DOJ Reaches Acquisition Settlement with Geisinger, Evangelical; Demonstrates Department’s Willingness to Challenge a Minority Investment
Last week, Geisinger Health (“Geisinger”) and Evangelical Community Hospital (“Evangelical”) reached a settlement agreement with the Department of Justice (“DOJ”), resolving the DOJ’s ongoing litigation challenging Geisinger’s partial acquisition of Evangelical. Notably, the settlement agreement, among other terms, limits Geisinger’s ownership interest in Evangelical to a 7.5% passive investment and prevents Geisinger from exercising any control or influence over Evangelical. When the DOJ’s suit was first announced, we discussed it in depth here.
The settlement agreement is a significant downsize from the partial-acquisition agreement: Geisinger was to acquire a 30% interest in Evangelical in exchange for a $100 million pledge for Evangelical’s investment projects and IP licensing. Additionally, Geisinger was to receive rights of first offer and first refusal with respect to any future joint venture, competitively significant asset sale, or change-of-control transaction. The DOJ indicated in its court filing that Geisinger originally thought of acquiring all of Evangelical, but fearing antitrust head-winds opted for a partial acquisitions with provocative control elements in the agreement.
To DOJ, these original terms were all anticompetitive and provided Geisinger with too much influence over Evangelical. Ultimately, this litigation and settlement signals DOJ’s willingness to challenge partial acquisitions that provide too much involvement and control by a close competitor.
Background and the Challenged Agreement
Geisinger is the largest health system in a six-county region in central Pennsylvania, while Evangelical is the largest independent community hospital in the same region. According to the DOJ’s complaint, Geisinger and Evangelical operate five of the eight hospitals in the six-county region and account for approximately 70% of the general acute care market in the area. This fact is highlighted throughout the complaint, which describes the parties as “each other’s closest competitor.”
In 2017, Evangelical announced a bidding process for its sale, and, initially, Geisinger wanted to acquire the entirety of Evangelical. DOJ alleges in its complaint that Geisinger wanted complete acquisition to prevent Evangelical from becoming a stronger competitor. However, according to the complaint, the parties quickly recognized that such a deal would pose significant antitrust risks, and ultimately decided to sign a “Collaboration Agreement” under which Geisinger would obtain a 30% ownership interest in Evangelical in exchange for $100 million. The agreement “created other additional entanglements” between the parties, which, according to DOJ, provided Geisinger with significant influence over Evangelical.
For example, as noted above, Geisinger was to receive rights of first offer and first refusal with respect to any future joint venture, competitively significant asset sale, or change-of-control transaction. Additionally, the partial-acquisition agreement provided mechanisms for the parties to share competitively sensitive information, such as requiring Evangelical to inform Geisinger about planned transactions with other hospital systems before the transactions were executed.
Though these provisions were eliminated through amendments throughout the DOJ’s investigation, the original agreement also gave a number of rights to Geisinger which would allow it to exercise additional influence over Evangelical. These rights included the right to appoint six individuals to Evangelical’s board of directors, certain consultation rights on the appointment of Evangelical’s chief executive officer, and required Evangelical and Geisinger to work toward joint ventures in service lines where the parties have historically competed.
In August 2020, DOJ sued to block the partial acquisition, alleging that it created significant entanglements between the parties that would lead to “increased coordination between them, high prices, lower quality, and reduced access to inpatient general acute-care services in central Pennsylvania.” Specifically, the complaint asserts that “[a] partial acquisition that creates the incentive and ability for two close competitors to coordinate in such a highly concentrated market poses a similar danger to consumers” as that of a full acquisition.
DOJ notes in its Competitive Impact Statement that together, the two hospitals account for approximately 71% of this six-county market and are each other’s closest competitors for many services. Geisinger and Evangelical compete head-to-head for patients—including through investment in high-quality facilities and services, in negotiations with insurers, and through discounts to uninsured patients—and consumers have benefited from this competition through increased quality of care, broader availability, and lower costs. To DOJ, the agreement “would also reduce Geisinger’s incentives to compete by investing in improvements that would attract patients from Evangelical. . . . [I]f Geisinger were to expand its offerings or improve the quality of its services in areas in which it competes with Evangelical, it would attract patients at Evangelical’s expense, reducing the value of Geisinger’s 30% interest in Evangelical.”
The Competitive Impact Statement also asserts that the arrangement gave Geisinger undue influence over Evangelical and its strategic decision making and would also involve improperly the exchange of competitive sensitive information.
As noted, the settlement agreement caps Geisinger’s ownership interest at a 7.5% passive investment in exchange for $20.3 million paid to Evangelical. It also prohibits Geisinger from, among other things, exercising influence over Evangelical in the following ways:
Appointing directors to Evangelicals’ board of directors;
Acquiring any management or leadership position with Evangelical that would provide Geisinger with the ability to influence competitive decision-making at Evangelical;
Making loans or providing any line of credit to Evangelical;
Maintaining or obtaining any right of first offer or first refusal regarding any proposal or offer to Evangelical;
Controlling Evangelical’s expenditure funds, including Evangelical’s choice of strategic project investments;
Licensing certain information technology systems to Evangelical without the consent of the DOJ; and
Entering into any joint ventures with each other, including those contemplated in the Collaboration Agreement.
The parties also must implement a firewall to prevent the sharing of competitively sensitive information. Specifically, the parties cannot provide each other with information about strategic projects or access each other’s financial records. Moreover, the parties must appoint an antitrust compliance officer and institute an antitrust compliance program.
The settlement agreement does allow for a very limited number of procompetitive aspects of the partial-acquisition agreement to move forward:
Evangelical may retain the $20 million payment from Geisinger, so long as the funds are used to benefit patients, i.e., assisting Evangelical’s patient room improvement project and sponsoring a recreation and wellness center.
Evangelical may obtain new electronic health care IT systems and related support from Geisinger.
The DOJ’s challenge is notable for a couple of reasons. First, it demonstrates the DOJ’s willingness to challenge a partial acquisition. Historically, the antitrust agencies have seldom challenged mergers involving a minority-interest. However, this suit, in addition to the FTC’s recent challenge of a partial acquisition, make it clear that the agencies are willing to challenge a partial acquisition if they believe the acquisition provides too much involvement and influence to a close competitor.
Second, the parties sought to remedy the DOJ’s concerns throughout the investigation with amendments to the original agreement, but ultimately the DOJ determined that these amendments did not eliminate the competitive harm and filed a complaint. While it would be probably over reading the matter to conclude that each of the “entanglements” standing alone were illegal and a sufficient ground upon which the government would base a case, it does appear that partial acquisitions of competitors that contain provisions arguably designed to protect the investment committed will be subject to significant scrutiny.