Does a Tennessee governmental hospital have to notify the AG before merging two of its subsidiary corporations?

Plain-English summary

The Tennessee Public Benefit Hospital Sales and Conveyance Act of 2006 (Tenn. Code Ann. §§ 48-68-201 et seq.) requires public benefit hospital entities to give the Attorney General written notice before entering into certain extraordinary asset transfers. The Act is the legislative response to a long-running concern that nonprofit and governmental hospitals were quietly transferring valuable charitable assets to for-profit affiliates without the public ever finding out. The AG's review under § 48-68-206 and § 48-68-207 looks at whether the entity is getting fair market value, whether the transaction breaches fiduciary duties or enriches insiders, whether the board did its diligence, and whether community access to care will be hurt.

Rep. Fitzhugh asked whether the Act applies when a governmental hospital decides to merge two of its own subsidiaries. The hospital is the sole member of both subsidiaries, both are public benefit hospital entities, and after the merger all the assets remain under the governmental hospital's control. Doesn't this look like internal corporate housekeeping?

The AG concluded: it does not look like that, legally. Each subsidiary is itself a public benefit hospital entity under § 48-68-202(4) (the definition expressly captures entities "affiliated... such as a holding company or subsidiary"). When two such subsidiaries merge, the merging subsidiary transfers control of all its assets to the surviving subsidiary. That is the very transaction § 48-68-202(3)(B) defines as a "public benefit hospital conveyance transaction": the transfer of control or governance of a material amount of the assets or operations of a public benefit hospital entity to another entity. So the merger triggers § 48-68-203's notice requirement.

The Act does have an escape hatch in § 48-68-203(c): notice is not required if the transaction is in the "usual and regular course" of the entity's activities and the AG has issued a written waiver. The AG concluded a merger is not in the "usual and regular course" of activities. The Tennessee Nonprofit Corporation Act treats mergers and asset sales differently: there is no "usual and regular course" exception for nonprofit mergers (under Tenn. Code Ann. § 48-61-102(b)) precisely because a merger ends the merging entity. After a merger, the merging corporation no longer exists to continue its activities at all. By contrast, the "usual and regular course" concept does apply to asset sales by nonprofits (under §§ 48-62-101 and 48-62-102(g)), because the corporation survives the sale and can keep pursuing its mission.

Because the merger is not in the usual and regular course of activities of the merging subsidiary, the AG did not need to address whether the proposed transaction could qualify for the AG's written-waiver criteria. The AG also declined to enumerate in advance which kinds of transactions warrant a waiver, noting that the determination is fact-specific and depends on the considerations in §§ 48-68-206 and 48-68-207.

Currency note

This opinion was issued in 2010. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The Public Benefit Hospital Sales and Conveyance Act has been amended at various points since 2010. Any current Tennessee hospital merger or asset-transfer should be analyzed against the current text of Tenn. Code Ann. §§ 48-68-201 et seq. and any current AG procedural guidance, not against the 2010 framework described here.

Common questions

Q: Why does Tennessee require AG notice before a hospital merger?
A: Charitable and governmental hospitals hold assets in trust for the public. Transactions that move those assets out from under public control (sales to for-profit operators, transfers to affiliates, mergers that end a charitable entity) are the moments when oversight is most needed. The Public Benefit Hospital Sales and Conveyance Act of 2006 requires AG notice so the AG can review the transaction against statutory factors before assets change hands.

Q: What kinds of transactions trigger the notification requirement?
A: Under § 48-68-202(3), a "public benefit hospital conveyance transaction" includes the sale, transfer, lease, exchange, option, conveyance, or other disposition of a material amount of the assets or operations of a public benefit hospital entity to another entity or person, and the transfer of control or governance of a material amount of those assets or operations.

Q: Does the "subsidiary of a subsidiary" structure matter?
A: No. The Act's definition of "public benefit hospital entity" in § 48-68-202(4) is broad: it captures governmental hospitals, public benefit corporations licensed as hospitals, and entities affiliated with either "through ownership, governance, or membership, such as a holding company or subsidiary." A wholly-owned subsidiary of a governmental hospital is itself a public benefit hospital entity, and merging two such subsidiaries is a covered transaction.

