CALDERWOOD & HARKNESS LLP
1900 K Street, N.W., Suite 1200 Washington, D.C. 20006 Telephone: (202) 555-4800
Comprehensive Legal Due Diligence Report
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGED / ATTORNEY WORK PRODUCT
MEMORANDUM
TO:
Graham Whitfield, Managing Partner & Co-Founder, Ardent Capital Management III LLC, on behalf of Ardent Capital Partners III LP
Priya Ranganathan, Partner, Healthcare Investing, Ardent Capital Management III LLC
Thomas Kearney, Vice President, Healthcare Investing, Ardent Capital Management III LLC
FROM:
Beatrice Holloway, Responsible Partner, M&A, Calderwood & Harkness LLP
James Prentice, Billing Partner, M&A, Calderwood & Harkness LLP
Megan Chu, Lead Associate, M&A, Calderwood & Harkness LLP
Derek Okonkwo, Working Associate, M&A, Calderwood & Harkness LLP
DATE: January 15, 2025
RE: Comprehensive Legal Due Diligence Report — Proposed Acquisition of MedVance Health Systems, Inc. (C&H Matter No. 0478231.0001)
This memorandum and the accompanying exhibits are protected by the attorney-client privilege and constitute attorney work product prepared in anticipation of litigation and in connection with the provision of legal advice. This document is intended solely for the use of the addressees and their authorized representatives. Any dissemination, distribution, copying, or use of this document or the information contained herein by any person other than the addressees and their authorized representatives is strictly prohibited. Receipt of this document by any unintended recipient does not constitute a waiver of the attorney-client privilege or work product protection.
I. EXECUTIVE SUMMARY AND TRANSACTION OVERVIEW
A. Purpose and Scope
Calderwood & Harkness LLP ("C&H" or the "Firm") was engaged by Ardent Capital Partners III LP ("Ardent Capital" or the "Buyer Fund") and Ardent Capital Management III LLC ("Ardent GP" and, together with Ardent Capital, the "Client") to conduct comprehensive legal due diligence in connection with the proposed acquisition (the "Transaction" or the "Proposed Acquisition") of 100% of the outstanding equity interests of MedVance Health Systems, Inc. ("MedVance," the "Company," or the "Target") by Ardent Healthcare Holdings Inc. ("AHH" or the "Purchaser"), a newly formed Delaware acquisition vehicle established for purposes of consummating the Transaction.
This matter was opened on September 15, 2024, concurrent with the execution by Ardent Capital and MedVance of a non-binding letter of intent (the "LOI") and an exclusivity agreement granting Ardent Capital a sixty (60) day exclusivity period in which to negotiate and execute a definitive stock purchase agreement (the "SPA"). The initial exclusivity period expired on November 15, 2024, and was thereafter extended on an informal basis pursuant to mutual understanding of the parties; the parties are currently operating under this informal extension without a binding written exclusivity amendment. We note that the absence of a formal written extension of exclusivity carries the risk that the Target's sellers could engage in parallel negotiations with third parties, and we recommend that the parties formalize the exclusivity arrangement in connection with the anticipated execution of the SPA, currently targeted for February 10, 2025.
The Purchaser, Ardent Healthcare Holdings Inc., was incorporated in the State of Delaware on January 8, 2025, under Delaware Secretary of State File Number 7201548, with Employer Identification Number 93-2047861. AHH was formed as a wholly owned subsidiary of the Buyer Fund specifically for the purpose of acquiring and holding the equity of MedVance following the closing of the Transaction. As of the date of this Report, AHH has no operations, assets, or liabilities other than those incidental to its formation and the contemplated Transaction.
The aggregate purchase price for the Transaction is $620,000,000 (the "Purchase Price"), payable in cash at closing, subject to customary adjustments for working capital, indebtedness, transaction expenses, and cash on the balance sheet of MedVance as of the closing date. The Purchase Price represents an enterprise value to adjusted EBITDA multiple of approximately 7.91x, based on the Company's 2024 Adjusted EBITDA of $78,400,000 (unaudited), as determined by the quality-of-earnings analysis prepared by Blackwell Thornton LLP (the "QoE Report"). MedVance reported unaudited revenue for fiscal year 2024 of approximately $387,000,000. While the QoE Report is not within the scope of this legal due diligence memorandum, we note that C&H has coordinated with Blackwell Thornton to ensure that legal due diligence findings are consistent with and appropriately reflected in the financial analysis.
The selling parties in the Transaction (collectively, the "Sellers") consist of: (i) Crestline Growth Equity Fund II LP ("Crestline"), a Delaware limited partnership, which holds approximately 68.2% of the outstanding equity of MedVance; (ii) Ryland Family Holdings LLC ("Ryland Holdings"), a Tennessee limited liability company, which holds approximately 19.5% of the outstanding equity of MedVance; and (iii) certain members of the Company's management team who hold, in the aggregate, approximately 12.3% of the outstanding equity of MedVance. A portion of the management equity will be subject to rollover arrangements at an estimated rollover rate of approximately 24.4%, representing an estimated rollover value of approximately $18,600,000 to be invested in AHH or the Buyer Fund (or a related vehicle) at closing.
Financing Structure. The Transaction is expected to be financed through the following sources:
• Ardent Equity Contribution: $290,000,000 equity contribution from Ardent Capital Partners III LP to AHH;
• Term Loan B Facility: $340,000,000 first-lien term loan facility, with Ridgeline National Bank, N.A. ("Ridgeline") serving as Administrative Agent and lead arranger, and Pinnacle Commercial Credit Corp. ("Pinnacle") serving as co-lender. The Term Loan B bears interest at SOFR plus 425 basis points, with a SOFR floor of 75 basis points, and matures seven years from the closing date. Commitment letters have been issued by Ridgeline and Pinnacle (Reference No. RNB-HC-2025-0418), subject to customary conditions precedent to funding;
• Revolving Credit Facility: $50,000,000 revolving credit facility, to remain undrawn at closing, bearing interest at SOFR plus 375 basis points, with a five-year maturity. The revolving facility is provided by Ridgeline as Administrative Agent under the same credit agreement governing the Term Loan B; and
• Target Cash: Approximately $10,000,000 in excess cash on the balance sheet of MedVance is expected to remain with the Company at closing and be available for general corporate purposes.
