AMARILLO, TX – Assume that John Smith owns ABC Medical Equipment, Inc. Assume that Jim Brown intends to purchase ABC. There are two ways for the purchase to occur: (i) an asset purchase or (ii) a stock purchase. In an asset purchase, Brown will form a new legal entity (“Newco”). Newco will, in turn, purchase the inventory, equipment, patient files and other assets from ABC. As a general rule, Newco will not assume any of ABC’s liabilities.
Newco will need to (i) become accredited, (ii) secure state DME licensure and a surety bond, (iii) secure a Medicare Part B supplier number (“PTAN”), (iv) secure a Medicaid provider number, and (v) secure third-party payor (“TPP”) contracts, including Medicare Advantage and Medicaid Managed Care contracts. ABC will not be able to transfer any of the forgoing items to Newco.
With a stock purchase, the purchaser will likely be Brown (individually). He will purchase a piece of paper: Smith’s stock certificate that shows ownership of ABC. Generally speaking, Brown (individually) will not assume ABC’s liabilities. However, after the purchase is consummated (“closing”), ABC will continue to be responsible for its liabilities.
With a stock purchase, ABC will continue to operate as it always has. The following will remain intact: Tax ID #, PTAN, accreditation, surety bond, Medicaid provider number, state DME licensure, and third-party payor (“TPP”) contracts. There will be no break in billing. However, change of ownership (“CHOW”) notices will need to be given to Provider Enrollment, the state Medicaid program, the state DME licensing agency, the surety bond issuer, and TPPs. Depending on the requirements of the recipient of the CHOW notice, some of the notices may need to be given prior to closing…while other notices can be given after closing.
Here is how a stock acquisition works:
- The parties will sign a Mutual Nondisclosure Agreement. This says that the parties will disclose confidential information to each other…and they will keep the information confidential.
- Smith and ABC will disclose ABC’s financials to Brown.
- The parties will sign a detailed, but mostly non-binding, letter of intent. This will set out the “terms of the deal.”
- Brown will conduct due diligence. This means that Brown will “kick the tires” of ABC so that Brown knows what it is that he is buying.Due diligence includes:
- Brown’s attorney will order a UCC lien search to determine if there are any recorded liens against ABC’s assets.
- Brown’s attorney will determine if ABC’s corporate charter is intact and if ABC’s corporate records are up-to-date.
- Brown and his attorney will determine if the following (regarding ABC) are in good standing: PTAN, accreditation, surety bond, state DME licensure, and Medicaid provider number.
- Brown and his attorney will review ABC’s TPP contracts to determine if they will remain in force after closing. It is likely that before closing (e.g., 30 to 60 days before closing), the TPPs will require ABC to submit a CHOW notice.
- Brown will review a sample of ABC’s patient files to determine if they are complete and accurate.
- Brown and his attorney will review the following pertaining to ABC: past/current/anticipated investigations, audits and litigation.
- Brown and his attorney will review ABC’s business model to confirm that it does not implicate federal and state fraud statutes.
- If ABC is leasing its premises, Brown and his attorney will review the terms of the lease that ABC previously signed for the premises.If Brown is satisfied with the results of the due diligence, then closing will occur. At closing:
- The parties will sign a Stock Purchase Agreement (“SPA”).
- Two of the most important sections of the SPA are (i) the representations and warranties section and (ii) the indemnification section.
- These sections will require Smith to indemnify and hold Brown harmless for any damages arising from Smith/ABC being less than honest during the due diligence stage.
- At closing, Brown will hold back a portion of the purchase price. Under the heading of “possession is 9/10ths of the law,” this will allow Brown to offset against the hold back in the event that after closing Brown determines that Smith/ABC were less than honest during the due diligence stage.
Smith will sign a stock transfer.
Other closing documents will be signed.
- Before and after closing, ABC will need to submit CHOW notices to Provider Enrollment, the state Medicaid program, the accreditation company, the surety bond issuer, the state licensing agency, TPPs and the commercial landlord.
Jeffrey S. Baird, JD is chairman of the Health Care Group at Brown & Fortunato, a law firm with a national health care practice based in Texas. He represents pharmacies, infusion companies, HME companies, manufacturers and other health care providers throughout the United States. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization and can be reached at (806) 345-6320 or firstname.lastname@example.org.