The buyer gives technical arguments to the court to justify its refusal to pay to the seller its share of funds it received from a state of Florida program designed to compensate hospitals for providing treatment to Medicaid patients at below market rates.
M&A Stories
August 10, 2022
Introduction
In a $1.1 billion acquisition of five Florida hospitals, a seller and a buyer are caught in a legal battle over a $27.7 million proration dispute. The disagreement centers around the buyer’s refusal to pay the seller its share of funds received from a state program designed to compensate hospitals for treating Medicaid patients at below-market rates.
The Deal
The transaction involved the sale of five Florida hospitals from one large hospital chain to another. As part of the deal, funds from a state program were prorated to compensate hospitals for treating Medicaid patients at reduced rates. Additionally, a transition services agreement was established, wherein the seller would provide certain patient services until February 2023 in exchange for monthly payments.
The Conflict
The deal closed on August 1, 2021, but the buyer failed to make any payments under the transition services agreement. As a result, the seller stopped providing transitional patient services in May 2022. The buyer claimed the seller owed more in indemnification claims than the unpaid amount of $18.2 million. Consequently, the buyer took the matter to the Delaware Court of Chancery to compel the seller to continue providing transitional patient services.
The Proration Dispute
In response, the seller argued that the buyer owed it $27.7 million, which represents the buyer’s share of the Florida funds intended for compensating hospitals for their Medicaid services at below-market rates. The court acknowledged that the seller is likely entitled to the funds, but a final decision is pending. In the meantime, the court ordered the seller to continue providing transitional patient services for two more months if the buyer posts a monthly bond of $2.8 million to cover these services.
See Steward Health Care System LLC v. Tenet Business Services Corporation., C.A. No. 2022-0289-SG Court of Chancery of Delaware, (Submitted: July 12, 2022. Decided: August 1, 2022).
Conclusion
The court’s ruling does not fully resolve the $27.7 million proration dispute, leaving room for further negotiation and litigation. This case highlights the risks sellers face when including post-closing payments in a deal, as there’s no guarantee that buyers will honor their financial obligations.
By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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