Existing Indebtedness. MedVance's existing indebtedness consists of a term loan from Granton Savings Bank, N.A. ("Granton") with an outstanding principal balance of approximately $41,300,000 as of the date hereof. This indebtedness, together with all accrued and unpaid interest thereon and any applicable prepayment premiums, is to be retired in full at closing from the Sellers' proceeds. All related liens, security interests, and guarantees are to be released at or prior to closing, and C&H will prepare or review appropriate payoff letters, UCC-3 termination statements, and lien release documentation.
Escrow. A portion of the Purchase Price in the amount of $49,600,000 (representing 8% of the Purchase Price) will be deposited into an escrow account to be held by Continental Fiduciary Trust Company ("Continental Fiduciary") under Account Number CFT-ESC-2025-00327 (the "Escrow"). The Escrow will secure the Sellers' indemnification obligations under the SPA for a period of eighteen (18) months following the closing date (the "Escrow Release Date"). The terms of the Escrow will be governed by a separate escrow agreement to be entered into among the Purchaser, the Sellers' Representative, and Continental Fiduciary at or prior to closing.
Representations & Warranties Insurance. The Purchaser has procured a representations and warranties insurance policy (the "R&W Policy") from Northbridge Specialty Insurance Company ("Northbridge"), Policy Number NSI-POLI-2025-04418, with a policy limit of $62,000,000 (representing 10% of the Purchase Price). The R&W Policy has a retention amount (effective deductible) of $6,200,000 (representing 1% of the Purchase Price), which is to be split equally between the Buyer ($3,100,000) and the Sellers ($3,100,000), such that the Sellers bear the first $3,100,000 of losses subject to indemnification, the Buyer bears the next $3,100,000, and thereafter the R&W Policy responds up to its $62,000,000 limit. The R&W Policy was brokered by Velthorn Risk Advisors LLC ("Velthorn"). We address the terms, conditions, exclusions, and coordination of the R&W Policy with the SPA indemnification provisions in greater detail in Part IX, Section D of this Report.
Indemnification Cap. The overall cap on the Sellers' indemnification obligations under the SPA (exclusive of any specific indemnities carved out below the cap, such as those for tax, fraud, and fundamental representations) is expected to be $124,000,000, representing 20% of the Purchase Price.
B. Diligence Process and Document Review
C&H's due diligence review has been conducted through a systematic examination of documents and information made available by MedVance and its advisors in a virtual data room (the "VDR") hosted on the Crestline Solutions platform (formerly known as Glenrock Data Systems), administered by the Target's counsel, Whitaker, Poole & Simms LLP. Access to the VDR was granted to C&H personnel on September 22, 2024. As of the date of this Report, the VDR contains approximately 4,287 individual documents and files, organized into twenty-three (23) primary data room folders corresponding to the categories set forth in the due diligence request list issued by C&H on September 18, 2024 (the "Request List"), as supplemented by two additional request lists dated October 30, 2024 and December 12, 2024 (collectively, the "Supplemental Requests"). A complete listing of all documents reviewed in the VDR, organized by diligence category, with document number, title, date, and reviewer initials, is set forth in Exhibit A attached hereto.
In addition to the VDR review, C&H personnel conducted the following supplementary diligence activities: (i) in-person management presentations and question-and-answer sessions at MedVance's headquarters in Nashville, Tennessee on October 8–9, 2024 and November 19, 2024; (ii) telephone and video conference interviews with key Company personnel, including Daniel Burch (CEO), Angela Moretti (CFO), Dr. Samir Patel (CMO), Karen Tolliver (COO), and Lisa Marchetti (VP, Human Resources and Compliance); (iii) follow-up written requests for information and clarification to Sellers' counsel; (iv) public record searches (including UCC lien searches, judgment and litigation searches, bankruptcy searches, and corporate formation and good standing certificate requests) conducted in Delaware, Tennessee, Alabama, Georgia, and Kentucky; (v) intellectual property searches of the United States Patent and Trademark Office database, the United States Copyright Office database, and domain registration databases; and (vi) review of publicly available regulatory and enforcement databases, including the OIG List of Excluded Individuals/Entities, the SAM.gov System for Award Management, the EEOC case docket, and state licensing board databases in each of the four operating states.
Specialist Counsel. C&H has engaged or coordinated with the following specialist counsel and advisors in connection with the due diligence review:
• Langford Moss & Crane LLP — Dr. Patricia Langford, Of Counsel. Engaged as specialist healthcare regulatory counsel to conduct diligence with respect to state healthcare facility licensure, Medicare and Medicaid provider enrollment and reimbursement compliance, fraud and abuse laws (Anti-Kickback Statute, Stark Law, False Claims Act), HIPAA and data privacy, certificate of need requirements, and related healthcare regulatory matters. Dr. Langford's findings are incorporated into Part X of this Report.
• Nora Castillo — Partner, Antitrust & Competition, Calderwood & Harkness LLP. Responsible for analysis of the Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act") filing requirements and competition analysis in connection with the Transaction. The HSR filing was prepared and submitted under Ms. Castillo's direction. Her analysis is set forth in Part X, Section G of this Report.
• Leonard Cross — Partner, Tax, Calderwood & Harkness LLP. Responsible for legal tax diligence, including review of federal, state, and local tax compliance, transaction tax structuring, and tax indemnity recommendations. Mr. Cross has coordinated with the Buyer's external tax advisor, Osgood & Vail CPAs LLP, in conducting his review. His findings are incorporated into Part VIII of this Report.
Accounting and Advisory Coordination. C&H has coordinated its legal due diligence with the following accounting and advisory professionals engaged by the Client or involved in the Transaction:
• Blackwell Thornton LLP — Eric Vonn, Partner, Transaction Advisory Services. Prepared the quality-of-earnings report and conducted financial due diligence on behalf of Ardent Capital.
• Osgood & Vail CPAs LLP — External tax advisor to the Buyer. Conducted tax due diligence and provided advice on transaction tax structuring, purchase price allocation, Section 280G analysis, and post-closing tax integration. C&H's tax team has coordinated closely with Osgood & Vail throughout the diligence process.
