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Keeping clean to reduce M&A antitrust risk: Three tips for clean teams during due diligence

Greg Mennerick May 4, 2022

Increased consolidation in the health care sector continues to draw media attention and antitrust scrutiny from a variety of regulators including the Federal Trade Commission, the Antitrust Division of the Department of Justice and state attorneys general. As a result, health care providers and hospital systems which are considering mergers, acquisitions and other types of strategic partnerships or joint ventures should take steps to ensure that they do not violate antitrust laws when sharing information regarding the business case for a particular transaction and should also keep in mind that failing to close a transaction can turn a potential partner into a better-informed competitor. However, it is not always clear what information may be shared, or with whom. It is also difficult to know when a typical non-disclosure agreement may fall short of the desired protections. In general, the best practice is to establish guardrails around the diligence process by delegating the responsibility for reviewing documentation for competitively sensitive information (and potentially scrubbing such documentation to remove any competitively sensitive information) to a third party or a special group of the buyer’s employees (a “Clean Team”).  

Speaking generally, a Clean Team’s purpose is to filter and remove competitively sensitive information from the stream of information flowing from a seller to a buyer. A Clean Team may accomplish this by, among other things, redacting certain information (including, but not limited to, strategic plans, business valuations, physician compensation policies, payor rates, facility performance, contractual terms for specific customers or suppliers, and future plans such as expansions or other capital expenditures) from documents that a seller provides to a buyer in the due diligence phase of a transaction. A Clean Team may also aggregate or roll-up certain information so that it can be presented to the buyer in a summary report or other manner that does not reveal competitively sensitive details. The list below highlights three tips with respect to the establishment and work of Clean Teams, but it is not intended to be an exhaustive list of potential antitrust considerations.

1. Use non-competitively sensitive information, if possible

While the exchange of certain competitively sensitive information regarding the parties to a potential transaction is a necessary part of the planning process, regulators are concerned that, if not done carefully and thoughtfully, the exchange of information could give the parties an opportunity to engage in current or future anticompetitive behavior. Thus, the parties should, before responding to any request for competitively sensitive information as part of a due diligence request, consider whether there is any publicly available or otherwise non-competitively sensitive information which would satisfy the request. For example, historical financial statements, tax returns, and asset depreciation schedules are typically not considered to be competitively sensitive and might be workable substitutes for certain competitively sensitive information such as current or future budgets or capital expenditure plans.

2. Choose the right team

Careful consideration should be given to the composition of the Clean Team. Generally, it is preferable to have a third party, such as a buyer’s outside legal counsel, outside antitrust counsel or financial advisers, serve as the Clean Team. Any third party chosen should enter into an agreement (the “Clean Team Agreement”) with the buyer and seller setting forth the third party’s duties and responsibilities, including the duty to maintain the confidentiality of any information provided to it and not to share any competitively sensitive information in an unredacted, disaggregated or otherwise unapproved form with the buyer or its employees. Additionally, the identity of each employee or representative of the third party should be disclosed to the buyer and seller and such employee or representative should execute an acknowledgment of such person’s obligations as a representative of the third party under the Clean Team Agreement. Importantly, the Clean Team Agreement acts as a supplement to, and not a replacement of, the non-disclosure agreement that the buyer and seller should have entered into at the very outset of their negotiations.

However, it is not always possible to engage a third party solely for the purpose of serving as a clean team. Hiring a third party may be costly and time consuming, and the preferred third party may not agree to serve in a Clean Team capacity for a given transaction. Therefore, the task may be left to certain employees of the buyer, which presents its own challenges. Employees of the buyer may serve as members of a Clean Team, provided that such employees do not have (and are not reasonably likely to have in the near future) responsibilities concerning strategic planning, direct pricing, negotiating payor agreements, sales and marketing, physician compensation or other duties which would allow them to use any competitively sensitive information revealed to them in an anti-competitive manner on behalf of the buyer. It can be difficult to find the right balance because each employee should (1) be sufficiently knowledgeable regarding the potential transaction and their responsibility to prevent the inappropriate disclosure of competitively sensitive information, but (2) not have (and are not likely to have in the near future) any job responsibilities which would permit such employee to act in an anti-competitive manner based on the information provided to them pursuant to their Clean Team duties. 

3. Establish a clean room

To facilitate the transfer of information between the parties, the parties need to establish a mechanism by which the seller can provide information which is potentially competitively sensitive to the Clean Team, which will then review such information and pass it along to the buyer if appropriate. Because of the large amount of documents which may need to be reviewed, best practice is to establish a separate virtual data room in which all documents to be provided by the seller can be uploaded by the seller and reviewed by the Clean Team (the “Clean Room”). The buyer and its employees and representatives that are not on the Clean Team should not have access to the Clean Room. The Clean Team should then review each document provided and log whether the document contains any competitively sensitive information. If the Clean Team and antitrust counsel for the seller concur that a document contains no competitively sensitive information, then the Clean Team can then send the document directly to a separate virtual data room (the “Ordinary Data Room”) which the buyer and its employees and representatives may access. The Ordinary Data Room and Clean Room should have a similar file hierarchy for ease of use and they should also have clearly distinguishable names in order to ensure that a document is not mistakenly uploaded to the Ordinary Data Room prior to review by the Clean Team. If a document does contain competitively sensitive information, then the Clean Team should follow procedures established by the parties’ respective antitrust counsels for redacting or aggregating the information before sending to the Ordinary Data Room, or withholding such information entirely if appropriate. 

Greg Mennerick is an attorney in Thompson Coburn’s Health Care group.