction, and they're getting some power, which currently is to delay deals. And potentially it's growing to become the ability to actually block deals.

Yes, that's right. And Massachusetts, for instance, just passed a statute that. And again, California was trying to. That actually is prejudiced, in my view, against private equity. It calls out private equity and some other areas in this statute, and it applies only to those areas. The California statute would have applied only to transactions involving private equity or hedge funds. This is an area that practitioners need to be constantly monitoring. What else in health care, there is some of the things we've actually already talked about. There's antitrust concern. That concern may or may not go Away with Trump still probably an industry that will be targeted to some extent by the antitrust authorities. There's something out there called the biosecure act, which has not yet passed Congress, but I think there's a good chance that it will. And that's another sort of supply chain type statute that says that it's passed in its current form. It would say that the US Government, government agencies are not permitted to contract buy products from companies whose supply chain includes certain covered companies in China, which of course means that since government agencies includes Medicare and Medicaid, it's a pretty significant sanction. So that's the kind of thing that we're seeing, the supply chain intervention by foreign governments. Trust is an issue. There's always new regulation, of course, at the FDA level. And we're seeing a number of things. One area is, of course, artificial intelligence becoming a key player. We think, in general, we're seeing under Trump, we'll see the regulation of AI relaxed. One issue that the FDA has recently dealt with is, look, if I've got a medical device and that medical device has AI built into it and it learns from experience, at what point is that a new device that that needs to go again through the device approval process with the fda? And that was a tough question. There are regulations now that allow companies to upfront say, this is what we expect is going to happen. This is the range of things that are going to happen with our changing product. And that should work as long as you stay generally within that range or the AI does. There was this Loper case that made a big splash, a Supreme Court case that overruled Chevron deference. Chevron, as you know, was the longstanding case that said that if there's ambiguity in the statute, the courts will defer to the interpretation given by the relevant agency. And that's now been overruled, which means that if there's some ambiguity in the law, the court has the right to determine what the right answer is. Certainly whatever the agency says will be persuasive. People tend to think that this will give the opportunity to many companies to go out and litigate against regulations that they don't like and that they think may not be consistent with the statute. Whereas it was almost impossible to win those kinds of lawsuits, because if there was ambiguity in the law, the court would just defer to the agency that made the rule.

A lot of stuff to keep up with, my friend, supply chain intervention, how the FDA is changing their regulations, some of these rules getting overruled, and things just Constantly changing.

So it's an exciting, wonderful area to practice law in. It's always changing, there's always something new.

Hair raising is what I think of. You're used to it.

Yeah.

The pharma industry, what is contingent value rights?

Contingent value rights. We call them CVRs. They are instruments that are used in deals to sort of bridge valuation gaps between the parties and deal with uncertainties. There are actually two kinds, probably more than two kinds, but the two kinds that you see are there. There's one that are called event driven CVRs, which are the ones we're talking about and put the others to the side for a moment. But event driven CVRs are the instruments that create value or provide value to the holder if a contingency is achieved or satisfied. So if I've got a company with a drug that's in phase two trials and it's going to get through and get approved by the fda, who knows? And maybe the buyer says, I don't think so, I don't think this is going to make it. How do you value that company with that distinction? They may solve that problem by saying, okay, look, we're going to give you a piece of paper or shareholders a piece of paper that in the event we do get through fda, we'll pay you money, we'll give you some money, and here's how much we'll give you. There are lots of different milestones or triggers that are used in these CVRs. They can be FDA approval, they can be commencement of clinical trials, they can be commercial launch of the product. They could be based on revenue achievement of certain revenue goals over some period of time. So there are a lot of ways to structure these things. There's been an upsurge in use in the pharma space, particularly the pharma biotech space, particularly over the last two years. Why is that part? Because increasingly difficult to value these companies, particularly biotech companies, which don't have a product yet on the market, was a challenging market to begin with. Anything that could be used to get to a close, get to a signing, let's use it. There's just been a substantial upsurge. Now they can be used outside the context of pharma. People use them in other industries too, but very rarely. The reason for that is, is that many of the concepts that you get in CVRs, you see in the common licensing agreements that pharma companies enter into every day, they're very familiar with the idea of milestones, they're very familiar with the idea of license fees. They're very familiar with the idea of efforts covenants. That's where we see the most challenge in these CVRs is what does the buyer have to do to achieve those milestones? It's one thing to say, yeah, look, if the FDA approves it, we'll give you $100, but say we're not going to spend any money or effort or resources to try to get it approved. One of the big challenges is negotiating an efforts covenant that works for both sides. These efforts covenants, though, are often the source of litigation, as they are in earnouts. And we've seen a couple of significantly sized litigation in this space. That's a risk and people need to decide whether it's worth the risk. It's fair to say that I'll pick a number. 20% of CVRs that are discussed in deals actually get used very often. I think these CVRs are more a mechanism to keep the parties talking than they are to actually solve the problem or ultimately be part of the consideration. Yeah, you're seeing them more and more, but I still think that they are a negotiating tool. But as I said, you're certainly seeing quite a bit of them in the pharma space as well.

