California Bill Would Increase Scrutiny on Private Equity Healthcare Transactions

The California Legislature recently passed Assembly Bill 3129 (“AB 3129” or the “Bill”), which, if signed by California Governor Gavin Newsom, would increase oversight of healthcare entity transactions involving private equity investment. Governor Newsom has until September 30, 2024, to sign or veto the Bill.

If signed, AB 3129 would require notice to and, in some instances, approval from the California attorney general for certain transactions, such as acquisitions and/or changes of control of healthcare entities/facilities, involving a private equity group. If a notice is required under the Bill, it would be required to be submitted at the same time that any other state or federal agency is notified pursuant to state or federal law, and otherwise at least 90 days before the transaction closes.

The following are pertinent definitions within the Bill:

• “Healthcare facility” includes nursing facilities, hospices, health clinics, ambulatory surgical center, clinical laboratories, imaging facilities, providers/provider groups, and intermediate care facilities.
• A “private equity group” is defined as an investor or group of investors who primarily engage in the raising or returning of capital and who invests, develops, or disposes of specified assets.
  • Note, the definition of “private equity group” excludes any individual or entity that contributes (or promises to contribute) funds to the private equity group, but does not otherwise participate in the group’s management of assets or any change in control of the group’s assets.
• “Transaction” is broadly defined as the direct or indirect acquisition in any manner, including, but not limited to, lease, transfer, exchange, option, receipt of a conveyance, creation of a joint venture, or any other manner of purchase, by a private equity group or hedge fund of a material amount of the assets or operations, or a change of control, of a healthcare facility, provider group, or provider doing business in California.
  • A transaction involves a “material amount of the assets or operations” if either the transaction affects more than 15% of the market value or ownership shares of the healthcare facility, provider group, or provider.
  • Of note, a transaction that vests rights significant enough to constitute a change in control, including, but not limited to, supermajority rights, veto rights, exclusivity provisions, and similar provisions, is deemed to involve a “material amount of the assets or operations” even if less than 15% of the market value or ownership shares of the healthcare facility, provider group, or provider is affected.

Certain transactions are excluded from the attorney general notice requirement, such as transactions subject to review by the director of the Department of Managed Health Care or subject to review by the insurance commissioner. Further, notice to and consent from the attorney general is not required for certain transactions involving transfers by health districts or counties.

If enacted, AB 3129 would require notice for transactions entered into on or after January 1, 2025. California is among other states seeking to place greater attention on private equity healthcare transactions. For example, in July 2024, Indiana enacted its healthcare entity mergers and acquisitions reporting requirement requiring written notice to its attorney general office at least 90 days in advance of a merger or acquisition. Parties to such transactions should expect this trend to continue.

For more information, please contact Change of Ownership (“CHOW”) team attorneys Alex Foster or Kadeja Watts.

The Arnall Golden Gregory CHOW team leads all regulatory aspects of healthcare transactions for investors, operators, managers, capital partners, and developers of every size in all 50 states. The team streamlines the regulatory process so that clients close their transactions on or ahead of schedule. Whether obtaining licensure and Medicare/Medicaid approvals, structuring transactions to expedite closings, anticipating issues to minimize cash flow disruption, negotiating regulatory terms in deal documents, creatively resolving diligence issues, or advising on CHOW guidelines and compliance, the team provides extensive experience and practical solutions. To date, the CHOW team has served as primary regulatory counsel in transactions valued at more than $35 billion.