connecting the dots on digital healthsep 17, 2020 · jason gordon 415.248.2154...

September 17, 2020 | 12:00 PM - 1:00 PM CT

Connecting the Dots on Digital Health

Webinar Series

CONNECTING THE DOTS ON DIGITAL HEALTH

Today’s Agenda

• Presenter Introductions

• Digital Health Series Overview

• Hypothetical

• Series B Financing

• Employment Considerations

• Acquiring a Digital Health Business

• Q&A


Presenters:

Joshua Reynolds

Shareholder

San Francisco

415.248.2180

[email protected]

Jason Gordon

Shareholder

San Francisco

415.248.2154

[email protected]

Scott Gilbert

Shareholder

Chicago

312.463.6375

[email protected]

Cybil Roehrenbeck

Shareholder

Washington, D.C.

202.777.8931

[email protected]

mailto:[email protected]





HYPOTHETICAL – You’re Hired as General Counsel of Beam Me Up

• You have just been hired as General Counsel at remote patient monitoring and patient care management start-up Beam Me Up.

Beam Me Up’s founder, Dr. Innovation, has tasked you with identifying the key legal issues that it should vet as the company

approaches investors, customers, and partners.

• During your first week at Beam Me Up, you learn the following:

Beam Me Up has two upcoming presentations to venture capitalist firms where the company plans to present its short and

long term objectives, including on its business, intellectual property, and regulatory clearance strategy in order to secure a

Series B financing.

Beam Me Up has outstanding questions from potential customers related to applicability of federal and state regulations, the

privacy and security of its modalities, Medicare and commercial reimbursement, medical malpractice liability, and other

issues.

Beam Me Up’s employees are all “at-will” and none are subject to any form of non-disclosure or other restrictive covenant

obligations. Additionally, you have discovered that the company relies heavily on independent contractors in order to keep

payroll costs low.

• Once the Series B Financing is done, Beam Me Up will be looking to acquire Hear Me Fall, LLC which is a hot new medical device

in remote patient monitoring.

Dr. Innovation has tasked you with coming up with key legal issues that need to be addressed in the diligence and eventual

acquisition documents.


Issues Related to a Series B Financing

Jason Gordon, Shareholder


Series B

• Issues to Address in PresentationsValue of the Business

Market Team IP

Risk Common Categories

Market Risk

Technological Risk

Execution Risk

Regulatory Risk

Ability to Mitigate


Series B

• Term sheet Economics

Value of the Company

Dividends

Liquidation preferences

Conversion rights

Anti-dilution rights

Redemption rights

Registration rights

Pro rata rights

Control Rights

Board seats/ observer seats

Information rights

Voting rights

Protective Provisions

Covenants


Series B

• Select Regulatory IssuesCorporate practice of medicine

Reimbursement considerations

Potential that any devices may require FDA approval

Personal health information

Other potential regulatory concerns including

CFIUS


An Ounce of Prevention: Important Employment Considerations to Address at the Start

Scott Gilbert, Shareholder


Presto-Chango: Transforming Employees to Independent Contractors


Tax and Wage Penalties

• Taxes: Past federal payroll taxes of 3 or more years State payroll taxes 100% penalty for ‘willful’ violations

• Wage/Litigation Penalties: Minimum wage/overtime back pay Meal/rest breaks, expenses, benefit eligibility Liquidated damages Class action exposure for all workers in similar position DOL supervision of wage payments Attorneys’ fees and court costs


Excuses, Excuses…

• Common reasons given by employers for misclassification issues include: “It’s always been this way!”

“The nature of the competitive marketplace!”

“It was the worker’s preference!”

• All of these reasons are wholly irrelevant to the law


Everybody’s Friends Until They’re Not: Key Restrictive Covenant Provisions

• Prohibits competition in specific geographic areas for a specified period of time

• Prohibits employment with a specific competitor for a specific period of time

• Prohibits solicitation of customers, generally and specifically, for a specified period of time

• Prohibits use of confidential, proprietary or trade secret information

• Prohibits hiring of other employees (no piracy)

• Damages and remedies

• Treat trade secrets like secrets


Key Considerations in Acquiring a Digital Health BusinessJoshua Reynolds, Shareholder


Key Deal Making Terms and Conditions

• Major Issues To Consider – A RoadmapWhat Is the Value Proposition

Designing the Due Diligence Investigation

All Roads Lead to Representations and Warranties and Sharing of Risk


Key Deal Making Terms and Conditions -Critical Due Diligence Issues

• For an Digital Health Company: Intellectual Property

Legislative/Regulatory Risk; Dynamic legal environment

Data Security/Privacy 25% of all data hacks in US are in health care

• Liability Risk – Buyer can address the uncertainty of the above diligence issues in the drafting of the purchase agreement


What Are Representations and Warranties?

• Scope and detail of representations and warranties are critically important as they define the subject matter of the transaction and allocate risk

• For the buyer, they provide protection and recourse to ensure that buyer is getting what it bargained for and there are no surprises They serve as the basis for closing conditions– buyer does not have to close if reps are

untrue at closing (subject to materiality test that is negotiable)

They serve as the basis for termination rights if not cured

They serve as additional comfort to Buyer’s diligence process

They provide the basis for post-closing indemnification

• Total Representations: Generally 20-30 representations covering all aspects of the business being acquired


Types of Representations and Warranties: Fundamental & General Representations

• Fundamental Representations assert facts of the acquired company or assets that are so important that if they are untrue, then the deal would not move forward. Examples: Organization and good standing; Authorization, Ownership,

Enforceability, Non-Contravention and Brokers;

• In a typical M&A deal, General Representations are all of the other representations that are not Fundamental Representations. General Representations portray what assets and liabilities are included or not

included in the acquired company or assets

Examples: Litigation; Compliance with Laws; Financial Statements; Employees and Employee Benefits; Tax; and Contracts.


Types of Representations and Warranties: Special Representations

• In Digital Health M+A, a growing trend of a category of Special Representations. These “Special Representations” are deemed to be more risky to a buyer than the

General Representations Separated for indemnification/survival Less significant than Fundamental Representations, but more material than General

Representations

• In Digital Health M+A, these include: Compliance with Health Care and other Regulatory Laws; Data Security Privacy (HIPAA); Intellectual Property; Payors.

• Buyers tend to also want some other reps to be in the “Special” category including Tax; Compliance with Laws; ERISA; Wage and Hour Representations.


Differences Between Types of Representations

• The below table shows the typical terms between each type of representation:

Purchase Agreement

Provision

General Special Fundamental

Survival of

Representation

12 – 24 months 24 – 48 months 24 months – Statute

of Limitations

Deductible Applied Yes Negotiable No

Indemnity Cap 8% – 15% of the

Purchase Price

20% - 40% of the

Purchase Price

Purchase Price or

uncapped


Application to Acquisition of Hear Me Fall, LLC

• Which Representations should be Special Representations? Intellectual Property – Need to protect the patents on the Medical Device

Data Security and HIPAA - Ensure no breaches in data or privacy

Compliance Applicable Law – Ensure their actual operations are compliant in this case specifically with related Health Care laws and FDA regulations

• Beam Me Up should ask for specific indemnity related to any specific liabilities found in diligence

• Beam Me up should ask for a bigger escrow/holdback that is above the general rep cap

Thank You

Jason Gordon

415.248.2154

[email protected]

Scott Gilbert

312.463.6375

[email protected]

Joshua Reynolds

415.248.2180

[email protected]

Cybil Roehrenbeck

(202) 777-8931

[email protected]

connecting the dots on digital healthsep 17, 2020 · jason gordon 415.248.2154...

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