So it's trending, it's increasing farmer space. They sound like sophisticated earnouts, but less certainty earnout. You sort of expect to hit your milestones and achieve it where here they're not as certain.

CBRs are sometimes called public earnouts because earnouts are generally done in the private context. Whereas cvrs. How do you do an earn out in the public context when you've got a thousand shareholders running around? You do it by using these CVRs. They are very similar, their triggers are often very different. And under a line of SEC no action letters, if it's a real earn out, if your milestones or your triggers are based upon an earnings metric, EBITDA or whatever it might be, you may well have to register that as a security. And when you register it as a security, there's disclosure, there's all kinds of things that have to play into that. But many of these, I shouldn't say many, there used to be many, now there are a few of these that do actually trade as securities. Not so much because they are based upon earnings metrics, although there have been some of those. But just because there's a thought that if they trade, there's more liquidity, they're more valuable, both the buyer and the seller are happy that way. It's fair to say that not a scientific study, but if you looked at the market value of these CVRs that do trade and compare them to the value that the banker had attributed to them in doing its fairness analysis at signing, it's generally the case that they trade lower than that value. So it's not clear that anybody's really getting the value. They're complicated instruments, not a lot of float. They often don't keep their value.

So that's unique trending.

It's a structural device.

Yeah, device.

Structural device, yeah. And look, these have been around for a while, but they've become a little bit more ubiquitous in the pharma space than before. It's also become sort of the thing, hey, my next door neighbor, big pharma guy, just use this, I want to use it too. It's that kind of thing.

What else have you seen in terms of just deal structure across healthcare? It's always interesting because I do these quarterly roundtables, heads of corp dev and it's always the folks in healthcare that have the most intricate structures of their deals. You sort of learn a lot from it. But I'd love to hear just what have you seen?

