Q&A: transactional issues with healthcare M&A in France

Transactional issues

What is the typical structure of a healthcare-related business combination in your jurisdiction?

In France, healthcare-related business combinations are mostly structured either as asset transactions (on a contractual basis through the sale of assets or using one of the legally organised options, such as a merger or transfer of a branch of activity) (asset deal) or as share transactions (transferring the shares issued by the entity to which the healthcare business belongs) (share deal).

The choice between these two kinds of structure depends on the intention of the buyer or investor: if the combination targets a whole business, a share deal is most commonly used as it allows for all assets and liabilities to be transferred upon completion. If, on the contrary, the acquirer is only interested in a specific branch of the business, the transaction would most probably be structured as an asset deal in order to transfer only the relevant assets.

Another criterium is the identity of the acquirer or investor: a share deal allows to transfer only part of the share capital and is more suited for investments where the acquirer will not have any operational duties (for instance, in cases where there are financial partners, such as investment funds, willing to invest in companies where the management of the business is left to more specialised partners).

Structuring a combination as an asset deal will therefore usually be preferred when not all the assets or liabilities of a healthcare entity need to be transferred (carveout), when the consideration is not in cash or for tax reasons. Structuring a combination as a share deal will usually be preferred if no such reasons exist, because this is very often the easiest option from a legal, regulatory and contractual point of view.

Also note that in the case of a healthcare business combination implying a specific asset or project in development, the transaction may also be structured as a collaboration agreement or a joint venture between a specialised company and a larger corporation. In the first case, the collaboration may be remunerated in cash or in equity. In the second case, a specific vehicle owned by both companies would be created for the development of the project. The relevant assets would be transferred or licensed to the joint venture vehicle, and the larger corporation would fund the development of the project. Occasionally, a company may spin out a business or a subsidiary that will further be sold in a share deal.

In some cases, more often in the healthcare sector in the narrow sense (eg, hospitals, medical practices, laboratories) than in the life sciences sector (ie, pharmaceutical companies, biotech companies, medtech companies, etc), the above choice will not be available because the business is not owned by a company, but by a specific type of legal entity (eg, non-profit association, foundation or administrative entity) that cannot issue shares and the combination can therefore not happen by a transfer of shares.

How long do healthcare business combinations usually take, and what factors tend to be most significant in determining the timing to completion?

Timing to completion may vary significantly depending on the structure of the transaction and in particular its size and complexity. In general, we would expect most healthcare business combinations to take between two and nine months to complete.

Several factors tend to be significant in determining the timing to completion: existence and number of subsidiaries in other jurisdictions, scope of the due diligence, potential regularisations or carve-outs before closing, availability of funding, time needed to comply with the corporate process, to obtain all necessary authorisations (including, as the case may be, regulatory approvals, third parties contractors consents, consultation of the work councils), to go through foreign direct investment and antitrust clearances or meet listing requirements (when at least one of the parties is a listed company) and the gap between the parties’ positions in the negotiations.  

Regarding combinations in the healthcare sector in the narrow sense, the authorisations needed to complete such combinations and more complex decision-making processes can take more time than average.

What are the typical representations and warranties made by a seller in healthcare business combinations? What areas would be covered in more detail compared with a more general business combination?

In all M&A transactions, the seller would typically be expected to provide representations and warranties regarding the target and its activities, which vary depending on the business to be transferred.

In addition to the representations and warranties that are common to all business combinations (capital structure, financial matters, real estate, taxation, litigation, etc), certain representations and warranties will receive more specific attention in healthcare business combinations, such as:

• intellectual property rights and licences, and freedom to operate;
• R&D agreements, co-developments, consents, grants or subsidies from public entities;
• clinical trial compliance;
• compliance with all regulatory matters;
• market authorisations, certifications and regulatory licences;
• prescription and reimbursement status;
• marketing and distribution;
• compliance of the buildings with all specific regulatory aspects (for labs for instance);
• status of founders with respect to healthcare regulations;
• data protection; and
• product liability and insurances.