Q: Why doesn't the merger qualify for the "usual and regular course" waiver?
A: Because a merger is not something an entity does in the usual course; it is what an entity does once, at the end of its existence. After the merger, the merging entity ceases to exist and can no longer carry on any of its activities. The Tennessee Nonprofit Corporation Act treats this exactly the same way: it imposes notification requirements on nonprofit mergers under § 48-61-102(b) without any "usual and regular course" exception.

Q: How is that different from asset sales by nonprofits?
A: Asset sales preserve the nonprofit. The corporation sells some property, pockets the proceeds, and continues its mission. So a hospital that routinely sells off, say, surplus diagnostic equipment as part of operating its business is in the "usual and regular course" of activities. The Nonprofit Corporation Act (§§ 48-62-101 and 48-62-102(g)) acknowledges that and excuses ordinary asset sales from notification. The hospital Act borrows the same concept.

Q: What does the AG review when it gets notice of a hospital conveyance?
A: Under § 48-68-206, the AG looks at, among other things, whether the public benefit hospital entity will receive full and fair market value for its charitable assets, whether the transaction would result in a breach of fiduciary duty or private inurement, and whether the entity's governing board exercised appropriate due diligence. Under § 48-68-207, the AG also considers whether the transaction may have a significant effect on the availability or accessibility of health care services to the affected community.

Q: When does the AG actually issue a written waiver under § 48-68-203(c)?
A: When the transaction is genuinely in the usual and regular course of the entity's activities AND the AG has affirmatively chosen to waive notice for that transaction. Both conditions must be met. The AG declined to provide a categorical list of waiver-eligible transactions, treating the decision as fact-specific.

Background and statutory framework

The Public Benefit Hospital Sales and Conveyance Act of 2006, Tenn. Code Ann. §§ 48-68-201 et seq., is Tennessee's framework for protecting charitable hospital assets during ownership changes. The structure has three pieces.

Definitions (§ 48-68-202): A "public benefit hospital entity" is broadly defined to include governmental hospitals, public benefit corporations licensed as hospitals, and any entity affiliated with them through ownership, governance, or membership. The legislature deliberately wrote this to capture holding companies and subsidiaries so that complex corporate structures could not be used to evade oversight. A "public benefit hospital conveyance transaction" includes both outright sales and transfers of control or governance of a material amount of assets or operations.

Notice and waiver (§ 48-68-203): Subsection (a) requires written notice to the AG before any covered transaction. Subsection (c) excepts transactions that are "in the usual and regular course of [the entity's] activities" and for which the AG has provided a written waiver.

AG review factors (§§ 48-68-206 to 48-68-207): The AG examines fair market value, fiduciary-duty compliance, board diligence, and community access to care, among other factors.

The "usual and regular course" language is borrowed from corporate law, where it has long distinguished between routine business decisions (which corporations make without shareholder/member notice or approval) and extraordinary transactions (which require notice or approval). The Tennessee Nonprofit Corporation Act applies it asymmetrically: ordinary asset sales by nonprofits are exempted from notice (§§ 48-62-101 and 48-62-102(g)), but mergers are not (§ 48-61-102(b)).

The opinion's reasoning rests on that asymmetry. A merger is structurally different from an asset sale because it ends the merging entity. There is no "usual" version of disappearing. By contrast, a hospital that regularly sells surplus equipment, leases ancillary services, or makes routine real-property transactions can plausibly be doing those things in the usual course. The opinion leaves open which specific transactions might qualify; that determination is left to the AG's case-by-case review.

The question Rep. Fitzhugh asked is a recurring one in hospital reorganizations: when a parent governmental hospital is reorganizing its corporate structure (consolidating two subsidiaries, simplifying governance, eliminating duplicative entities), does the Act treat that as "internal housekeeping" or as a covered transaction? The opinion comes down firmly on the side of treating it as a covered transaction. The textual hook is the statutory definition's express inclusion of subsidiaries as separate public benefit hospital entities. Once each subsidiary is its own covered entity, a transfer of assets from one to another is a transfer "to another entity or person," even if both are wholly owned by the same governmental parent.

The practical upshot is that hospital groups planning internal mergers should expect to file the same § 48-68-203 notice they would file for a third-party transaction. The AG's review is a fact-specific look at fair market value, fiduciary duties, and community impact, but the notice itself is mandatory.