Well, the two kinds of structures that you see a little bit more of. One is on the friendly physician structure. Many states, most states have what are called CPOM laws, which are corporate practice of medicine laws. They generally mean that the only people that can practice medicine are licensed doctors. So you can't have, in many of these states, you can't have corporations owning a medical practice because they would have be able to exert too much control over the practice of medicine by the doctor. So there are these CPAM rules that are spectrum of them across the country. So how do you do this? Because we often see private equity in particular coming in and looks like they're buying these practices, whether they're anesthesiologist practices, just physician practices, dental practices. How do you do that? Where there's CPAM law, the structure that's developed is an MSO structure or a friendly physician structure whereby you've got a company, you structure a managing services organization, an MSO that enters into contracts with a physician practice. And that contract basically says that all of the back office stuff, the leases, salaries, perhaps other decisions that don't implicate clinical decisions, are done at the MSO level, the management services organization level. That's meant to be a benefit to the practice because doctors would rather be practicing medicine than running their business. And in exchange, basically all the earnings of that practice get paid out to the management services organization as payments for These services, the key physicians in that practice tend to then as part of the deal, the acquisition by the P firm comes in and buys, not buys, but creates and therefore owns the mso. And many of the physicians also generally have an interest in that mso. That's where the money's flowing. And the physician practice itself continues to be managed by, run by doctors. Certainly the clinical piece of it. What you typically do is you'll get what's called a friendly physician, which is a doctor that you know that you trust, who will actually own the physician practice. He will have the equity. He can be removed by the private equity firm if they don't like what he's doing. But that's how it's done. And how much power the MSO can have, how much money can go out the door back to the mso, like salaries, can they go out? California is very stringent on these kinds of things. As an example, for instance, the management services organization can't make a decision with respect to which MRI device to buy. That's considered clinical decision that the doctor has to come up with. That's an interesting structural approach. Another thing that we see, it's not that common, honestly, but I tend to see it more in healthcare for whatever reason than in other industries, which is these partnerships between the private equity buyer and a strategic buyer, which is coupled usually with a complicated put call agreement. The idea here is that there are many ideas, but one of the ideas is that the buyer, the strategic buyer of that healthcare company, they want to own the company. At the end of the day, they have a call right on the private equity's interest. And the private equity guy wants to exit because their horizon is usually three to five years or whatever it might be. And their business model is to be able to exit at that time at a profit. So they have a put right at a certain time to put their interest to the corporate buyer, strategic buyer. Part of the idea from the strategics perspective is they may not know how to manage or rationalize or do a good job of it. The healthcare company itself, and that's the expertise of the private equity firm is what they're buying. And the idea is that over the next three years the private equity firm will work to make that business more efficient. It will lend its expertise on how to run that business to the strategic, which is often in a different, sometimes contiguous, but different sector subsector. You know, everybody gets what they want. So that's another structure that I've seen a number of times used in this space.

So Callright basically gives you an option to buy.

Yes.

And then a put right is basically an option to sell.

So in this case, the strategic would have the right to call the option to buy the PE's equity equity right. And the PE firm would have the right to put to sell to force the strategic buy their interest by its interests. These are very complicated papers. After how many years at what premium? What do you have to do during the time? What's the calculation of the put call price? How's it valued? What happens if there's an antitrust problem when you're trying to push it onto the strategics? There's a lot of stuff there that needs to get worked out, but seems to work well.

Sounds like a future podcast.

Just on these things.

Yeah, just on these things.

It's an interesting topic.

So we got some interesting insights on deal structures. We talked a lot about regulatory. I'd love to talk about the holistic process and I'm thinking broadly. I talk a lot about buyer led versus seller led. You know, always look at the traditional model that we think of as seller led bank processes driven by the sell side. But a lot more trends emerge around buyer led where just Cheechix for example are very proactive about finding proprietary deals from the beginning, but then also very proactive about finding integration and having more control over the timelines so they produce better outcomes. You're on the legal side, you see a volume of these deals both banked and non banked. What's your take? What do you see as the difference? And I'm almost like it's two parts that go back to what we just talked about. Is there a regulatory difference between the companies that have a more seller driven process versus a buyer driven process? And then do we have also the structural components that may be different when you're running a seller process with some compressed timelines versus more of a buyer led approach.