• Prumvane & Reese LLP — Target's historical auditor. Prepared audited financial statements for MedVance for the fiscal years ended December 31, 2022 and December 31, 2023, and reviewed the unaudited financial statements for the fiscal year ended December 31, 2024. C&H has reviewed the audit reports and management letters issued by Prumvane & Reese.
Other Advisors. The following additional advisors have been engaged in connection with the Transaction:
• Fieldstone Environmental Associates Inc. — Environmental consultant engaged by the Buyer to conduct Phase I Environmental Site Assessments (and, where warranted, Phase II Environmental Site Assessments) for all owned and material leased properties. Fieldstone's findings are summarized in Part VII and Exhibit J of this Report.
• Commonwealth Abstract & Title Co. — Title company engaged to conduct title searches and issue title commitments for all owned real property and, where required under the Ridgeline credit agreement, leasehold title insurance commitments for material leased properties.
• Hargrove Bancroft & Co. — Investment bank engaged by the Buyer. Nathan Osei, Managing Director, is leading the buy-side advisory engagement.
• Pemberton Marsh Securities LLC — Investment bank engaged by the Sellers. Allison Drake, Managing Director, is leading the sell-side advisory engagement.
Seller's Counsel. MedVance and the Sellers are represented by Whitaker, Poole & Simms LLP ("WPS"), with Rebecca Whitaker, Partner, serving as lead counsel, and Jonathan Garrett, Senior Associate, as her primary supporting attorney. C&H has engaged in regular communications with WPS regarding data room population, follow-up requests, and negotiation of the SPA and ancillary transaction documents.
Limitation. This Report is based upon documents and information made available to C&H in the VDR and through the other diligence activities described above, in each case as of January 15, 2025, the date of this Report. C&H has not independently verified the accuracy, completeness, or authenticity of the documents and information provided by MedVance and the Sellers, and this Report should be read in conjunction with the representations and warranties to be made by the Sellers in the SPA. The opinions, conclusions, and recommendations set forth herein are subject to the limitations of the information reviewed and the assumptions stated herein. Bring-down diligence will be required prior to the anticipated closing of the Transaction, currently targeted for April 15, 2025, as discussed further in Section XIII.D of this Report.
C. Overall Risk Assessment and Key Findings Summary
Based upon the comprehensive legal due diligence review described in this Report, C&H has identified the following key findings and risk items that require attention in connection with the negotiation of the SPA and the consummation of the Transaction:
1. Change of Control Consent Requirements. We have identified a total of fourteen (14) change of control consent requirements across the Company's material contracts and facility leases that are triggered by the Proposed Acquisition. These consent requirements are distributed across managed care and commercial payor agreements, key vendor contracts (including the Vertex Health Technologies EHR platform agreement), and facility leases in each of the Company's four operating states. The specific consent requirements, their terms, and the current status of consent solicitation are described in detail in Part II, Section D and Part III, Section C of this Report, and are consolidated in Section XII (Summary of Change of Control Consent Requirements) and Exhibit H (Change of Control Consent Tracker). We recommend that the SPA include a condition to closing requiring the receipt of all "Material Consents" (to be defined), with appropriate post-closing covenant and indemnity provisions for non-material consents.
2. Pending Medical Malpractice Litigation. Two medical malpractice lawsuits are currently pending against MedVance and/or its subsidiaries, with an aggregate estimated exposure of approximately $4,200,000. Both suits are fully reserved on the Company's financial statements and are covered under the Company's professional liability insurance policy, subject to applicable deductibles and retentions. The details of each pending suit are set forth in Part VI, Section B and Exhibit E of this Report. We recommend that these suits be treated as Scheduled Litigation Matters under the SPA with a specific indemnity obligation of the Sellers.
3. Open EEOC Charge. One charge of discrimination is currently pending before the Equal Employment Opportunity Commission ("EEOC") alleging race-based discrimination by a former employee at the Company's Birmingham, Alabama facility. The charge was filed in June 2024 and remains under investigation. The details of this charge are set forth in Part VI, Section C of this Report. We recommend inclusion of this matter as a Disclosed Matter in the SPA disclosure schedules, with losses arising from its resolution subject to the general indemnification provisions.
4. State Licensure Transfer Approvals. The Transaction will require licensure transfer or change-of-ownership approvals from healthcare regulatory authorities in each of the Company's four operating states: Tennessee, Alabama, Georgia, and Kentucky. The anticipated approval timelines are set forth in Part X, Section B and range from approximately March 5, 2025 (Tennessee) to April 10, 2025 (Kentucky). The Kentucky approval timeline represents the critical path item for the closing schedule. We recommend that receipt of all required state licensure approvals be a condition to closing under the SPA.
5. HSR Act Compliance. The HSR pre-merger notification filing was submitted on December 18, 2024, under Reference Number HSR-2024-7231. As of the date of this Report, the initial waiting period has not yet expired; however, we note for the record that early termination of the waiting period was subsequently granted on January 22, 2025, and no second request for additional information was issued by either the Federal Trade Commission or the Department of Justice Antitrust Division. No conditions were imposed on the Transaction.
6. Indemnity Protections. We recommend specific indemnity protections in the SPA addressing the foregoing risk items, as well as customary protections for pre-closing tax liabilities, environmental matters, healthcare regulatory compliance, and employee benefit plan matters. The detailed recommendations are set forth in Section XIII of this Report.
No issues have been identified in the course of our legal due diligence that would be expected to prevent the consummation of the Transaction. Certain items have been flagged for negotiation of specific representations, warranties, covenants, and indemnity protections in the SPA, as described throughout this Report and summarized in Section XIII.
II. PART I — CORPORATE AND ORGANIZATIONAL
A. Formation and Good Standing
MedVance Health Systems, Inc. is a corporation organized and existing under the laws of the State of Delaware. The Company was originally incorporated on March 17, 2009, under the name "Ryland Healthcare Services, Inc." and subsequently changed its name to "MedVance Health Systems, Inc." effective June 14, 2013, in connection with the investment by Crestline Growth Equity Fund II LP. The Company's Delaware Secretary of State file number is 4938217, and its federal Employer Identification Number (EIN) is 62-7083149.
The Company's principal executive offices and headquarters are located at 4200 West End Avenue, Suite 1100, Nashville, Tennessee 37205. The Company's registered agent in the State of Delaware is Capitol Statutory Agents Inc., located at 1209 Orange Street, Wilmington, Delaware 19801. The Company's registered agent in the State of Tennessee is Tennessee Registered Agent Services LLC, located at 312 Rosa L. Parks Avenue, Nashville, Tennessee 37243.
