Private Equity in Healthcare: Legal Challenges and Best Practices for 2025

How State and Federal Regulations Are Reshaping Healthcare Deals

[00:01:30] Andrew’s background and overview of Debevoise & Plimpton’s healthcare practice

Kison Patel: Can we kick things off with a little intro about yourself?

Andrew Bab: As you mentioned, I'm a partner at the firm of Debevoise & Plimpton. I have been practicing law for 35 or more years now. I'm an M&A practitioner principally. I co-chair the Healthcare Group. I probably do about 60–70% of my work in the healthcare group, but my practice includes public and private deals, private equity. And it's been a great experience working at Debevoise—and great to be here.

Kison Patel: That’s a lot of deals over 35 years. And they’ve got the healthcare focus on both public and private?

Andrew Bab: Yeah, we try to keep general at Debevoise as much as we can. And so I do a lot of different types of work.

Kison Patel: Let’s get into it. What are the big changes happening regulatory-wise? I feel like there are two lenses: there’s a broad, holistic view, and then looking into the healthcare space. New regulations?

[00:03:00] Regulatory updates: DEI rollbacks, reverse CFIUS, foreign direct investment

Andrew Bab: The things that people are thinking about these days are perhaps things like antitrust, cross-border-related regulations—whether that’s CFIUS or sanctions rules—or the reverse CFIUS. Executive orders and case law on things like DEI programs—that's something we’re seeing. DEI programs at many companies are being unwound, and compliance with those rules and cases is an important factor when you’re considering buying another company—to see if they’re complying and what might need to be done down the road.

So that’s... it’s not so much regulation as it is, so far, executive orders and case law. But those are some of the key things that people are focused on more generally.

Kison Patel: What’s reverse CFIUS?

Andrew Bab: The reverse CFIUS is outbound investment rules that are fairly new. What they are is—in certain circumstances, the government can prohibit, or at least require notification of, investments outside the United States, principally in Chinese companies with specialized technology or products. But also in other non-U.S. companies that have some sort of relationships with China.

Those are just things you have to know about when you’re doing deals outside the United States.

Kison Patel: Interesting. So you have CFIUS for investments coming in the U.S., reverse CFIUS for investments going out of the U.S.

Andrew Bab: Every country has its CFIUS. We call them FDI—Foreign Direct Investment rules—but those are rules by other countries that may object to or require approval for investments into that country, into certain industries.

[00:05:30] National security laws expanding into tech, steel, and social media

Andrew Bab: What’s happened over the last five years is that many of these rules have been invented or expanded in connection with the desire to protect against national security. CFIUS certainly is a national security set of regulations.

Over the last five years, we’ve seen the definition of national security broadened to enormous heights. It’s not just investments in the defense industry or NASA—it's investments in steel. People are talking about how the ability to manufacture our own steel is critical to national security. Anything with high tech, nanotechnology, those sorts of things. Because those are the future of both the economy and our national defense.

Kison Patel: And social media?

Andrew Bab: Social media as well. Sure.

Kison Patel: So it really broadened the scope of what they consider national security.

Andrew Bab: They have. Under Trump, we’re going to see those regulations used, at least. I don’t think we’re going to see new kinds of regulations—we’re going to see them used to further his policies. If there’s a country he wants to pay more to NATO, one could see more aggressive CFIUS enforcement of companies from that country investing in the U.S.

[00:06:00] Antitrust enforcement differences between Trump and Biden administrations

Kison Patel: You think there are areas that would ease up, like tech? I feel like they’ve been under a lot of constraints—regulatory-wise, anti-competitive—from doing deals. But it seems like a lot of them are showing up to Trump events and advocating.

Andrew Bab: So the pure regulation—putting aside the cross-border CFIUS stuff—under Trump, antitrust regulation is going to be relaxed in many ways, not in all ways. We’re going to see the antitrust authorities be more willing to talk about remedies when a deal has problems. The Biden administration and Lina Khan were much less willing to do that.

In other words, to divest a piece of the business in order to eliminate the antitrust concerns. It was very hard to get those kinds of remedies, so that you could at least move your deal forward.

