Navigating corporate integrity agreements during M&A integration

Compliance leaders share how corporate integrity agreements (CIAs) impact M&A deals and require strategic compliance planning.

CIAs—formal commitments between healthcare entities and the Office of Inspector General (OIG) following settlements of fraud allegations—create obstacles during M&A transactions such as financial risks, due diligence challenges, integration complications, and compliance burdens.

When approaching an M&A transaction, several CIA-related scenarios may emerge:

• An acquiring company operating under a CIA
• A target company subject to a CIA
• A target company under investigation that may soon face a CIA

Each scenario requires careful consideration of how the CIA might impact the deal structure and whether it would extend to the integrated company post-acquisition, according to the panelists at the Pharmaceutical Compliance Congress.

“Every CIA has successor liability provisions,” said Alison Fethke, counsel at Ropes & Gray. “It tends to be incredibly standard language that says, ‘in the event you are either divesting or acquiring, you need to go to OIG [Office of Inspector General] and discuss how the CIA will follow in either case.’”

Alison Fethke, counsel at Ropes & Gray

This requirement creates an additional layer of difficulty in transactions where one party operates under such an agreement. However, the panelists emphasized that this doesn’t necessarily mean abandoning a deal.

One insight that was shared during the panel discussion was that CIA management in M&A cannot be handled through document review alone, Fethke noted.

As the acquirer, “You can never do this analysis just looking at the language of the CIA. You need to have a conversation with OIG about what their expectations are,” she emphasized.

While some companies have successfully “cabined off” the CIA, most situations require some level of integration. Early discussions with OIG are strongly suggested by Fethke, who stated “the earlier you can do that, I would recommend it.”

The silver lining perspective

Mark Casey, chief legal officer and corporate secretary at Novavax, offered an alternative perspective to CIAs, suggesting that a target company with a CIA might actually present advantages. “It could be a bit of a silver lining from a diligence perspective under the theory that you know, put your hand on the hot stove twice, probably means the company’s got itself in order, maybe not voluntarily, but it’s got itself in order,” he said.

Casey’s insight indicates that targets operating under CIAs may present less compliance risk in some ways, as they’ve been forced to implement robust compliance programs and generate extensive documentation under regulatory supervision.

Mark Casey, chief legal officer and corporate secretary, Novavax

“You do know that a company under a CIA is generating a lot of documentation under the terms of that CIA,” Fethke said. “Whether or not you might be able to get access to things like annual reports, implementation reports, reportable events, it’s all things that have to exist based on the terms of that agreement.”

When acquiring companies under investigation, the panelists recommend:

• Engaging in conversations with the target’s outside litigation counsel
• Executing common interest agreements between law firms to facilitate information sharing
• Considering how the transaction might impact potential CIA negotiations

Negotiating CIA exemptions

The panel revealed that in certain circumstances acquirers have successfully negotiated with OIG to prevent CIA obligations from transferring to the combined entity. Fethke shared, “I’ve had a number of transactions where we have had a target with a potential CIA, and we have successfully negotiated with OIG to not have the CIA be implemented based on the successor owner provisions.”

Fethke referenced the OIG’s 2016 exclusion guidance, which provides a framework for determining whether a CIA should extend to an acquiring company.

According to Fethke, OIG evaluates these factors when making this determination:

• Whether the new owner purchased after the fraudulent conduct occurred

• The robustness of the acquirer’s existing compliance program
• The acquirer's history regarding compliance issues
• Steps taken to address misconduct and reduce future risk

“This has been successful, at least from my perspective, in this scenario where you are, if you can come in with the white hat company, bigger company, typically robust compliance program infrastructure, and talk about how the smaller company with the history of potentially problematic conduct is going to be absorbed into that program. We’ve had some success with that,” she said.

Learn more about the role of compliance in M&A and licensing agreements at our upcoming conference.

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