Medical M&A Agreements: Essential Clauses and Checkpoints for SPA and Business Transfer Agreements

For all parties considering a medical M&A, the agreement is an extremely crucial document that determines the success or failure of the M&A closing. In particular, Share Purchase Agreements (SPA) and Business Transfer Agreements include a wide range of clauses, from the prerequisites of the M&A to risks after the transaction is completed. This article focuses on SPAs and Business Transfer Agreements, the main types of agreements in medical M&A, and provides a detailed explanation of their essential clauses, with a particular focus on representations and warranties, indemnification clauses, and non-compete obligations, along with practical checkpoints. Understanding these points and negotiating and executing them appropriately will enable smooth and safe M&A transactions.

Basics of Medical M&A Agreements: SPA and Business Transfer Agreement

In medical institution M&A, two main types of agreements are used: “Share Purchase Agreements (SPA)” and “Business Transfer Agreements.” The choice between them significantly affects the procedures, legal effects, and tax treatment. It is essential for both the seller and the buyer to understand the merits and demerits of each and select the agreement type that best suits their company’s situation.

What is a Share Purchase Agreement (SPA)?

An SPA is an agreement where the acquiring company purchases the shares of the target company. This allows the acquiring company to inherit the legal entity of the target company as is. In the case of medical institutions, there is an advantage in being able to inherit business assets and rights/obligations such as licenses, qualifications, employees, facilities, patient lists, and know-how all at once. However, since there is a risk of inheriting off-balance sheet liabilities (such as contingent liabilities not explicitly stated in the agreement), careful due diligence (DD) becomes even more important.

What is a Business Transfer Agreement?

A Business Transfer Agreement is a contract where the acquiring company selectively purchases all or part of the business of the transferring company. The scope of assets and rights/obligations to be transferred and acquired, such as licenses, employees, facilities, and patient lists, can be clearly defined. This has the advantage of making it easier to avoid the risk of inheriting off-balance sheet liabilities. On the other hand, transfer procedures are required for each individual asset and right/obligation, which may lead to cumbersome procedures such as re-acquiring licenses and re-hiring employees.

Comparison Item	Share Purchase Agreement (SPA)	Business Transfer Agreement
Scope of Succession	Entire legal entity (all rights and obligations)	Individually selected assets and rights/obligations
Complexity of Procedures	Relatively simple (e.g., shareholder meetings)	Complex (individual transfer procedures for licenses, contracts, employees, etc.)
Off-Balance Sheet Liability Risk	Risk of inheritance	Easier to reduce the risk of inheritance
Licenses/Qualifications	Generally transferable	Generally requires re-acquisition
Taxation	Corporate tax of the transferring company, capital gains tax for shareholders	Business income of the transferring company, calculation of acquisition cost for the acquiring company

Essential Clauses and Checkpoints in Medical M&A Agreements

Medical M&A agreements include various clauses that form the core of the M&A transaction. Here, we will explain the essential clauses and their checkpoints that are particularly important for both the seller and the buyer.

1. Conditions Precedent

This defines the conditions that must be met before the M&A transaction can be formally executed. Examples include the completion of final due diligence by the acquiring company, obtaining necessary licenses, and receiving consent from third parties. If these conditions are not met, the transaction will be canceled. The buyer should consider setting conditions to minimize the risk of transaction cancellation due to external factors beyond their control, while the seller should consider setting conditions to enhance the certainty of transaction execution.

2. Payment Method and Timing

This defines how and when the M&A consideration will be paid. Various methods are possible, such as lump-sum payment, installment payments, equity (stock) payments, and earn-outs (additional payments based on future performance). In particular, for medical institution M&A, careful consideration is required, taking into account outstanding medical fees, unpaid bills, and the impact of future revisions to medical fee schedules.

3. Closing

This defines the procedures for the final completion of the M&A transaction and its timing. In the case of an SPA, it typically involves the transfer of shares, while in a business transfer, it involves the transfer of assets and payment of consideration. Clearly defining the date and place of closing, necessary documents, and the obligations of each party will lead to a smooth transaction completion.

Practical Checkpoints for Representations and Warranties

Representations and warranties are assurances given by the seller to the buyer regarding the truthfulness and accuracy of specific facts concerning the transferred subject (shares or business). Representations and warranties in M&A transactions serve as an important source of information for the buyer to accurately understand the transferred subject and grasp the risks. In medical institution M&A, detailed representations and warranties are particularly required for the following points.

