Introduction

California Assembly Bill 3129 (“AB 3129”) would have targeted private equity and hedge fund investment in health care entities specifically. It would have required private equity and hedge fund groups to provide 90 days pre-closing notice and obtain consent from the California Attorney General (“AG”) prior to a change of control or acquisition of a health care facility or provider group. It also provided for pre-closing notice to the AG of any change of control or an acquisition of either a non-physician provider with a gross annual revenue of more than $4 million or a provider with gross annual revenue between $4 million and $25 million.

AB 3129 Analyzed

AB 3129 took aim at private equity and hedge fund investment in health care entities utilizing the “friendly PC” model in which the private equity or hedge fund acquires ownership in a non-clinical management services company (“MSO”) having a contractual arrangement for administrative services with a health care professional entity owned only by licensed professionals. In addition to the baseline of at least 90 days pre-closing notice for approval, the AG had the option to extend the 90 day period to one additional 45 day period, and could enforce a stay on this additional period in the event of there being need for any additional information or if the AG decided there would be a need for a public meeting. A “transaction” was defined as direct or indirect acquisition in any manner, including, lease, transfer, exchange, option, receipt of conveyance, creation of a joint venture, or any other manner of purchase, by a private equity group or hedge fund of a material amount of assets or operation, or a change of control, of a health care facility, provider group, or provider doing business in California. The materiality threshold applied if the transaction affected more than 15% of the market value or ownership shares of the relevant health care entity. Given such broad definitions and discretion of the AG, AB 3129 posed a threat of prohibiting a broad swath of health care transactions, or at least resulting in significant additional delays to the closing of transactions.

Veto

Governor Gavin Newsom vetoed AB 3129 September 28, 2024. In his veto letter Governor Newsom highlighted the creation of the Office of Health Care Affordability (“OHCA”) in 2022 and its task to review health care transactions through cost and market impact reviews (“CMIR”). While OHCA cannot block transactions, it evaluates impacts the transaction may have on market competition, state spending targets, and the overall affordability of health care for consumers. As part of the review, OHCA can refer transactions to the AG for further review. Governor Newsom expressed concern that AB 3129 would remove private equity and hedge fund health care transactions from CMIR and potential further review by the AG in the existing market review regulatory environment.

Nationwide Trend

To date, several other states have tried and either succeeded or failed in enacting legislation similar to AB 3129. By way of example, Indiana passed legislation requiring that as of July 1, 2024 health care entities and private equity groups entering into transactions with health care entities, must provide notice to the Indiana Attorney General 90 days before undergoing the transaction, if the value of the transaction is at least $10 million. Pre-approval is not explicitly required, however, the Indiana Attorney General has discretion to document in writing any antitrust concerns with the transaction or issue a civil investigative demand for additional information to evaluate the market effects of the transaction. Minnesota also enacted legislation that requires health care entities formed or licensed in Minnesota with an annual revenue of $80 million or more as of May 27, 2023 to provide 60 day pre-closing notice to the Minnesota Attorney General and Commissioner of Health for transactions including mergers and acquisitions, transfers of ownership, and creation of new health care entities. The law provides authority for the Minnesota Attorney General to block or unwind transactions if determined necessary to public interests.

Conclusion

In addition to AB 3129, another failed piece of legislation, Assembly Bill 1091, would have required certain health care entities to submit pre-closing notice and obtain approval from the California Attorney General prior to entering into transactions with a value of at least $15 million. This recent legislative activity generally shows that at least California is reticent to require regulatory pre-approval for health care transactions. Nonetheless, prior notice is still in place for many health care transactions in California, which may also trigger an analysis through CMIR. The proliferation of similar legislation providing either pre-closing notice or approval for a broad array of health care transactions in other states highlights the need to monitor ongoing legislation and carefully evaluate necessary regulatory notices and approvals at the outset of transactions to determine the time needed to prepare notices and filings and ensure an appropriate time period between signing and closing to avoid missing expectations and creating unforeseen delays.

To learn more about this topic, please contact the author at dmason@foxrothschild.com or 704-384-2611. Dylan Mason is an Associate and member of the Health Care Transactions Practice Group at Fox Rothschild LLP. Dylan is based in Charlotte, North Carolina and specializes in assisting clients with corporate, health law, M&A, and data privacy matters.