Question
From:
(Redacted)
Sent:
Tuesday, June 15, 2010 2:52 PM
To:
Ferkingstad, James H.
Cc:
(Redacted)
Subject: Formation of a hospital system:exemption 802.40
James,
We wanted to discuss with you at theearliest convenient time the applicability of Sec. 802.40 to the followingtransaction:
Hospital A and Hospital B arecontemplating a proposed transaction whereby Hospital A and Hospital B,including their subsidiaries (Hospital C is a subsidiary of Hospital A), wouldbecome part of one overall system in which a single non-profit entity would bethe sole "other body" in control of both the non-profit corporationfor Hospital A and the non-profit corporation for Hospital B. Under Pennsylvania law, an entity designated as the "other body" exercises essentiallythe same control as a sole member of a non-profit corporation. See PaCon. Stat. sec. 5103 et seq. It is our IJ11derstanding that if HospitalA and Hospital B joined to form a new nonprofit entity to act as the new parentof both Hospital A and Hospital B, no Hart Scott Rodino filing would berequired pursuant to the exemption in section 802.40 (see discussion below). Inthis instance, however, in order to save time and transaction costs, HospitalB's current parent organization ("Parent")(which is a 501(c)(3)nonprofit) would change its nan1e, completely replace its articles and bylawsand appoint a new slate of directors and officers in order to convert into a501(c)(3) non-profit parent organization of Hospital A and Hospital B. Only theEmployer Identification Number of Parent would remain the same.
The Parent's initial board of directorswould consist of thirteen (13) directors. Seven (7) of the directors would bechosen by Hospital A. Four (4) of the directors would be chosen by Hospital B.One (I) director would by chosen by Hospital C. The final director would be theSystem CEO, as an ex-officio voting member. This position will initially beheld by the current CEO of Hospital A. As part of the Agreement, Hospital A andHospital B would agree upon the individuals who would serve as the initialdirectors, officers and committee members of the Parent. After the initialterm, the number of Parent board seats allocated to each hospital would remainthe same. Each hospital would nominate appointees to the Parent board by firstsubmitting candidates to the Parent's nominating committee for review. Thenominating conID1ittee will be composed of give (5) members, three (3) fromHospital A and two (2) from Hospital B. Once a c811didate is "vetted"811d approved by the nominating committee through a majority vote, thecandidate will be sent back to each hospital for the hospital's submission ofthe candidate to the Parent for election. On an ongoing basis, Hospital A andHospital B will continue to maintain the same percentage of board seats asinitially held. At some point in the future, Parent may convert to aself-perpetuating board.
Sec. 802.40 exempts from HSR reportingthe "formation of an entity ... if the entity will be not-for-profitwithin the meaning of sections [501(c)(3) ... of the Internal RevenueCode]." Parent will be a new non-profit entity in all material respects,even though it will be created utilizing the existing non-profit corporateEmployer Identification Number of Hospital B Parent. Thus, treating thetransformation of Hospital B Parent into the new Parent organization as thecreation of a new non-profit entity exempt under 802.40 appears to beconsistent with various PNO informal interpretations, in particular InformalStaff Opinion 0907008 (James Ferkingstad,