The Premerger Notification Office (PNO) of the Federal Trade Commission (FTC) recently published a tip sheet that provides new interpretative guidance on reporting obligations under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) with respect to affiliations among nonprofit organizations, which transactions often occur in the healthcare industry. The net effect of such guidance is that certain affiliation structures among nonprofit organizations will now be reportable for HSR Act purposes.
Assuming certain financial thresholds are met, the HSR Act requires parties seeking to engage in certain acquisitions and other forms of transactions to report such transactions to the FTC and U.S. Department of Justice in advance of closing, pay a substantial filing fee (in 2018, $45,000 to $280,000 depending on the size of the transaction) and only consummate the reported transaction after expiration of the applicable waiting period (most often 30 days).
Historically, the question of whether affiliation transactions between nonprofit corporations involved a potentially reportable “acquisition” of one of the nonprofit corporations and/or its assets was based on the parties’ respective board appointment rights and specifically analyzed as follows:
- “Any person who acquires control of an existing not-for-profit corporation which has no outstanding voting securities is deemed to be acquiring all of the assets of that corporation.” 16 C.F.R. § 801.2(f)(3) (emphasis added).
- Assuming that nonprofit corporations typically do not have “voting securities,” the key inquiry therefore was whether there would be a deemed acquisition of the nonprofit corporation’s assets via acquisition of “control” over such corporation.
- In this context, “control” is defined as “[h]aving the contractual power presently to designate 50 percent or more of the directors of a . . . not-for-profit corporation . . .” 16 C.F. R. § 801.1.
Therefore, if, for example, an affiliation transaction involved one nonprofit corporation becoming the sole corporate member of another nonprofit corporation, but the acquiring nonprofit corporation did not obtain the right to appoint at least 50% of the members of the acquired nonprofit’s governing board, then the transaction was, at least arguably, not a reportable “acquisition” for HSR Act purposes, even if the acquiring nonprofit otherwise obtained substantial control rights over the acquired nonprofit (e.g., reserved powers, approval rights, authority to unilaterally act on behalf of the acquired nonprofit, officer appointment rights, control over governing documents, etc.)
In what appears to be a response to a number of recent informal guidance requests on the reportability of nonprofit healthcare facility/health system affiliations, the PNO published the tip sheet to explain how it will now analyze whether such affiliations constitute a potentially reportable acquisition. The PNO first noted that it recently realized that the historic focus on board appointment rights was too narrow because an acquiring party might still obtain “beneficial ownership” of a nonprofit even if does not obtain control over the nonprofit’s governing body:
Recently, however, when asked to analyze combinations of non-for-profit entities, the PNO began to appreciate the limitations of relying solely on the concept of control to determine reportability. In particular, as potential filers described combinations of not-for-profit hospitals, it became clear that a potentially reportable acquisition could occur even when there is no change in control of the board of directors of one of the combining entities. Typically, this is because one party obtains the indicia of beneficial ownership over the assets of another party –the fundamental basis for concluding that a potentially reportable acquisition occurs under any HSR analysis.
The tip sheet goes on to explain how, aside from obtaining control via board appointment rights, “beneficial ownership” can be obtained if the acquiring organization is vested with certain “indicia of beneficial ownership” over the acquired nonprofit organization and its assets. In the context of nonprofit hospital/health system affiliations, the PNO lists the following non-exclusive list of factors relevant to assessing “beneficial ownership:”
- Corporate membership (i.e., becoming the corporate member of a nonprofit corporation)
- Authorization/approval rights with respect to articles, bylaws or other governing documents
- Authorization/approval rights with respect to the sale or leasing of assets
- Appointment/approval rights with respect to senior officers
- Rights to devise/approve strategic plans, capital budgets and expenditures, and significant contractual arrangements
The foregoing interpretation is consistent with recent informal discussions that we have had with the PNO in which representatives informed us that the PNO would be taking a more comprehensive and subjective approach to analyzing reportability of nonprofit affiliation transactions, focusing on all relevant facts and circumstances demonstrating the acquisition of “beneficial ownership” over the acquired party (i.e., not solely board control). During such discussions, the PNO also explained that, while it is theoretically possible for reserved powers and control rights conveyed in a nonprofit affiliation transaction to be weak enough as to not transfer “beneficial ownership,” experience suggests that this is almost never the case, especially in nonprofit healthcare facility/health system affiliation transactions.
- Nonprofit organizations considering future affiliation transactions should, in consultation with antitrust counsel, analyze not only whether the acquiring party will obtain the right to appoint at least 50% of the acquired party’s governing board, but also whether the facts and circumstances otherwise demonstrate that the acquiring party has obtained “beneficial ownership” of the acquired party and its assets.
- More nonprofit healthcare facility/health system affiliation transactions (to the extent meeting applicable financial thresholds) will be reportable for HSR Act purposes going forward because in nearly every such transaction, at least historically, the acquiring organization becomes the corporate member of the acquired organization (with substantial parental reserved powers) and/or is vested with substantial control and oversight rights, even if such acquiring organization does not have the authority to appoint 50% of the acquired organization’s board members.
- Especially if the parties to a nonprofit affiliation transaction conclude that the acquiring party will not obtain “beneficial ownership” of the acquired party and its assets and that, therefore, no HSR Act filing is required, the parties should carefully and thoroughly document the facts and analysis supporting such conclusion (e.g., lack of reserved power/oversight authority, continued autonomy of the acquired party, etc.) and should also assess, in consultation with antitrust counsel, whether, in light of such weaker oversight/affiliation, the newly-affiliated organizations would still be considered a “single economic actor” that is effectively immune from conspiracy claims under Section 1 of the Sherman Antitrust Act of 1890. Under such circumstances, there would also be important ancillary issues to consider, including whether, in the absence of the strong parental powers/authority, the nonprofit “parent” entity and its new affiliates would satisfy IRS requirements pertaining to integrated Section 501(c)(3) health systems for purposes of exemption qualification, transfer and sharing of assets and related resources, capital financing etc.