Citations and references

Statutes:

• Tenn. Code Ann. § 48-68-201 et seq. (Public Benefit Hospital Sales and Conveyance Act of 2006)
• Tenn. Code Ann. § 48-68-202(3)(B) (definition of public benefit hospital conveyance transaction)
• Tenn. Code Ann. § 48-68-202(4) (definition of public benefit hospital entity)
• Tenn. Code Ann. § 48-68-203 (notice requirement)
• Tenn. Code Ann. § 48-68-203(c) (waiver for usual-and-regular-course transactions)
• Tenn. Code Ann. § 48-68-206 (factors the AG must consider)
• Tenn. Code Ann. § 48-68-207 (community-access factor)
• Tenn. Code Ann. § 48-51-101 et seq. (Tennessee Nonprofit Corporation Act)
• Tenn. Code Ann. § 48-61-102(b) (no usual-and-regular-course exception for nonprofit mergers)
• Tenn. Code Ann. §§ 48-62-101 and 48-62-102(g) (asset sales by nonprofits)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2010/op10-049.pdf

Original opinion text

April 14, 2010

Opinion No. 10-49

Applicability of Notification Provisions of Tenn. Code Ann. § 48-68-203 to Subsidiary Mergers

QUESTIONS

1. Do the notification requirements of Tenn. Code Ann. § 48-68-203 apply to a governmental hospital, which is also a public benefit hospital entity, where: i) the governmental hospital chooses to merge two of its subsidiaries; ii) the governmental hospital is the sole member of each subsidiary; and iii) all related nonprofit assets of both the surviving entity and the merging entity remain under the ownership and control of the governmental hospital?

2. Does such a transaction meet the attorney general and reporter's requirements for a written waiver pursuant to Tenn. Code Ann. § 48-68-203(c)?

3. If not, what types of public benefit hospital entity transactions do warrant a written waiver under Tenn. Code Ann. § 48-68-203(c)?

OPINIONS

1. Yes. Pursuant to Tenn. Code Ann. § 48-68-202(4), a subsidiary of a public benefit hospital entity is also a public benefit hospital entity. Therefore, the merger of two such subsidiaries, whereby the merging subsidiary transfers control of all of its assets to the surviving subsidiary, constitutes a "public benefit hospital conveyance transaction" as defined at Tenn. Code Ann. § 48-68-202(3)(B). Because the merger is not in the "usual and regular course" of the activities of the merging subsidiary, it is subject to the notification requirements of Tenn. Code Ann. § 48-68-203.

2. No. Because the merger does not meet the "usual and regular course" condition for exemption from the notification requirements of Tenn. Code Ann. § 48-68-203, it is not necessary to determine whether the transaction meets the attorney general and reporter's requirements for a written waiver.

3. Whether a particular public benefit hospital conveyance transaction warrants a written waiver from the attorney general and reporter pursuant to Tenn. Code Ann. § 48-68-203(c) will depend on the specific facts and circumstances of the proposed transaction.

ANALYSIS

1. The Public Benefit Hospital Sales and Conveyance Act of 2006, Tenn. Code Ann. §§ 48-68-201, et seq. (the "Hospital Act") governs the transfer of assets from one public benefit hospital entity to another entity. Pursuant to § 48-68-203 of the Hospital Act, a public benefit hospital entity must provide written notice to the attorney general and reporter before entering into certain extraordinary asset transfers. The term "public benefit hospital entity" is defined in § 48-68-202(4) of the Hospital Act, as "any public benefit corporation … or any governmental entity that is licensed as a hospital … or considered a hospital …, including entities affiliated with any of these through ownership, governance, or membership, such as a holding company or subsidiary." Emphasis added. Under this definition, a subsidiary of a government hospital, which is itself a public benefit hospital entity, would also be considered a public benefit hospital entity.

When two such subsidiaries merge, control of the assets of the merging subsidiary is transferred to the surviving subsidiary. Section 48-68-202(3)(B) of the Hospital Act defines a public benefit hospital conveyance transaction to include "[t]he transfer of control or governance of a material amount of the assets or operations of a public benefit hospital entity to another entity or person." Under this definition, the merger of the two subsidiaries, each of which is a public benefit hospital entity pursuant to § 48-68-202(4) of the Hospital Act, constitutes a public benefit hospital conveyance transaction.