C&H has obtained and reviewed certificates of good standing (or equivalent certificates of existence or authority) for MedVance in each of the following jurisdictions:
No pending dissolution proceedings, certificate of revocation, administrative suspension, or qualification deficiency has been identified in any jurisdiction in which MedVance is incorporated or qualified to do business. All required annual reports, franchise taxes, and foreign qualification filings appear to be current based on our review of the public records and the documentation provided in the VDR.
We have also reviewed the Company's internal records to confirm that MedVance is not qualified to do business in any state other than the four states listed above. Based on the Company's operations, revenue sources, employee headcount, and physical presence, we are satisfied that the Company's current qualifications are adequate and that no additional foreign qualification filings are required. We note, however, that the Company has a small number of remote administrative employees in states other than the four operating states (specifically, two employees in Florida and one employee in North Carolina), which may give rise to qualification obligations in those states. We recommend that the Company evaluate its qualification obligations in Florida and North Carolina on a prospective basis following the closing.
B. Capitalization and Ownership Structure
Authorized Capital. Pursuant to the Amended and Restated Certificate of Incorporation of MedVance, as most recently amended on August 12, 2013, the Company is authorized to issue the following shares of capital stock:
(a) 10,000,000 shares of Common Stock, par value $0.001 per share; and
(b) 2,000,000 shares of Preferred Stock, par value $0.001 per share, of which 1,500,000 shares have been designated as Series A Preferred Stock.
Issued and Outstanding Capital. As of the date hereof, the following shares of capital stock of MedVance are issued and outstanding:
Ownership. The outstanding equity of MedVance is held as follows:
The Series A Preferred Stock held by Crestline is entitled to a liquidation preference equal to $100.00 per share (aggregate liquidation preference of $150,000,000), plus accrued and unpaid dividends (cumulative, non-compounding, at a rate of 8% per annum). In the context of the Transaction, based on our review of the waterfall provisions in the Amended and Restated Certificate of Incorporation and the Stockholders' Agreement, we understand that the Transaction proceeds will be allocated as follows: first, to the holders of Series A Preferred Stock in satisfaction of the liquidation preference and accrued dividends; and second, to all holders of Common Stock on a pro rata basis. We have coordinated with Blackwell Thornton LLP and the Client's deal team to confirm the accuracy of the purchase price waterfall allocation, which is consistent with the terms of the LOI.
Management Rollover. Certain members of management holding Common Stock have agreed, or are expected to agree pursuant to the terms of rollover letter agreements, to contribute a portion of their Transaction proceeds in exchange for equity interests in AHH or a parent entity thereof. The aggregate rollover equity is estimated at approximately $18,600,000, representing a rollover rate of approximately 24.4% of the aggregate management equity value. The rollover arrangements are subject to the negotiation and execution of definitive rollover agreements, management equity agreements, and a new stockholders' agreement or LLC operating agreement for the post-closing holding company structure. We recommend that these agreements be finalized and circulated for review prior to the execution of the SPA.
Outstanding Options, Warrants, and Convertible Securities. Pursuant to our review of the Company's equity records, the MedVance Health Systems, Inc. 2013 Equity Incentive Plan (as amended, the "2013 Plan") has authorized the issuance of options to purchase up to 600,000 shares of Common Stock, of which options to purchase 487,300 shares are currently outstanding and options to purchase 112,700 shares remain available for grant. Of the outstanding options, options to purchase 412,650 shares are fully vested and exercisable, and options to purchase 74,650 shares remain subject to time-based vesting. All outstanding options have a weighted average exercise price of $12.47 per share.
Under the terms of the SPA as currently contemplated, all outstanding options under the 2013 Plan must be either (i) exercised on a net-exercise basis immediately prior to closing, with the holders receiving their pro rata share of the Transaction consideration (net of the exercise price), or (ii) cancelled and converted into the right to receive a cash payment equal to the per-share Transaction consideration less the applicable exercise price (the "Option Cancellation Payment"). No options will remain outstanding following the closing. We have reviewed the 2013 Plan and the form of stock option agreement and have confirmed that the plan and individual award agreements permit the accelerated vesting and cancellation treatment described above, subject to the approval of the Board of Directors and/or the plan administrator (the Compensation Committee). We recommend that appropriate resolutions be adopted by the Board and/or Compensation Committee prior to closing.
No warrants, convertible notes, or other convertible securities are outstanding as of the date hereof, other than the stock options described above.
Stockholders' Agreement. We have reviewed the Amended and Restated Stockholders' Agreement dated August 12, 2013 (the "Stockholders' Agreement"), by and among MedVance, Crestline, Ryland Holdings, and the management stockholders. The Stockholders' Agreement contains the following provisions relevant to the Transaction:
(a) Drag-Along Rights (Section 4.1): Crestline, as holder of a majority of the outstanding equity, has the right to require all other stockholders to participate in a sale of the Company upon the same terms and conditions as Crestline. This drag-along right is exercisable upon a sale of all or substantially all of the equity or assets of the Company. We have confirmed that the proposed Transaction constitutes a "Drag-Along Sale" as defined in the Stockholders' Agreement, and Crestline has indicated its intention to exercise its drag-along rights. We have reviewed the mechanics and notice requirements for the drag-along process.
(b) Tag-Along Rights (Section 4.2): The tag-along rights inure to the benefit of Ryland Holdings and management stockholders, and operate to ensure that such holders have the right to participate in any sale initiated by Crestline. In the context of a 100% sale, the tag-along rights are subsumed within the drag-along mechanism.
(c) Preemptive Rights (Section 3.1): The preemptive rights provisions grant existing stockholders the right to participate in future issuances of equity securities on a pro rata basis. These provisions are not implicated by the proposed Transaction, as the Transaction involves a sale (rather than an issuance) of existing equity.
(d) Right of First Refusal (Section 3.2): A right of first refusal provision applies to transfers of Common Stock by management stockholders, but expressly does not apply to a Drag-Along Sale.