That’s one thing we’ll see. The attack, if you will, on private equity and big business that we’ve seen to some extent under the last administration is going to be relaxed.

That will be good. For instance, the antitrust authorities over the last few years have been focused on private equity roll-ups—where a private equity firm buys a platform in a particular area, and then buys more and more of those types of businesses, building up a larger platform. That had never been an antitrust concern really, until Lina Khan got in. And now that became a focus, which I think will no longer be a focus under Trump’s regime.

But who knows? He did use antitrust laws to kill a number of deals in his first term. So I don’t think we can expect a much more relaxed situation entirely—but I do think there are areas where it’ll be a lot better and easier for M&A to proceed.

Let me know if you'd like me to continue formatting the next sections, starting with:

[00:09:00] Delaware case law: MFW, Molus, Crispo and corporate governance implications

Kison Patel: Not a full 180° change, but definitely some anticipated changes—and sounds like a little more business-like thinking.

Andrew Bab: I think it’ll be business-like. I think the discussions with the antitrust authorities will be more transparent. They’ll tell you what they need, what the problem is, and you’ll get it done.

Your question was more... other regulatory regimes on healthcare may be a problem. But on other areas—tech is a good one, AI is a good one—regulation will be relaxed, and it will be easier to do deals and to run businesses in those areas.

Kison Patel: People are backing out of DEI initiatives. How does that impact M&A?

Andrew Bab: It does in a couple of ways. I think it’s more of a diligence-type question and an integration question. And it may be something that you want to put into your draft of the merger agreement. You might want to say that the company is complying with the various cases and executive orders relating to DEI.

But I think it’s really going to be a question of diligence—making sure compliance is being monitored and you limit your risk.

Kison Patel: What was all the buzz last year about amending the Delaware code?

Andrew Bab: There were a few cases last year in Delaware. They were in response to three cases, really, that put into question some very common... the most significant of those was the Molus case, which held that very common provisions you see in all sorts of shareholder agreements—like veto rights granted to a shareholder—might violate Delaware Section 141, which says that it is the board that has the duty, obligation, and right to manage the business and affairs of the company.

The court did say you can put those kinds of rights, if you want, into the certificate of incorporation. You can’t put them into a contract—a shareholders agreement—between the shareholder and the company.

There are literally hundreds of thousands of shareholder agreements that do this. But it really threw a wrench into how we practice in this area.

The other piece of this that was a challenge was that activists—when they settle with a company—very often will also enter into these shareholder agreements, which give the activist... could be veto rights, could be a right to appoint a director, whatever it is, which also came into question. If they did come into question, it would make it very difficult to settle with an activist.

So there was a lot of concern about this. Delaware just jumped into action. They amended the statute to say, “Yes, yes, you can—as long as the provisions in the shareholders agreement are not contrary to law or inconsistent with what you could have put into a certificate of incorporation, you can do it.”

It doesn’t mean that the fiduciary duties of the board in agreeing to those things are waived in any way—it overruled the most challenging piece of the Molus case. That’s one of the cases.

The other two are... I can talk about them—they’re a little less significant. One is interesting: the Crispo case.

There has been on the books a New York case called Con Edison, which held that shareholders don’t have third-party beneficiary rights. They don’t have a right to seek a lost premium from a buyer who fails to close a transaction. Nor does the company have the right to seek that—unless you contract for it.

People have put in many agreements “Con Edison language,” which allows shareholders to be deemed third-party beneficiaries for that purpose.

The Crispo case in Delaware, which arose frankly out of the attempt by Elon Musk to get out of his deal to buy Twitter... one of the shareholders of Twitter sued. And then, when Musk decided to go forward with the deal, the shareholder sought a fee from the company—saying, “Hey, look, it was because of me.”

And the court ruled, “No, you’re not a third-party beneficiary. Look at the whole regime under Con Edison.” The Delaware legislature amended the statute to say, “Yes, you can put provisions in the agreement that allow for the shareholders to be third-party beneficiaries and to seek those kinds of damages for loss premium.”

