Incorporation the Only Way for PDS Holders?

It has always been awkward for holders of PDS agreements to sell. Unlike GDS contracts which allow holders to enter partnership, have the contracts varied and for such partnerships then to be dissolved PDS agreements area meant to be ‘personal’, held by only one dentist or entity (e.g. an LLP or Limited Company) and so the right to take on and shed partners is absent.

PCT and now NHS England consent has therefore always been necessary for a transfer to a buyer. With the increased understanding (and enforcement) of European procurement rules, NHS England (as seen in its current policies) is unwilling to give such consent, for fear of legal challenges.

This is currently the situation no matter whether the PDS agreement is for orthodontic services, domiciliary services or sedation. It is of course the case that a PDS agreement for mandatory services can be converted to a GDS contract (on 3 months’ notice under Regulation 21 of the PDS Regulations), although there is a risk for high-UDA-rate contracts that the contract value may be challenged (the GDS Statement of Financial Entitlements maintains the right of NHS England to ‘agree’ the contract value of a new GDS Contract). Furthermore, due to the nature of a PDS Plus agreement (only a percentage of the contract value may be converted to GDS), such conversion is inappropriate making consent necessary for PDS Plus agreements too.

Consequently, it is of great interest (especially to Orthodontics who wish to sell) that in recent months it has become clear that NHS England’s position towards incorporation may offer a solution.

It was always the case that many PCTs refused consent to incorporate, and the fear of breach of procurement rules often provided them with the excuse. However that slowly changed, especially with the growing knowledge of the 2009 European Court of Justice ‘Pressetext’ ruling, and in June 2013 NHS England released its first policy on incorporation.

That policy has meant that PDS agreement holders have been able to apply for consent to incorporate and obtain a new PDS agreement in the name of their company. Once that is arranged, the company can then be sold to a buyer. This therefore appears to be a solution to a sale proceeding.

However, there are some downsides and some issues to seriously consider:

  •  NHS England, applying the incorporation policy criteria, may still refuse consent in certain circumstances;
  • Incorporation (even when followed by a sale) is a serious trading change and there are costs attached to it;
  • Having only shares in a company to sell can limit the market of willing buyers (there are still some buyers who are nervous of buying shares rather than assets);
  • NHS England insists, in its policy, on a ‘novation agreement’ signed by the contractor who must agree to guarantee the company’s performance of the new company PDS agreement. That obligation is open-ended, and would feasibly continue beyond the sale of the company unless NHS England consent to be released from the guarantee (or agree a replacement guarantor) is obtained.

Having said all of this, such issues and potential problems perhaps pale into insignificance (though they should be dealt with appropriately) if there is no alternative, leaving the contractor with the choice of selling on these terms or not selling at all.

However, a further issue on the Horizon looms. In June 2014 NHS England published a revised incorporation policy (‘revised April 2014’), which encourages Area Teams to consider including a change of control clause in the novation agreement as a condition of consent. Such clauses, necessitating NHS England consent to a sale of the company who in the future, are attractive for NHS England as they give Area Teams a degree of control over who the company is sold to.

Worst-case scenario, this could defeat the sale objective, as NHS England could refuse. However the chances of successfully arguing that NHS England should consent to a transfer of the shares to a buyer (or indeed that a refusal is unreasonably), should still be higher than the current prospect of convincing an Area Team to agree to a straight transfer in breach of procurement rules. Indeed, paragraph  35 of the revised policy helpfully states;

consent shall not be unreasonably withheld, delayed or conditioned and shall not apply in relation to the departure by reason of death, retirement or ill-health of a director or shareholder”.

Those most at risk of refusal will be those:

  • Who are openly incorporation simply to sell shortly after, highlighting the importance of care and confidentiality throughout the process; and
  • those whose buyers are unpalatable to NHS England. Buyers in such circumstances should expect some difficult questions from vendors and their about their previous NHS performance, ongoing patient complaints and GDS and performances list proceedings.
 It is interesting to note that NHS England appears to expect the opposition to its new policy in these respects as paragraph 39 of the revised policy states“Area Teams should be aware that they may face challenge on the inclusion of the change of control” and the policy includes several references to disputes being referred to the NHS Litigation Authority, first-tier tribunal or the civil courts.

Consequently, cumbersome though it is, and despite the fact that it is still fraught with risk and issues, incorporation appears to be an option that should be considered for sellers who hold a PDS Plus agreement or PDS agreement for advanced, further or additional (i.e. non-mandatory) services.

GUEST CONTRIBUTION FROM MEADE KING LLP: Alex Hall is based at Meade King Solicitors and specialising in the Sale and Purchasing of Dental practices; Regulatory and Contract Law Advice for Healthcare businesses. 

You can contact Alex Hall at 0117 923 4050 or email ajh@meadeking.co.uk