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Nonprofit divestiture: Preparing for the sale

March 26, 2012
by Mike Ashley and Daria Niewenhous, JD
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Editor’s note: The following story is a continuation of last week’s “7 steps to divestiture every nonprofit should follow”.

A seller’s legal and financial consultants should assist the seller in preparing for the upcoming transaction. Such preparation may include: ensuring that corporate documents, including meeting minutes, articles of organization and bylaws and appointments of trustees and officers, are current and correct; ensuring all filings necessary for obtaining corporate and tax good-standing certificates are in place; reviewing and organizing resident and vendor agreements to assure they are current, complete and orderly; and ensuring all licenses, permits and approvals are up to date.

In many ways, the sale of a nonprofit’s assets to a for-profit buyer progresses in much the same way as the sale of a nonprofit’s assets to a nonprofit. However, the sale may be subject to approval by the state. This could be a formal process that is limited to the attorney general’s office or may result in the attorney general’s recommendation to a state court for approval of the sale.

A public notice and comment period, which may include public hearings, is often a feature of such proceedings. These activities also could be coordinated with the review process undertaken by the state agency that may regulate the facility.

Generally, such a review is based on common law principles applicable to the trustees of nonprofit organizations, who are required to exercise their fiduciary duty, specifically the duties of loyalty and due care to the entity. In some states, statutes have formalized these common law requirements. This review process may present the opportunity for negotiated conditions to the transaction as part of the attorney general’s or court’s approval of the transaction. In such cases, the buyer may agree to certain conditions, such as the commitment to maintain the facility or certain services for a period of time. The attorney general may be in a position to enforce such conditions long after the seller has left the scene.

Sellers must realize, however, that any buyer’s tolerance for post-closing conditions will be limited and certainly will chill the transaction if the buyer views them as unreasonable or likely to adversely affect financial viability of the facility going forward. For this reason, the seller’s request for proposal (RFP) should include any post-closing conditions that the seller considers an essential part of the transaction.

Divestitures and acquisitions may evoke an image of Wall Street and seem like a far cry from the world of senior living. In reality, such transactions are part of today’s senior living landscape. When faced with a decision to sell a senior living facility, nonprofits can be prepared by knowing what to expect and where to seek advice during the divestiture process.

Mike Ashley is a vice president with the Kansas City, Kan., office of Lancaster Pollard, a financial services that specializes in providing capital funding to senior living providers nationwide. He can be reached at (785) 841-3700 or mashley@lancasterpollard.com.

Daria Niewenhous, JD, is a member of Mintz Levin's Health Law Practice in Boston. Niewenhous has extensive experience with the merger and acquisition of hospitals, skilled nursing facilities and assisted living facilities. She can be reached at (617) 348-4865 or dniewenhous@mintz.com.

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