Connecting the Dots on Digital HealthSep 17, 2020 · Jason Gordon 415.248.2154...
Transcript of Connecting the Dots on Digital HealthSep 17, 2020 · Jason Gordon 415.248.2154...
September 17, 2020 | 12:00 PM - 1:00 PM CT
Connecting the Dots on Digital Health
Webinar Series
CONNECTING THE DOTS ON DIGITAL HEALTH
Today’s Agenda
• Presenter Introductions
• Digital Health Series Overview
• Hypothetical
• Series B Financing
• Employment Considerations
• Acquiring a Digital Health Business
• Q&A
CONNECTING THE DOTS ON DIGITAL HEALTH
Presenters:
Joshua Reynolds
Shareholder
San Francisco
415.248.2180
Jason Gordon
Shareholder
San Francisco
415.248.2154
Scott Gilbert
Shareholder
Chicago
312.463.6375
Cybil Roehrenbeck
Shareholder
Washington, D.C.
202.777.8931
CONNECTING THE DOTS ON DIGITAL HEALTH
HYPOTHETICAL – You’re Hired as General Counsel of Beam Me Up
• You have just been hired as General Counsel at remote patient monitoring and patient care management start-up Beam Me Up.
Beam Me Up’s founder, Dr. Innovation, has tasked you with identifying the key legal issues that it should vet as the company
approaches investors, customers, and partners.
• During your first week at Beam Me Up, you learn the following:
Beam Me Up has two upcoming presentations to venture capitalist firms where the company plans to present its short and
long term objectives, including on its business, intellectual property, and regulatory clearance strategy in order to secure a
Series B financing.
Beam Me Up has outstanding questions from potential customers related to applicability of federal and state regulations, the
privacy and security of its modalities, Medicare and commercial reimbursement, medical malpractice liability, and other
issues.
Beam Me Up’s employees are all “at-will” and none are subject to any form of non-disclosure or other restrictive covenant
obligations. Additionally, you have discovered that the company relies heavily on independent contractors in order to keep
payroll costs low.
• Once the Series B Financing is done, Beam Me Up will be looking to acquire Hear Me Fall, LLC which is a hot new medical device
in remote patient monitoring.
Dr. Innovation has tasked you with coming up with key legal issues that need to be addressed in the diligence and eventual
acquisition documents.
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Issues Related to a Series B Financing
Jason Gordon, Shareholder
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Series B
• Issues to Address in PresentationsValue of the Business
Market Team IP
Risk Common Categories
Market Risk
Technological Risk
Execution Risk
Regulatory Risk
Ability to Mitigate
CONNECTING THE DOTS ON DIGITAL HEALTH
Series B
• Term sheet Economics
Value of the Company
Dividends
Liquidation preferences
Conversion rights
Anti-dilution rights
Redemption rights
Registration rights
Pro rata rights
Control Rights
Board seats/ observer seats
Information rights
Voting rights
Protective Provisions
Covenants
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Series B
• Select Regulatory IssuesCorporate practice of medicine
Reimbursement considerations
Potential that any devices may require FDA approval
Personal health information
Other potential regulatory concerns including
CFIUS
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An Ounce of Prevention: Important Employment Considerations to Address at the Start
Scott Gilbert, Shareholder
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Presto-Chango: Transforming Employees to Independent Contractors
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Tax and Wage Penalties
• Taxes: Past federal payroll taxes of 3 or more years State payroll taxes 100% penalty for ‘willful’ violations
• Wage/Litigation Penalties: Minimum wage/overtime back pay Meal/rest breaks, expenses, benefit eligibility Liquidated damages Class action exposure for all workers in similar position DOL supervision of wage payments Attorneys’ fees and court costs
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Excuses, Excuses…
• Common reasons given by employers for misclassification issues include: “It’s always been this way!”
“The nature of the competitive marketplace!”
“It was the worker’s preference!”
