It is a typical scenario: an M&A project is underway, gains momentum and before you know it the pressure is on. The deal must close in time! And then some regulatory points are overlooked that turn out to be very important later.
I thought I’d share some of the EU legal / regulatory points that I often see go wrong on the buyer side and that cost companies a lot of time, resources and/or goodwill to fix if they are noticed too late or are not dealt with at all.
Most issues can be traced back to the buyer not realizing that an M&A transaction impacts on the CE mark and quality system for a (group of) medical device(s).
If a business unit with a number of medical devices – or even a single product (line) – is lifted out of a larger medical devices company, the ‘legal’ manufacturer will change, because the devices will not continue to be produced in the quality system of the seller. As a result, the CE mark will no longer remain valid because the party issueing the declaration of conformity underlying the CE mark is no longer responsible for the device. Similarly, the buyer may not retain the services of the notified body that issued the CE certificate for the devices concerned. In that case it is important to realise that the label of the devices contains a reference to the notified body that issued the certificate. However, even if the notified body does not change and the production stays in the exact same location, the quality system changes (among other things: new manufacturer) and the notified body will need to audit the new system. If all of these things are not taken care of in time (usually before closing of the transaction), the buyer will be faced with devices with an invalid CE mark and consequently, an illegal presence on the market. The ultimate consequence may be a recall or risking enforcement by authorities if they find out and perhaps a fight with the seller whose fault it was that the buyer finds itself in this difficult situation.
If the seller uses an authorised representative in the EU, the relationship with the authorised representative does not under all circumstances automatically transfer with the purchased business. However, the authorised representative has an important role as contact point for the authorities and is listed on the label as such. Neither the authorised representative nor the buyer will be happy with devices on the market with the wrong contact information for authorities.
So, what do buyers routinely overlook?
- in case of a share deal there is no issue? Certainly not. All the above considerations apply equally to a share and an asset deal.
- check if the notified body changes or not. Contact the current or new notified body before agreeing a closing date to check if it can complete audit before the planned closing date.
- make sure that at closing the right notified body is happy with the buyer’s quality system. Even if nothing seems to change as a result of the transaction, there are changes from a legal perspective.
- if the notified body changes, make sure to agree with the old notified body until what date its number can be used on the label.
- if there is an authorised representative for the device in the EU, make sure that it is willing to remain authorised representative for the device. If the authorised representative changes, make sure transitional arrangements are in place with the old authorised representative (e.g. until what date the authorised representative’s details can be used on the label of the device).
- assess how much product is in the distribution chain and make sure that distributors have sold off or returned the devices before the above regulatory problems may arise. This is usually an issue if a buyer purchases significant stocks of devices that have not been placed on the market in the EU yet.
Why do considerations apply equally in share purchase situations and in asset deals? The Notified body may have change of control clauses in their standard contract, and so may be entitled to opt out based on a change in control, but assuming that the the only thing changing is the ownership of a manfacturer, there ought to be no reason why CE marks should be affected. The manufacturer is the same as before the share deal. The quality system is the same, unless the buyer was actually planning to implement their own QA routines on the target from day one, in which case there will be trouble. But that technically isn’t something that would affect the deal itself, is it? It would just mean that the buyer hadn’t done his homework and would not reap all the benefits of scale until appropriate adjustments had been made, right. Granted, that would be likely to take years, but still.
Patrik, thanks for your comment. I agree with you that it may happen in a share transaction that the manufacturer or other critical elements of the quality system do not change and the quality system is not affected at all, but that is the exception in my experience. In that case the company bought would have done everything covered by the quality system within the tree of entities controlled by the entity in which the shares purchased and that is almost never the case in my experience, neither for the bigger nor for the smaller companies. Usually the quality system stays more or less the same, but the manufacturer changes, which necessitates timely preparation for the regulatory consequences.