Kison Patel: What’s the effect of that?

Andrew Bab: The effect is probably... people are more focused on it than they were. It gets negotiated now, whereas in the past, it hadn’t gotten a lot of attention.

Kison Patel: I can see why this upsets Musk. On the Molus one, can we go back to that? I just want to make sure I understand that one. If you can maybe give me an idea of—how does that actually affect the current landscape for shareholder agreements and board responsibility?

Andrew Bab: The effect of the amendment is to restore what was common practice. Those amendments aren’t going to result in many changes because it’s really just restoring what people have done in the past and overruling the sea change that was in the Molus case.

For instance, let’s say I’m a company, and I have a significant shareholder, and I have an agreement with that shareholder. I’m a Delaware corporation. I agree that the shareholder has to be consulted or has a right of veto on, say, a change to the lines of business.

Just as an example—what the Molus case said is: “No, you can’t do that. That’s unenforceable because you are constraining the right of the board to manage the company in its best judgment.” But that’s the way we’ve done these things for decades.

Kison Patel: It was a real eye-opener.

Andrew Bab: That’s the change that they made.

Kison Patel: I guess what’s the net impact from that? Do you see more people sort of running away from Delaware as a place to incorporate?

Andrew Bab: When Molus came out, when Activision Blizzard came out, when Crispo came out—people were starting to say, “Hey, is Delaware the best jurisdiction to incorporate in? Should we run to Nevada?” Which has been marketing their corporate law pretty vociferously—or Texas, as well.

Musk was particularly upset—not about this case, the Crispo case (he didn’t like it)—but the cases that held that his multibillion-dollar pay package was invalid. That got him a little annoyed. He said, “We gotta go to Nevada.” And I believe he has moved X to Nevada. Meta is also looking to potentially move, which was a little surprising to us.

There was a lot of noise. Delaware is still by far the best place to incorporate. The experience they have dealing with these issues, the Chancery Court focused directly on these issues, the flexibility of the statute, the intelligent sophistication of the legislature...

I mean, for a legislature to have been able to, in such short order, overrule this case—because it recognized the damage it could do to the market and to corporations incorporated in Delaware—was pretty impressive.

There were a lot of criticisms: “They’re doing it too fast, they’re doing it too fast.” But what they were doing was returning to the status quo, which had worked for decades.

We generally would be surprised to see an exodus from Delaware. But Meta has said, I think, that they’re planning to reincorporate. And there have been some other companies as well.

[00:19:00] State-level regulation of healthcare deals (e.g., CA OHCA, MA law)

Kison Patel: Interesting. We talk healthcare—what's going on in the healthcare world?

Andrew Bab: Oh my God. It depends on which day you ask me. There is a lot going on in the healthcare world.

One of the things that we’re seeing quite a bit of is the growing state intervention into healthcare transactions. We’ve seen statutes being passed in California, Massachusetts, Washington, Oregon, and another 30 states.

Most of those tend to give the regulators the right to notification of a deal involving a healthcare company in their state. And maybe they have the right—like the OHCA statute—the Office of Health Care Affordability in California, which was created two years ago now. It’s a whole new bureaucracy, and what their job is supposed to be is to look at potential deals. They get time—like 90 days—to look at them and decide whether they want to perform a cost and efficiency review.

I don’t think that’s exactly the term, but it’s a review of who these companies are in the market and what the effect of the transaction might be in terms of cost, quality of care, and access to care.

And they’re not supposed to be able to block deals, but they can delay them. They can cause lots of costs and expenses. But there are some statutes that actually do give the regulators or the Attorney General the ability to block healthcare deals in the state. California has tried—unsuccessfully so far—to pass one. But who knows whether they’ll come back.

And the part of the problem with those kinds of statutes is that... particularly for private equity, but for others as well... are you going to put your money into a California healthcare company if it’s completely possible that you won’t be able to get out? Because you can’t sell the company without getting this approval, and the Attorney General decides that they don’t want to give the approval.

That’s a big risk to take, particularly for a PE firm who is looking for a particular horizon—three to five years, and then out.

