Rob Gerberry, Senior Vice President and Chief Legal Officer, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Emery, about the role of health care corporate boards in reviewing major transactions. They discuss key elements of corporate policies related to transactions, the board’s standard of conduct when reviewing transactions, how to handle transactions that are not consummated, common fiduciary “landmines,” and management’s role in navigating transaction activity.
To learn more about AHLA and the educational resources available to the health law community, visit americanhealthlaw.org.
Rob Gerberry, Senior Vice President and Chief Legal Officer, Summa Health, speaks with Michael Peregrine, Partner, McDermott Will & Emery, about the role of health care corporate boards in reviewing major transactions. They discuss key elements of corporate policies related to transactions, the board’s standard of conduct when reviewing transactions, how to handle transactions that are not consummated, common fiduciary “landmines,” and management’s role in navigating transaction activity.
To learn more about AHLA and the educational resources available to the health law community, visit americanhealthlaw.org.
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Speaker 2:This episode of A HLA speaking of health law is brought to you by A HLA members and donors like you. For more information, visit american health law.org.
Speaker 3:Hello everyone, and welcome again to our corporate governance podcast series. I'm Rob Berry, I'm the Chief legal officer of Summa Health and a member of the HLA Board of Directors. I'd like to welcome and thank again, Michael Peregrine for joining me this month. Hello, Michael.
Speaker 4:Rob, thanks so much. It's always happy to be with you.
Speaker 3:So this month we're gonna focus on the latest , um, issues related to governing around confronting healthcare organizations mergers and acquisition activity. Today's topic , uh, is a developing one, the board's role in reviewing these major transactions and making sure that they're exercising their fiduciary oversight responsibility. Michael, lots of our fellow HLI members that are listening today have experience in advising clients and their boards on these types of major transactions and have done so for many years. Um, what do you think has changed as we revisit this issue today?
Speaker 4:Well, thanks, Rob. I think you're right in the sense most of our listeners have been helping their clients and boards on the adoption of major transaction policies and other guidelines that they've got in place to help the boards , uh, make decisions when they're , uh, looking at a big deal, so to speak. Uh , not just , uh, maybe a merger acquisition, but a significant , um, investment or , or just any other major transaction. I I think the message today is that it's time to kick the tires on your existing policy if you've got one, or to create a new one if you haven't , uh, done so already. Because there's so much evolving and from the regulatory agencies and from courts that are evaluating fiduciary duties that it just makes sense. I think there's just greater pressure on the steps that a board's taking in terms of the process by which it reviews and approves or doesn't approve major decisions. I think that's the big thing that's going on right now.
Speaker 3:Michael, as you think about those , uh, policies, are there key elements that you would advise organizations to make sure they have included in that type of policy?
Speaker 4:If there is, and , you know, I think I would take a step back and, and take a , and explain a little bit more. 'cause you're gonna have to explain to the client why, why have things changed so much? Why do we have to focus on the board's effort? Uh, we're not gonna be popular with management that when we do this , uh, what's changed so dramatically that, that we need to kind of reboot these policies. And , and, and I would say, you know, first we have to look at the complexity of deal making . That's dramatically , uh, increased with respect to the evolution of our sector. The kinds of transactions, the kinds of investments , uh, the subject matter or the investments, the dollar amount involved, the financial terms have become much more complex. Um, second, the investment in, in the proceeds from a company involved in a major deal have zoom. So we're all of a sudden talking about, you know, not just seven, but eight, nine figure , uh, transactions and investments. So the dollars are, have greatly increased. Uh, and the, so the stakes are higher in that. And also I think the risks have as well. Uh, we, we've, you know , uh, complex deals, lots of money, the legal and regulatory risks ha , have increased. And we're also seeing that Rob, as you know, from the Delaware course , which are be continuously weighing in on the board's role in , uh, its oversight of in decision making process. Uh, I think we, we see the number of , uh, interested observers increasing , um, in that I, I think we'll talk about in a second. But not just , uh, disgruntled board members, but also other regulatory agencies, if, if , uh, no better example than how the enfor antitrust enforcement agencies are becoming much more involved in the board's process by which , uh, they make decisions. And I think the last thing that makes a difference, and what we'd wanna emphasize to our clients and internal executive management team is that the exposure for the board has increased a lot as well. I , I, I think that we can see many of our listeners are , uh, practicing states where there are , uh, new complicated state statutes governing transactions and change of ownership transactions of healthcare facilities. A lot of those trans , uh, policies and statutes and regulations look at the role of the board. They require certifications from the board. They focus very much on what do the boards see and review and discuss. And so I think a combination of those five things have really changed , uh, uh, the focus on the board's role and, and make it valuable to update how the board approaches its review and approval of big deals.
