Hospital's Legal Opinion On Chapter 55A
Hospital's Legal Opinion On Chapter 55A
Dear Lynn:
In connection with this analysis, we have examined those documents deemed relevant
and appropriate to these matters, including the following:
(ii) The Articles of Incorporation of NHRMC, as amended and on file with the
Secretary of State of the State of North Carolina as of the date hereof;
(v) The Municipal Hospital Act, N.C. Gen. Stat. § 131E-5 et. seq.
(vi) Information and facts derived from consultation with NHRMC and
County executive leadership;
NHRMC is a North Carolina nonprofit corporation and component unit of the County.
NHRMC is tax-exempt under Section 501(c)(3) of the Internal Revenue Code. NHRMC was
formed pursuant to N.C. Gen. Stat. § 131E-5(b)1 and is deemed a “public hospital” pursuant to
N.C. Gen. Stat. § 159-39(a)(2).2
NHRMC operates a health care system, which includes hospitals, physician practices, and
related facilities, clinics, and services, that serves the residents of the County and the surrounding
area in southeastern North Carolina (collectively, the “Business”). NHRMC operates the
Business on behalf of the County. Pursuant to the terms of the Lease, the economic benefits of
the operation of the Business ultimately accrue for the benefit of the County.
The business and affairs of NHRMC are governed by a board of trustees (the “NHRMC
Board”). The County, through its County Board of Commissioners (the “Board of
Commissioners”), appoints all non-ex-officio3 members of the NHRMC Board. Those appointed
members make up a majority of the NHRMC Board. The Board of Commissioners further has
1
N.C. Gen. Stat. § 131E-5(b) states: “The purpose of this Part is to authorize municipalities to construct, operate and
maintain hospitals and other facilities which furnish hospital, clinical and similar services to the people of this State.
It is also the purpose of this Part to authorize municipalities to cooperate with other public and private agencies and
with each other. Additionally, it is the purpose of this Part to authorize municipalities to accept assistance from State
and federal agencies and from other sources.”
2
Pursuant to N.C. Gen. Stat. § 159-39(a)(2), the definition of “public hospital” includes any hospital which “is
owned by a county, city, hospital district or hospital authority and operated by a nonprofit corporation or
association, a majority of whose board of directors or trustees are appointed by the governing body of a county, city,
hospital district, or hospital authority.”
3
Ex Officio members of the NHRMC Board of Trustees include (i) one Member of the Board of County
Commissioners of the County, (ii) one member of the Board of Trustees of Pender Memorial Hospital; (iii) the
President of the Medical Staff of New Hanover Regional Medical Center, (iii) the immediate past President of the
Medical Staff of New Hanover Regional Medical Center, and (iv) the President of the Medical Staff of Pender
Memorial Hospital.
2
the right to remove and replace any or all non-ex-officio members of the NHRMC Board, at any
time and for any or no reason, in its discretion. While the NHRMC Board provides a slate of
suggested nominees for the Board of Commissioners to consider for any appointments to the
NHRMC Board, the Board of Commissioners has no obligation and is not required to select and
appoint any of such nominees and, in fact, the Board of Commissioners has in the past appointed
individuals to the NHRMC Board who were not nominated or recommended by the NHRMC
Board. By virtue of this unrestricted right to appoint and remove all non-ex-officio members of
the NHRMC Board, the County indirectly asserts control with respect to the governance of
NHRMC.
The County further asserts control with respect to NHRMC and the Business under the
terms of the Lease, which is essentially an operating lease pursuant to which NHRMC operates
the Business on behalf of the County. The County owns, or has a beneficial interest in, all of the
assets used in the operation of the Business, including, but not limited to, all of the property
comprising the NHRMC healthcare system (collectively, the “Assets”).4 The Lease includes
comprehensive covenants and restrictions pertaining to NHRMC’s use of such Assets.5 Over the
years, NHRMC has procured financing through County-issued bonds, including the above
referenced Series 2017 Bonds. Such financing arrangement is only possible as a result of
NHRMC’s status as a component unit of the County.
While NHRMC does hold title in the name of NHRMC to certain property and assets
constituting Assets used in conjunction with the Business, NHRMC holds such title for the
benefit of the County, effectively as a custodian, pursuant to the terms of the Lease. At any time,
the County has the right to cause NHRMC to transfer or convey title to any such assets to the
County. NHRMC cannot transfer Assets to any third-party, outside the ordinary course of
business, without the County’s consent.6 Further, in the event the Lease terminates for any
reason, NHRMC is required to assign and convey all of the Assets to the County or the County’s
designee, and cannot retain or distribute any such Assets in any other manner.7
4
Under the Lease, the County leases certain “Existing Facilities” to NHRMC. See Lease, Section 3.01; definition of
“Existing Facilities”. “Existing Facilities” was redefined, through various amendments, to add new projects and
properties to the scope of assets leased to NHRMC. See, e.g., Second Amendment to Lease, definition of “Existing
Facilities”. Further, the County has a beneficial interest in all assets comprising the “Health Care System” as defined
in the Lease, which includes, but is not limited to, the Existing Facilities, any bond-financed projects, all equipment,
all facilities, and all real property of the County or NHRMC operated by NHRMC, together with all additions,
improvements, extensions, alterations, and appurtenances thereto and thereon, whether existing at the inception of
the Lease or acquired during the term of the Lease. See Lease, definition of “Health Care System”; Lease Article IV
(setting forth NHRMC’s covenants and commitments to operate the Health Care System for the benefit of the
County); and Lease, Section 12.11 (requiring NHRMC to transfer all assets of NHRMC to the County upon
termination of the Lease).
5
See e.g. Lease, Article IV.
6
See Lease, Section 5.03.
7
See Lease Section 3.03.
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with the County’s Assets.8 NHRMC’s sole purpose is to operate the Business on behalf of the
County pursuant to the Lease.
The Board of Commissioners and the NHRMC Board have determined that it is in the
best interests of the County, NHRMC, and the community, to explore a potential affiliation
transaction in order to improve the availability and quality of care in New Hanover County and
the surrounding area. As part of this process, the Board of Commissioners and the NHRMC
Board formed a joint sub-committee of each, the Partnership Advisory Group (“PAG”).
The County, in coordination with NHRMC, further pursued this exploration of a potential
affiliation by initiating the public bid process set forth in N.C.G.S. 131E-13(d), applicable to any
lease or sale of any municipal, public hospital, of which NHRMC qualifies (“Public Bid
Process”).9 The Public Bid Process managed by the County, in coordination with the NHRMC
Board and the PAG, has been competitive. Six nationally recognized health systems from around
the country submitted proposals in response to the County’s request for proposals issued in
connection with the Public Bid Process (“Request for Proposals”). Through considerable
deliberation, the PAG has tentatively narrowed the respondents down to three finalists, which
include The Charlotte-Mecklenburg Hospital Authority d/b/a Atrium Health, a North Carolina
hospital authority10 (“Atrium”), Duke University Health System, Inc., a North Carolina
nonprofit corporation (“Duke”), and Novant Health, Inc., a North Carolina nonprofit corporation
(“Novant”) (Atrium, Duke, and Novant are, collectively, the “Finalists”); provided, however,
that all six respondents remain under consideration pending a public hearing and the final
determination of the Board of Commissioners and NHRMC Board. The County and NHRMC
envision that, subject to such public hearing and final determinations, the Proposed Transaction
(“Proposed Transaction”) may be structured as an asset purchase transaction, pursuant to which
the County will transfer, or cause to be transferred, all of the Assets and operations of the
Business to one of the Finalists (the “Acquiring Entity”). Upon the closing of the Proposed
Transaction, the Acquiring Entity would convey certain consideration, including cash
consideration, certain capital commitments, and other covenants relating to the post-closing
operation of the Assets and the Business.
All monetary payments made in exchange for the Assets pursuant to such Proposed
Transaction would accrue to the sole and exclusive benefit of the County, unless otherwise
8
See N.C. Gen. Stat. § 131E-7(b) (“A municipality…may contract with or enter into any arrangement with…[any]
nonprofit corporation or association for the provision of health care.”).
9
N.C. Gen. Stat. § 131E-13(d)
10
N.C. Gen. Stat. § 131E-16(14) (defining “hospital authority”).
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specifically directed by the County.11 In addition, based on the proposals received, any Acquiring
Entity would further commit to make significant, very meaningful capital and other investments
within the County and the surrounding region for the purpose of fostering and promoting health
and health equity for the betterment of the County and the County’s citizens and communities.
As such, the Proposed Transaction has the potential to be transformative with respect to
expanding access to quality health care in the County and region.
Of the respondents to the County’s Request for Proposal that proposed a full integration
model, the core consideration offered in conjunction with such model by each such respondent
all fell within a reasonable range of one another. Further, in addition to the general market value
“assessment” inherent to a public, competitive bid process, the County and NHRMC have
engaged a nationally recognized financial consultant, Ponder and Co., to further review and test
the appropriateness of any consideration to be paid or committed as part of any Proposed
Transaction.
Following the closing of the Proposed Transaction, it is anticipated that the Assets and
operations of the Business, while titled at that point to either a North Carolina not-for-profit
corporation or a North Carolina hospital authority (or an affiliate thereof) and subject to certain
authority of the parent health system governing board, will remain under the general direction
and oversight of a board of trustees comprised of local appointees, the members of which would
have a fiduciary obligation with respect to the Assets and the Business. The Business will
continue to serve the residents of New Hanover County and the surrounding area without any
diminution in the operations of the Business.
Pursuant to the Act, a nonprofit corporation generally must notify the Attorney General
of any transaction whereby the nonprofit corporation plans to sell or lease all, or a majority of, its
property. Specifically, Section 55A-12-02(g) of the North Carolina General Statutes states in
relevant part:
The Act defines a “charitable or religious corporation” as any corporation that is exempt
under section 501(c)(3) of the Internal Revenue Code of 1986 or any successor section, or that is
organized exclusively for one or more of the purposes specified in section 501(c)(3) of the
Internal Revenue Code of 1986 or any successor section and that upon dissolution shall distribute
its assets to a charitable or religious corporation, the United States, a state or an entity that is
exempt under section 501(c)(3) of the Internal Revenue Code of 1986 or any successor section.12
11
By way of example, subject to the County’s approval, the Acquiring Entity might also make certain financial
contributions to a designated tax-exempt, nonprofit corporation, for the purposes of promoting health within the
community and other charitable purposes.
12
N.C. Gen. Stat. § 55A-1-40(4).
5
Separately, the Act defines a “governmental subdivision” as an authority, county, district, or
municipality.13
Separately, the North Carolina legislature has set forth an entirely different statutory
process to govern the sale or lease of a public hospital.14 As part of the Municipal Hospital Act,
N.C. Gen. Stat. § 131E-13 sets forth specifically the process for the sale, lease or other
conveyance of hospital facilities to a nonprofit corporation or other business entity by a
municipality.15 “Hospital facilities” is defined as:
“Municipality” is defined as “any county, city, or other political subdivision of this State,
or any hospital district created under Part C of” Article 2 of Chapter 131E of the North Carolina
General Statutes.”17
As noted above, the Municipal Hospital Act sets forth a very thorough, comprehensive
Public Bid Process that requires transparency for, and the solicitation of feedback from, the
public.18 This Public Bid Process includes, among a number of other steps, the requirement to
solicit multiple bids, to make copies of all proposals received available for public inspection, to
hold a public hearing on the proposals, and to make a copy of any proposed final contract
13
N.C. Gen. Stat. § 55A-1-40(12) (emphasis added).
14
N.C. Gen, Stat. § 131E-5 et seq. (the “Municipal Hospital Act”)
15
N.C. Gen. Stat. § 131E-13.
16
N.C. Gen. Stat. § 131E-6(4).
17
N.C. Gen. Stat. § 131E-6(5).
18
N.C. Gen. Stat. § 131E-13(d).
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available for public inspection prior to execution.19
3. Conclusions.
Based upon the foregoing, and subject to the assumptions, qualifications and limitations
set forth herein, we believe that the Proposed Transaction is covered by the process applicable to
a municipality’s sale of hospital facilities under the Municipal Hospital Act. Although NHRMC
is a not-for-profit corporation, it is also a component unit of the County and operates entirely as
an agent of the County with respect to the operations of the Business. Further, NHRMC does not
hold any assets for its own benefit or in its own right, as all of the Assets of the Business
ultimately belong to, or accrue to the benefit of, the County.
4. Qualifications.
The opinions expressed herein are based upon facts and applicable laws covered by our
opinions, each as in existence on this date. Our advice on every legal issue addressed in this
letter is based exclusively on the internal laws of the State of North Carolina. We express no
opinion as to what law might be applied by any courts to resolve any issue addressed by our
opinion and we express no opinion as to whether any relevant difference exists between the laws
upon which our opinions are based and any other laws which may actually be applied to resolve
issues which may arise in connection with the Proposed Transaction.
For purposes of this letter, we are relying, with the permission of NHRMC and the
County, solely and exclusively on the accuracy of any facts provided to us by NHRMC and the
County. In rendering the opinions set forth above, we have assumed the authenticity and due
execution of all documents and the absence of any fraud or intent to mislead.
The opinions contained herein are legal opinions only and do not constitute a guaranty or
warranty of the matters stated. The opinions are limited to the matters stated herein, and no
opinion is implied or may be inferred beyond the matters expressly stated. Our opinions
expressed herein are issued solely for the benefit of NHRMC and the County. No other person or
entity may rely or claim reliance upon this opinion without our prior written consent, and we are
not hereby assuming any professional responsibility to any other person whatsoever. Our
opinions are limited to the subject matter and conclusions set forth herein as of the date hereof,
and we hereby undertake no, and disclaim any, obligation to advise of any change in any matters
set forth herein or upon which the opinions set forth above are based.
19
Id.
7
On behalf of the Firm:
By: ____________________________
Joseph M. Kahn, Shareholder