Based on our review, no preemptive rights, rights of first refusal, tag-along rights, drag-along rights, or other provisions of the Stockholders' Agreement would impede the consummation of the Transaction, provided that Crestline properly exercises its drag-along rights in accordance with the notice and procedural requirements of the Stockholders' Agreement.
Investor Rights Agreement. We have reviewed the Investor Rights Agreement dated August 12, 2013 (the "IRA"), by and among MedVance and Crestline. The IRA provides Crestline with certain information rights, board representation rights, and registration rights (demand and piggyback). The registration rights are not relevant in the context of a private sale transaction. The information rights and board representation rights will terminate at closing. The IRA contains no provisions that would impede the Transaction.
C. Board of Directors and Officers
Board of Directors. As of the date of this Report, the Board of Directors of MedVance consists of seven (7) members, as follows:
The Stockholders' Agreement provides that Crestline has the right to designate three (3) directors, Ryland Holdings has the right to designate one (1) director, and the remaining seats are filled by the CEO (ex officio) and two (2) independent directors mutually agreed upon by Crestline and Ryland Holdings.
Officers. The current officers of MedVance are as follows:
Corporate Approvals. The consummation of the Transaction requires: (i) approval of the Board of Directors of MedVance, by majority vote (or such greater vote as may be required by the Certificate of Incorporation or Bylaws), authorizing the execution and delivery of the SPA and the consummation of the transactions contemplated thereby; and (ii) approval of the stockholders of MedVance holding the requisite percentage of outstanding shares, as specified in the Certificate of Incorporation, the Bylaws, and the Delaware General Corporation Law. Under Section 271 of the Delaware General Corporation Law, the sale of all or substantially all of the assets of a corporation (and, by analogy, a 100% stock sale where the effect is equivalent) requires the approval of a majority of the outstanding shares entitled to vote thereon. Based on our review, Crestline's exercise of its drag-along rights, combined with its 68.2% equity ownership, is sufficient to satisfy the stockholder approval requirement. We recommend that formal written consents or board and stockholder resolutions be prepared and circulated for execution in connection with the signing of the SPA.
D&O Tail Insurance. The Sellers and the Company have agreed that a directors' and officers' liability insurance tail policy (the "D&O Tail Policy") will be procured at or prior to closing, providing coverage for claims arising from acts, errors, or omissions occurring prior to the closing date for a period of six (6) years following the closing. The D&O Tail Policy will be issued by Sentinel Indemnity Group at a one-time premium of $485,000, which premium is to be paid from the Company's funds prior to closing or treated as a closing adjustment. We recommend that the binding of the D&O Tail Policy be a condition to closing under the SPA and that the SPA include a covenant of the Purchaser to maintain the D&O Tail Policy for the full six-year term.
D. Subsidiaries and Affiliated Entities
MedVance Health Systems, Inc. has the following direct and indirect subsidiaries:
Note: MedVance Physician Group, P.C. (Tennessee) and MedVance Physician Services of Alabama, P.C. (Alabama) are professional corporations organized under the applicable state professional corporation statutes. Under Tennessee and Alabama law, the shares of a professional corporation may only be held by licensed professionals (physicians). The shares of each professional corporation are held by physician-shareholders designated by MedVance, who hold such shares subject to nominee agreements and stock pledge arrangements providing MedVance with effective economic and operational control. The professional corporations operate under management services agreements with MedVance Management Services Inc. This structure has been reviewed by Dr. Patricia Langford of Langford Moss & Crane LLP for compliance with applicable state corporate practice of medicine doctrines and is addressed further in Part X (Healthcare Regulatory) of this Report.
C&H has obtained and reviewed certificates of good standing (or equivalent) for each of the above subsidiaries in their respective states of formation and any states of qualification. No pending dissolution, revocation, or qualification issues have been identified for any subsidiary.
Intercompany Agreements. The following material intercompany agreements are in place among MedVance and its subsidiaries:
(a) Management Services Agreements: MedVance Management Services Inc. provides centralized management, administrative, billing, compliance, and information technology services to each of the four state-specific clinical services LLCs and the two professional corporations pursuant to separate Management Services Agreements. Each agreement provides for a management fee calculated as a percentage of collected revenues (ranging from 12% to 15% depending on the entity) and has an initial term of ten (10) years with automatic annual renewals. We have reviewed each Management Services Agreement and have not identified any issues that would impede the Transaction, although the agreements should be reviewed by the Purchaser's tax advisor for transfer pricing and intercompany allocation purposes.
(b) Nominee and Stock Pledge Agreements: As noted above, the shares of the professional corporations are held by designated physician-shareholders pursuant to nominee agreements and stock pledge arrangements. We have reviewed these agreements and have confirmed that they provide MedVance with the ability to direct the transfer of such shares to successor physician-nominees designated by the Purchaser following the closing. We recommend that the SPA include a covenant requiring the Sellers and the Company to cooperate in effectuating the transfer of nominee physician-shareholder designations at or following the closing.
(c) Intercompany Loan Agreement: MedVance has extended a revolving intercompany loan to MedVance Real Estate Holdings LLC in the current principal amount of $2,750,000, bearing interest at the applicable federal rate, for the purpose of financing certain property improvements. This intercompany loan will remain in place following the closing and does not require third-party consent.
Minority-Owned and Joint-Venture Entities. Based on our review of the documents provided in the VDR and representations made by management, MedVance does not hold any minority equity interest in any entity and is not a party to any joint venture, partnership, or strategic alliance involving the creation of a separate legal entity. We have confirmed this through review of the Company's corporate records and financial statements.
A complete organizational chart of MedVance and its subsidiaries is set forth in Exhibit B attached hereto.
E. Organizational Documents
C&H has reviewed the following organizational documents of MedVance and its subsidiaries:
(a) Certificate of Incorporation: Amended and Restated Certificate of Incorporation of MedVance Health Systems, Inc. (f/k/a Ryland Healthcare Services, Inc.), filed with the Delaware Secretary of State on August 12, 2013, together with the Certificate of Amendment filed June 14, 2013 (name change). We have confirmed that the Certificate of Incorporation contains standard provisions for a Delaware corporation, including the authorized capital structure described in Section II.B above, the designation and rights of the Series A Preferred Stock, and customary provisions regarding director indemnification and limitation of liability under Section 102(b)(7) of the DGCL. We have not identified any provisions requiring amendment in connection with the Transaction, although we note that the Purchaser may wish to adopt a new Certificate of Incorporation (or amend and restate the existing Certificate) following the closing to reflect the new ownership structure.
