Filing a Change of Ownership (CHOW) for your pharmacy or drug supply chain business can be extremely daunting. Between managing a systematic change in your business, adhering to each state's requirements, tracking down historical data, following deadlines, and more, - it's no wonder there is so much confusion surrounding this topic.
Our team of experts specialize in the many nuances of CHOWs to help clients navigate the process. Join REAL Solutions Group CEO, Marty Allain, while he breaks down common mistakes, questions, and his expert advice for completing the process.
What Level of Ownership Change Requires Notice to the Board of Pharmacy?
If you are looking for a general rule of thumb, any change of 5% or more at the operating entity or parent level should trigger an analysis. That's an incredibly simple statement for a complicated change notice analysis, but it's a good way to jump start your review of requirements. Additionally, it's important to note that grandparent level changes can also trigger notice or filings in some circumstances.
We are Beginning Negotiations that May Lead to an Ownership Change, When Do I Need to Start Thinking About Licenses?
If any change to ownership is happening at any level, your team should immediately pause and ask is this a change requiring notice to, or a formal filing with, the regulatory entity that issued the license? It's never too early to start your work plan, but we highly recommend giving yourself at least 90 days before the close date of the sale to begin the execution of a CHOW work plan, considering best practice in some states is to file 60 days before close and in many states the mandatory deadline is 30 days before close.
A common mistake we see clients make is waiting too long to engage with RSG, sometimes waiting until after the close date, which results in fines, discipline, and gaps in licensure for your business.
How Should I Prepare for a CHOW?
The first thing you should do is prepare documentation needed for verification and filing. This includes: past license applications, license lists, personnel and corporate documentation, and other materials needed when filing CHOW application. In addition to this, you will need to provide the pre-close and post-close organization chart of the company.
Another important step is to prepare the new owners for their role in CHOW filings. They may have to disclose personal information, and should prepare to be responsive in the process. We have found private equity firms are surprised by the amount of personal information required for owners.
All parties should also be alerted to the fact that they may have to disclose an unredacted purchase agreement in certain states.
California will require the most preparation of any state due to the size and complexity of its applications. Within the application, there is a unique temporary permit process where the state will "approve" the temporary permit application upon the close of the transaction; however, the permanent license is not issued until the California BOP conducts additional due diligence, which can take up to six months after the close date. This leads to confusion and angst on the days leading up to closing for the buyer and seller.
What are Common Errors in the CHOW Process?
The quickest way to set up for failure is to delay preparation for the CHOW. To complete a successful change of ownership, we highly recommend starting the work plan a minimum of 90 days before the close date.
Additional issues consist of poor record keeping and unresolved compliance issues prior to engaging with RSG. This includes failing to file changes of ownerships, officers, relocations, or PICs in the past. Building a culture of compliance is crucial to preventing these systemic errors.
How Do I Know Which Filings are Required for my CHOW?
The number and type of filing requirements vary significantly by state. Factors include the percentage of change of ownership, and where within the corporate structure the change is taking place (e.g. operating entity, parent, grandparent, or above).
Operating entity (asset deal). An application is required in all circumstances.
Operating entity (equity deal). Expect an application to be filed with majority changes at the operating entity level; however, an application is not always required if a certain threshold is not reached (e.g. >5%, >20%, or >50%), or if the FEIN number does not change.
Parent level. If there is a majority change at the parent level, quite a few states require a new application. States are notoriously inconsistent and have challenges interpreting corporate structure changes, meaning that letter notice may be sufficient in one transaction while a full application is required in another–even though the structure of the deals are identical.
Grandparent or higher. A majority change of ownership at the grandparent level or above would typically be limited to a small number of applications/change forms, with letter notice to the remaining states.
What Does the CHOW Process Look Like?
A 50 state + DC CHOW requiring applications and notice in all states will be split into two (2) categories: pre- and post-close. The required applications are, in most cases, a 1:1 with initial license acquisition applications, which require Board staff review and deficiency responses, when needed. As with initial license applications, full Board approval is required in some states.
Pre-close. The filing must take place prior to close, meaning that an application has been filed in the state before the deal is complete. Pre-close deadlines range from pre-60 to pre-7. Approximately half of all states require a pre-close filing.
Pre-close action required. In some states, the regulatory body must approve the application pre-close; without the approval, the buyer may not operate on the seller license upon close. These states are typically “closing condition” states, meaning that the deal is structured so that it cannot close without state approval of the new permit. In these states, upon closing, the Board is notified and a permanent or temporary license is issued the same day or day after close.
Pre-close without Board action. In these matters, the filing is sufficient to continue to operate on the seller license.
Power of Attorney. A power of attorney is required in some states to operate on the seller license during application review.
Post-close. These applications are filed upon change, or range from post-5 to post-30. The timely filing of these applications/notices is sufficient to continue to operate under the seller license in most cases, with a few states also requiring a power of attorney.
Leave it to the Experts
Managing state dependent requirements and following rigid deadlines is a tall order - leave it to the experts at RSG. Our team has supported licensing changes of ownership for $10.75 billion in mergers and acquisitions. Whether you are considering a change in ownership in the next year, or are preparing to close the deal, we have seen it all and are here to help.