Guaranteeing Capital Improvements

It is likely you will hear a proposed buyer talk about how the hospital is “outdated” and in need of financial support to make necessary upgrades to the facility and equipment. Often when a buyer makes a proposal to purchase a nonprofit hospital, it will argue it is going to make these “much-needed improvements” to the facility. Unfortunately, these improvements are not necessarily required by the asset purchase agreement or other transactional documents. When reviewing the transaction documents, pay careful attention to the details about how, when, and if expenditures for capital improvements will be made.

As part of its purchase of public Slidell Memorial Hospital, for-profit Tenet told the public it would spend $40 million on proposed improvements. But when the community looked at the actual language of the asset purchase agreement, it was so vague that it raised more questions than answers about what the money would be spent on. A review of the contract language, however, revealed that Tenet could have spent the money at any time over a five-year period; there was no guarantee that the purchases would be made immediately after the sale. Moreover, the money could have been spent on things such as equipment and services—normal expenditures every hospital makes—and not just on capital improvements. Finally and most important there was no guarantee that the money would be spent at Slidell Memorial. Tenet could have spent the money at its other facility, Northshore Regional Medical Center, located down the street. This was one of several factors that led to defeat of the proposed purchase.

What You Can Do:

• Ask the buyer for details on how it came up with the amount it would spend on capital expenditures.
• Did it, for example, survey the staff or the community for what is most needed at the hospital?
• Request the buyer provide information on where the expenditures will be made and how long they will take.
• Request the buyer put all promises to the community in writing as part of the asset purchase agreement.