Kison Patel: We’re seeing increased regulation at the state level, where they want notification about these deals, they want to understand the effect of the transaction, and they’re getting some power—which currently is to delay deals and potentially it’s growing to become the ability to actually block deals.

Andrew Bab: Yes, that’s right. In Massachusetts, for instance, just passed a statute that... and again, California was trying to... that actually is prejudiced, in my view, against private equity. It calls out private equity and some other areas in the statute, and it applies only to those areas.

The California statute would have applied only to transactions involving private equity or hedge funds.

This is an area that practitioners need to be constantly monitoring—at least in this area—as we go forward.

Kison Patel: What else in healthcare?

Andrew Bab: Some of the things we’ve actually already talked about. There’s antitrust concern—that concern may or may not go away with Trump. Still probably an industry that will be targeted to some extent by the antitrust authorities.

We’ll see a lot of... there’s something out called the Biosecure Act, which has not yet passed Congress. But I think there’s a good chance that it will. That’s another sort of supply chain–type statute that says that—if passed in its current form—the U.S. government and government agencies are not permitted to contract or buy products from companies whose supply chain includes certain covered companies in China.

Which, of course, means that—since “government agencies” includes Medicare and Medicaid—it’s a pretty significant sanction.

So that’s the kind of thing that we’re seeing. Supply chain intervention by foreign governments. Antitrust is an issue. There’s always new regulation, of course, at the FDA level.

[00:21:30] FDA’s AI guidance and post-Chevron court deference

Andrew Bab: We’re seeing a number of things. One area is, of course, artificial intelligence—becoming a key player. We think in general, under Trump, we’ll see the regulation...

One issue that the FDA has recently dealt with is: look, if I’ve got a medical device and that medical device has AI built into it, and it learns from experience—at what point is that a new device that needs to go again through the device approval process with the FDA?

And that was a tough question. There are regulations now that allow companies to upfront say, “This is what we expect is gonna kind of happen. This is the range of things that are going to happen with our changing product,” and that should work—as long as you stay generally within that range (or AI does).

That’s another area.

There was this Loper case that made a big splash—a Supreme Court case that overruled Chevron deference. Chevron, as you know, is the longstanding case that said that if there’s ambiguity in the statute, the courts will defer to the interpretation given by the relevant agency. That’s now been overruled, which means that if there’s some ambiguity in the law, the court has the right to determine what the right answer is.

Certainly, whatever the agency says will be persuasive. People tend to think that this will give the opportunity to many companies to go out and litigate against regulations that they don’t like and that they think may not be consistent with the statute.

Whereas it was almost impossible to win those kinds of lawsuits before—because if there was ambiguity in the law, the court would just defer to the agency that made the rule.

Kison Patel: A lot of stuff to keep up with, my friend. Supply chain intervention, FDA is changing their regulations, some of these rules getting overruled, and things just constantly changing.

Andrew Bab: That’s why it’s an exciting, wonderful area to practice law. Always changing. There’s always something new.

[00:24:00] CVRs in pharma: structuring, litigation risk, and buyer incentives

Kison Patel: The pharma industry. What is contingent value rights?

Andrew Bab: Contingent value rights—contingent value rights, we call them CVRs. They are instruments that are used in deals to sort of bridge valuation gaps between the parties and deal with uncertainties.

There are actually two kinds—probably more than two kinds—but the two kinds that you see are: there's one that’s called event-driven CVRs, which are the ones we’re talking about, and then there are others to the side for a moment.

But event-driven CVRs are the instruments that create value or provide value to the holder if a contingency is achieved or satisfied.

So if I’ve got a company with a drug that’s in phase two trials, and it’s going to get through and get approved by the FDA—who knows? And maybe the buyer says, “I don’t think so. I don’t think this is going to make it.”

They may solve that problem—because how do you value that company with that distinction? They may solve that problem by saying, “Okay, look, we’re going to give you a piece of paper—or shareholders a piece of paper—that in the event we do get through FDA, we’ll pay you money. We’ll give you some money, and here’s how much we’ll give you.”