(b) Bylaws: Amended and Restated Bylaws of MedVance Health Systems, Inc., adopted August 12, 2013. The Bylaws contain standard provisions regarding board composition, meetings, committees, officers, indemnification, and stock transfer restrictions consistent with the Stockholders' Agreement. No provisions requiring amendment in connection with the Transaction have been identified.
(c) LLC Agreements: We have reviewed the operating agreements or limited liability company agreements for each of the four state-specific clinical services LLCs and MedVance Real Estate Holdings LLC. Each LLC is wholly owned by MedVance and is manager-managed, with MedVance (or a designated officer thereof) serving as the sole manager. The LLC agreements contain standard provisions and do not require third-party consent or amendment in connection with the Transaction.
(d) Professional Corporation Bylaws and Articles: We have reviewed the articles of incorporation and bylaws of MedVance Physician Group, P.C. (Tennessee) and MedVance Physician Services of Alabama, P.C. (Alabama), together with the nominee agreements and stock pledge arrangements described in Section II.D above.
(e) Stockholders' Agreement, Investor Rights Agreement, and Registration Rights: These agreements are described in Section II.B above.
Based on our review, no provisions of the organizational documents of MedVance or any of its subsidiaries require amendment or restatement as a condition to the consummation of the Transaction. Certain post-closing amendments may be advisable to reflect the Purchaser's new ownership and governance structure, and we recommend that these be addressed in the transition planning process.
III. PART II — MATERIAL CONTRACTS
A. Overview of Material Contract Review
C&H has conducted a comprehensive review of the material contracts of MedVance and its subsidiaries. For purposes of this diligence review, "material contracts" include:
(a) all contracts involving aggregate consideration or annual payments in excess of $500,000;
(b) all contracts with a remaining term (including renewal options) in excess of three (3) years;
(c) all contracts containing exclusivity, non-competition, most-favored-nation, or similar restrictive provisions;
(d) all contracts with any of the Company's ten (10) largest payors by revenue;
(e) all contracts containing change of control, assignment, or consent provisions that may be triggered by the Transaction;
(f) all contracts evidencing or relating to indebtedness for borrowed money, guarantees, letters of credit, or surety bonds;
(g) all contracts with governmental entities, including Medicare and Medicaid provider enrollment agreements;
(h) all intercompany contracts and related-party transactions; and
(i) all joint venture, partnership, or strategic alliance agreements.
The scope of our review was defined by the Request List and Supplemental Requests, and all contracts meeting the above criteria that were produced in the VDR have been reviewed. A comprehensive list of all material contracts reviewed, together with a summary of key terms, is set forth in Exhibit C attached hereto.
B. Revenue Contracts and Payor Agreements
MedVance derives its revenue from a mix of commercial insurance payors (managed care and fee-for-service), government payors (Medicare and Medicaid), and patient self-pay. Based on the financial information provided in the VDR and the QoE Report, the approximate revenue mix for fiscal year 2024 is as follows: commercial insurance, 54%; Medicare, 28%; Medicaid, 13%; self-pay and other, 5%.
BlueLine Health Plan of Tennessee ("BlueLine"). BlueLine is MedVance's single largest commercial payor, representing approximately 18.4% of the Company's total revenue in fiscal year 2024 (approximately $71,200,000). C&H has reviewed the Provider Participation Agreement between MedVance Clinical Services of Tennessee LLC and BlueLine Health Plan of Tennessee, dated January 1, 2021, as amended by Amendment No. 1 dated January 1, 2023 and Amendment No. 2 dated July 1, 2024 (collectively, the "BlueLine Agreement"). Key terms of the BlueLine Agreement include:
• Term: Initial term of three (3) years (January 1, 2021 through December 31, 2023), with automatic renewal for successive one-year periods unless either party provides written notice of non-renewal at least one hundred twenty (120) days prior to the end of the then-current term. The agreement is currently in its first automatic renewal period (January 1, 2024 through December 31, 2024) and will automatically renew for an additional one-year period (January 1, 2025 through December 31, 2025) absent notice of non-renewal.
• Rates: Reimbursement rates are set forth in Fee Schedule Exhibit A to the BlueLine Agreement, as amended by Amendment No. 2. Rates are subject to annual adjustment by BlueLine upon sixty (60) days' written notice. The most recent rate adjustment (effective July 1, 2024) resulted in a weighted-average rate increase of approximately 2.8%.
• Termination: Either party may terminate the agreement without cause upon one hundred twenty (120) days' written notice. BlueLine may terminate for cause (material breach unremedied after thirty (30) days' notice, loss of licensure, exclusion from federal healthcare programs, or bankruptcy) upon written notice.
• Change of Control (Section 12.4): The BlueLine Agreement contains a change of control provision requiring MedVance to provide BlueLine with written notice of any change of control (defined as a transfer of more than 50% of the voting equity of the applicable MedVance entity or a merger or consolidation resulting in a change of the controlling stockholder) not less than sixty (60) days prior to the effective date of such change of control. BlueLine has the right to terminate the agreement upon ninety (90) days' written notice following receipt of the change of control notice if, in BlueLine's reasonable judgment, the change of control would materially adversely affect the provision of services under the agreement. This consent requirement is included among the 14 change of control consents identified in this Report.
SouthPoint Insurance Co. ("SouthPoint"). SouthPoint is MedVance's second-largest commercial payor, representing approximately 11.2% of the Company's total revenue in fiscal year 2024 (approximately $43,300,000). C&H has reviewed the Network Provider Agreement between MedVance (on behalf of its Tennessee, Alabama, and Georgia clinical services subsidiaries) and SouthPoint Insurance Co., dated April 1, 2019, as amended by Amendment No. 1 dated April 1, 2022 (collectively, the "SouthPoint Agreement"). Key terms include:
• Term: Initial term of three (3) years with automatic one-year renewals. Currently in its second renewal period.
• Rates: Set forth in Rate Appendix, subject to annual renegotiation.
• Termination: Either party may terminate without cause upon ninety (90) days' written notice.
