News and Insights
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The COVID-19 pandemic has impacted all aspects of business in the United States, M&A transactions in particular. The global IPO market ground to a halt in March of 2020, and corresponding developments in the M&A market were felt almost immediately. By the end of March 2020, M&A levels for the first quarter of 2020 had fallen by more than 50% compared to levels for the first quarter of 2019. Many companies and private equity buyers moved away from the deal market in an effort to preserve jobs, customers and resources. For example, Xerox ceased its $35 billion takeover bid for HP, SoftBank terminated a $3 billion tender offer for WeWork stock and Hexcel and Woodward ceased discussions on a $6.4 billion merger of equals.
Private company transactions were also impacted – a recent study of private company deals valued at less than $2 million found that 46% of deals were delayed and 11% were cancelled as a result of the pandemic. Some transactions involving the acquisition of physician practices that primarily perform elective procedures were delayed or cancelled altogether following the suspension of the performance of elective procedures. The pandemic caused the re-evaluation of the terms of M&A transactions. Transactions are still occurring, but in many cases the pandemic has caused the parties to agree to modified terms and conditions. This article highlights five areas where the pandemic has affected the terms of M&A transactions. The second part of this two-part series will discuss actions prospective sellers can take in the face of the pandemic to optimize their position as targets for acquisition.
- Purchase Price. One of the most noticeable effects of the pandemic has been the reassessment of target company valuations. M&A transactions in 2020 have seen a greater prevalence of contingent forms of consideration, such as earn-outs or increased percentages of escrowed purchase price. In the health care context, earn-outs and other post-closing adjustments can have regulatory implications. These contingencies add complexity to the transaction and increase the potential for disputes between the buyer and seller. Post-closing adjustments have a new level of importance as day-to-day uncertainties of operations have made the ability to anticipate performance more difficult.
- Due Diligence. While the diligence effort is always an important aspect of any transaction, the pandemic has caused a heightened emphasis on the buyer’s diligence of the seller. Buyers are now taking an even deeper dive into the pandemic’s impact on the target company’s sales, regulatory compliance, contract obligations, internal controls, among many other aspects. A significant portion of due diligence occurs electronically over remote technologies, but not everything can be done virtually (e.g. site visits, surveys). As in-person diligence remains limited, sellers should expect a longer and more rigorous due diligence process.
- Representations and Warranties. There has already been a shift in the negotiations of representations and warranties to address COVID-19. Some buyers are now requiring that sellers represent and warrant regarding: (1) the seller’s compliance with all local laws, rules and regulations regarding the pandemic, including any restrictions regarding the opening and closing of businesses; (2) the impact of the pandemic on the seller’s workforce and the ability of the seller to continue to operate in the face of “shut-down” orders; (3) whether the seller has obtained any CARES Act related relief, the seller’s eligibility for relief, and the seller’s compliance with CARES Act program requirements; and (4) the internal controls, policies and procedures of the seller regarding a safe workplace, including compliance with U.S. Centers for Disease Control guidance regarding re-opening. Given the depth of these new representations and warranties, representations and warranties insurance (“RWI”) has become a consideration for many sellers who would have not previously considered it, or who may have determined the cost of RWI premiums outweighed its benefits. This has led to new negotiations between sellers and insurers over the terms of such insurance and whether the policy contains COVID-19-related exclusions (which may result in coverage gaps during the pandemic).
- Operating Covenants. Buyers are demanding tighter controls on the target company between the signing of a purchase agreement and the closing of the transaction. This tighter control is typically evidenced by covenants that obligate the selling company to operate in a certain way or with certain limitations, typically based on the “ordinary course” of the business. Operating a business “in the ordinary course” may not be applicable (or as applicable) in a time of a worldwide pandemic. What is the “ordinary course” today? Does “ordinary course” mean pre-pandemic? Historically, these provisions have been somewhat loose and allowed the selling company a level of room to continue to operate the business as it had historically operated. However, in the pandemic era, buyers are demanding much greater controls and tighter restrictions on the selling company’s pre-closing operations.
- Material Adverse Effect. Material adverse change or Material Adverse Effect (“MAE”) clauses generally allow a buyer to walk away from the deal if the seller’s business and operations suffer a material adverse change between the signing of the purchase agreement the and closing of the transaction. For transactions that were entered into before the onset of the pandemic, or for those contracts of the selling company that are under review, a question may arise whether the pandemic constitutes a MAE. The party invoking a MAE faces a high standard in demonstrating that there has been an adverse change to the selling company’s business that qualifies as a MAE that would excuse the buyer’s performance. In evaluating whether there has been a MAE, the courts will likely consider: (1) the express language of the agreement; (2) whether a pandemic or epidemic is an anticipated (or reasonably anticipated) event; and (3) the depth of the impact on the business and length and scope of the downturn. Given the fact that the long-term effects of COVID-19 are still unknown, and the high standard for demonstrating a MAE, it will likely be difficult for buyers to successfully argue that the disruptions caused by the pandemic constitute a MAE.
