The Premerger Notification Office (“PNO”) of the Federal Trade Commission recently announced it would change how it and the Department of Justice evaluate transactions that involve the combination of one or more not-for-profit entities, including non-profit hospitals.  Previously, parties’ obligation to file under the Hart-Scott-Rodino (“HSR”) Act turned on whether the combination would result in a change of control of the board of directors of either party.  However, hospital affiliations are often structured to form a new corporate parent for both hospitals, meaning that board control might not change at either entity.  As such, antitrust practitioners have previously assumed that hospital affiliations of this type did not involve a change of beneficial ownership and, consequently, no HSR filing was required.

Recognizing that potentially reportable combinations may occur, even where there is no change of control of the board of directors, the PNO recently announced that, beginning October 26, 2018, it will analyze non-profit combinations by focusing on whether one party has gained beneficial ownership over the assets of another party.

Analysis

The PNO guidance explains that beneficial ownership of a not-for-profit company changes (and triggers the obligation to file) when another person gains “control” of the entity holding the assets of the not-for-profit company, even if control of the board of directors remains the same.  Applying this analysis to standard hospital affiliations, as well as to the formation of a new corporation (“NewCo”) by affiliating hospitals, the PNO has identified several factors that may indicate that beneficial ownership of hospital assets has changed hands.  These include:

• NewCo becoming a corporate member of the affiliating hospitals;
• NewCo having the right to approve the affiliating hospitals’ governing
  documents, including its articles of incorporation and bylaws;
• NewCo having the authority to sell or lease hospital assets;
• NewCo having the authority to appoint or approve senior officers of the affiliating hospitals;
• NewCo having the authority to create or approve strategic plans, budgets, expenditures, and significant contracts of the affiliating hospitals;
• NewCo having the right to appoint 50% or more of the Board of Directors of the affiliating hospitals.

Although no one factor is dispositive, if multiple factors are present in a transaction, the PNO is more likely to find that beneficial ownership has passed to one of the affiliating parties or to the new corporate parent, and thus that the transaction is reportable.  It is important to note that these factors are not exhaustive; the PNO may consider other indicia of beneficial control not included above.

Takeaways

Under the PNO’s new approach, more non-profit hospital combinations are likely reportable under the HSR Act.  Parties should be aware that the PNO is focusing less on the formal structure of a transaction and more on its practical effects.  If a transaction is considered reportable under the HSR Act, the merging parties may not close a transaction until an initial 30-day waiting period has expired.  The FTC staff may also issue a “Second Request” at the end of the initial waiting period if the agency still has questions or concerns about a transaction.

In addition, affiliating hospitals should be aware that the PNO is closely scrutinizing the joint formation of new entities.  Non-profit hospitals hoping their transaction will fall within the HSR Act exemption for the formation of certain joint ventures may be disappointed — the PNO has clarified that the exemption applies to “formations,” not “consolidations.”  If the PNO determines beneficial ownership has passed to the newly-formed entity, it is likely to consider the transaction reportable.

Finally, the PNO guidance suggests that operating or management agreements between non-profits will not fall under the HSR Act, absent a change in beneficial ownership.  While the FTC’s authority to investigate mergers of non-profit entities does not extend to non-merger conduct, operating or management agreements involving non-profits are subject to Section 1 of the Sherman Act, which prohibits unreasonable restraints of trade. Accordingly, the Department of Justice Antitrust Division may investigate such arrangements, even if they would not be reviewable by the FTC.

Documents

The Federal Trade Commission’s press release is available at https://www.ftc.gov/news-events/blogs/competition-matters/2018/10/control-no-longer-controlling-hsr-reporting-not-profit. The PNO has released a tip sheet for evaluating future non-profit combinations, available at https://www.ftc.gov/system/files/attachments/hsr-resources/tipsheet_-_not-profit_combinations_10-5-18.pdf.