NHS Mergers and Acquisitions
Whilst mergers and acquisitions involving NHS Trusts and NHS Foundation Trusts have had differing success rates over the years, they create an opportunity to generate consistency, efficiencies through scale and better quality services for patients.
NHS mergers and acquisitions are governed by provisions in the National Health Service Act 2006. There are different provisions (and implications) depending on whether the transaction is structured as a merger or an acquisition. Given the scale of these transactions, there are a number of regulatory requirements that must be complied with, as well as other legal issues. These include:
Single Operating Framework: a Single Operating Framework has recently been developed by NHS Improvement which replaces the Accountability Framework for NHS Trusts and the Risk Assessment Framework for FTs as of 1 October 2016. Monitor (now part of NHS Improvement), is responsible for reviewing proposed transactions to understand their potential impact on both the risk profile of the acquiring FT and its ability to continue to meet its provider licence conditions. Monitor also has a statutory role in approving "statutory transactions" (mergers or acquisitions involving one or more FTs, separations and dissolutions of FTs as defined in the NHS Act 2006).
Competition law: transactions involving FTs are subject to competition review by the Competition and Markets Authority ("CMA") to ensure that the transaction does not have an adverse effect on patients by reducing competition between providers – the benefits to patients are paramount and must be focussed on for a successful outcome.
Procurement law: both the Trusts involved in the transaction, as well as commissioners of their services should consider their obligations under the Public Contracts Regulations 2015, as such obligations may be triggered as a result of the merger or acquisition.
Vires and governance: Each NHS Trust and/or FT must comply with its own internal governance arrangements when making a decision to merge or acquire another organisation. With FTs, satisfying this requirement will involve both the agreement of the Board, as well as the Council of Governors. Where a new organisation is formed as the result of a merger, the timings of making appointments to the new board of that organisation needs to be carefully considered, particularly where governors need to be elected in order for such appointments to be made. Transitional arrangements are likely to be required in FT constitutions to transition the various constituencies and ensure they are reflective of the patients served by the enlarged organisation.
From a legal perspective the following transactional elements are necessary:
- The parties enter into a heads of terms document which sets out:
- the agreed principles of the transaction;
- the commitment and intention of the parties;
- the steps to be taken prior to entering into a business transfer agreement ("BTA"); and
- an indicative timetable and milestones for the transaction such as completion of a final business case, completion of due diligence and intended date by which the BTA will be agreed.
- Legal due diligence: as part of the assurance process for a merger or acquisition, NHS Trusts and FTs must undertake due diligence including financial, legal and clinical due diligence. NHS Improvement sets out guidance for FTs on the level of legal due diligence required in its publication, “Supporting NHS providers on transactions for NHS foundation trusts”. Legal due diligence should consist of a thorough review and report on all areas such as contracts, governance, regulatory, health and safety, estates, IT and HR (to name a few), highlighting all legal risks based on the information provided and recommend mitigating steps;
- A separate financial due diligence will also take place, often led by the relevant Trust's financial advisers. The legal and financial advisors must work in partnership and liaise with regard to risks and how they are mitigated where financial risks interface with legal risks;
- Negotiation of the BTA should cover any areas highlighted by the due diligence exercise and include any protections available in respect of the risks identified; and
- Statutory application granted and dissolution and transfer orders where relevant.
Overcoming the challenges
Navigating the transaction is the beginning of the journey; the real challenge that our clients have encountered is seeking to integrate the cultures of organisations, achieve consistency in service quality across the newly merged organisation, and harmonising of the various policies and procedures.
Tough decisions may also need to be made to change, or even decommission certain services. It is difficult to avoid the staff of an acquired Trust feeling they are part of a "take over", and a great deal of staff engagement is necessary to win the "hearts and minds" of all involved in the project, and to communicate the benefits of the merger for patients and staff.
Competition review by the CMA should not be underestimated. It is vital to demonstrate the patient benefits arising from the transaction. This, alongside Monitor’s role in risk assessment can be resource intensive, requiring a great deal of upfront, preparatory work.
For statutory transactions, more than half of the members of the full FT's Council of Governors must approve any merger or acquisition. It is critical therefore, that the FT Board fully engages with Governors and ensures they are well informed of the purpose and aims of the transaction, and that it deals with any concerns raised.