One thing that we're M and A practitioners in general are going to need to focus on more. There's a lot of these regulatory changes and a lot of these things going on. These deals are going to start to take a little bit more time and not so much time between signing and closing though there will be that, but also preparation. One example folks are focused on is the change in the HSR rules. HSR is Hart Scott Rodino. It's the antitrust form that you need that both sides need to file when they're doing a merger and can't close their deal until approval from the antitrust authorities has been given. And everybody knew how to do that. And you say in your agreement that you have 10 days to get that on file and there's a bunch of provisions, but the antitrust authorities have just overhauled that form and made it far more complex and require far more information and thought than it had before. The resources that are going to be required are going to be substantial. Companies are going to want to think ahead before they enter into an agreement because you're going to want to make sure that you can actually answer the questions on the form. That is, they're not going to be issues in the form that you have the information. It's just going to take so long, you're going to want to start doing that in advance. Now, what does that mean for the question you've asked? It seems to me that it means that it could mean that seller auctions processes that are aimed at speed may be a little bit harder to do because you need to focus on this. And those kinds of transactions that strategic buyers anyway want to do are more naturally suited to this kind of let's get prepared in advance. Now. A seller gets prepared from his side, from its side, often in advance. But it's hard to do that when you don't know who the buyer is. That's one thing. I mean, there will be increasing amount of buy side diligence, and along with that buy side diligence, that will require more looking down the road than perhaps we have in the past. There are state statutes now, Massachusetts is an example. DOJ gave a speech that said, look, we're concerned about private equity in connection with companies that might have healthcare, companies that might be liable for false claims act liability. We're gonna go after PE firms, we're gonna go after sponsors. And if they knew about those sorts of problems and didn't fix them, we're gonna hold them liable, going to try and hold them low. And Massachusetts now has a statute that says something like that. So what does that mean? I mean, I think that means that private equity buyers in particular are going to need to be very careful about these kinds of issues. They can't put their heads in the sand, not that they have in the past, but they can't going forward. And they're going to need to make sure that because inevitably you're going to find problems. You're going to find in many of these types of companies there's going to be something that could be deemed a false claim. And you're going to need to stop those practices and you're going to need to figure out how to integrate the company, how to run it going forward, to make sure that you as the monitor, you're not actually down in the trenches making these claims you're above. You got to make sure that you're comfortable that there's no pressure on doctors to make false claims. Because if you do, that will potentially provide greater reimbursement or something like that. From the buy side, at least from the private equity buy side, there's going to be a little more focus on outpro diligence, but more focus on the integration and how you address some of these regulatory concerns going forward. Particularly in healthcare.

The more complicated the deals gets because of these advancements in the regulatory side, the more you need to be buyer led and just really get ahead of it and be proactive on it.

That's right.

How about the deal structures? We talked about some of these different deal structures that are pretty common in healthcare. Do they sort of apply again like auction versus a proprietary deal, where if it's a proprietary deal, have more flexibility to come up with these different structures versus an auction? It tends to be we just want certainty to get this much money and call it a day.

That's absolutely right. Now, sometimes in an auction, if your auction includes private equity as well as corporate potential bidders, you could think about putting them together in deals where that's happened. It doesn't happen that often, but yeah, a proprietary deal. And as about some of the deals that have this put call structure, they've all been ones I can think of have all been proprietary deals. Usually ones that the sponsor comes up with, but I guess not necessarily. So. Yeah, I think some of these more complicated deal structures, it's hard to put that in an auction draft. They could certainly evolve. Once you've narrowed down the list of potential bidders or you've come decided on one single potential bidder, it's possible that the structure can evolve into what? See for a more proprietary side, I did a deal very recently where we sold. It was an auction, we had a private equity buyer and our client decided that it would go exclusive with that buyer. By which I mean that it will only negotiate with that buyer. So it was an auction turned into basically an exclusive proprietary deal. The private equity firm took advantage of the fact that it had exclusivity and started raising all kinds of different issues that we needed to structure around. Many of these were frankly retrades. You do have to be a little bit careful about it from that perspective as well. But to your point, proprietary deals are much Easier to structure with some tailor made ideas. Tailor made constructs.

Yeah. Generally gives you more options to structure the deal. Okay, so the bank process, what things do you see in terms of conflicts of interest that come up in a bank process versus a proprietary? How are those things managed? Especially when it comes to these real headlining, high stake M and A transaction?

Yeah. When you're talking about investment bankers, there really is not much of a difference between auctions or I mean the same conflicts can arise. The conflicts that you see with investment bankers, they're really twofold. The conflicts the investment banker itself might have. But there are also conflicts that the board might be involved in where you might have a special committee. And in that case, there have been a slew of cases where the investment banker might be viewed to have aided and abetted a breach of fiduciary duty by the board as a result of certain things. But because there was a board conflict. Talk about some of the recent cases. There are a couple of very recent cases that have honed in on disclosure of conflicts as an important aspect, particularly in a going private transaction. Because in a going private transaction you've got this. In a real going private where you got a controlling stockholder who's buying out the minority, you have generally heightened fiduciary duties called entire fairness. So the board has to be more careful. And the standard of judging the board is the board's actions much higher than the business judgment rule or even Revlon. So it's the highest standard of care. There's a case called MFW that says that in that context, if. And there are nuances here I won't get into, but basically, if you have a properly functioning special committee that's independent, has the power to say no, has advisors who are independent, and the deal is agreed to or approved by a majority of the minority stockholders based upon good information, then you can get out of this high standard of care and go back to sort of a lower business judgment rule standard. So people try and do that. That's a good thing. What's happened with these cases? What bankers have typically done with companies. They've said, look, bankers have said, I don't want to have to disclose to the world everything about my relationship with you or my relationship with the buyer. In one of the cases, the investment banker had a $500 million investment in the funds managed by the buyer and they were representing the special committee, the seller. There was a clear kind of. At least you could see that as a conflict.