One should note that some venture funds tend to refuse to provide any representations and warranties as sellers of a healthcare company in which they invested. Such investors will secure this principle at the moment of their respective investment in the company, the latter, and its management, being the only parties to provide representations and warranties at the moment of the M&A transaction.

Describe the legal due diligence required in healthcare business combinations. What specialists are typically involved? What searches would typically be carried out?

Legal due diligence in healthcare business combinations would be tailored depending on the structure of the target business and the main concerns of the buyer, but will tend to address the same risks as those to be covered by representations and warranties. The idea would generally be to identify and qualify the main risks concerning the target company or branch of assets, in order to provide either for specific indemnities in the documentation relating to the transaction or for regularisation within certain delays (prior or post closing).

Regulatory and compliance matters would generally be a specific area of focus during due diligences on a healthcare business, to ensure the adequate transfer of the authorisations and compliance with all appropriate standards. Intellectual property matters would also be carefully reviewed as they may have major consequences on the valuation of the target, and employment matters would as well be dealt with, as there may be underlying litigations (which may be particularly costly in France as the employment law is quite protective of the employees) or as they may affect the timing of completion.

Given the specificities of healthcare businesses, scientific or medical experts, or both, are typically involved in the process, and specific teams specialising in the above-mentioned matters would also play an important role. Intellectual property experts will also give insight as to freedom to operate material patents. Key opinion leaders will review also the strategic rationale of business. Human resources specialists may interview the key people of the target company.

In cases where a plant is involved, a specific focus will also cover the environmental law compliance, in particular the classified installation for the protection of the environment legal framework.

In France, companies operating in the healthcare industry with R&D activity may be eligible to the Research Tax Credit provided by section 244-quater B of the French Tax Code.

The Research Tax Credit is calculated on a yearly basis and amounts to 30 per cent of eligible expenses in relation to R&D projects up to €100m, and to 5 per cent above that threshold.

The Research Tax Credit:

• may be offset against the statutory French Corporate Income Tax (CIT) due by the company in respect of the fiscal year during which the calendar year of the computation of the tax credit has ended, and, as the case may be, against the CIT due in respect of the three subsequent fiscal years; and
• is refundable after this three-year period for the part that has not been offset against CIT.

The Research Tax Credit is a non-taxable income (paragraph 510 of Administrative Guideline BOI-BIC-RICI-10-10-50).

If due diligence is not correctly undertaken, what specific healthcare risks might buyers inherit?

For buyers of healthcare business, due diligences are a major concern on the path to closing. This is explained by the fact that insufficient due diligence may lead to damages and degraded valuation (as in all M&A transactions) but also civil and criminal liability as healthcare businesses deal with consequences on the health of patients. There is also a reputational risk that has accrued in the healthcare field.

The exposure will to some extent depend on the structure of the transaction. In the case of a share deal, the buyer or investor would only suffer a decrease in the valuation of the target company and potentially a reputational risk (ie, the damages would mostly be indirect). On the contrary, in an asset deal, the buyer generally becomes liable for all debts and sanctions (subject to some cases where the seller and the buyer are jointly liable). The damages would therefore be direct for the buyer in the event of oversights during the due diligence process.

How do buyers typically approach specific material diligence issues in healthcare business combinations?

Buyers would typically approach those issues by a combination of properly understanding them through detailed due diligence investigations, requiring corrective pre-completion measures if necessary, getting proper contractual protection through representations and warranties (and possibly specific indemnities), getting insurance coverage or, if the issue can only be properly addressed after the deal is completed, by ensuring that processes and compliance are improved afterwards. Upon review of the due diligence conclusions, specialist advisers would advise on mitigating risks and identifying actions to be taken, and as a default solution and where appropriate, indemnities (sometimes supported by an escrow on part of the price) will be sought.

What types of pre-closing conditions are most common in healthcare business combinations?