Speaker 3:So, Michael, if I'm hearing you correctly , uh, as we look at a transactions policy, it may be broader than just the change of control transaction. It may involve other corporate type transactions as well.
Speaker 4:Yeah, I think that's right, Rob . We're , we're so used to changing control transactions, either buying or selling. And I think as we all know there , there's probably no more complex transaction than if we're, we are on the selling end of a change of control transaction. Um, but that's what , but I think that, you know, we , we wanna look at broader transactions when we are talking about what that big deal is. And we would encourage management and the board to agree on a definition of what is the major transaction? Is it a significant investment in another business? Is it an acquisition or sale of a part of a , uh, organization's portfolio? Could it be a major investment in technology? Um, that kind of definition is gonna be affected by factors way beyond just change of control. Could be the dollar amount involved, the strategic importance of a transaction. It could be a regulatory risk, a reputational risk, investment risk, and the impact, and it , it , the definition of, of major transaction could also be affected by the impact on corporate constituencies. So I , I think the question is, let's focus on the proper definition of a big deal of a major transaction and go from there and use that broad definition is that which triggers specific protocols on board oversight.
Speaker 3:So Michael, maybe if we could hone in for a second on your comment on corporate constituencies. Who are you thinking there?
Speaker 4:Well, that's the one that gets the most pushback from senior executive leaders and , and gets some head scratching in , in the, the boardroom as well . But , um, I , I think that's what , what if we look a little bit broadly , uh, we have both principles of corporate sustainability, and I know a lot of people will sigh at that one. Um, and , and, and of an expansive definition of the purpose of the organization, which we've seen from groups like the Business Roundtable , um, are having a role here. And if, if there , there should be some kind of recognition within the context of a major transaction policy for the board to have the opportunity to at least discuss how a proposed major transaction may have an impact on customers, employees, vendors , uh, and the communities in which the company operates, not just shareholders and members are sponsored sponsors. Again, we see this very much in the broader discussion of corporate sustainability. Uh, I won't mention the , uh, the alphabet letters, but , uh, the principles adopted by the business roundtable on purpose should include the support of these additional constituencies. But I also have to say from a black , more black and white regulatory perspective, you can look at the new antitrust enforcement climate , uh, and and interpret there , the , the , the , the FTC and the DOJ are saying very clearly that they're evaluating , uh, the antitrust impact of, of some major transactions , uh, from , uh, uh, the perspective of , uh, of a similar analysis. How will this affect , uh, customers, how will this affect smaller competitors? Uh , how will it affect workers? You know, it's an ex completely different dynamic we've ever seen before. So I really do think that we need to be talking to our board, not just about the traditional , uh, concepts and how that might define major transaction, but some of these new ones coming out of the antitrust enforcement area and , um, corporate sustainability and have in the record that, yeah, we did have a conversation on how this transaction is going to affect our, our employees , uh, how it'll affect our vendors, how it'll affect , um, uh, are certainly our , our , our patient care community and our , the access to FA healthcare, but also the communities in which we operate. I think those are factors we need to get used to considering more at the board level.
Speaker 3:So when management teams and their advisors bring to a board a major sale of the organization, you know, should the board immediately have its radar up that a higher standard of conduct's gonna apply?
