PE Corporations Face Legal responsibility for the Conduct of their Portfolio Corporations: Are you Paying Consideration?


Whereas authorities enforcement has historically been an oblique concern for personal fairness (“PE”) traders, akin to taking a look at whether or not a goal entity has been sanctioned or could possibly be sanctioned sooner or later, the present development in authorities enforcement has been to focus on PE companies immediately.

A number of questions that PE companies ought to take into consideration with respect to healthcare and life science investments:

  • Does the agency distinguish itself from acquired corporations, or does it use communal language like “we” when discussing the exercise of the acquired firm (together with in inner communications)?
  • Is there overlap in personnel between the PE agency and the acquired firm, akin to officers and board members?
  • Is the PE agency utilizing the identical methods to show round healthcare corporations that it makes use of to show round different sorts of corporations?
  • Has the PE agency evaluated the operational and monetary practices of its portfolio corporations to make sure compliance with distinctive healthcare necessities?

These questions are primarily based on current enforcement situations that PE companies have grappled with regarding their healthcare and life science investments. These considerations come about as a part of an evolving emphasis by the federal government on stopping fraud and abuse in well being care.

On March 25, 2021, the U.S. Home of Representatives’ Methods and Means Oversight Subcommittee held a listening to on “Analyzing Non-public Fairness’s Expanded Position within the U.S. Well being Care System.” Throughout this listening to a number of audio system prompt that various reforms had been wanted with respect to PE involvement in well being care, together with better transparency by way of traders. Individuals additionally mentioned using the False Claims Act (“FCA”) as a instrument for healthcare fraud enforcement. Underneath the FCA, a non-public celebration, often known as a relator or whistleblower, is ready to convey claims towards an individual or entity for allegedly defrauding the federal government. Profitable whistleblowers are in a position to share in any financial restoration.

In a current enforcement motion the DOJ pursued costs towards, inter alia, a former PE proprietor of an entity accused of partaking in improper off-label advertising of its medication. Whereas DOJ enforcement of improper off-label advertising is widespread, it was noteworthy that the DOJ settlement announcement didn’t comprise any particular allegations of misconduct by the PE agency, however fairly oblique accountability for permitting the alleged improper gross sales and promotion practices to proceed after the PE agency acquired the entity. In different phrases, the conduct started previous to the PE agency’s funding within the firm, however the PE agency did not put a cease to it. The case finally settled, with the PE agency paying $1.5 million to the U.S. authorities and the opposite main defendant paying out $10 million.

Non-public fairness traders ought to take observe to not solely fastidiously evaluation any firm acquisitions throughout their due diligence course of previous to taking possession, however to additionally delineate the PE agency’s actions as an investor from the portfolio firm’s actions as a separate operational entity. Blurring the traces between the PE agency and portfolio firm can lead to heightened enforcement threat.

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