There are a number of legal issues a practice must consider when deciding to merge with another partnership, or to become a shareholder in a federation company
Due to the current demand practices face many are arranging themselves into new structures to meet the needs of patients within the limitations of the GP contract.
Although often mentioned in the same breath mergers and federations are actually very different beasts when it come to the law. This article looks at both in terms of the legal implications.
Mergers – legal structure
When a merger takes place, one partnership has to dissolve. The partners of the dissolved entity will join the other partnership and take their assets across with them.
A merger itself can be effected simply by drawing up a new partnership agreement for the newly-merged entity. This new agreement can also contain the provisions necessary to capture the merger deal.
Once the merger takes place, all the partners become jointly and severally liable for all liabilities of both practices.
Although it is usually recommended that indemnities are included against historic liabilities. The effect of this is that the partners of the dissolved partnership will indemnify the partners of the other partnership against any liabilities which were in the dissolved partnership before the merger date – and vice versa.
Dissolution of a partnership
When a partnership dissolves all its contracts come to an end. Technically this includes the GP contract.
There is a risk that the local area team or the local health board (LHB) could take the position that the contract should not just transfer to a partnership, but instead should be put out to tender. Generally this is only a theoretical risk, and we have never seen the point taken, but given the importance of the contract, reassurance should be sought from the LHB or NHS England at an early stage, as it often takes a while to process.
Dissolution of a partnership also means that its bank funding can be called in immediately – so if the dissolving practice has an existing loan at a favourable rate, the bank may exercise its right to renegotiate that rate.
Which of the two practices the partners decide to dissolve will depend on a variety of factors. It is often the case that the smaller practice dissolves, but this is not always so.
TUPE will apply to the merger, and will operate to transfer the employees of dissolved practice into the other practice. Liabilities can arise – for both practices – if the proper process is not followed.
The employees who transfer will do so on their current terms and conditions, with their continuity of employment preserved. TUPE contains specific provisions regarding changing terms and conditions of employment of the transferring employees and dismissing employees, and specialist advice on this should be taken.
TUPE also provides for a process of informing and consulting with affected employees about the transfer and any measures that will take place as a consequence of the transfer.
The property interests of the two merging practices need to be carefully considered, especially if all assets and liabilities are to be “pooled”.
If both practices own the freehold of their buildings, it may be that one practice has plenty of equity while the other has very little, meaning an increase in borrowing in order to buy in. Existing borrowing terms may differ radically and for example, one partnership may have punitive redemption penalties on a mortgage while the other may have very flexible and advantageous terms of borrowing.
Both practices will want to check the other building’s fitness for purpose and statutory compliance, and to identify potentially hidden liabilities before they buy into them.
Where properties are leasehold, the terms of the leases need to be reviewed and fully understood. It may be that Landlord’s consent is required for any lease transfer to take place. Leases also may contain hidden liabilities, such as dilapidations claims or service charge liabilities, and again partners should check these before becoming liable for them.
Before getting involved in the federation, the practice should ensure its own partnership deed is up to date and deals, in particular, with the practicalities of being a shareholder in a federation, in case the partners fall out about it later. The practice should also understand what it will pay for its shares and how it can exit the company if needs be.
The usual setup for a federation is for the practice itself to be a shareholder, so that the share(s) are partnership property. Typically the shares are registered in the name of one of the partners holding on trust for all. Again, the partnership deed and the articles of association of the company specify what happens if the nominated shareholder retires, or indeed if there is a practice merger.
Generally there will be a prohibition on share transfers
for an initial period – often three years – although transfers from one nominated
shareholder to another would be permitted so long as the
practice remains a member of the federation.
A practice cannot simply “retire” from the federation in the
way that a partner in a practice can give notice, retire and be paid out his share capital. A practice wishing to “resign” as a shareholder will have to follow the share transfer procedure in the company’s articles of association – which is why it is important to check these before joining, as leaving may be easier said than done.
Generally a shareholder has no liability other than the obligation to pay the subscription monies for its shares. So if the federation company fails, the amount that the practice loses is limited to its investment only.
The federation company will determine the number of shares subscribed for, usually based on practice size, and a price per share.
A practice will need to consider if it wants to join at the outset, or join later, when the shares may have become more expensive.
The company will be run by its board of directors, who will usually have been appointed on the incorporation of the company and typically, all the directors will resign at the first annual general meeting (AGM). Those initial directors and any others who wish to put themselves forward then seek re-election at the first. This is usually for a set period of office, again often for three years. It is common for a proportion of the directors (usually one third) to retire automatically at each subsequent AGM and to continue in office, they must be re-elected by the members. This is a critical means of holding the directors to account and effectively, to remove them from office.
In addition, a majority of shareholders may remove a director from office at any point using the procedure set out in the Companies Act 2006.
There are many different legal considerations that a practice must take into account before changing its structure. It is imperative that legal advice is sought to ensure that all bases are covered.