This week we will look at whether the purchase of all of the ownership interests of a healthcare company is a CHOW. Initially, it should be noted that oftentimes when people discuss a stock purchase, they are really referring to the purchase of all the ownership interests of a business. While many such transactions involve a corporation's stock, when the ownership interest involves a partnership or limited liability company, it is correctly referred to as a partnership interest purchase or membership interest purchase. For purposes of this blog, a Stock Purchase shall refer to the purchase of all the ownership interests of an entity.
In a Stock Purchase, all of the ownership interests of the business are transferred directly from the owners of the business (i.e. shareholders, partners or members) to the buyer. Although there may be cases where a party to a contract with the entity has a right to object, the buyer steps into the place of the seller(s), and the operation of the business continues in an uninterrupted manner. Unlike an asset sale, Stock Purchases generally do not require separate conveyances of each individual asset because the title of each asset remains within the entity being purchased.
Does a Stock Purchase result in a CHOW? The answer may vary depending on the type of entity being purchased and state law.
Corporation. The transfer of corporate stock does not result in a CHOW. This is because CMS believes there is no change of ownership where the operating entity continues to exist and operations continue uninterrupted.
Partnership. The removal, addition, or substitution of a partner, unless the partners expressly agree otherwise, as permitted by state law, constitutes a CHOW. The purchase of a partnership is treated differently than the purchase of a corporation because the removal, addition or substitution of a partner can result in a dissolution of the partnership in many states. As discussed in the previous blog, whenever a new entity becomes responsible for the operation of a healthcare provider, it is a CHOW. Therefore, the purchase of partnership interests of a partnership will generally be a CHOW, except for situations where the partnership agreement and applicable state law allow the transaction to occur without causing the dissolution of the partnership.
Limited Liability Company (LLC). Since LLC’s rarely provide for dissolution upon the removal, addition or substitution of a member, the transfer of membership interests usually does not result in a CHOW because the operating entity continues to exist and operations continue uninterrupted.
Sole Proprietor. If an individual owns the healthcare provider and sells it to another person or entity, it is a CHOW.
Please note that whenever an ownership interest is acquired in a corporation, partnership or LLC that directly owns a healthcare provider and the transaction is not a CHOW, CMS must be notified of the new ownership via a change of information filing after closing.