The Premerger Notification Office (PNO) of the Federal Trade Commission (FTC) recently formalized a new position on Hart-Scott-Rodino Act (HSR Act) reporting obligations for certain not-for-profit, non-stock transactions. The change is currently in effect and applies to transactions that have not yet closed. The change in position will require reporting of many hospital transactions that have not traditionally been treated as reportable events. The biggest area of change relates to affiliation transactions where hospitals or health systems affiliate under a new parent entity.
Under its previous position, the PNO focused on whether a transaction results in a change of “control” of the board of directors of one or more of the combining entities. Under its new position, the PNO will focus on beneficial ownership–whether one party receives beneficial ownership over the assets of another party as a result of the transaction. Now, a potentially reportable acquisition can occur even when there is no change in the control of the board of directors of one of the combining entities because formal board control is not the exclusive method of obtaining beneficial ownership.
In a recently published Tip Sheet, the PNO provided analysis of reportability for three types of not-for-profit combinations that it regularly sees, which we summarize below. The first two examples involve traditional application of the rules to hospital transactions, while the third example represents the PNO’s newly formed position on affiliations. Note that in all of the examples below, we focus on the nature of the transaction structure to evaluate whether a potentially reportable acquisition of assets has occurred. In any specific transaction, the parties would also need to evaluate whether the statutory thresholds are met (e.g., the $84.4 million size-of-transaction test), as well as whether any exemption applies.
1. A simple acquisition in which an existing acquiring person (g., a not-for-profit hospital) is deemed to hold the assets of the acquired entity (e.g., another not-for-profit hospital) as a result of the acquisition. This can happen in a variety of ways, such as a straight asset acquisition or a transaction in which one not-for-profit becomes the sole corporate member of another. If one not-for-profit obtains the right to manage and operate another through a corporate transaction, that is likely a reportable structure.
a. PNO conclusion: This structure is reportable as an asset acquisition.
2. A transaction in which the existing not-for-profit entities remain independent but form a new joint venture entity as a jointly owned subsidiary or affiliate. The pre-existing entities remain separate persons for HSR Act purposes.
a. PNO conclusion: This structure is reportable. However, the 16 C.F.R. § 802.40 exemption for the formation of a not-for-profit joint venture is likely to apply.
b. The illustration below depicts this structure:
3. A transaction in which the existing not-for-profit entities consolidate under a new not-for-profit entity. The existing entities lose their separate pre-acquisition identities or become wholly owned subsidiaries of the new entity. The exact structure of board appointment for the members of the not-for-profit entities does not drive the reportability assessment.
a. PNO conclusion: Under the PNO’s new position, the transaction is reportable as a consolidation.
b. The illustration below depicts this structure:
In the Tip Sheet, the PNO described several factors that it has considered relevant to the analysis of beneficial ownership in the context of hospitals affiliating under a new entity:
- The new entity becomes the corporate member of the affiliating hospital entities
- The new entity has the right to authorize and/or approve the articles, bylaws, and other governance documents of the affiliating hospital entities
- The new entity has the right to authorize and/or approve the sale or lease of the affiliating hospital assets
- The new entity has the right to appoint and/or approve the senior officers of the affiliating hospital entities
- The new entity has the right to devise and/or approve the strategic plans, capital budgets and expenditures, and significant contracting of the affiliating hospitals
Overall, not-for-profit hospital systems need to plan for HSR Act filings being required for many transactions that, under prior PNO analysis, would not have required notification. While the FTC would routinely investigate hospital affiliations that did not require HSR Act filings, the FTC will have additional procedural leverage when there is a mandatory filing, which creates the statutory waiting periods and Second Request mechanisms.