The COVID-19 pandemic has wreaked havoc on the U.S. economy; the M&A market is not immune to the pandemic’s negative impact. That said, some M&A activity has continued unabated, though the terms of such deals and the associated risks look markedly different than they did pre-pandemic. For information about the steps that prospective sellers can take to better position themselves when the time comes for a sale, stay tuned for part two of this series. If you have any questions regarding any M&A issues, the business transactions team at Milligan Lawless is here to assist. Please contact Steve Lawrence at 602-792-3635 or email@example.com or Miranda Preston at 602-792-3511 or firstname.lastname@example.org.
 Jens Kengelbach, Jeff Gell, Georg Keienburg, Dominik Degen and Daniel Kim, COVID-19’s Impact on Global M&A, Boston Consulting Group, March 26, 2020.
 Richard Harroch, The Impact of the Coronavirus on Mergers and Acquisitions, Forbes, April 17, 2020.
 Cara Lombardo, Xerox Is Ending Hostile Takeover Bid for HP, The Wall Street Journal, April 1, 2020; Peter Eavis, SoftBank Won’t Buy $3 Billion in WeWork Stock, New York Times, April 1, 2020; Reuters, Aero Suppliers Hexcel and Woodward Scrap Deal as Coronavirus Pummels Industry, April 6, 2020.
 Market Pulse Report, Pepperdine Graziadio Business School, April 29, 2020.
 For example, in the context of the sale of a physician practice, where a portion of the purchase price is paid as an earn-out, if the owners of the seller will refer any patients to the buyer post-closing, the Stark Law and the Anti-Kickback Statute may be implicated.
 See Akorn, Inc. v. Fresenius Kabi AG, No. CV 2018-0300-JTL, 2018 WL 4719347, at *53 (Del. Ch. Oct. 1, 2018), aff’d, 198 A.3d 724 (Del. 2018) (citing Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008) at 738 (stating “A buyer faces a heavy burden when it attempts to invoke a material adverse effect clause in order to avoid its obligation to close”).
U.S. District Court Strikes Down Portions of the Department of Labor’s FFCRA Implementing Regulations
On August 3, 2020, a federal court in New York state struck down portions of the regulations implementing the Families First Coronavirus Response Act (“FFCRA”). In litigation brought by the state of New York against the United States Department of Labor (“DOL”), a U.S. District Court, among other things, substantially narrowed the “health care provider” exception to the FFCRA.
The FFCRA requires employers to provide employees paid leave benefits in connection with certain COVID-19-related absences. The health care provider exception allows employers to deny FFCRA’s leave benefits to employee health care providers. The court rejected as too broad DOL’s regulatory definition of “health care provider” which included:
“[A]nyone employed at any doctor’s office, hospital, health care center, clinic, post-secondary educational institution offering health care instruction, medical school, local health department or agency, nursing facility, retirement facility, nursing home, home health care provider, any facility that performs laboratory or medical testing, pharmacy, or any similar institution, Employer, or entity. This includes any permanent or temporary institution, facility, location, or site where medical services are provided that are similar to such institutions, as well as any individual employed by an entity that contracts with any of these institution . . . .”
DOL Final Rule at 19,351 (§ 826.25). Instead, after recognizing its applicability to the FFCRA, the court applied the narrower Family Medical Leave Act “health care provider” definition:
“(A) a doctor of medicine or osteopathy who is authorized to practice medicine or surgery (as appropriate) by the State in which the doctor practices; or (B) any other person determined by the Secretary to be capable of providing health care services.”
29 U.S.C. § 2611(6); State of New York v. U.S. Department of Labor, et al., No. 1:20-cv-03020 (S.D. N.Y. Aug. 3, 2020).
In that same decision, the court also: rejected a DOL rule which denied FFRCA leave to employees in the absence of available work for the employee to perform (e.g. during a furlough); vacated a DOL rule requiring employer consent to intermittent use of FFCRA leave; and struck down a DOL requirement that employees provide FFCRA documentation in advance of taking leave.
The court’s decision substantially affects key components of the FFCRA. Significantly, for healthcare sector employers, it may reduce the ability to exempt most employees from FFCRA leave benefits. It also raises the question of potential liability for employers who denied employees FFCRA leave based upon DOL’s now-vacated regulations. Finally, the impact of the court’s decision outside the state of New York is currently unclear. Employers are encouraged to speak with an attorney if they have questions about FFCRA compliance or other employee leave-related matters.