Speaker 4:Yeah , I think so. I think you , you actually make a good point immediately is the key thing. Uh, we , we start from the perspective that , um, uh, the board should be involved very, very, very early on in , in planning for a strategic major business transaction. I know there's always a, a reluctance and sometimes it's for good reasons about confidentiality and otherwise, but , uh, the board, there's the major mistakes in , uh, transaction planning occur usually at the very beginning, at least as it relates to board overview, that there are certain decisions made that can't be , uh, overcome if you bring the board in too late. So I, I like your emphasis on immediate. Um, but yeah, we, we also have to evaluate the standard of conduct, you know, which will, which will drive the level of a board involvement. And if , if it's a change of control transaction, very clearly that's the highest level of standard of conduct that's gonna be applied to fiduciary , uh, relationships on big deals. Uh , but, you know, the, the , uh, fiduciary duties of , uh, and then we're principally talking about the duty of care, but we're also talking about the duty of loyalty. We're talking about that in a second. Those obligations are always gonna be viewed through the prism of particular facts and circumstances. You know, the greater the significance of the deal, the higher the expected standard of conduct. While , while , as I said before, the pinnacle is gonna be change of control transactions, that's standard, I don't think is gonna drop precipitously for other big deals. And that , that's a concept and a message that I wish more members of the senior leadership team, especially the CFO and the CEO would understand. There's a real legal reason , uh, for bringing the board in at the earliest possible time. And that legal reason is to put them in a better position to exercise their responsibilities.
Speaker 3:Yeah. One of the things we talked about recently at the HLA Transactions conference , uh, is when a board develops a set of guiding principles at the beginning of a transaction, it really helps them to navigate, you know, that rollercoaster that we all ride during a transaction. It really gives them objective criteria to evaluate potential transactions against. But are there other examples you can think of related to this higher standard of conduct that we could share with our , uh, listeners as far as tangible things , uh, they could advise their boards to do?
Speaker 4:Yeah, I think that, you know , it's always gonna depend on the facts and circumstances, and I lo always love using that as a weasley language. But , um, I , we generally want in a transaction policy or anything similar, we want the board to be on the lookout for the following. Um, and, you know, for example, how is the board gonna monitor the deal? Is it gonna do it directly hands-on or through a special committee? And if it's the latter , how's that committee gonna keep the full board involved? Because the full board's gonna need to be able to rely on the committee , uh, in making its final decisions. Um, a second standard is, you know , is to refine the strategic operational and mission issues and opportunity that are prompting the deal, whether we're buying, selling, investing or , or whatever. What does this have to do with the mission? How does this advance our , uh, our , our mission goals? How is this consistent with the strategic plan? We wanna make sure that we board can answer that. Um, I think the board should always understand the history of the deal, just just how is this coming , uh, to me , to the board today? What's the genesis of it? Was it a investment banker , uh, coming to us with the pitch? Is it something that was , uh, we had identified as part of our strategic plan? Is it coming out of CEO to CEO conversations? Uh , that's a substance consideration. The board, you know, what prompted all this? Because I do think that that will make a difference as the board reviews this. Um, something you said though , uh, earlier on , uh, conflicts of interest is going to be a huge, huge aspect , uh, of, of , uh, the board's involvement and is gonna be right at the top of any major transactions policy checklist. Uh, the board is going to be held to a higher standard of care on conflicts disclosure , uh, and on whether and determination , uh, has, that has to happen right up front . It doesn't work if you've just with , to answer, well, I filled out my annual questionnaire six months ago, can't you work on that? And the answer is really no. You need to do a su uh , subsequent deal specific transaction , uh, transaction, conflicts of interest policy. You just can't take a chance on having a conflict popped up and, and threaten the sustainability of the transaction. I , I , the , the board is also gonna be, want to be