• Matters related to licenses and qualifications: Whether the medical institution subject to transfer possesses all currently valid licenses and qualifications, and whether they comply with laws and regulations.
• Matters related to medical fees: Whether there have been any irregularities or errors in past medical fee claims, the status of outstanding and unpaid fees, and the impact of future revisions to medical fee schedules.
• Matters related to legal compliance: Whether all applicable laws and regulations for medical institutions, such as the Medical Care Act, the Physicians Act, the Pharmaceuticals and Medical Devices Act, and the Personal Information Protection Act, are being complied with.
• Matters related to employees: Compliance status with laws and regulations regarding employment contracts, working conditions, social insurance, etc., and the existence of unpaid overtime wages.
• Matters related to litigation and disputes: The existence of ongoing or potential future lawsuits, administrative dispositions, or complaints.
• Matters related to facilities and pharmaceuticals: The maintenance status of medical equipment, the management status of pharmaceuticals, and compliance with the latest safety standards.

Buyer’s Checkpoints:

• Comprehensiveness: Does it comprehensively cover the risks related to the transferred subject? In particular, check if specific medical institution risks (medical fees, licenses, personal information leaks, etc.) are sufficiently represented.
• Specificity: Are the representations specific, rather than vague?
• Exclusions: Are there an excessive number of exclusions (Disclosures) from the representations and warranties?

Seller’s Checkpoints:

• Accuracy: Ensure accurate understanding of the company’s situation before making statements to avoid misrepresentations.
• Excessive Limitations: Avoid wording that excessively limits future risks.

Practical Checkpoints for Indemnification Clauses

Indemnification clauses stipulate the seller’s obligation to compensate the buyer for damages in the event of a breach of representations and warranties or if the buyer suffers damages due to specific reasons. These clauses are fundamental to risk allocation in M&A transactions and serve as an important means for the buyer to recover damages resulting from breaches of representations and warranties.

Scope and Cap of Indemnification

This defines specifically what types of damages (direct damages, indirect damages, lost profits, etc.) are covered by indemnification, as well as the upper limit of the indemnified amount (Cap) and the minimum amount for indemnification claims to be recognized (Deductible/Basket). In medical institution M&A, potential risks include revenue reduction due to future revisions of medical fee schedules, unexpected litigation risks, and business suspension due to revocation of licenses. Therefore, determining the extent to which these risks are included in the scope of indemnification is a crucial negotiation point.

Survival Period

This defines the effective period of representations and warranties, i.e., the period during which claims for indemnification can be made in case of a breach. Generally, the period is set based on the nature of the representations and warranties. For example, general representations and warranties may have a period of 1-2 years, tax-related ones 3-5 years, and real estate-related ones longer. In medical institution M&A, risks related to licenses and medical fees may persist for a long time, requiring careful determination of the period.

Indemnification Claim Procedure

This specifies the notification method, required documents, and procedural flow for making an indemnification claim.

Buyer’s Checkpoints:

• Sufficient Scope and Period: Is the scope and period of indemnification sufficient, considering the nature and risks of the transferred business?
• Appropriateness of Cap and Deductible: Are the upper and lower limits set reasonably to cover unexpected damages?
• Coordination with Representations and Warranties: Are risks not covered by representations and warranties also covered by indemnification clauses?

Seller’s Checkpoints:

• Limitation of Liability: Appropriately set the scope, cap, and period of indemnification to avoid excessive liability.
• Coordination with Disclosure: Negotiate to exclude disclosed matters from the scope of indemnification in principle.

Practical Checkpoints for Non-compete Obligations

A non-compete obligation is a clause that prohibits the seller (or its management or major shareholders) from engaging in the same business (competition) as the transferred business within a certain period and in a certain geographical area after the M&A transaction is completed. This is an essential clause for protecting the customer base, know-how, and brand value acquired by the buyer through the M&A.

Reasonableness of Period, Territory, and Scope

The effective period, geographical area, and scope of business prohibited by a non-compete obligation are generally set within “reasonable” limits. In the case of medical institution M&A, it is important to set balanced conditions that protect the buyer’s business continuity and development, considering the nature of the business (medical specialty, regional characteristics, etc.) and the scale of the transferred business, without excessively restricting the economic freedom of the seller (or related parties).