• All of these reasons are wholly irrelevant to the law
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Everybody’s Friends Until They’re Not: Key Restrictive Covenant Provisions
• Prohibits competition in specific geographic areas for a specified period of time
• Prohibits employment with a specific competitor for a specific period of time
• Prohibits solicitation of customers, generally and specifically, for a specified period of time
• Prohibits use of confidential, proprietary or trade secret information
• Prohibits hiring of other employees (no piracy)
• Damages and remedies
• Treat trade secrets like secrets
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Key Considerations in Acquiring a Digital Health BusinessJoshua Reynolds, Shareholder
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Key Deal Making Terms and Conditions
• Major Issues To Consider – A RoadmapWhat Is the Value Proposition
Designing the Due Diligence Investigation
All Roads Lead to Representations and Warranties and Sharing of Risk
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Key Deal Making Terms and Conditions -Critical Due Diligence Issues
• For an Digital Health Company: Intellectual Property
Legislative/Regulatory Risk; Dynamic legal environment
Data Security/Privacy 25% of all data hacks in US are in health care
• Liability Risk – Buyer can address the uncertainty of the above diligence issues in the drafting of the purchase agreement
CONNECTING THE DOTS ON DIGITAL HEALTH
What Are Representations and Warranties?
• Scope and detail of representations and warranties are critically important as they define the subject matter of the transaction and allocate risk
• For the buyer, they provide protection and recourse to ensure that buyer is getting what it bargained for and there are no surprises They serve as the basis for closing conditions– buyer does not have to close if reps are
untrue at closing (subject to materiality test that is negotiable)
They serve as the basis for termination rights if not cured
They serve as additional comfort to Buyer’s diligence process
They provide the basis for post-closing indemnification
• Total Representations: Generally 20-30 representations covering all aspects of the business being acquired
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Types of Representations and Warranties: Fundamental & General Representations
• Fundamental Representations assert facts of the acquired company or assets that are so important that if they are untrue, then the deal would not move forward. Examples: Organization and good standing; Authorization, Ownership,
Enforceability, Non-Contravention and Brokers;
• In a typical M&A deal, General Representations are all of the other representations that are not Fundamental Representations. General Representations portray what assets and liabilities are included or not
included in the acquired company or assets
Examples: Litigation; Compliance with Laws; Financial Statements; Employees and Employee Benefits; Tax; and Contracts.
CONNECTING THE DOTS ON DIGITAL HEALTH
Types of Representations and Warranties: Special Representations
• In Digital Health M+A, a growing trend of a category of Special Representations. These “Special Representations” are deemed to be more risky to a buyer than the
General Representations Separated for indemnification/survival Less significant than Fundamental Representations, but more material than General
Representations
• In Digital Health M+A, these include: Compliance with Health Care and other Regulatory Laws; Data Security Privacy (HIPAA); Intellectual Property; Payors.
• Buyers tend to also want some other reps to be in the “Special” category including Tax; Compliance with Laws; ERISA; Wage and Hour Representations.
CONNECTING THE DOTS ON DIGITAL HEALTH
Differences Between Types of Representations
• The below table shows the typical terms between each type of representation:
Purchase Agreement
Provision
General Special Fundamental
Survival of
Representation
12 – 24 months 24 – 48 months 24 months – Statute
of Limitations
Deductible Applied Yes Negotiable No
Indemnity Cap 8% – 15% of the
Purchase Price
20% - 40% of the
Purchase Price
Purchase Price or
uncapped
CONNECTING THE DOTS ON DIGITAL HEALTH
Application to Acquisition of Hear Me Fall, LLC
• Which Representations should be Special Representations? Intellectual Property – Need to protect the patents on the Medical Device
Data Security and HIPAA - Ensure no breaches in data or privacy
Compliance Applicable Law – Ensure their actual operations are compliant in this case specifically with related Health Care laws and FDA regulations
• Beam Me Up should ask for specific indemnity related to any specific liabilities found in diligence
• Beam Me up should ask for a bigger escrow/holdback that is above the general rep cap
Thank You
Jason Gordon
415.248.2154
Scott Gilbert
312.463.6375
Joshua Reynolds
415.248.2180
Cybil Roehrenbeck
(202) 777-8931