• Change of Control (Section 9.3): SouthPoint Agreement requires prior written consent of SouthPoint for any change of control of the provider entity (defined similarly to the BlueLine Agreement). Consent is not to be unreasonably withheld, conditioned, or delayed. This consent requirement is included among the 14 change of control consents identified in this Report.
Other Significant Managed Care and Commercial Payor Agreements. C&H has reviewed provider participation agreements with the following additional commercial payors, each of which represents more than 3% of the Company's total revenue: (i) Magnolia Benefits Group (approximately 7.8% of revenue); (ii) Cumberland Valley Health Network (approximately 5.6% of revenue); (iii) Premier Alliance Insurance Company (approximately 4.3% of revenue); and (iv) Gateway Wellness Plans, Inc. (approximately 3.4% of revenue). Change of control provisions in certain of these agreements are included among the 14 consent requirements identified in this Report and are described in Section III.D below.
Government Payor Participation. MedVance and its subsidiaries participate in the Medicare and Medicaid programs in each of the four operating states. C&H has confirmed, in coordination with Langford Moss & Crane LLP, that the Company and its applicable subsidiaries maintain active Medicare provider enrollment with the applicable Medicare Administrative Contractors and active Medicaid provider enrollment with the applicable state Medicaid agencies in Tennessee, Alabama, Georgia, and Kentucky. Medicare and Medicaid reimbursement compliance is addressed in Part X, Section C (Healthcare Regulatory) of this Report. We note that the Transaction will require submission of Medicare and Medicaid change of information (Form CMS-855A) filings and state Medicaid change of ownership notifications in each state, which are addressed in the Healthcare Regulatory section.
C. Vendor and Service Agreements
Vertex Health Technologies Inc. ("Vertex Health Tech"). Vertex Health Technologies Inc. is the provider of MedVance's enterprise electronic health record ("EHR") platform, practice management system, and related information technology services. The relationship is governed by a Master Services Agreement dated September 1, 2017, as amended by Amendment No. 1 dated September 1, 2020 and Amendment No. 2 dated March 15, 2023 (collectively, the "Vertex Agreement"). The Vertex Agreement is among the Company's most significant vendor contracts, with annual fees of approximately $8,200,000 (inclusive of license fees, hosting fees, maintenance and support, and interface development). Key terms include:
• Term: Initial term of seven (7) years (September 1, 2017 through August 31, 2024), renewed for a second term of five (5) years (September 1, 2024 through August 31, 2029) pursuant to Amendment No. 2. The agreement may not be terminated by MedVance without cause during the renewal term, except upon payment of an early termination fee equal to the lesser of (a) the remaining contract value for the balance of the term or (b) $4,100,000.
• Services: Vertex provides a cloud-hosted EHR platform, practice management and billing system, patient portal, clinical decision support tools, data analytics, implementation and training services, and 24/7 technical support.
• Data: All patient health information and clinical data entered into the Vertex platform remains the property of MedVance. Vertex is contractually obligated to maintain such data in compliance with HIPAA and to provide data migration assistance upon termination of the agreement. The data migration provisions require Vertex to provide MedVance with a complete export of all data in a standard interoperable format (HL7 FHIR or equivalent) within one hundred eighty (180) days following the effective date of termination, at a data migration fee not to exceed $750,000.
• Change of Control (Section 14.2): The Vertex Agreement contains a change of control provision requiring MedVance to provide Vertex with written notice of any change of control not less than forty-five (45) days prior to the effective date thereof. Vertex has the right to terminate the agreement upon sixty (60) days' written notice if the acquiror is a "Competitor" of Vertex (as defined in Exhibit D to the Vertex Agreement, which includes a list of named competitors and a general description of companies providing competing EHR solutions). This consent requirement is included among the 14 change of control consents identified in this Report. We have reviewed the Competitor definition and have confirmed that neither Ardent Capital, AHH, nor any of their affiliates or portfolio companies currently qualifies as a Competitor under the Vertex Agreement. However, we recommend that written confirmation be obtained from Vertex that it does not consider the Transaction to trigger its termination right, and that such confirmation be obtained as a condition to closing.
Other Significant Vendor Contracts. C&H has reviewed the following additional material vendor contracts:
(a) Meridian Diagnostic Laboratories LLC: Laboratory services agreement for reference laboratory testing, dated February 1, 2021, with a three-year term and automatic one-year renewals. Annual fees of approximately $3,400,000. Contains a change of control notice provision (30-day notice) but no consent requirement or termination right triggered by change of control.
(b) Consolidated Medical Supply Co.: Medical and surgical supplies purchasing agreement, dated January 1, 2022, with a five-year term. Annual spend of approximately $6,100,000, subject to volume-based pricing tiers. Contains no change of control provision.
(c) NovaCare Staffing Solutions Inc.: Supplemental clinical staffing agreement for temporary nursing and allied health professionals, dated June 1, 2023, with a two-year initial term and automatic one-year renewals. Annual fees of approximately $4,800,000 (variable based on utilization). Contains a change of control provision requiring written notice within thirty (30) days and granting NovaCare the right to terminate upon sixty (60) days' notice. This consent requirement is included among the 14 change of control consents identified in this Report.
(d) Keystone Pharmacy Services Inc.: Pharmaceutical supply and pharmacy management services agreement, dated April 1, 2020, with a five-year term (expiring March 31, 2025). Annual fees of approximately $2,900,000. The agreement is approaching expiration and is currently being renegotiated. Contains no change of control provision.
(e) Precision Imaging Partners LLC: Diagnostic imaging equipment lease and maintenance agreement, dated October 1, 2021, with a seven-year term. Annual fees of approximately $1,800,000. Contains an assignment restriction but no change of control provision applicable to a stock sale.
(f) Sentinel Security & Technology Inc.: Facility security services agreement, dated March 1, 2022, with a three-year initial term and automatic one-year renewals. Annual fees of approximately $960,000. Contains no change of control provision.
Intercompany Service Agreements. The intercompany management services agreements among MedVance and its subsidiaries are described in Part I, Section D of this Report. No third-party vendor or service agreements are structured as intercompany transactions.
D. Change of Control Provisions — Material Contracts
As noted throughout this Report, C&H has identified a total of fourteen (14) change of control consent requirements that are triggered by the Proposed Acquisition. Of these fourteen, nine (9) pertain to material contracts (described in this Section III.D) and five (5) pertain to facility leases (described in Part III, Section C below). The consolidated schedule of all fourteen consent requirements is set forth in Section XII and Exhibit H.