There are lots of different milestones or triggers that are used in these CVRs. It can be FDA approval, they can be commencement of clinical trials, they can be commercial launch of the product. They could be based on revenue—even if certain revenue goals are met over some period of time. So there are a lot of ways to structure these things.

There’s been an upsurge in use in the pharma space—particularly the pharma/biotech space—particularly over the last two years.

Kison Patel: Why is that?

Andrew Bab: It’s in part because it’s increasingly difficult to value these companies—particularly biotech companies, which don’t have a product yet on the market. It was a challenging market to begin with. Anything that could be used to get to a close, get to a signing—let’s use it. It’s just been a substantial upsurge.

Now, they can be used outside the context of pharma. People use them in other industries too—but very rarely. The reason for that is that many of the concepts that you get in CVRs are in the common licensing agreements that pharma companies enter into every day.

They’re very familiar with the idea of milestones. They’re very familiar with the idea of license fees. They’re very familiar with the idea of efforts covenants.

That’s where we see the most challenge in these CVRs—what does the buyer have to do to achieve? It’s one thing to say, “Yeah, look, if the FDA approves it, we’ll give you a hundred dollars,” and then just cut it—“We’re not going to spend any money or effort or resources to try to get it approved.”

One of the big challenges is negotiating an efforts covenant that works for both sides. These efforts covenants, though, are often the source of litigation—as they are in earnouts. And we’ve seen a couple of significantly sized litigations in this space.

But it’s a risk, and people need to decide whether it’s worth the risk.

It’s fair to say—I'll pick a number—20% of CVRs that are discussed in deals actually get used. Very often, I think these CVRs are more a mechanism to keep the parties talking than they are to actually solve the problem or ultimately be part of the consideration.

Kison Patel: Yeah, you’re seeing them more and more, but I still think that they are a negotiating tool.

Andrew Bab: But as I said, you’re certainly seeing quite a bit of them in the pharma space.

Kison Patel: So it’s trending, it’s increasing in the pharma space. They sound like sophisticated earnouts—but less certainty. Earnouts, you sort of expect to hit your milestones and achieve it, whereas here they’re not as certain.

Andrew Bab: CVRs are sometimes called “public earnouts” because earnouts are generally done in the private context.

Whereas CVRs—how do you do an earnout in the public context when you’ve got a thousand shareholders running around? You do it by using these CVRs.

They are very similar—their triggers are often very different. And under a line of SEC no-action letters, if it’s a real earnout—if your milestones or your triggers are based upon an earnings metric, EBITDA, or whatever it might be—you may well have to register that as a security.

And when you register it as a security, there’s disclosure, there’s all kinds of things that have to play into that.

But many of these—I shouldn’t say many, there used to be many, now there are a few of these—that do actually trade as securities. Not so much because they are based upon earnings metrics (although there have been some of those), but just because there’s a thought that if they trade, there’s more liquidity, they’re more valuable. Both the buyer and the seller are happy that way.

Whether that’s true or not is not entirely certain.

It’s fair to say that—not a scientific study—but if you looked at the market value of the CVRs that do trade and compare them to the value that the banker attributed to them in doing its fairness analysis at signing, it’s generally the case that they trade lower than that price.

So it’s not clear that anybody’s really getting the value. And because they’re complicated instruments—the float is still generally not a lot of float—they often don’t keep their value.

Kison Patel: That’s unique. Trending like a…

Andrew Bab: It’s a structural device. Yeah, device. Structural device. Yeah.

And look, these have been around for a while, but they’ve become a little bit more ubiquitous in the pharma space than before.

It’s also become sort of the thing—“Hey, my next-door neighbor, big pharma guy just used this. I want to use it too.” It’s that kind of thing.

[00:33:00] Put/call deal structures for PE–strategic healthcare partnerships

Kison Patel: What else have you seen in terms of just deal structure across healthcare? It’s always interesting because I do these quarterly roundtables—heads of corp dev—and it’s always the folks in healthcare that have the most intricate structures of their deals. And you just sort of learn a lot from it. But I’d love to hear just what have you seen?

