Tips for Negotiating Non-Disclosure Agreements When Selling Your Ambulatory Center
Non-disclosure agreements (NDAs) have become universally commonplace when dealing in transactions among Ambulatory Centers. These agreements, while designed to provide protection for all parties involved, can cover a wide range of sensitive topics, timetables and other areas of concern for potential buyers and sellers. With the expensive nature of the enforcement of NDAs, a seller could be left wondering where to even begin with an NDA. Thankfully, the experts have shared advice and tips on how to best go about crafting and enforcing your NDA.
Health Care Attorney at Michelman & Robinson, LLP, Damaris Medina, says that NDAs have become more widely used and are now universally applicable to transactional negotiations.
“Sellers want to make sure buyers are not transmitting confidential information to competitors,” Medina said. “If the buyer is a competitor, the seller wants to have some confidence the competitor will not be using that information to put the seller at a disadvantage should the sale not go through.”
Jeffrey Cohen, founder of the Florida Healthcare Law Firm, says that recent trends in NDAs would imply very few changes to how they are used and implemented compared to the past. Rather, the few changes noticeable are in the confidentiality provisions. These are submitted commonly in the form of Letters of Intent (LOIs).
“The noticeable change is a tendency towards putting so much of the business points into the LOI that the selling ASC gets locked into deal points they would have preferred to negotiate more fully,” Cohen said. “There is a fine line between having the LOI be too specific and not being specific enough.”
There has been a developed general trend in healthcare in the form of consolidation, as a result of the Affordable Care Act (ACA) according to Medina. This, she says, has led to more information that owners and leaders of centers wish to keep confidential.
“A lot of centers are now trying to come up with innovative business models,” she said. “In doing that there’s all this innovation happening in the market and all this competition happening, and a lot of those business models are becoming protected information. We’ve definitely seen a rise in the use of NDAs as a result of all this.”
As far as key provisions go when drafting an NDA, things to consider are not only what to include as confidential information, but also what not to include.
“First and foremost in the NDA is to define what is confidential information, and that’s typically drafted in a very broad way,” says Jay Harris, partner at King & Spalding in Atlanta, GA. “Also defining what is not confidential information included public information and information that was already known by the potential buyer via a legitimate source. Another area where there’s actually a good amount of negotiating in NDAs is how the confidential information can be used, or limits on its use.”
According to Cohen, the more standard key provisions that should be laid out in an LOI include price (which is based on a valuation), the effect of a sale on owner loyalty, exclusive dealing provisions, the purchaser’s management fee, the purchaser’s management agreement, and operational control.
“Real estate may also factor in that the lease could be seen as a significant financial issue in such transactions,” Cohen said. “The business issues are different, and hence the deals are structured based on the business objectives.”
Medina notes that while these provisions are generally standard among various types of Ambulatory Center transactions, they have the potential to be either stricter or narrower from case to case.
“NDAs are not one-size-fits-all,” Medina said. “Some states find them unenforceable if they are overbroad or vague. Therefore, we would recommend certain language that fits the particular circumstances of a client and the potential transaction, rather than language merely fitting the type of center or practice.”
What Can Go Wrong
One of the things for sellers to be wary of would be price collusion. This can occur when bidding parties have a sense of the value of a business. NDAs could potentially offer some protected in this area, says Medina, depending upon where that valuation information originated from.
“[Price collusion] may occur because one bidding party has received confidential information and has shared it with other bidding parties, or it may occur because bidding parties have access to public information that gives them an idea of the estimated value of a business opportunity,” she said.
Nevertheless, such instances are cannot always be protected.
“In the healthcare field, a party may easily estimate the value of a business by virtue a competitor because it has an understanding of the market where the center for sale is located,” Medina said. “So while an NDA may keep parties that have received information from talking and, therefore, price fixing, it won’t avoid the possibility of price collusion completely.”
These scenarios can be tricky in Cohen’s opinion, even though applicable anti-trust laws prohibit competing surgery centers from jointly negotiating with payers.
“Most surgery centers with common corporate ownership do not sit in the same geographic area,” he said. “That is, they are not likely to compete, and hence are not likely to violate applicable anti-trust laws that pertain to price fixing. Still, they need to be very careful in analyzing this, since price fixing is a per se violation of federal and state law, meaning there is no legal defense to it.”
Sometimes, one of the more delicate pieces of information that a seller might wish to consider would be the fact that a transaction is being considered at all.
“Often times for a seller one of the more sensitive issues is the fact that a center could be sold,” Harris said. “That can be disruptive to employees, patients, physicians, etc., so keeping the fact that there’s a potential transaction confidential, making that part of the NDA, is very important.”
Harris went on to note the two of the most sensitive areas addressed by NDAs are focused around non-solicitation covenants and pricing.
“If you’re providing information, you want to make sure the potential buyer doesn’t learn the information in an attempt to hire away your employees or key physician relationships,” Harris said. “When it comes to pricing, contracts that a center may have with managed care companies are typically very sensitive information.”
In efforts to avoid issues in these areas, sellers might choose to release information in stages, starting with less sensitive information and moving on to more specific things as the process goes on. Another option would be to bring in a third party to help keep confidential information protected.
“What you often see is that the parties might hire a consulting firm or accounting firm to analyze the pricing data and, in effect, make it sort of a blind type study so the potential buyer couldn’t identify who the various managed care companies are and what their rates are,” Harris said.
Enforcement of NDAs
While helpful and necessary, NDAs can prove extremely difficult and expensive to enforce. The reason for this, according to Medina, has to do with proving the means by which the information was obtained.
“You have to track the genesis of the information and then you have to show that you were actually damaged by it and what that damage was,” she said. “Because it’s so difficult and expensive to enforce we tend to counsel our clients to be very wary of the information they are providing and only provide what’s really necessary to make the transaction happen, just to avoid the issue in the first place.”
In her practice, Medina urges caution when first providing documents and/or information. She recommends having certain dates and milestones where money goes hard.
The more complicated scenarios wherein enforcement of a leak or breach of information takes place is when multiple potential buyers are involved, according to Harris.
“If you’re running a process where you’ve got a number of potential buyers and a lot of parties receiving information, if there is a leak of information it’s typically really difficult to identify where that leak comes from,” he said. “If someone attempts to use your confidential information for a competitive purpose, you may be able to successfully enforce the limits. It’s not easy, and any time you’re seeking injunctive relief it’s challenging. But in that context you can probably be successful.”
Accuracy of the information contained in the agreement, how sensitive that information is, and by what means it is obtained by outside parties are all things to keep in mind when dealing with NDAs.
“When you’re looking at a purchase document, whether it’s a stock purchase or a membership interest purchase, or anything like that, the actual purchase document itself is pretty substantial and has all these statements and promises,” Cohen said. “If those statements and promises are wrong and someone gets hurt financially, you’d have to pay it because the document contains an indemnification provision.”
All things considered, the use of NDAs will most likely increase within the ever-changing market in which the healthcare industry abides. The biggest question for the seller will continue to be that of what to disclose to potential buyers.
“The best approach for a potential seller is to be aware that, notwithstanding that there is a confidentiality agreement in place, you should be sensitive as to what information you do share,” Harris said. “You have control over that information and in what way its presented and packaged. That may be the better control than totally relying on trying to get legal relief if someone breaches their obligation.”
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