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HomeHealth LawPE Companies Face Legal responsibility for the Conduct of their Portfolio Corporations:...

PE Companies Face Legal responsibility for the Conduct of their Portfolio Corporations: Are you Paying Consideration?


Whereas authorities enforcement has historically been an oblique concern for personal fairness (“PE”) traders, reminiscent of taking a look at whether or not a goal entity has been sanctioned or could possibly be sanctioned sooner or later, the present pattern in authorities enforcement has been to focus on PE corporations instantly.

A couple of questions that PE corporations ought to take into consideration with respect to healthcare and life science investments:

  • Does the agency distinguish itself from acquired firms, or does it use communal language like “we” when discussing the exercise of the acquired firm (together with in inside communications)?
  • Is there overlap in personnel between the PE agency and the acquired firm, reminiscent of officers and board members?
  • Is the PE agency utilizing the identical methods to show round healthcare firms that it makes use of to show round different kinds of firms?
  • Has the PE agency evaluated the operational and monetary practices of its portfolio firms to make sure compliance with distinctive healthcare necessities?

These questions are based mostly on current enforcement situations that PE corporations have grappled with regarding their healthcare and life science investments. These considerations come about as a part of an evolving emphasis by the federal government on stopping fraud and abuse in well being care.

On March 25, 2021, the U.S. Home of Representatives’ Methods and Means Oversight Subcommittee held a listening to on “Inspecting Personal Fairness’s Expanded Function within the U.S. Well being Care System.” Throughout this listening to a number of audio system steered that quite a lot of reforms had been wanted with respect to PE involvement in well being care, together with larger transparency when it comes to traders. Individuals additionally mentioned using the False Claims Act (“FCA”) as a device for healthcare fraud enforcement. Beneath the FCA, a personal celebration, referred to as a relator or whistleblower, is ready to deliver claims towards an individual or entity for allegedly defrauding the federal government. Profitable whistleblowers are in a position to share in any financial restoration.

In a current enforcement motion the DOJ pursued prices towards, inter alia, a former PE proprietor of an entity accused of participating in improper off-label advertising of its medication. Whereas DOJ enforcement of improper off-label advertising is frequent, it was noteworthy that the DOJ settlement announcement didn’t comprise any particular allegations of misconduct by the PE agency, however relatively oblique accountability for permitting the alleged improper gross sales and promotion practices to proceed after the PE agency acquired the entity. In different phrases, the conduct started previous to the PE agency’s funding within the firm, however the PE agency didn’t put a cease to it. The case in the end settled, with the PE agency paying $1.5 million to the U.S. authorities and the opposite major defendant paying out $10 million.

Personal fairness traders ought to take be aware to not solely rigorously assessment any firm acquisitions throughout their due diligence course of previous to taking possession, however to additionally delineate the PE agency’s actions as an investor from the portfolio firm’s actions as a separate operational entity. Blurring the traces between the PE agency and portfolio firm can lead to heightened enforcement danger.

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