Andrew Bab: The two kinds of structures that you see a little bit more of:

One is on the “friendly physician” structure. Many states—most states—have what are called CPOM laws, which are corporate practice of medicine laws. They generally mean that the only people that can practice medicine are licensed doctors. So you can’t have—in many of these states—you can’t have corporations owning a medical practice because they would have and be able to exert much control over the practice of medicine by the doctor.

So there are these CPOM rules—a spectrum of them across the country.

So how do you do this? Because we often see private equity in particular coming in, and it looks like they’re buying these practices—whether they’re anesthesiologist practices, just physician practices, dental practices—how do you do that where there’s CPOM law?

The structure that’s developed is an MSO structure, a friendly physician structure, whereby you’ve got a company, a structure—a management services organization (MSO)—that enters into contracts with a physician practice. And that contract basically says that all of the back office stuff—the leases, salaries, perhaps other decisions that don’t implicate clinical decision-making—are done at the MSO level, the management services organization level. Clinical decision-making has to remain with a doctor.

That’s meant to be a benefit to the practice, because doctors would rather be practicing medicine than admin.

And in exchange, basically all the earnings of that practice get paid out to the management services organization as payments for these services. The key physicians in that practice tend to then, as part of the deal—the acquisition by the PE firm comes in and buys (not buys, but creates and therefore owns) the MSO. And many of the physicians also generally have an interest in that MSO, and that’s where the money is flowing.

And the physician practice itself continues to be managed by—run by—doctors, certainly the clinical piece of it. What you typically do is you’ll get what’s called a “friendly physician,” which is a doctor that you know, that you trust, who will actually own the physician practice. He will have the equity. He can be removed by the private equity firm if they don’t like what he’s doing. That’s how it’s done.

And how much power the MSO can have, how much money can go out the door back to the MSO—like salaries—can they go out? California is very stringent on these kinds of things. As an example, for instance, the management services organization can’t make a decision with respect to which MRI device to buy—that’s considered a clinical decision that the doctor has to come up with.

Kison Patel: That’s an interesting structural approach.

Andrew Bab: Another thing that we see—not that common, honestly—but I tend to see it more in healthcare for whatever reason than in other industries, which is these partnerships between the private equity buyer and the strategic buyer, which is coupled usually with a complicated put/call agreement.

The idea here is that the buyer—the strategic buyer of that healthcare company—they want to own the company. At the end of the day, they have a call right on the private equity’s interest.

Interestingly, the private equity guy wants to exit because their horizon is usually three to five years or whatever it might be, and their business model is to be able to exit at that time at a profit. So they have a put right at a certain time to put their interest to the corporate buyer—the strategic buyer.

Part of the idea from the strategic’s perspective is they may not know how to manage or rationalize—or do a good job of it—the healthcare company itself. And that’s the expertise the private equity firm is bringing. And the idea is that over the next three years, the private equity firm will work to make that business more efficient. It will lend its expertise on how to run that business to the strategic, which is often in a different—sometimes contiguous—but different sector/subsector. Everybody gets what they want.

So that’s another structure that I’ve seen a number of times used in this space.

Kison Patel: So call right basically gives you an option to buy?

Andrew Bab: Yes.

Kison Patel: And then put right is basically an option to sell. So in this case, the strategic would have the right to call—the option to buy—the PE’s equity, right?

Andrew Bab: And the PE firm would have the right to put—to sell, to force the strategic—to take their interest.

These are very complicated papers. After how many years? At what premium? What do you have to do during the time? What’s the calculation of the put/call price? How is it valued? What happens if there’s an antitrust problem when you’re trying to push it onto the strategic?

So there’s a lot of stuff there that needs to get worked out—but it seems to work well.

Kison Patel: Sounds like a future podcast just on these things.

Andrew Bab: Yeah, just on these things. It’s an interesting topic.

Ready for the next section?

[00:39:30] HSR form overhaul and implications for auction vs. proprietary deals

Kison Patel: So we got some interesting insights on deal structures. We talked a lot about regulatory. I'd love to talk about the holistic process, and I’m thinking broadly—I talk a lot about buyer-led versus seller-led. I always look at the traditional model that we think of as seller-led and bank process—it's driven by the sell side.

