Practice mergers – why have warranties?
When two GP practices merge it will, in most cases, be the two partnerships coming together as one. At the simplest level the new partners start running and owning one business, and this should be evidenced by a new partnership deed being signed by all the partners of the merged practice.
Every business has a history and will have entered into many and varied arrangements. It is vital that when you merge with another practice, you find out as much about its history as you can, so you know what you are inheriting and what you will be liable for.
This is one of the reasons for having a clear merger agreement and for that agreement to have warranties which each of the original partners gives to the other. Warranties are statements of information which you warrant are true. If they prove not to be true, the other partners can claim against you for any losses which result.
An example of a warranty might be: “There are no circumstances which would result in the patient list being reduced by more than 1,000 patients.”
In this example, what if Practice A knew there was a plan by a neighbouring practice to build a new health centre which would also be a hub providing other services? If that went ahead it could result in many patients transferring, having a severe impact on the patient list size and the income of Practice A.
If the Partners of Practice B were not informed, they would have grounds for making a claim for the losses resulting as the warranty was made by Practice A when they knew there was a risk that it might not be true.
Therefore an important second part of warranties is disclosure. This is the procedure by which each practice informs the other practice that there are issues which mean that the warranty is not totally true, and so it is qualified.
In the example above, provided Practice A disclosed against the warranty by giving the information they had to Practice B, and Practice B agreed to go ahead with the merger in full knowledge of the risk, then no claim could be made.
As a successor partner it is essential that you require warranties to be given and that you have a very clear procedure for disclosing against warranties, with all the information put in a disclosure bundle.
Then if a claim is made in the future for a breach of a warranty, you are able to refer back to it, demonstrate you have made a proper disclosure, and show that you are not liable under the warranty.
In any merger, asking the right questions and answering them well at the outset, including in your merger agreement comprehensive warranties, and disclosing against them in a clear and methodical way are essential to build a stable new partnership together and to avoid claims in the future.
This article first appeared in Practice Management in September 2018.