Conducted due diligence before purchase of medical company in Ukraine
In December 2016, we were contacted by a Client who intended to purchase a company, a privately-owned enterprise, specializing in laboratory diagnostics, with a Medical License.
The Client was mainly interested in that firm, because according to the information he had, it had been operating at the same location for a long time, had a pool of clients and was a well-established business. So, the Client contacted our company for legal assistance in preparing documents for the re-registration of the company.
However, our specialists immediately offered the Client a number of additional services, which in our opinion shall use any Client prior to making the down payment. We offered him to check the validity of the Medical License, the history of a medical institution accreditation, court decisions on the recovery of company’s funds. One of the important tasks is to thoroughly analyze the current Charter of the enterprise for the established procedure of transfer of corporate rights. This paragraph is especially relevant for privately-owned enterprises, as this type of companies is not regulated by law, and many regulatory requirements are applied to them in a similar manner as to the limited liability company.
Analysis of the charter showed that according to its current provisions that hadn’t been amended since 2000, the alienation of corporate rights in the company by the former owner was legally impossible. Firstly, this procedure was not envisaged in the charter. Secondly, the company had no authorized capital, and accordingly, there was nothing to alienate. As a result, it was decided to adopt interim amendments to the company’s charter, correcting the provisions of the outdated charter adopted in 2000.
The license validity check revealed that the license was issued indefinitely in 2014 and was not revoked, but the health care facility didn’t have the valid accreditation. The lack of accreditation is not a critical moment for the activity of a health care facility: the accreditation is required by the regulatory documents, but in case of failure to comply with these requirements, one can receive only a prescription to undergo the accreditation procedure. And failure to comply with the prescription may lead to the revocation of the license. In our case, there was no such a prescription. However, the Client realized that after the purchase of the company, he would have to bear additional costs for the accreditation of the health care facility in the nearest time.
One of the mandatory stages of the pre-sale inspection of the company is the review of the lease agreement for possible loss of its effect in the event of a change in ownership or management of a party to the agreement. Fortunately, the lease agreement didn’t contain any such clauses.
We also reviewed other aspects of the company’s activities, the most notable of which was the actual structure of the company’s income and expenses. The findings did not confirm the confidence of the owners of the company that the level of the company’s profits justified their proposed price. Therefore, as a result, the Client abandon the idea to buy this company.
Complex pre-sale legal due diligence is an essential stage in buying a business. It allows to obtain reliable information about the company activities and to protect the buyer’s investment funds.