A lot more trends are emerging around buyer-led, where strategics, for example, are very proactive about finding proprietary deals from the beginning, but then also very proactive about planning integration and having more control over the timelines, so they produce better outcomes.

You're on the legal side. You see a volume of these deals—both banked and non-banked. What's your take? What do you see as the difference? And I'm almost like—it’s two parts that go back to what we just talked about: is there a regulatory difference between the companies that have a more seller-driven process versus a buyer-driven process? And then do we have also the structural components that may be different when you're running a seller process with some compressed timelines versus more of a buyer-led approach?

Andrew Bab: One thing that M&A practitioners in general are going to need to focus on more is—a lot of these regulatory changes and a lot of these things going on—these deals are going to start to take a little bit more time. And not so much time between signing and closing, though there will be that, but also preparation.

One example folks are focused on is the change in the HSR rules. HSR is Hart-Scott-Rodino. It’s the antitrust form that you need—that both sides need to file when they're doing a merger—and you can’t close your deal until approval from the antitrust authorities has been given.

Everybody knew how to do that, and you say in your agreement that you have 10 days to get that on file, and there's a bunch of provisions. But the antitrust authorities have just overhauled that form and made it far more complex and required far more information and thought than it had before.

The resources that are going to be required are going to be substantial. Companies are going to want to think ahead before they enter into an agreement because you're going to want to make sure that you can actually answer the questions on the form—that there are not going to be issues in the form, that you have the information. It's just going to take so long you're going to want to start doing that in advance.

Now, what does that mean for the question you've asked? It seems to me that it could mean that seller auctions—the processes that are aimed at speed—may be a little bit harder to do because you need to focus on this.

And those kinds of transactions that strategic buyers anyway want to do are more naturally suited to this kind of “let’s get prepared in advance.” Now, a seller gets prepared from its side often in advance, but it's hard to do that when you don't know who the buyer is.

That's one thing. There will be an increasing amount of buy-side diligence. And along with that, buy-side diligence that will require more looking down the road than perhaps we have in the past.

[00:48:50] Increased scrutiny of PE under False Claims Act and integration risk

There are state statutes now—Massachusetts is an example. The DOJ gave a speech that said, "Look, we're concerned about private equity in connection with companies that might have healthcare companies that might be liable for False Claims Act liability. We're going to go after PE firms. We're going to go after sponsors."

And if they knew about those sorts of problems and didn’t fix them, we’re going to hold them liable—or try and hold them liable.

Massachusetts now has a statute that says something like that.

So what does that mean?

I think that means private equity buyers in particular are going to need to be very careful about these kinds of issues. They can’t put their heads in the sand—not that they have in the past—but they can’t going forward. They’re going to need to make sure that—because inevitably you're going to find problems.

You’re going to find, in many of these types of companies, there’s going to be something that could be deemed a false claim. And you're going to need to stop those practices. You're going to need to figure out how to integrate the company, how to run it going forward. Make sure that you, as the monitor—you’re not actually down in the trenches making these claims, you're above—make sure that you’re comfortable that there’s no pressure on doctors to make false claims, because if you do, that will potentially provide greater reimbursement or something like that.

On the buy side—at least on the private equity buy side—there’s going to be a little more focus on pre-close diligence, but more focus on the integration and how you address some of these regulatory concerns going forward.

[00:58:30] Political scrutiny of PE in healthcare and rising public pressure

Kison Patel: These are like things you just don't come across day to day, so it's interesting to hear about them. Why is everybody picking on private equity, and especially in healthcare?

Andrew Bab: I don't know. I agree with you. And I don't know.

There's a lot of reasons. A lot of things are going on. There’s enormous political pressure from people like Elizabeth Warren and others who can’t abide private equity and make a lot of noise about it. There are congressional investigations as a result of this—there’s been a number into private equity, particularly in the healthcare space.

We’ve talked about some of these state laws that have come out that have attacked private equity and are laser-focused on private equity.