• Period: Generally around 1-3 years, but may be longer depending on the nature of the business.
• Territory: The area where the transferred business operates or where the buyer plans to operate in the future.
• Scope: Limited to medical specialties and services that compete with the transferred business.

Buyer’s Checkpoints:

• Sufficiency of Business Protection: Is competition prohibited for a sufficient period, territory, and scope to protect the value of the transferred business?
• Relationship with Seller: Is there no risk of the seller resuming competitive business in the future?

Seller’s Checkpoints:

• Ensuring Economic Freedom: Negotiate for reasonable limits, as excessively long periods or broad scopes of non-competition can deprive the seller (or related parties) of future business opportunities.
• Consideration of Alternatives: Consider partial installment payments of the transfer consideration or setting up earn-outs as alternatives or supplementary measures to the non-compete obligation.

Steps to Concluding a Medical M&A Agreement

The process leading up to the conclusion of a medical M&A agreement generally involves the following steps. In each step, it is key to proceed with the support of experts (M&A advisors, lawyers, accountants, tax accountants, etc.) for a smooth M&A execution.

1. Formulation of M&A Strategy: Clarify the objectives of transfer/acquisition, conditions, and criteria for selecting candidates.
2. Candidate Selection and Initial Negotiations: Research candidate companies, make contact, and conclude a Memorandum of Understanding (MOU) or Letter of Intent (LOI).
3. Due Diligence (DD): Conduct detailed investigations of the business, financial, legal, and tax aspects of the transferred subject.
4. Negotiation of Agreement Terms: Based on the DD results, negotiate detailed terms of the SPA or Business Transfer Agreement (representations and warranties, indemnification, consideration, etc.).
5. Drafting and Review of Agreement: Draft the agreement with the help of legal experts and review and revise it by both parties.
6. Contract Execution (Closing): Sign and seal the final agreement and execute the transaction.

FAQ Regarding Medical M&A Agreements

Q1. What are the most critical points to be aware of in a medical M&A agreement?

A1. For the buyer, it is important to ensure robust indemnification clauses that allow for reliable recovery of damages from breaches of representations and warranties, manage the risk of off-balance sheet liabilities, and carefully scrutinize risks related to licenses and medical fees. For the seller, it is important to limit future liability from breaches of representations and warranties and ensure reliable recovery of the consideration. In either position, a detailed review of the agreement by an expert (such as a lawyer) is essential.

Q2. What actions can be taken if a breach of representations and warranties is discovered?

A2. If a breach of representations and warranties is confirmed, the buyer may be able to claim contract termination, damages, or renegotiation of contract terms (such as a reduction in consideration). Specific actions will be taken based on the indemnification clauses and termination clauses stipulated in the agreement.

Q3. How are the period and scope of non-compete obligations determined?

A3. The period, territory, and scope of non-compete obligations are determined through negotiation between the parties, taking into account the nature and scale of the transferred business, the need to protect the buyer’s business, and the balance with the seller’s economic freedom. Generally, the period is around 1-3 years, the territory is limited to the area where the business operates, and the scope is limited to competing medical specialties, but it is flexibly set according to individual circumstances.

Q4. How long does it take to draft a medical M&A agreement?

A4. The time required for drafting the agreement varies greatly depending on the scale and complexity of the M&A and the progress of negotiations. It generally takes several weeks to several months from the basic agreement to the contract execution. In particular, detailed negotiations regarding risk allocation, such as representations and warranties and indemnification clauses, tend to take more time.

Q5. What role does a lawyer play in concluding a medical M&A agreement?

A5. Lawyers play a crucial role throughout the contract conclusion process, including drafting the agreement, reviewing the contract terms for both parties, assessing legal risks, and supporting negotiations. It is particularly recommended to engage a lawyer with specialized knowledge of legal regulations and licensing specific to medical institutions.

Medical M&A agreements are indispensable for the safe and smooth execution of transactions. Please refer to the essential clauses and checkpoints explained in this article and aim to conclude the best agreement for your company in cooperation with experts.

Get an instant estimate with a free simple assessment

📊 FREE ASSESSMENT

1-Minute, 3-Question Free Simple Assessment

We will provide an estimated transfer price for your medical institution on the spot.
Strictly confidential, no sales calls, receive report via a single email.

Start Free Simple Assessment →