Not long ago, I had my appendix out. Not wanting to spend more than necessary, I did a little reading on the subject and decided to do some of the pre-op work myself. In addition to making certain the incision area was appropriately clean, I entered the hospital with my own set of scalpels and my own special concoction of over the counter pain killers to self-anesthetize. Once in the hospital, I decided I might as well start the procedure and so I . . . .
Of course, I'm making this up.
But there is a point here. While I would never consider beginning even minor surgery on myself, many hospitals and health systems go through the early stages of negotiating and developing a merger, significant joint venture or affiliation transaction without the help of transaction counsel in order to save some costs.
The analogy is imperfect, but it does highlight one of the most frustrating parts of being an M&A lawyer – I frequently get called too late.
Too frequently hospitals and health systems sign a letter of intent, and make the incision, without fully understanding all their options or how best to protect their interests. I've seen the following result from a failure to consult with transaction counsel early enough in the process:
- Impractical transaction structure adopted
- Insufficient data room population – ineffective diligence process
- Board – management team disconnect and discord
- Creation of "bad facts" and closing risk
- Failure of third-party or internal approvals
- Renegotiation of critical transaction terms
Worst of all, I have seen fundamental expectations for the merger or joint venture not met, or met only after a long struggle to "correct" fundamental transaction problems.
Does this mean every hospital or health system contemplating an M&A transaction should immediately consult an experienced transactional lawyer? No. There are many factors that inform the decision as to when to engage transaction counsel. But generally, unless a hospital or health system's management team (including in-house counsel) has the right combination of training and experience, bad things can happen.
This is particularly true when the transaction is dispositive for the organization – a change in control, conversion, merger or "whole-system" joint venture. In such circumstances legal and transaction risk can be created quickly and inadvertently. And worse – board and stakeholder expectations can be set inappropriately high.
Fortunately, the cost of involving transaction counsel early is relatively low. If your organization is considering a transaction, one of your first tasks should be to contact an advisor who can you help identify and navigate the many, and frequently unseen, pitfalls that you face.