Gaining “control” over a nonprofit entity’s board of directors is not the only way to obtain the “beneficial ownership” of the assets of a nonprofit entity necessary to trigger reporting requirements for nonprofit entity affiliation/combination transactions under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act), according to new guidance from the Federal Trade Commission (FTC).
This means that certain nonprofit hospital combination transactions, which previously may not have been considered reportable, will now be subject to HSR Act notice filing requirements. While focused on nonprofit hospital transactions, the guidance put forth by the FTC’s Premerger Notification Office (PNO) applies to any nonprofit combination/affiliation-style transaction.
Under the HSR Act, certain acquisitions of a certain size (currently $84.4 million and above) involving certain-sized parties trigger notice filings required by the Act. Previously, the general analysis of nonprofit entity combination transactions had focused on whether a change of control of the board of directors of one of the entities had occurred. If so, the transaction was generally treated as an asset acquisition for the purposes of determining whether the size of transaction and size of party tests required by the HSR Act were met.
But the PNO’s new guidance acknowledges the limitations of relying solely on the concept of board control to determine whether the HSR Act’s reporting requirements apply. Now, a potentially reportable transaction can occur even when there is no change in control of a board of directors of a combining entity, according to the updated guidance.
In a tip sheet released to help practitioners analyze nonprofit combinations that are potentially reportable, the PNO pointed to the following factors to determine whether beneficial ownership exists in the context of hospitals affiliated under a newly created nonprofit entity (e.g. a “newco”):
- The newco becomes the corporate member of the affiliating hospital entities.
- The newco has the right to authorize and/or approve the articles, bylaws and other governance documents of the affiliating hospital entities.
- The newco has the right to authorize and/or approve the sale or lease of the affiliating hospital’s assets.
- The newco has the right to appoint and/or approve the senior officers of the affiliating hospital’s entities.
- The newco has the right to devise and/or approve the strategic plans, capital budgets and expenditures, and significant contracting of the affiliating hospitals.
The tip sheet suggests that, for example, if a newco parent becomes the corporate member of the affiliating hospitals and obtains governance power over the existing hospitals to such an extent that the indicia of beneficial ownership of the hospitals passes, an acquisition subject to the HSR Act notice filing requirements has occurred.
This new guidance supersedes previous informal interpretations made by the PNO regarding non-reportability of certain nonprofit combinations that focused solely on board control. Now, parties to such nonprofit entity transactions must analyze their contemplated transaction under this new guidance to determine whether the HSR Act reporting requirements apply.