certain that it has its handle on and can effectively monitor the other kinds of conflicts that are always going to arise in a major transaction. Uh, potential conflicts at , at the executive level, potential conflicts at the advisor level. Um, the , uh, the, the Delaware courts historically have had lots of cases addressing the question of whether or not the , as a , a CEO's conflict was disclosed whether or not counsel or financial advisors conflicts were disclosed. You've gotta make these disclosures so the board can keep their fingers on the pulse of whether or not any potential bias is seeping into the transaction. So, conflict's way at the top of the board's , uh, activity, you know, and then you get to the specific things that you were mentioning. What are the criteria by which we're gonna be evaluating the proposal? How do we make sure it's in the country , the company's best interests? Um, what are the fundamental deal terms? How do we, how can we be assure they're commercially reasonable? What are the legal and regulatory requirements by which the deal must be structured? And what risks do the opportunity present? And on this one, we , we could spend a long time on this, but I think the current antitrust enforcement environment presents a particular , uh, uh, dilemma for the board. They're gonna have to take into consideration and evaluate the antitrust risk , uh, of a transaction. Not just whether you can get a deal through, but just how long it's gonna take, what's the cost, how likely is the second request? And looking at all the , uh, various issues involved in some of, in the enforcement level over the last three years, all of a sudden, I think it's a huge rule , uh, aspect of the board's review rule . 'cause they're gonna have to say , uh, is this worth it? How much are we going to spend on this? Where , uh, how long is it going to take? You know, the , the , the worst case example of the situation. Are we gonna be off the market in terms of this particular strategic strategic transaction spending $50 million on antitrust legal fees and , and advisor fees and end up with nothing? Uh, those are very difficult , uh, questions that have to be raised, and it's the board that has to raise them . And then finally , um, the board's gotta be comfortable with the financial feasibility of whatever the proposal is. And, and there has to be a , a ongoing working appreciation for the advantages and disadvantages of the deal and of proposed alternatives. You want the board to be in a position, Rob, I think to say, even if it happens, and you've seen it, I've seen it halfway into the deal , uh, some terms change and the board says, wait a minute, we got in the deal to achieve strategic goal X. The, the goalposts have now shifted. Can we still achieve that goal? Are there other goals? Um, those are the kinds of questions that need to continue to be asked. We don't want those being raised at a board meeting the evening of when the deal is gonna be signed off on by the full board. So, you know, those are the kinds of things on our checklist that you'd like to see in any kind of major business transaction policy.
Speaker 3:So, Mike , we talked about the lifecycle of a transaction. You know, how do you advise boards to talk about the topic that nobody wants to talk about, which is, what if this transaction isn't consummated? You know, what is our plan B?
Speaker 4:What an excellent point. I think you have to take that into consideration when you're talking about the fundamental risks of the deal. Uh, it , this is, it's certainly an initiative that has to be considered in the context of the antitrust enforcement environment. But I think it also has to be considered rather the context of tough deals where , uh, negotiations are hard, where the financial terms may be driven by , uh, due diligence investigations or shifting markets or , uh, major changes in the economy. Uh , there are a lot of reasons , uh, uh, legitimate reasons where, where the parties just say, I can't get this deal done. Uh, the board always has to feel that it has the ability to say no. Um , but the , this , the prudent board , uh, and the the smart executive team are going to be, have to be prepared for that possibility. I don't know about your experience. I'd be interested in the experience of a lot of our listeners, but it sure seems to me that we we're seeing a lot of transactions , uh, not , uh, going forward to fruition. Uh , also some that are breaking up rather quickly. So it's unfortunate, but there has to be , uh, the board should have the right to ask management to have a plan B in place if the deal doesn't go through to fruition.
Speaker 3:Okay . So with the number of boards that you're advising, what are some of the common fiduciary landmines you're seeing arising from some of these deal conversations?
