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Over the past few years, numerous M&A transactions have involved medical products law. Various small and medium-sized companies active in the sector have merged to take advantage of economies of scale and synergy effects. Digitalisation has also seen the establishment of many start-ups on the market, hailing new technologies in the medical sector. German companies especially are among the absolute world leaders and are desired by many foreign investors.
Where the target is involved in the manufacture or distribution of medical products, transaction structure will be key. As the existence and issue of product certifications directly affect the value of a company, all certifications must be properly transferred to the acquirer. This raises the question of whether a share or asset deal would better capture these characteristics. The answer to this question is not straightforward and will depend on the case.
Generally, a share deal will be less complicated than an asset deal for transactions involving medical products. The inherent rights and obligations will transfer with the shares in the target company. This can be a significant advantage considering regulatory requirements. As the value of a medical product primarily depends on whether it has the relevant legal authorisations – such as a CE label – it is particularly important for acquirers that these authorisations transfer to the new owner. In contrast to an asset deal, the target retains its legal identity in a share deal. The manufacturer does not change, so the CE label and any other approvals and licenses remain unchanged.
The transfer is not without conditions but requires both the company and its internal organisational structure, e.g. the existing quality management system and the distribution of responsibilities with respect to product monitoring within the target company, to remain unchanged after the transfer. If processes or the organisational structure change, recertification will often be required. If the acquirer renames the company, it will necessitate recertification and an amendment to the label as it will change the name of the manufacturer.
Another advantage of a share deal is that all relationships, internal and external, remain unaffected. However, contacts can contain a change of control clause which gives a third party the right to unilaterally terminate the contract in the case of changes to the ownership structure. You should therefore examine contracts with third parties more closely, particularly where subsidies have been granted.
An asset deal will be more complicated than a share deal in many cases involving medical products. It requires individual assets to be carved out of the company and transferred to the acquirer.
As authorisations are tied to the manufacturer as a company, any changes to the organisational structure will make renaming necessary. Only Class I medical products are excluded from this rule; a company can certify such products itself. A time-consuming certification process can only be avoided by transferring individual sites without any changes. As such a transfer will not trigger a need to reassess the existing documents, it will be sufficient to inform the relevant authority. However, the acquirer will also be required to relabel the product accordingly. In exceptional cases, tax aspects will justify the additional costs and effort of an asset deal.
In the preliminary stages of a transaction, the potential acquirer should carefully examine and analyse the target for its economic, legal, tax and financial standing (so-called due diligence). Due diligence is particularly important in highly regulated markets such as medical products.
Due diligence should show the extent to which the target complies with the strict requirements of the medical device regulation and reveal any potential liability risks for the acquirer. This must identify which regulatory provisions apply to the product manufactured or distributed. Marginal differences between medical devices law and similar areas such as pharmaceutical law can make the classification difficult.
If the MDR applies, the classification of the target will play a decisive role. Depending on whether the company is active as a manufacturer, importer, or in some other role, particular legal obligations may be triggered, such as documentation requirements, or monitoring or inspection obligations. For this reason, acquirers must carefully examine whether the regulatory requirements for the certification have been fulfilled and whether they will continue to be fulfilled in the future. The sale and purchase agreement should adequately represent any risks identified during due diligence, such as with guarantees or warranties, waivers, or a reduction in the purchase price. Given the strict requirements of the MDR, it can also be advisable to make certain requirements a condition precedent.
Updates to medical devices law have exacerbated the existing difficulties of corporate acquisitions in this field. Manufacturers must consistently ensure that their products fulfil the regulatory requirements. Outside of the EU, it can be even more complicated, costly and time-consuming to transfer authorisations and licences.
If you are considering selling or acquiring a target active in this sector, you should involve specialists in the early stages to advise on the tax aspects of the transaction structure, keep an eye on the regulatory provisions, and reduce the risks of liability.