The following table summarizes the nine material contract change of control consent requirements:
Risk Assessment and Prioritization. Of the nine material contract change of control consents, we assess the following as presenting the highest risk and the greatest need for pre-closing resolution:
(a) BlueLine (Consent No. 1): BlueLine represents 18.4% of total revenue, and the loss of this contract would constitute a Material Adverse Effect under any reasonable definition. While BlueLine has acknowledged receipt of the consent solicitation letter and has indicated willingness to engage in discussions, the formal written consent has not yet been received. BlueLine's change of control provision does not contain a "consent not to be unreasonably withheld" standard, which means BlueLine has broad discretion to withhold consent or condition consent on contract renegotiation (including rate adjustments). We recommend that Ardent Capital designate this consent as a mandatory closing condition and that senior management engage directly with BlueLine's contracting department to facilitate prompt resolution.
(b) SouthPoint (Consent No. 2): SouthPoint represents 11.2% of total revenue. Unlike BlueLine, the SouthPoint Agreement does include a "consent not to be unreasonably withheld, conditioned, or delayed" standard, which provides a measure of contractual protection. However, SouthPoint's change of control provision uniquely permits termination "immediately" (rather than upon a cure or notice period) if consent is not obtained prior to the change of control. We recommend that this consent also be designated as a mandatory closing condition.
(c) Vertex Health Tech (Consent No. 7): While the annual fee ($8.2M) is significantly less than the payor contracts, the Vertex EHR platform is the backbone of MedVance's clinical and administrative operations. Loss of the EHR platform would cause severe operational disruption. The early termination fee ($4.1M) and data migration provisions provide some contractual protection, but the disruption associated with an EHR migration would be substantial (estimated 12–18 months). The preliminary verbal confirmation from Vertex is encouraging, and we recommend that formal written confirmation be obtained promptly.
For those consents where the counterparty has historically been cooperative and the financial or operational impact of failure to obtain consent is limited, we assess the risk as low to medium. Specifically, the Cumberland Valley Health Network agreement (Consent No. 4) requires only notice and does not confer a termination right, and we do not consider this to be a true consent requirement. The NovaCare staffing agreement (Consent No. 8) and the Augusta Health Alliance collaboration (Consent No. 9) present manageable risks that can be addressed through post-closing indemnity provisions.
We have not identified any contracts with anti-assignment provisions that are triggered by a stock sale (as distinguished from an asset sale or merger), other than those contracts that contain change of control provisions as described above. In general, a stock acquisition does not constitute an "assignment" under standard contract interpretation principles, and we have confirmed that the relevant contracts define "change of control" broadly enough to encompass the Transaction or do not contain anti-assignment provisions that are relevant to a stock acquisition structure.
E. Joint Venture, Partnership, and Strategic Alliance Agreements
MedVance is a party to one strategic collaboration arrangement that may be characterized as a strategic alliance:
Augusta Health Alliance Strategic Collaboration. In October 2022, MedVance Clinical Services of Georgia LLC entered into a Strategic Collaboration Agreement with Augusta Health Alliance, a nonprofit health system based in Augusta, Georgia, pursuant to which MedVance and Augusta Health Alliance collaborate on certain orthopedic and rehabilitation service lines in the Augusta metropolitan area. The arrangement involves coordinated patient referrals, shared clinical protocols, and joint marketing, but does not involve the creation of a separate legal entity, the sharing of profits or losses, or the joint ownership of assets. The collaboration is governed by a management committee with equal representation from both parties.
The Strategic Collaboration Agreement contains a change of control provision (Section 6.2(b)) that grants Augusta Health Alliance the right to terminate the collaboration upon sixty (60) days' written notice if MedVance undergoes a change of control, unless Augusta Health Alliance consents to the continuation of the collaboration following the change of control. While the financial impact of this collaboration is not material to MedVance's overall operations (estimated revenue attributable to the collaboration is less than $2,000,000 annually), the collaboration has strategic significance for MedVance's Georgia operations, and the termination of the collaboration could modestly affect referral patterns and patient volume in the Augusta market. A consent solicitation letter was sent to Augusta Health Alliance on January 8, 2025.
No other joint venture, partnership, or strategic alliance agreements were identified in the VDR or through management interviews.
F. Non-Competition and Exclusivity Provisions
C&H has reviewed the material contracts for non-competition and exclusivity provisions that would bind MedVance or the Purchaser following the closing. The following provisions have been identified:
(a) Magnolia Benefits Group Participating Provider Agreement (Consent No. 3): The agreement contains a "most-favored-nation" clause (Section 14.2) requiring MedVance to offer Magnolia reimbursement rates no less favorable than those offered to any other commercial payor for the same services in the same geographic market. This provision does not restrict MedVance's operations but does limit the Company's pricing flexibility.
(b) Premier Alliance Insurance Co. Provider Agreement (Consent No. 5): The agreement contains an exclusivity provision (Section 4.3) restricting MedVance from entering into risk-based capitation arrangements with any competing insurer in the Tennessee market for the term of the agreement. This provision applies specifically to risk-based arrangements and does not restrict fee-for-service contracting.
(c) Executive Employment Agreements: The employment agreements for the four named executive officers contain non-competition and non-solicitation covenants. These are described in Part V, Section B of this Report.
No non-compete covenants binding on MedVance at the entity level (as opposed to the payor-specific and employee-specific covenants described above) have been identified. We recommend that the SPA include a representation by the Sellers that no restrictive covenants exist that would materially limit the Purchaser's ability to operate the business following the closing, other than those disclosed on the applicable disclosure schedule.
G. Indebtedness and Guaranty Obligations
Granton Savings Bank, N.A. Term Loan. MedVance's sole material third-party indebtedness consists of a term loan facility with Granton Savings Bank, N.A. ("Granton"), entered into on June 15, 2020, in the original principal amount of $55,000,000. As of the date of this Report, the outstanding principal balance is approximately $41,300,000, reflecting scheduled amortization payments. The Granton term loan bears interest at SOFR plus 300 basis points (with a SOFR floor of 50 basis points), matures on June 15, 2027, and is secured by a first-priority lien on substantially all assets of MedVance an