Due Diligence and Disclosure – A Guide for Healthcare Professionals
If you are thinking of acquiring, merging with or disposing of a primary care practice, then this blog is for you.
Firstly, let’s look at two scenarios. When a patient attends an appointment with his GP, the GP will probably ask a series of questions, conduct a physical examination and review the patient’s medical record. Likewise, when buying a house – you will engage a solicitor to make some pre-contract enquiries, to carry out some property searches at the Local Authority and Land Registry, and you will probably instruct a surveyor to check that the building is sound.
When acquiring a GP practice, there is no analogous method for carrying out a physical examination or survey. Similarly there are no publicly available records in relation to partnerships (and information is scant even for companies). Accordingly, the only effective option for investigating a GP practice which you may be interested in acquiring or joining, is by asking a series of questions of its owner. These questions come in the form of a comprehensive due diligence questionnaire – essentially a checklist – covering the commercial, financial, regulatory and legal aspects of the business. The answers to those questions are critical as they form the only x-rays of the target business that a buyer sees.
Just as x-rays are only as good as the ability of the people taking them and as useful as the knowledge of the people examining the results, due diligence is only as good as the questions asked and the understanding of the people reviewing the answers. Lawyers will have comprehensive due diligence questionnaires; those supplied by accountants tend to focus on finance and therefore may be less comprehensive. Prudent buyers will review the answers received themselves and also have their lawyer and accountant review them.
Just as the occasional patient might be less than honest with a doctor in an effort to obtain a particular prescription, business owners have been known to be economical with the truth when answering due diligence enquiries. A problem arises in this regard for buyers, because a peculiarity of the English law of misrepresentation means that a buyer probably cannot place legal reliance on the answers to due diligence enquiries. So why bother with it at all?
Fortunately, to overcome the problem, a buyer’s solicitor will ask the seller to give a series of warranties to the buyer concerning the state of the target business. Breach of those warranties is directly actionable in law and therefore avoids the legal problems related to misrepresentation claims. Warranties are a comprehensive series of statements about the business included in a business transfer agreement prepared by the buyer’s lawyer.
Why then do lawyers not proceed directly to warranties and cut out the due diligence enquiries altogether? Making due diligence enquiries and reviewing the answers is a relatively inexpensive process conducted at the outset of the transaction and therefore, with honest sellers at least, it flushes out any potential problems with a business cheaply and early on in the process.
Warranties differ slightly from guarantees and are essentially a checklist in the form of statements that could be made unqualified in relation to a (mythical) flawless business. To the extent that there are exceptions to the warranties the seller needs to reveal them to the buyer in a disclosure letter. This process is best illustrated by an example.
A warranty that is typically included in a business acquisition is one to the effect that the business is not currently a party to any litigation. If the business is, in fact, in the middle of a court case then the seller needs to disclose that information to the buyer in a disclosure letter, setting out the full facts of the case (dates, parties, nature of claims, nature of defences etc) and attaching copies of the relevant documentation. If the seller fails to make this disclosure then she will be giving an unqualified warranty to the buyer that the business is not involved in any litigation. Because that warranty will be untrue, it will be actionable in law by the buyer. There is therefore a considerable onus on sellers to make full and proper disclosure for fear of otherwise leaving themselves open to legal action. Warranties therefore force sellers to reveal in disclosure letters matters that they might have preferred to leave hidden and which they may not have revealed in response to due diligence enquiries.
In a well-managed transaction nothing will emerge in the disclosure letter that wasn’t already revealed in the answers to due diligence enquiries. There is therefore considerable overlap between due diligence and disclosure, leading many people to conflate the two. This is a mistake, as they are entirely different processes. Due diligence enquiries and answers are essentially an information-gathering process from which few adverse consequences can befall a seller. Warranties and disclosures, on the other hand, form the main protection available to a buyer so that she knows what she is buying ‘warts and all’ and forces the seller, on pain of legal action, to reveal all instances of human papillomavirus infecting her business. As with all documents which you may one day need to rely on in court, you would be well advised to speak to a specialist solicitor before signing any warranties and indemnities!
If you are thinking of acquiring, joining or merging with a practice and would like a free consultation with one of our experienced healthcare solicitors, then please contact Daphne Robertson on 01483 511555 or email email@example.com