📖 Approx. 8 minutes
The Importance of Confidentiality in Medical M&A
M&A of medical institutions is not merely a business transaction; it is a delicate process directly impacting patients’ health and lives, as well as the livelihoods of healthcare professionals. Therefore, confidentiality is of paramount importance throughout the M&A process. Specifically, patient information, employee data, and management information held by medical institutions, if leaked externally, can lead to violations of patient privacy, damage to the medical institution’s reputation, and even legal liabilities. This article explains the importance of confidentiality in the medical M&A process, specific information management methods, and countermeasures in the event of an information leak, from a professional perspective for medical corporation directors, clinic presidents, and M&A managers.
Information Subject to Confidentiality and Associated Risks in the M&A Process
The M&A process for medical institutions involves the exchange of highly confidential information at various stages, from initial consideration to final contract signing and post-acquisition integration. If this information is handled improperly and leaked externally, the following risks are anticipated:
- Leakage of Patient Information: The leakage of personal information such as names, addresses, medical histories, and treatment records carries risks of misuse and privacy violations. This constitutes a violation of the Act on the Protection of Personal Information and may lead to administrative guidance or claims for damages.
- Leakage of Employee Information: The leakage of information such as employee salaries, performance reviews, and employment conditions can lead to employee distrust and decreased motivation, increasing the risk of talent attrition.
- Leakage of Management and Financial Information: The leakage of information such as sales, profits, debts, and medical fee claims can allow competitors to understand management strategies or lead to reputational damage.
- Leakage of Information Regarding Medical Fee Claims and Facility Standards: The leakage of information regarding individual medical fee claim calculations or compliance with facility standards may subject the institution to audits or guidance from insurers.
- Leakage of Information Regarding Licenses and Administrative Dispositions: The leakage of information related to licenses for operating a medical institution or past administrative dispositions can significantly damage the institution’s credibility.
To mitigate these risks, it is essential to establish a Non-Disclosure Agreement (NDA) from the initial stages of M&A and clearly define the scope of information sharing and the management system among involved parties.
The Importance and Key Points of Concluding a Non-Disclosure Agreement (NDA)
A Non-Disclosure Agreement (NDA) is the first and most crucial step in minimizing the risk of information leakage in M&A transactions. Before commencing M&A considerations, it is common practice to conclude an NDA between the target medical institution (or potential buyer) and advisors (M&A intermediaries, lawyers, tax accountants, etc.). Key points for concluding an NDA in medical M&A are as follows:
1. Clarification of Parties to the Agreement: Clearly list all parties involved in the M&A consideration (medical corporations, sole proprietors, advisors, etc.).
2. Definition of Confidential Information: Specifically define what constitutes confidential information. It is important to include sensitive information unique to medical institutions, such as patient information, financial information, employee information, information related to medical fee claims, and management strategies.
3. Scope of Confidentiality Obligation: Clearly define the recipients of information, the purpose of disclosure, and restrictions on information usage. For example, prohibit the use of information for purposes other than M&A consideration.
4. Return or Destruction of Confidential Information: Stipulate how received confidential information will be returned or destroyed if M&A negotiations fail or after the transaction is completed.
5. Contract Term: Define the period during which the confidentiality obligation is effective. Generally, this is set for several years after the NDA is concluded, but consideration may be given to imposing longer obligations depending on the nature of the information.
6. Measures in Case of Breach: Define legal measures such as claims for damages or injunctions in the event of a breach of contract.
In M&A of medical corporations and clinics, specialized knowledge is indispensable regarding aspects such as the existence of equity interests, the medical corporation system, and the impact of medical fee revisions. Therefore, it is recommended to collaborate with experts such as lawyers and M&A advisors to conclude an appropriate NDA tailored to your institution’s specific circumstances. As a guideline, it is common to utilize NDA creation and review services by experts within the scope of M&A intermediary fees.
Information Management During Due Diligence (DD)
M&A Due Diligence (DD) is a process of thoroughly investigating the assets, liabilities, profitability, and future prospects of the medical institution to be acquired. During this phase, potential buyers will gain access to all information of the target medical institution. Therefore, information management during the DD process is extremely important for fulfilling confidentiality obligations.
1. Limiting the Scope of Information Disclosure: Disclosure should be limited to information necessary for DD, and excessively broad information disclosure should be avoided. The composition of the potential buyer’s DD team should also be limited to the minimum necessary members.
2. Utilizing Secure Information Sharing Tools: Use password-protected file-sharing systems, encrypted emails, or dedicated Virtual Data Rooms (VDRs) for exchanging highly confidential information. VDRs, in particular, offer advanced security features such as access control, tracking of viewing history, and watermarking.
3. Explaining to Employees and Patients: As DD progresses, it may become necessary to explain the situation to the employees of the target medical institution and, in some cases, to patients. In such instances, it is important to convey the purpose of the M&A, future outlook, and considerations for confidentiality in a clear and transparent manner to prevent confusion and maintain trust. Explanations that consider regional medical plans and the impact of medical fee revisions are also required.
