Legal considerations when acquiring or selling medical and healthcare businesses

Regulatory scrutiny of medical and healthcare businesses is intense, multi-faceted, and ongoing. Premises, professional staff, equipment, devices, and services are all regulated to some degree. For buyers and sellers in the sector, regulatory due diligence will be front and centre of any deal. Of key importance here is registration with the Care Quality Commission (CQC), the body that oversees all healthcare providers in the UK (Private and NHS). Buyers should note that CQC registration will not automatically transfer to them on completion and they must apply for fresh registration. Even in a share sale, where the registered entity doesn’t change, the CQC must still be notified.

While CQC registration itself is essential, buyers should also look beyond this step and delve deeply into the target entity’s historical dealings with the regulator. What is the CQC rating, for example? Is there a history of poor ratings or a higher than normal rate of CQC inspections? That could indicate an underlying compliance failing at the business being acquired, which could decrease value and, ultimately, affect saleability.

The relationship of the target entity with the NHS should also be examined carefully by the buyer. If the business is reliant on NHS contracts, then these agreements should be checked to see what change of ownership notifications are required, and whether the contracts will survive the transition to new ownership. In most cases, the Integrated Care Board (ICB) must be notified to avoid contract termination. Merging parties are usually required to demonstrate to the ICB that the transaction will, at least, maintain or, ideally, improve existing standards.

In addition, parties to mergers of businesses within the health and medical sector will want to ensure Provider Selection Regime (PSR) compliance. There is a risk that, if the new entity does not align with PSR processes, including the ‘most suitable provider’ benchmark, then the benefits of valuable contracts to which the target entity is party will be lost.

Finally, purchasers of a private healthcare business with NHS contracts should note that a change of control will often trigger a requirement that contracts are put out for re-tender. This is more likely where the contracts in question are high value.

Where the target entity manufactures or supplies medical equipment, it will be subject to a separate regulatory regime. Compliance requirements are made more complex where there is any EU or international element to the business.

In the UK, the Medicines and Healthcare products Regulatory Agency (MHRA) oversees this area, ensuring that medicines, medical devices, and blood components for transfusion in the UK are safe and effective. It is crucial for buyers to understand which marking regime (UKCA/CE or both) are required for products sold by the target business and to ensure that there is a satisfactory compliance history.

Where compliance failures exist, and are not disclosed, the effect on the business post-completion can be devastating. Product recalls, enforcement proceedings, and civil and criminal sanctions are all a possibility.

We have seen overseas trade buyers and groups active in this area, so analysis of the incumbent management team and potential need for support if founders leave needs to be considered.

The UK’s Competition and Markets Authority (CMA) has a role to play in both public (NHS) and private healthcare mergers where the deal involves a significant market share. Where appropriate, the CMA will intervene to safeguard patients and protect service quality. As consolidation in the market has proliferated, so too has CMA scrutiny.

A particular concern of the CMA is the trend for ‘roll up’ acquisitions of huge numbers of smaller dental practices, GP surgeries, and care homes to form much larger, nationwide groups. Any suggestion that deals like these will harm patients through lower quality or reduced choice will be investigated. For buyers and sellers, appropriate planning must be made early on in the deal stage to mitigate against CMA intervention, and to factor the costs and time necessary to handle any investigation. Ultimately, the CMA can order a reduction in the scope of the deal, for example, by specifying that certain entities comprised in the deal be divested to other operators in the sector.

A highly qualified and regulated workforce, NHS scrutiny of transfers of staff in specialised areas, and the treatment of complex NHS pension rights: some of the reasons why employment law considerations will be top of the agenda for buyers and sellers in any M&A in the healthcare sector.

The TUPE protections for employees applicable to any business transfer where the disposal or acquisition is affected through an asset sale will apply to healthcare M&As too. Where the transaction is structured as a share sale, TUPE will not generally apply. If TUPE does apply due to an asset or business sale, relevant consultation periods and other requirements should be accounted for when planning the deal.

The status of consultants and others working across both the NHS and any private target entity must be clearly established by buyers to ensure that valuable personnel will be retained post-completion and that their employment status is defined correctly for tax purposes. Additionally, buyers will expect to have access to disciplinary records of staff and, where appropriate, confirm registrations with the General Medical Council and other relevant bodies.

Lack of clarity on staff retention, professional qualifications, accreditations, and licenses can delay or even derail the deal. It is, therefore, essential that buyers carry out early internal audits of all employment documentation and evidence of strict compliance processes.

The nature of the healthcare industry, where patient/customer safety is always a risk, means that the threat of future medical negligence and other claims will always be a major concern for buyers. Sellers should disclose existing claims and buyers should seek assurances on future claims and seek to quantify potential legal exposure. If necessary, appropriate indemnities should be negotiated and concluded before completion.

Where the target entity sells or manufactures medical devices, buyers should check for any existing or ongoing claims, verify that adequate testing and other protocols are in place and, again, seek bespoke indemnities where a risk of future liabilities is identified.

Healthcare businesses process the most sensitive personal data of patients and clients. Under UK GDPR, medical information has the elevated status of ‘special category data’. Stricter controls apply to it than other personal information, so businesses must meet a high threshold to justify processing it and it must be protected with enhanced security measures.

Before going to market, sellers must be prepared for extensive scrutiny of their data protection systems, their UK GDPR compliance record, and disclosure of any data breaches or regulatory penalties or other interventions.

The rise of AI tools in healthcare management and the risk of cyber-attack have meant data protection is a significant risk area in healthcare M&As. The due diligence process should reflect this.

We have outlined just a selection of the legal and regulatory issues that can arise when negotiating healthcare sector M&As. Other areas to be aware of range from assessing supplier and outsourcing contracts and IP licensing to the survival of any research collaborations following the sale. Real estate transactions will also usually play a part in the overall deal, for example, where clinics or other healthcare facilities need to be transferred or leased to the new owner post completion.

Our award winning M&A team continues to grow in strength and is ideally positioned to advise on acquisitions, joint ventures, internal restructures, and exits from the healthcare and medical sector. We work with you at every stage of the transaction, from initial valuation and marketing of the business to intensive due diligence and negotiation and drafting of all documentation necessary to complete the deal on time and within budget. We also offer legal guidance on any transition/integration issues that arise post completion.

Our Sales, Acquisitions and Mergers lawyers are backed up by others working in the firm, in areas such as Commercial Real Estate and Employment Law as well as Finance and IT.

For an initial conversation get in touch.