Speaker 4:Well, you know, one of the more interesting things, Rob , that we've been talking about this year, and it's something that's, that , uh, arose recently in a , uh, a decision of the Delaware course , which is, is now gonna be addressed by Delaware statute, is that that's that , uh, resolution that we all prepare for our clients near the end of the deal, where we get the board to sign off on the, the transaction documents and authorize management to wrap up any of the remaining bits and pieces of the deal. And , uh, I think one of the issues that we're seeing , uh, a landmine right now is when , when that resolution is passed too early and when management doesn't go back to the board when there have been substantive terms or additions changes, and the board doesn't recognize the deal when, when it goes through. So I think, you know, that's the most current landmine. But then I think the other things, if you look at the, let's just say from the non-profit sector, if you look at what the attorney generals are pointing out when they're challenging transactions, they're gonna say, look, it , it doesn't cl it's not clear to us that you looked at, really looked at the mission interests , uh, as part of your decision to do this deal. Uh, or they're gonna say , uh, uh, as certainly we've seen this in some of the Delaware decisions, you blew the conflicts analysis. You , you didn't , uh, address conflicts when they arose, you didn't do a good review. And now , uh, they've really undermined the sanctity of the board deliberation. Uh, you didn't consider alternatives. You picked the worst one. You could have ease , you could have saved the company money, avoided regulatory concern, whatever, by going in a different direction. And the record isn't , uh, clear on what you did. Um, you didn't keep the board management, you didn't keep the board informed on a timely manner. And to be honest with you, Rob, I think that's the information flow and how the, how management keeps the board posted is probably the biggest risk, but it's the most fixable risk. Uh , another is , uh, you know, you delegated most of the decisions to a board committee, but the delegation wasn't really , wasn't really effective, didn't have the right people on it, and they didn't advise the full board. Um, you know, one of the things that we were concerned about through the revised Hart Scott rules, it was, it was gonna really force a rushed board review process. Uh, and , and that's, that's a practical consideration, but is the board getting enough time to be involved in the review of the transaction? Was the risk evaluation process blown? Um, was there reliance on questionable data or advice and a whole lot more? You know, we could always like point out some of these landmines, but I'll say one thing, Robin . This is an issue that , uh, we've been working on with our A HLA uh, members. Uh, there has been more guidance on the concept of what should be going in corporate minutes, and there's been a greater recognition thanks to , um, uh, former , uh, Delaware Supreme Court Chief Justice Stre Law Review article of a month ago, pointing out the, the prophylactic benefits of really well-written minutes, and especially in the context of transactions and justice str comments on, on how valuable well-written minutes can be in terms of addressing challenges to major transactions, where you've got it right in the , into the minutes where the minutes reflect , uh, all the good things that happen at board meetings. And I can't stress that enough, the , the role of minutes and board and committee meetings throughout the transaction process. So if the question never pops up, you could say, Hey, thanks for, thanks for asking this question, Mr. Regulator. Here are minutes of , uh, uh, May 22nd, 2024, where we talked about that exact issue, and you could see , uh, our outside financial advisors gave a briefing, and here's a copy of it. Thanks very much. I'll e email it to you and have it in a minute. Uh , you can't discount the value of something like that.
Speaker 3:So that's a pretty long list of landmines out there, Mike , who , do you think there's any chance that this is, you know, too much of a burden on management as they try to navigate a transaction?
Speaker 4:Absolutely. The management's gonna feel that way. And I think one of the important roles that the , uh, chief legal officer is going to have is, is anticipating that issue and maybe teaming with the , uh, financial or investment advisor and , and saying , look, the , the landscape has changed. Uh , if we don't get the board thing right, we're not gonna get this deal done because the state or the antitrust enforcement agencies or somebody else are gonna look and say just how closely did the board , um, review and , and , and how closely were they involved in this transaction? We gotta get this right. If we don't, we're increasing the risk of our ability to get the deal done. But I I , I would be less than honest if I would've said, some management teams don't get it, and they don't understand the board's role and responsibility in proving deals. It's a huge , it continues to be, you know, this is part of the conversation you and I have had before. Uh , one of the biggest fiduciary challenges out there is the , is where management doesn't really appreciate the, the role and duties of the board, and the board doesn't truly appreciate , uh, the responsibilities and leadership of management. Then as a result, there's chaos and chaos can arise if there are competing views on major transactions. So you're right,
Speaker 3:This is a heavy lift for a lot of our volunteer board members in a nonprofit setting, who do you think really cares mostly about these fiduciary issues? Where should they look , uh, for challenges from?