4. Verifying the Reliability of the Potential Buyer: It is also important to verify in advance whether the potential buyer has a history of information leaks or other incidents and whether they are a reliable company.
5. Information Regarding Fund Repayment or Changes in Membership: In the case of medical corporations, M&A targets are not equity interests but rather the transfer of membership rights (e.g., voting rights in general meetings of members) of the medical corporation itself, or the repayment of funds. This information must also be strictly managed as confidential information.
| Information Type | Main Risks | Example Management Methods |
|---|---|---|
| Patient Information | Privacy violation, violation of Personal Information Protection Act | Access control settings, encryption, anonymization (where possible), VDR usage |
| Employee Information | Talent attrition, decreased motivation | Access control settings, NDA conclusion (for buyer’s DD personnel), VDR usage |
| Financial and Management Information | Disclosure of strategies to competitors, reputational damage | Access control settings, NDA conclusion, VDR usage, limiting scope of information disclosure |
| Medical Fee Claims and Facility Standards | Insurer audits, guidance | Access control settings, NDA conclusion, VDR usage, limiting scope of information disclosure |
Disclosure of Information to Employees and Patients and Confidentiality
As the M&A process progresses, there will be instances where information disclosure to employees and patients becomes necessary. However, this information disclosure must be conducted carefully to avoid violating confidentiality obligations.
1. Explanation to Employees:
- Timing: It is common to explain to employees after the basic agreement for the M&A is concluded, when the likelihood of the M&A proceeding is relatively high.
- Content of Explanation: It is important to sincerely communicate the purpose of the M&A, the organizational structure after succession, whether there will be any changes in employment conditions, and how employee concerns will be addressed. Emphasizing positive aspects, such as contributions to regional healthcare, is also beneficial.
- Accountability: A stance of carefully answering employees’ questions, such as “Why is M&A necessary?” and “What will happen to our work after succession?”, leads to the maintenance of trust.
2. Explanation to Patients:
- Timing: This is generally done when the execution of the M&A is confirmed and changes in the medical system become concrete.
- Content of Explanation: Clearly explain the continuity of the medical system, whether there will be any changes in attending physicians, how medical records will be handled, and any changes in how to receive treatment.
- Consideration: To minimize patient anxiety, careful explanation and, if necessary, individualized support are required.
In both cases, the content and scope of information to be disclosed must be determined incrementally according to the progress of the M&A. Furthermore, it is desirable to share explanation materials for employees and patients with the potential buyer who has concluded an NDA in advance and confirm the content.
✅ Points to Confirm When Explaining to Employees and Patients
- Clarification of M&A purpose and benefits
- Continuity of organizational and medical systems after succession
- Presence or absence of changes in employment and treatment conditions
- Handling of medical records and patient information (compliance with Personal Information Protection Act)
- Timing and method of explanation
- System for responding to Q&A
Countermeasures in Case of Information Leakage
In the unfortunate event that an information leak occurs during the M&A process, prompt and appropriate action is crucial to prevent the expansion of damage and restore trust. The following outlines the countermeasures:
1. Fact-Finding and Cause Investigation: First, accurately ascertain the fact of the information leak, the scope of the leaked information, and the cause.
2. Notification to Stakeholders: Promptly notify relevant stakeholders who may be affected, such as supervisory authorities (public health centers, prefectural governments, etc.), patients, employees, and business partners. The notification should include the type of leaked information, the cause, and future countermeasures.
3. Implementation of Recurrence Prevention Measures: Analyze the cause of the information leak and implement recurrence prevention measures, such as reviewing security measures and strengthening employee training, to prevent similar incidents from recurring.
4. Consideration of Legal Measures: If the cause of the leak is unauthorized access by a third party or internal misconduct, consider legal measures. Also, coordinate with experts such as lawyers in preparation for claims for damages from victims.
5. Consultation with Experts: In the event of an information leak, it is important to promptly consult with experts such as lawyers, M&A advisors, and information security specialists to receive appropriate advice and support. Specialized knowledge is particularly essential in cases of information leaks related to licenses or medical fee claims unique to medical institutions.
In medical M&A, confidentiality is not merely an obligation but the foundation for maintaining the credibility of the medical institution and fulfilling its responsibilities to patients. At M&A Medical, our team of experts, well-versed in medical institution M&A, provides meticulous support throughout the entire M&A process, including the establishment of confidentiality systems. Please feel free to contact M&A Medical (CentralMedience Inc.) for any M&A-related consultations.
Consultations on Medical Succession to M&A Medical
M&A Medical is a specialized M&A and business succession support service for medical institutions. As an M&A support institution certified by the Small and Medium Enterprise Agency, we support the successful transfer of clinics and medical corporations facing succession issues, as well as strategic acquisitions, on a success-fee basis.
- Initial consultation and preliminary assessment are free
- No upfront fees or monthly charges (success fee only)
- Strict confidentiality (proceeding upon NDA conclusion)
- Service available nationwide in all 47 prefectures and for all medical specialties
Please consult with us early, even in the initial stages of consideration, whether you “just want to know the market price,” “have no successor,” or “are considering joining a group.”