There’s a view that in healthcare, what we’re looking for are three things. We're looking for—because it’s a public good in some sense, unlike beverage companies which aren’t really public goods in the same sense—in healthcare companies, you want to make sure that costs are low so people are able to pay for healthcare. You want to make sure that there’s good access to healthcare, particularly for people in rural or poor areas who can’t get it. And you want the quality of care to be excellent.

Private equity’s business model is to make money. They go in, they cut costs—this is what the anti-PE people are saying, I’m not saying it’s true necessarily—but those who challenge private equity in this space, that’s what they say.

They say private equity has no incentive to think of the wellbeing of the patient base. They’re just out to make a buck. They could put pressure on the doctors, or whoever—whatever type of business it is—to make money. And that, in turn, makes doctors cut corners, makes them seek higher reimbursement, or seek reimbursement for more tests than are necessary, because there's more profit there.

That’s where this challenge comes from.

I don’t think there’s any particular body of research or evidence that shows that’s true. There are certainly examples where you could infer that it was the fault of the private equity owner. But look, it could also be we have a shortage of nurses. That could also be the rationale.

And what’s the difference between a private equity firm in this context and any for-profit buyer? They’re all there for profit. That doesn’t mean they aren’t very well aware—and frankly, the firms that I’ve worked with are very focused on patient health, on access. They’re actually very concerned about these things. It’s a question of balancing it properly.

I just don’t think there’s a lot of great evidence that private equity doesn’t balance it properly.

Just give you one quick anecdote—which is old now, this is not a new phenomenon—but we represented a private equity fund years ago that bought an ambulance company. And the day that deal closed, tragically, a woman who was in one of those ambulances didn’t make it. And the press came out saying, “Here’s a great example of why we shouldn’t have private equity owning healthcare companies.”

Kison Patel: Wow.

Andrew Bab: That was the same day they actually closed on the deal. It was clearly not the fault of the private equity company in any way, shape, or form. But there’s a lot of perception.

Kison Patel: Yeah, there's a scapegoat, I guess, in the industry.

Andrew Bab: They are a substantial scapegoat, yes.

[01:08:00] “Craziest M&A moment” – Mercury in the House of Orion delays closing

‍Kison Patel: Andrew, what’s the craziest thing you’ve seen in M&A?

Andrew Bab: Well, there are two things I’d mention. One is just a—I’ve never encountered something like this before.

I was representing a private equity firm in the acquisition of a fitness-type company. It was owned by a bunch of siblings—there were about five or six of them. We negotiated, we did the diligence, we negotiated—it was whatever it was, three months to get to a signing.

We’re finally then at our approvals and ready to close. The lead sibling comes up to me and says, “We have a little bit of a problem.”

And you know, it’s the seller that wants to sell as quickly as it can because if in the interim there is a problem with the company, the buyer could walk. But the seller comes to me, comes to us, and says, “We’ve got a problem. My sister—a little bit superstitious—it turns out that Mercury is currently in the house of Orion. And that is a very bad omen for financial transactions. So we can’t close the deal now. We gotta wait.”

And we had to wait 10 days until Mercury found its way out of the house of Orion. I’ve never in my life encountered something like that.

But the other thing, on a less whimsical note, was just—I don’t know if it’s crazy—it was just an enormously complicated deal with an enormous number of moving parts.

That was a deal I did. I represented TPG and Carlos Carbonell on the acquisition of a company, Kindred, which was a public company—a home health and hospice company. We had to negotiate around all kinds of regulations. We were splitting it into two pieces. Humana came in and was a strategic partner in that deal. We talked about put-calls—that deal had one.

The lessor for the hospitals' lease was immensely complicated and had to be negotiated around. I could talk for a long time about that deal, but in my practice, that was the most complicated, challenging, and really craziest deal that I’ve ever worked on.

Kison Patel: In the extremities of complexity and then deals getting delayed by 10 days from... There you have it—a day in the life of the M&A practitioner. I appreciate you taking the time to have this conversation with me, helping me become a better M&A scientist.