Speaker 4:Well, I think there are a couple of issues. Yeah. I mean, the , the , the people will say, Hey, I don't get paid to do this. This is, I got a day job. I don't have time to get to, to do the diligence. Uh, that seems to be required to satisfy my responsibilities. I think , um, the legal teams , uh, of our clients can , uh, can support the board. Well in this, can, can do a lot of the heavy lifting. But if I'm a board member, if I'm, you know, I'm gonna worry be , be worried about the following kind of groups who can give me a hard time about the job I do. I think we're, we're seeing incidents where disgruntled board members are, are making complaints to state regulatory officials about the process. In other words, I didn't like the deal when it began. I was shut out of the decision making process. I didn't have a right to point out the issues, you know, whatever it is. Uh, we're seeing more situations where disgruntled board members , uh, have beefs fairly or unfairly and they go public with them . Uh, you know, the part of the challenge here, and this is something that you , you hope management understands is your transaction partner , uh, is gonna be vitally interested in how you've had board approval of the deal. They're not gonna wanna close if they think your approval process is flawed. And I think a lot of , uh, of our listeners who have represented purchasers and transactions are gonna see this. They're gonna wanna see the opinions, they're gonna wanna see the board resolutions. They're, they're gonna wanna make sure the documents is there and they're gonna wanna have a sense of how much diligence was applied by the board, because they don't wanna end up in a situation where they can't close because seller's lawyer can't, you know, can't opine , or that the attorney general is upset because he thinks the board didn't do its job. We've, we've got said the antitrust enforcement agencies not only the , you know, on their traditional approach to the application of the merger rules, but through their new enforcement theories , uh, that really is perhaps the presents the greatest regulatory challenge these days to, to , uh, uh, major transactions. The states certainly are heavily involved. I don't know right off the top of my head, Rob, how many states now have , uh, trans transaction review statutes covering healthcare facilities. But many of them, again, look to, at some level or another, the role of the board. Um, the media you and I talked about before, the ProPublica, the politica of the world are, are, if they smell a story arising from a major transaction, they're gonna go at it and they know right to look at the board. And then, you know, we have the , uh, the issue that , uh, we could talk about for a long time. And that's , um, this whole issue. If you are , uh, regardless of whether you're a buyer or a seller, the Department of Justice is voluntary , uh, program about , uh, if you're a buyer and you discover , uh, indications of criminal activity in , in the , in the , uh, uh, seller's business, you can take that and disclose that to the government and theoretically get a free pass going forward. Um, that could add significant , uh, pressure on the both parties in terms of the due diligence review and whether or not you go forward because , uh, the government is trying to incentivize disclosure from the due diligence process in an m and a transaction. All of these are, are reasons why we must anticipate closer board review of big deals.
Speaker 3:So as we think about the cadence of a transaction, all these considerations seem to add a lot of time and process to the deal making . Do you think there's a risk of our CEOs, our management teams turning to us as chief legal officers or you all as outside counsel and accuse us of over lawyering or being too conservative?
Speaker 4:Oh, absolutely. It happens all the time. And I think that's why there's a real value in both inside and outside counsel , where you have a regular relationship with the senior leadership team bringing him up to date and just saying, look, if you, if we ever are gonna go down this process , uh, we're gonna have to build enough time because , uh, the , the, to the extent to which we marginalize the role of the board in the review process , uh, we're increasing the risk that we won't be able to sustain the transaction because someone's gonna claim the board wasn't allowed to do. Its , uh, normal care and oversight of the deal. So I think we, this is one of those things as part of revising , uh, an existing or preparing a new business transaction policy, we take the, you know, time to say, look, this is, this is what's going on here. This is what's forcing us. We're not trying to make work. The new reality is there's tremendous pressure, much more so than before on the role of the board in reviewing and approving big deals. And we've got to build that into the timetable. I'm not pushing it as your inside counsel , I'm not pushing it as your outside counsel . It's just the way it is . Um, and sometimes sharing , uh, newspaper clippings or things of that nature about recent cases or enforcement action help, but it's gotta , you know, I'd start the education process now.
Speaker 3:So as I mentioned again at the HLA session in Nashville, having a chief legal officer who's on your board who understands these and can also support inside and outside counsel on these issues, I think is also very beneficial.
Speaker 4:Oh , absolutely.
Speaker 3:So Michael, thanks again for sharing your thoughts with us this month. We'll be next , uh, back together next month for a further discussion related to the antitrust environment that we're all living in, kind of a new and aggressive enforcement climate that our clients are navigating. Michael, thank you as always for sharing your insights with our membership.
Speaker 4:Thank you, Rob . And thanks to HLA
Speaker 2:Thank you for listening. If you enjoyed this episode, be sure to subscribe to a HLA speaking of health law wherever you get your podcasts. To learn more about a HLA and the educational resources available to the health law community , visit American health law.org .