For more information regarding the implications of the court’s decision, the FFCRA or other employment-related matters, please contact attorney John Conley at (602) 792-3500.
In a landmark decision issued on June 15, 2020, the United States Supreme Court held that Title VII of the Civil Rights Act of 1964 prohibits employment discrimination based on sexual orientation and gender identity. Resolving a longstanding split among federal courts as to whether Title VII’s protections extend to LGBTQ employees, the Court ruled 6-3 that Title VII’s prohibition on sex-based employment discrimination encompasses sexual orientation and gender identity discrimination.
The Basics of Title VII
Title VII of the Civil Rights Act of 1964 is a federal law prohibiting employment discrimination based on race, color, religion, sex, or national origin (i.e., protected classes). The law applies to any public or private sector employer with 15 or more employees, employment agencies, labor unions, and training programs.
Title VII makes it unlawful for employers to discriminate in any aspect of employment, including recruiting, hiring, promoting, training, terminating, and providing benefits. Additionally, Title VII prohibits employers from retaliating against employees for complaining about discrimination, filing a charge of discrimination, and/or participating in an investigation of discrimination or legal proceeding.
The Court’s Decision
The Court’s decision is in response to a trio of consolidated cases (captioned Bostock v. Clayton County) alleging employment discrimination: a child welfare coordinator was fired after his employer learned of his participation in a gay softball league; a skydiving instructor was fired after informing a customer that he is gay; a transgender funeral director was fired after telling her boss about her plans to transition.
In all three cases, the employee asserted unlawful sex discrimination in violation of Title VII. Rejecting an argument by the employers that Title VII only prohibits sex discrimination on the basis of an employee’s status as a male or female, the Court declared that it is impossible for employers to discriminate on the basis of sexual orientation or gender identity without impermissibly discriminating based on sex. Writing for the majority, Justice Neil Gorsuch opined, “An employer who discriminates against homosexual or transgender employees necessarily and intentionally applies sex-based rules.”
The Court’s full opinion can be accessed here: https://www.supremecourt.gov/opinions/19pdf/17-1618_hfci.pdf
Takeaways for Employers
Employers should review their employment policies and practices to ensure compliance with the Court’s ruling. Specifically, employers should make certain that their anti-discrimination policies include express language prohibiting discrimination and/or harassment based on sexual orientation and gender identity. Employers should also consider conducting employee training addressing anti-discrimination and harassment policies.
For more information regarding the implications of the Court’s decision, please contact attorneys John Conley or Kylie Mote at (602) 792-3500.
On June 2, 2020, the Centers for Medicare and Medicaid Services (CMS) published updated FAQs related to Medicare Fee-for-Service Billing and COVID-19, and the interim final rule with comment period (IFC), CMS-1744-IFC. These updates supplement CMS’ FAQs on Section 1135 Waivers, released March 15, 2019.
In these FAQs, CMS analyzes provisions from the Coronavirus Aid, Relief, and Economic Security (CARES) Act relevant to payment for COVID-19 testing, billing, diagnostic services, hospital services, rural health clinics, opioid treatment programs, drugs, and vaccines, among other topics.
Of particular interest to physicians are the following FAQs and a brief summary of CMS’ response:
- What does the IFC change for physician and practitioner billing?
The IFC makes temporary changes to certain policies, such as supervision by a physician or non-physician practitioner (NPP), payment for certain services furnished by teaching physicians and moonlighting residents, telehealth, services furnished by Rural Health Clinics and Federally Qualified Health Centers, and payments to labs for specimen collection.
- What are the changes to supervision?
CMS has revised the definition of “direct supervision” and changed the supervision requirements for hospital outpatient non-surgical extended duration therapeutic services from direct supervision to general supervision.
- When do the changes on supervision take effect and for how long?
The supervision changes are effective March 1, 2020 and last for the duration of the national COVID-19 Public Health Emergency (PHE).
- Can residents furnish telehealth services?
Through the interim final rule and for the duration of the PHE, Medicare may pay for services billed by teaching physicians when residents furnish telehealth services to beneficiaries under direct supervision of a teaching physician provided by interactive telecommunications technology.
- Does Medicare pay for a doctor or NPP to furnish care in a beneficiary’s home?
Yes. Medicare pays for care furnished in a beneficiary’s home, including evaluation and management services, telehealth services, and non-face-to-face services to assess and manage a beneficiary’s condition. In addition, Medicare pays physicians for services furnished in a beneficiary’s home by auxiliary personnel, as long as those services are furnished incident to a physician’s service and with the physician’s appropriate supervision.