Absolutely.

The lower court said no. I don't think there's really a conflict here that's that important because the bank, that $500 million is only. It was 0.1 or 0.01% of the bank's investments in toto to them, what do they care? The Delaware Supreme Court said, no, you got to look at it as part of the mix of information that the shareholders are getting. While the bankers and the company might say, okay, look, if the SEC tells us to put this in when they review the thing, we'll put it in, but if not, we won't. But the court said, hey, you didn't do that. You didn't disclose this. So the vote by the majority of the minority is not really valid because they weren't properly informed. They're not properly informed. The MFW protections don't apply. And we go back to that heightened standard of care. So because of the banker's decision not to disclose, the banker's client got a bum deal, had to be judged at a much higher standard of care. The use of the word may. There were a couple of cases where the bankers in their disclosure in the proxy said, we may have engagements currently with the buyer. They did have engagements with the buyer. So may wasn't an appropriate word. And that use of that word was sufficient to create all kinds of problems. So I guess the first point is disclosure of conflicts, which is becoming more important.

What ends up happening on something like that? You can't unwind a deal.

So you're right. What happens is that there are cases that will hold liable. You launch a claim against the board, frankly, for breach of fiduciary duty, or you do it before closing. It's more typically done before closing, after the announcement of the deal.

You could block the deal.

There's always a question, once the deal closes, does the stockholder who is suing on behalf of the company derivatively, does that stockholder still have standing to sue? So lots of questions, A good question and people address it. But typically these things are brought as soon as the proxy statement comes out and the plaintiff reads that. That's one thing. Another issue that we've seen, something called the foundation building materials case. What that case was about was it was also. It was a transaction. It was also sort of a go private transaction where there was a tax receivable agreement. And that's just an agreement. I could spend another session on that. But it's an agreement between some of the legacy holders of the company and the company which provides some tax benefits to the legacy holders. And on a Change of control. There will also often be an acceleration of those and therefore a big payment at that point to those holders of that TRA tax receivable agreement. Those people also happen to be, by the way, shareholders typically of the company as well. And the banker's engagement letter in that situation said, okay, look, the total value of this deal is going to be the sum of the acceleration payment under the TRA plus the purchase price for the company. Because you can imagine that the purchase price will go down the higher the required payment out to the TRA holders. Gagos. But the court said, look, in that case, the banker is actually incentivized not just by getting the best price, he's incentivized by getting a high payout value on the TRA which goes to the controller who holds that TRA and holds those controlling shares. The banker was in a very conflicted position, was not seem to have been independent in the sense of representing the interests of the public shareholders who don't own the TRAs. And that was an issue which people need to be focused on. I think now there's been a lot of focus on different types of conflicts. Again, we could have another session on aiding and abetting liability of investment bankers. There are cases where the breach of fiduciary duty by the board was the result of actions by the investment banker that were not known by the board, but the board is still tagged with breach of fiduciary duty and the banker is then tagged with aiding and abetting that breach of fiduciary duty. But that's probably not.

They're pretty cool. These are like things you just don't come across day to day. So it's interesting to hear about them. Why is everybody picking on private equity and especially in healthcare?