The most common pre-closing conditions are not specific to healthcare business combinations and would usually be required in all transaction structures: necessary corporate approvals, merger control clearance, regulatory approvals if applicable (including foreign direct investment clearance for sensitive public health business), required pre-closing regularisation measures if identified during the due diligences, completion of consultation with work councils and third-party consent (mostly for asset transactions, but also for share transactions in the case of change of control clauses).

However, some of those pre-closing conditions are particularly crucial in healthcare business combinations: both healthcare businesses in the narrow sense and life-sciences businesses are most often regulated businesses and ensuring that regulatory approvals are kept in place is key. Also, intellectual property plays a more important than average role, and ensuring that proper licensing arrangements are put or kept in place is crucial.

Some business conditions may also apply to the transaction: for instance, the carve-out of certain branches of the business, or the successful completion of certain development milestones.

What sector-specific covenants are usually included to cover the period between agreement and completion in healthcare business combinations?

The most common pre-closing covenant is an ordinary course of business covenant: this is not sector specific, but is particularly crucial for healthcare business combinations because they are most often structured with a subsequent signing and closing, due to the conditions before completion, and the time needed to meet pre-closing conditions can be longer than average. Such covenants aim at ensuring that no extraordinary decision is taken during this intermediary period. The contractual mechanisms may also provide for leakage clauses: as the price of the transaction is already set on signing (ie, before the effective transfer on closing), the idea is to adjust this price of any cash leakage occurring between signing and closing.

Given the specifics of healthcare businesses, being more precise in terms of involvement in regulatory discussions, and being informed and consulted in the case of casualties or other relevant incidents, and intellectual property infringements and maintenance of insurance cover can prove very useful.

What specific provisions are commonly seen in warranty and indemnity insurance policies for healthcare business combinations compared with general business combinations?

The use of W&I insurance is increasing in France as acquirers or investors wish to mitigate their risk exposure. This is particularly the case in healthcare transactions because of the higher than average risk profile and complexity of healthcare businesses.

Particular care should be given to W&I contractual documentation as it often contains exclusions for regulatory compliance or criminal sanctions, which are more of a concern in healthcare business combinations than in other sectors, as well as for product liability and more generally for any specific risk identified during the due diligences (the insurance companies asking to be provided with the due diligence reports).

Is there any sector-specific documentation typically used in healthcare business combinations? Does this differ depending on the structure of the transaction?

However, healthcare business combinations will often require ancillary documents to properly complete the transaction or manage its risks (licensing agreements, third-party consents, regulatory aspects). In the case of assets transactions, the transfer would generally imply the transfer and/or granting of new authorisations (for example, authorisations relating to the use of the CE marking, specific authorisations for the new manufacturing site and for the status of legal manufacturer). The transfer of such authorisations require a specific documentation to be filed before the relevant competent authorities, at the French and/or EU level.

In addition, because combinations of healthcare businesses in the narrow sense will often be asset transactions and subject to prior regulatory approval, they will often rely on a more elaborate acquisition or merger plan, containing details about the transaction to be submitted to regulatory (and sometimes even political) authorities.

Fewer documents would be required in the case of a share deal compared to an asset deal since all authorisations and registrations would not change (no need of a filing before the regulatory authorities) and the assets would continue to be owned by the target company.

The sale of an ongoing business needs specific filing and publicity to third parties’ creditors and the use of an escrow account.

Which post-completion undertakings are common in healthcare business combinations? Which undertakings are common?

Healthcare business combinations are not different to typical business combinations in terms of post-completion undertakings. Therefore, non-solicitation and non-competition undertakings (known as restrictive covenants) are likely to be used and will need to be checked against applicable limitations under French law (related to duration, geography and activities).

As earn-out considerations are more frequent in healthcare business combinations, the way the business is managed once the transfer has been carried out will be crucial to the seller and often lead to more precise post-completion undertakings to ensure that the buyer will operate the business in the ordinary course and avoid actions likely to negatively affect the business’ performances.

As healthcare businesses in the narrow sense are usually dependent on the identity, reputation and client-following of their services providers (especially physicians), ensuring a longer-term commitment can prove useful.