Care sector M&As – the legal considerations

Central to the sale or purchase of any care home business will be the facility’s relationship with the CQC. Understandably the provision of care services is tightly controlled, and the CQC independently monitors, inspects, and regulates providers in the sector. Registration with the Commission is mandatory. If you are providing any CQC regulated services without being registered, you will be criminally liable. (More than 50 providers have been prosecuted in the last decade.)

While the CQC registration process on change of ownership will differ depending on how the deal is structured, buyers and sellers alike should factor in this approval process to the deal timeline. Delays at the CQC mean it is likely to be time consuming and, in some cases, protracted.

In most cases, formal CQC approval will not be granted until legal title to the care facility has formally been transferred. Buyers should therefore obtain a comfort letter from the CQC ahead of exchange of contracts to ensure approval will be granted on completion.

In addition to the registration and approval process, CQC issues will also feature heavily throughout due diligence. Buyers will require, for example:

• Access to all CQC inspection reports
• CQC assessment rating details
• Details of any CQC interventions, including warning notices and improvement recommendations

Sellers should prepare documents for disclosure early on and be prepared to defend their position where a buyer seeks to alter the deal price in light of any negative CQC findings.

The CQC is particularly concerned with the financial sustainability of providers, and it will closely monitor any change of ownership of care businesses. Reacting to the failure of several large-scale providers in recent years, the CQC now applies additional scrutiny when deals involve large or ‘difficult to replace’ providers. This CQC ‘market oversight’ process can lengthen transaction timings and, in some cases, may dissuade buyers from proceeding.

Often, the target entity is a limited company. Where this is the case, buyers must decide whether to purchase the shares of the company and take on all company liabilities or, instead, acquire its assets.

Buyers often prefer to purchase specific assets so that they do not inherit unwanted liabilities. Deals arranged in this way, however, can be more complex because individual contracts and transfer provisions will need to be separately negotiated. In addition, the CQC approval process requires a completely fresh registration because the buyer effectively becomes a new provider.

Where the shares of the company are purchased, the CQC needs only to be notified of the change of control. This simplifies the deal on the one hand, however, because the buyer will assume all historic liabilities, they assume more risk and extensive warranties and indemnities may have to be negotiated.

Both types of structure have advantages and disadvantages, and there are significant tax implications to consider also. While a share purchase may ease approval for CQC and residence/supplier contracts, it is key to understand if the accounts and tax have been professionally run or operated as a support to owners’ lifestyle. The latter produces a high level of risk and might influence a buyer to follow the asset acquisition route to avoid it.  Of course, with an asset acquisition, staff will need to be consulted ahead of sale, under the transfer of undertakings regulations.

Ultimately, the choice of structure will be a matter of negotiation between the parties. We can advise on the most appropriate structure in your case considering all aspects of the deal.

The personal information held by care home owners relating to residents and patients is of the most sensitive nature. Buyers must take account of their onerous UK GDPR responsibilities before committing to any purchase.

Where the transaction involves a share purchase, buyers will assume liability for previous data protection breaches and must scrutinise existing policies to ensure they are fit for purpose.

Where there is an asset sale, personal data will be transferred to a new data controller, and this may require comprehensive modification of existing policies and privacy notices. Fresh consent may also need to be obtained from residents, family members, or attorneys under Lasting Powers of Attorney (where the resident has lost mental capacity).

The importance of data protection compliance in a care home setting cannot be underestimated. Regulatory intervention – fines and other sanctions – can result in serious financial and reputational harm to the business. In some cases, it may undermine the entire viability of the enterprise.

Often the most significant revenue stream for care home facilities, including private sector homes, comes from local authority contracts. Existing local authority contracts must therefore be examined carefully by the buyer during due diligence.

In particular, buyers should establish how far these contracts need to be renegotiated following completion. An analysis must also be made as to the extent of available public funding for care fees. Public spending cuts mean that, where a facility is heavily reliant on local authority funding of resident care, any freezing of fee levels could affect the commercial future of the business.

When examining local authority contracts the following should be clarified:

• Change of control and consent
• Assignment clauses
• Fixed-term provisions relating to short stays and respite care
• Fee review clauses
• Service level requirements

Often a significant aspect of the deal value will be the property in which the home operates. This may have a big impact on the style of transaction – whether asset or share sale.  Typically, for the buyer, a share sale will be cheaper, with stamp duty avoided, but this will be one of a number of factors to assess.

The DMH Stallard property team have a specialist team dealing with Nursing and Care homes and are used to clearing property title issues and ensuring all planning approvals have been put in place. In some cases, the property diligence occurs ahead of commercial diligence, given the proportionate impact the property has.

We have highlighted a selection of the legal issues buyers and sellers of care homes in the UK need to be aware of. Other matters to consider include careful allocation of risk between the parties, commercial conveyancing issues, planning laws and staff contracts and employment of staff in regulated roles.

At DMH Stallard our solicitors in all commercial practice areas work as a team to support your M&A transaction. With the resources and expertise to manage the most complex Care Home sales and purchases, we can successfully manage each transaction to a timely conclusion. At the same time we will take all steps to minimise the possibility of future disputes through extensive due diligence and other checks.

For an initial conversation please get in touch.