- Can a “distant site practitioner” furnish Medicare telehealth services from their home? Or do they have to be in a medical facility?
There are no payment restrictions on distant site practitioners furnishing Medicare telehealth services from their home during the PHE.
- The ambulatory surgical center (ASC) in my community has recently converted to a hospital under unique provisions available during the PHE and my medical group has been contracted to provide care there. If clinicians from our medical group furnish covered professional services to Medicare beneficiaries at the ASC-turned-Hospital, can we bill Medicare for non-surgical services?
Yes. Practitioners are permitted to bill under Medicare can bill Medicare for covered professional hospital services furnished to beneficiaries at an ASC-turned-Hospital during the PHE.
- My medical group is contracted to provide care at a local hospital. The hospital has built a tent, transitioned a gymnasium, or converted another non-clinical location into a space to provide patient care. If clinicians from our medical group furnish covered professional services to Medicare beneficiaries at those new patient care locations, can we bill Medicare?
Yes. Practitioners who bill under Medicare may bill Medicare for covered professional services furnished to patients at temporary expansion sites, such as gymnasiums or other non-clinical locations.
- The state, Army Corps of Engineers, or other governmental entity established a new care location in our area by repurposing and retrofitting a convention center, gymnasium, or other site for patient care. My medical group has been asked to provide patient care in one of these locations. Can we bill Medicare for covered professional services furnished in these locations? If so, are there reporting or billing rules that determine how this is done?
Yes. Practitioners who bill under Medicare may bill Medicare for covered professional services furnished to patients at temporary expansion sites, including those established by the state, Army Corps of Engineers, or other governmental entities. To bill for these services, practitioners would bill under the Medicare Physician Fee Schedule and follow existing billing rules for services provided in hospitals. Practitioners should also add the “CR” modifier to professional claims for care provided in temporary expansion sites.
For full answers to these physician-related and other FAQs, please visit this website: https://www.cms.gov/files/document/03092020-covid-19-faqs-508.pdf. For any other questions or comments, please contact Milligan Lawless at 602-792-3500.
The Payroll Protection Program (“PPP”) continues to be revised in ways that are favorable to physician practices and other small businesses. In May, amidst growing uncertainty about whether businesses that took out loans under the PPP would be subject to second-guessing regarding their certification as to their need for the loans, the SBA and Department of the Treasury determined that any borrower that received a PPP loan of less than $2 million would be deemed to have made the certification in good faith.
Yesterday, the Senate passed the ‘‘Paycheck Protection Program Flexibility Act of 2020 (the “Bill”), which the House had passed previously. The Bill includes several additional improvements to the PPP, from the perspective of small businesses. Among other things, the Bill:
- Extends the term of PPP loans from 2 years to at least 5 years, for loans made after the effective date of the Bill; as to loans made prior to the effective date, the Bill permits lenders and borrowers to agree to modify the maturity terms of their loans;
- Extends the maximum “covered period” during which a borrower can use its PPP loan for forgivable purposes from 8 weeks to the earlier of 24 weeks from the loan origination date, or December 31, 2020; for loans originated prior to the effective date of the Bill, borrowers who wish to retain the original 8 week covered period are free to do so;
- Provides that loan forgiveness will be available to borrowers who use at least 60% of the loan proceeds for payroll (down from 75%) and use at least 40% for rent, utilities and mortgage interest payments (up from 25%);
- Extends the period in which a borrower may rehire employees or reverse a reduction in employment, salary, or wages in order to avoid a reduction in the forgivable amount of the loan, from June 30, 2020 to December 31, 2020;
- Provides that the forgivable amount of the loan will not be reduced as a result in a reduction in the number of a borrower’s employees if the borrower is (1) unable to rehire former employees and is unable to hire similarly qualified employees, or (2) unable to return to the same level of business activity, as existed prior to February 15, 2020, due to compliance with federal requirements or guidance related to COVID-19;
- Extends the payment deferral period, from 6 months to the date on which the applicable borrower’s amount of forgiveness is determined; this means that each borrower’s deferral period will be based on the date on which the borrower applies for forgiveness. However, if a borrower does not apply for forgiveness, the borrower’s payment obligation will start 10 months after the borrower’s “covered period” (the 24-week period beginning on the origination date of the loan) expires; and
- Eliminates a provision that made borrowers ineligible for payroll tax payment deferrals if the borrowers’ PPP loans are subject to forgiveness.
Media reports indicate that President Trump intends to sign the Bill.
The full text of the Bill is available here: https://www.congress.gov/bill/116th-congress/house-bill/7010.
Prior Milligan Lawless reports on the PPP are available here: