Since the release of Several Opinions on Accelerating the Development of the Elderly Service Industry, policies towards the senior-care sector have continued to be positive. An aging population and the severe undersupply in the growing market for healthy aging have led to an accelerated influx of social capital into the senior-care industry, making it an appealing investment area.
At present, social capital investment in the industry is still in the early development stage in China. The “public welfare” and “social” attributes of the senior-care industry, the long-term nature and uncertainty of market returns, the diversity and particularity of legal subjects of our senior-care institutions, contribute to the difficulties of M&A in this industry. This article will draw on practical experience and make an analysis of M&A models for the sector.
The main models
New construction. Senior care institutions can be divided into for-profit and non-profit institutions according to the standard of whether they aim to make profits and distribute these to investors or organisers.
Have they registered with the competent market supervision and management department (for-profit institutions)? The public institution registration management authority (non-profit institutions with the nature of a public institution legal person)? Or the civil affairs department (non-profit institutions with the nature of a private non-enterprise unit)? They should all have filed with the civil affairs department. Senior-care institutions combining medical and elderly services should have a medical institution practice permit or filed with the health department for the record.
Public construction with private operation
This model is mainly applied in projects funded by both social capital and government. The operational model can be further divided into the following modes:
Authorised operation: After the government finances the construction of senior-care institutions and entrusts part or all of their operations and management to social capital, the operator will be responsible for profit and loss, or the government will pay management fees to the operator and retain the right to income, or both parties will share the income according to the operation status.
Lease model: The government leases out the sites and facilities of the institutions to social capital for use and collects rents. Social capital is responsible for the operation and management of the institutions, ensures the safety of assets, and is also responsible for the maintenance of the sites and facilities, and is responsible for profit and loss and pays rents to the government.
Build-operate-transfer (BOT): As public infrastructure, senior care institutions are jointly built by social capital and the government. Under this model, social capital can participate in the construction and provide a public service. This model includes three processes, i.e., building, operating and transferring. Social capital is responsible for their operation. When the operation right expires, senior care institutions must be handed over to the government without compensation.
Mergers of existing institutions
In terms of legal subjects, for-profit senior-care institutions mainly include corporate and/or unincorporated corporate entities, foreign-invested enterprises, individual entrepreneurs, sole proprietorships, partnerships and other for-profit legal or unincorporated entities. Non-profit institutions mainly include legal persons of public institutions and private non-enterprise units.
When social capital merges for-profit institutions, especially those of corporate entities, usually equity or asset acquisition may be adopted, which can be easily operated. But if the institution is an individual entrepreneur, sole proprietorship, partnership and other unincorporated entity, there are some limits in terms of the investor and model of M&A.
Specifically, companies, organisations or other entities than natural persons cannot merge or acquire the equity of a wholly individual-owned senior-care institution, which can only be invested by natural persons; state-owned enterprises, wholly state-owned companies, listed companies and social organisations cannot acquire a senior-care institution in the form of a general partnership, nor can they receive transfer of the property shares held by the general partners in a senior-care institution in the form of limited partnership and become a general partner.
There are legal obstacles for social capital to merge or acquire a senior-care institution in the form of the public institution legal person. On the one hand, there is no such concept as “shareholder” or “equity” in a public institution legal person, only “organiser” and “right to hold”. There is no legal basis to whether the “right to hold” can be treated as “equity”.
On the other hand, the organisers of institutions are mainly the governments at all levels (such as the civil affairs bureau), and in practice, the change of organisers of government-run senior-care institutions is limited to the change of the name of the organisers or the change of the affiliation of the institutions due to the reform of government agencies or other institutional adjustments. Thus, it is difficult for social capital to implement M&A by changing the organisers of institutions.
Moreover, institutions are established for public welfare purposes and do not distribute profits to the organisers. Thus, it is difficult for social capital to merge and acquire such institutions to achieve financial consolidation and return on investment.
Because of the non-profit, asset donation and public welfare nature of private non-profit senior-care institutions (“private institutions”), it is difficult for social capital to merge and acquire them through common equity or asset mergers and acquisitions.
Social capital acquisitions of private non-government institutions are mainly through indirect equity acquisitions or conversions to for-profit institutions (“conversion mode”). The latter is a complex and difficult process, and indirect equity M&A is more commonly used in practice, specifically in two situations:
(1) in the case where the organiser is a corporate legal entity, social capital can acquire a controlling stake in the organiser’s company (including its controlling shareholder or actual controller) through equity acquisition or capital increase;
(2) in the case where the organiser is a natural person or an unincorporated entity, social capital may acquire a controlling stake in the new service/or management company established by the organiser and/or its controller as the operating entity (“new entity”, which will enjoy the right to operate and manage the institution) by way of equity acquisition or capital increase of the new entity.
Cindy Hu is a partner and Yang Jiaxin is an associate at East & Concord Partners
East & Concord Partners
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