I don't know. I don't know. I agree with you and I don't know. There's a lot of reasons that a lot of things are going on. There's enormous political pressure from people like Elizabeth Warren and others who just can't abide private equity or make a lot of noise about it. There are congressional investigations as a result of this. There's been a number into private equity, particularly in the healthcare space. We've talked about some of these state laws that have come out that have attacked private equity and are laser focused on private equity. There's a view that in healthcare what we're looking for are three things we're looking for because it's a public good in some sense, unlike beverage companies, which aren't really public Goods in the same sense, healthcare companies. You want to make sure that costs are low so people are able to pay for healthcare. You want to be able to make sure that there's good access to healthcare to particularly people in rural areas or poor areas who generally can't get it. And you want the quality of care to be excellent. Private equity's business model is to make money. They go in, they cut costs. But those who challenge private equity in this space, that's what they say. Sponsors have no incentive to think of the well being of the patient base. They're just out to make a buck. They could put pressure on the doctors or whatever type of business it is to make money. And that in turn makes, makes doctors cut corners, makes them seek higher reimbursement, to seek reimbursement for more tests than are necessary because more profit there. That's where this challenge comes from. I don't think there's any particular body of research or evidence that shows that's true. There's certainly examples of where you could certainly infer that it was the fault of the private equity owner. But look, it could also be we have a shortage of nurses. That could also be the rationale. And what's the difference between a private equity firm in this context and any for profit buyer? They're all there for profit. That doesn't mean that they aren't very well aware. And frankly, the firms that I've worked with are very focused on patients health, on access. They're actually very concerned about these things. It's a question of balancing it properly. And I just don't think there's a lot of great evidence that private equity doesn't balance it properly. Just give you one quick anecdote which is old now. This is not a new phenomenon, but we represent today a private equity fund years ago that bought an ambulance company and the day that it closed, that deal closed tragically. A woman who was in one of those ambulances didn't make it. And the press came out saying, here's a great example of why we shouldn't have private equity owning healthcare companies.

Wow.

That was the same day they actually closed on the deal. They had no, it was clearly not the fault of the private equity company in any way, shape or form. But there's a lot of perception.

Yeah, they're the scapegoat, I guess in the industry.

They're a substantial scapegoat, yes.

Andrew, what's the craziest thing you've seen in M and A?

Well, there are two things I'd mention one is just I've never encountered something like this before. I was representing a private equity firm in the acquisition of a fitness type company. It was owned by a bunch of siblings. There were about five or six of them. We negotiated, we did the diligence, we negotiated. It was whatever it was. Three months to get to a signing and we were finally then got our approvals, we're ready to close. The lead sibling comes up to me and says we have a little bit of a problem now. You know that it's the seller that wants to sell as quickly as it can because if in the interim there is a problem with the company, the buyer could walk. But the seller comes to us and says we got a problem. My sister a little bit superstitious. It turns out that Mercury is currently in the House of Orion and that is a very bad omen for financial transactions. So we can't close the deal now. We got to wait and we had to wait 10 days until mercury found its way out of the House of Orion. And I've never in my life encountered something like that. But the other thing on a less whimsical note was just, I don't know if it's crazy, it was just an enormously complicated deal with enormous number of moving parts. I was a DLI data representative, TPG and Welsh Carson on the acquisition of the company Kindred, which was a public company, a home health and hospice company. We had to negotiate around all kinds of regulations. We were splitting it into two pieces. Humana came in and was a strategic partner in that deal. We talked about put calls that we had one in that deal, the lessor for the hospitals lease was immensely complicated and we had to negotiate around that. So I could talk for a long time about that deal. But in my practice that was the most complicated, challenging and really craziest deal that I've ever worked on in the.

Extremities of complexity and then deals getting delayed by 10 days from superstition.

There you have it. A day in the life of the M and A practitioner.

I appreciate you taking the time to have this conversation with me, helping me become a better M and A scientist.

It's certainly my pleasure and I hope it's been helpful and anytime learned a.

Lot about healthcare specific deal structure and regulations.

Yeah.

Those of you still with us, you are a true M and A scientist. I appreciate you sticking through the interview. Always welcome to Feedback. Connect with me on LinkedIn. Can't handle my email anymore, it's out of control. But reach out to me. LinkedIn Love Getting Topic ideas and just connecting with folks chatting about M and A. Till next time, here's to the deal.

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