has the benefit of making employees immediate owners and beneficiaries of the historical value of the company. However, restricting stock grants to a wide class of employees potentially expands the number of individuals on the cap table who have information and voting rights which can present complexities in acquisition and/or investment activity. • An alternative to plain-vanilla equity awards is phantom equity. Phantom equity provides value to employees while limiting the number of individuals with information and voting rights. These awards can also be used to avoid securities law exposure (if properly structured). The messaging around phantom equity needs to be carefully crafted to properly convey to the employees that the awards represent a contractual right to receive payment, even if the award is not a tangible set of shares. The downside to phantom equity is that the payouts are always taxed at ordinary income rates to the employee. However, employers can work with legal and tax counsel to structure gross- ups to put certain key employees in the same after-tax position as if their phantom award was taxed at long-term capital gains rates. 11. Section 220 Demand Considerations – Updates from Delaware Chancery Court BY MARGARET DODSON & BRITT LATHAM Section 220 books and records demands remain popular, especially from minority shareholders in healthcare PE post- closing disputes. However, decisions this year from the Delaware Chancery Court may help portfolio companies limit the scope of informal communications like email data, management materials, or investor communications sought pursuant to these demands. The Delaware Chancery Court has issued recent opinions that, among other things, do the following: Make it tougher for a demanding shareholder to obtain such communications if formal board materials are available, comprehensive and consistent with shareholder communications. • Limit the shareholder’s request for additional materials if they are not essential to the admittedly proper investigative purpose under Section 220. • Praise companies for responding to – rather than rejecting outright – the shareholder’s demand and providing relevant, formal board materials in its response.
Moving forward in the healthcare PE context, these cases underscore the importance of:
• Maintaining corporate formalities – including clear distinctions between the PE firm’s work and the management and board work of the target healthcare entity. • Taking the time to formally document board agendas, meetings and other board-level materials and communications so that the healthcare company is well-situated and prepared to respond to an inspection demand, no matter the context. • If a shareholder has arguably stated a proper purpose, responding by providing well-documented, formal board materials, could fulfill the company’s information-sharing duties under Section 220. 12. Breaking News: FTC Non-Compete Proposed Rule In breaking news, on January 5, 2023, the Federal Trace Commission (FTC) issued a proposed rule that would ban employers from imposing non-competes on their workers. The FTC is seeking public comment. If passed, the rule would significantly alter the landscape between companies and their employees, as well as the ability to secure transactional non-competes.
To read more about the FTC’s proposed rule and its implications, click here.
7 HEALTHCARE PRIVATE EQUITY: 2023 OUTLOOK & TRENDS IN M&A |
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