Section 48-68-203(a) of the Hospital Act provides that "any public benefit hospital entity shall be required to provide written notice to the attorney general and reporter, prior to entering into any public benefit hospital conveyance transaction." Therefore, because the merger of two subsidiaries constitutes a public benefit hospital conveyance transaction, the notification requirements of § 48-68-203 apply.

In certain circumstances, however, a public benefit hospital conveyance transaction may be exempt from the notification requirements of the Hospital Act. Section 48-68-203(c) provides that:

[t]his part shall not apply to a public benefit hospital entity, if the public benefit hospital conveyance transaction is in the usual and regular course of its activities, and if the attorney general and reporter has given the public benefit hospital entity a written waiver of this part as to the public benefit hospital conveyance transaction.

There are two conditions, therefore, for a public benefit hospital conveyance transaction to be exempt from the notification requirements of the Hospital Act: (1) the transaction in question must be in the usual and regular course of public benefit hospital entity's activities, and (2) the attorney general and reporter must provide the public benefit hospital entity with a written waiver of the notice requirements.

If a transaction is not in the usual and regular course of the public benefit hospital entity's activities, then a written waiver from the attorney general and reporter will be insufficient to avoid the notification requirements of the Hospital Act. The term "usual and regular course" is not defined in the Hospital Act, nor does it appear to be defined elsewhere in Tennessee statutory or case law. Nevertheless, because a merger effectively ends the business of the merging public benefit hospital entity, it is likely not in the "usual and regular course" of activities of the merging entity. For example, under the Tennessee Nonprofit Corporation Act, Tenn. Code Ann. §§ 48-51-101, et seq., there is no "usual and regular course" exception to the notification requirement for mergers by nonprofit corporations. Cf. Tenn. Code Ann. § 48-61-102(b). By contrast, the "usual and regular course" exception does apply to sales of assets by nonprofit corporations. Cf. Tenn. Code Ann. §§ 48-62-101 and 48-62-102(g). This is likely due to the fact that after selling its assets, a nonprofit corporation may be able to use the sale proceeds to pursue its mission, while after a merger, the nonprofit corporation ceases to exist and can no longer carry out its activities.

Because the merger of two subsidiaries is not in the "usual and regular course" of the activities of the merging subsidiary, the merger will be subject to the notification requirements of § 48-68-203 of the Hospital Act, with or without a written waiver by the attorney general and reporter.

2. Because the merger of two subsidiaries is not in the "usual and regular course" of the activities of the merging subsidiary, the notification requirements of § 48-68-203 of the Hospital Act will apply to the transaction, with or without a written waiver by the attorney general and reporter. Therefore, it is not necessary to address whether or not the proposed merger meets the attorney general and reporter's requirements for a written waiver pursuant to § 48-68-203(c).

3. As noted above, certain public benefit hospital conveyance transactions may be exempt from the notification provisions of the Hospital Act. Such transactions must first be within the "usual and regular course" of activities of the public benefit hospital entity. Tenn. Code Ann. § 48-68-203(c). However, even if the proposed transaction is in the "usual and regular course" of activities, whether or not such a transaction qualifies for a written waiver from the attorney general and reporter will depend on very specific facts and circumstances. For example, § 48-68-206 requires the Attorney General to consider, among other things, whether the public benefit hospital entity will receive full and fair market value for its charitable assets; whether the proposed transaction will result in any breach of fiduciary duty or private inurement, and whether the public benefit hospital entity's governing board exercised appropriate due diligence. Tenn. Code Ann. § 48-68-207 further requires the attorney general and reporter to consider "whether the proposed public benefit hospital conveyance transaction may have a significant effect on the availability or accessibility of health care services to the affected community." The determination of these issues will need to be made on a case-by-case basis and will depend on the unique facts and circumstances surrounding the proposed public benefit hospital conveyance transaction.

ROBERT E. COOPER, JR.
Attorney General and Reporter

MICHAEL E. MOORE
Solicitor General

JEREMY E. PYPER
Assistant Attorney General

Requested by:

The Honorable Craig Fitzhugh
State Representative
33 Legislative Plaza
Nashville, TN 37243-0182