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Bar Journal - March 1, 2003

The Charitable Trusts Aspects of a Hospital Merger


The Merger of Franklin Regional Hospital and Lakes Region General Hospital


Over the last five years, the healthcare industry in New Hampshire has been the subject of a regulatory revolution which has refocused hospitals and other healthcare entities to a remarkable degree on their original identities as public charities. This refocusing has expressed itself in a number of regulatory developments, the most dramatic of which involved the Attorney General's March 1998 Report on Optima Health,1 and the subsequent, Probate Court overseen, dissolution of Optima Health into its constituent hospital organizations, Elliot Hospital and Catholic Medical Center.2 That process highlighted, for both lawyers and healthcare administrators, the critical importance of examining major corporate actions for fidelity to the stated charitable mission of a healthcare entity; and it also emphasized the central role of the Director of Charitable Trusts ("the Director") and the Probate Court (under the charitable doctrines of cy pres and deviation) as protectors of the public interest in ensuring that fidelity.

At the same time, some less dramatic, but nevertheless critical statutory enactments and regulatory actions have also contributed to the reapplication of charitable principles to New Hampshire healthcare entities. These include the enactment of RSA 7:32-c - 7:32-l ("the Community Benefits Law," effective January 1, 2000), which imposes on "healthcare charitable trusts" - including virtually all community hospitals in the state - an obligation to report annually to the Director of Charitable Trusts on their community benefits plans and actions; and of RSA 7:19-b ("Standards for Acquisition Transactions Involving Healthcare Charitable Trusts and Review by Director of Charitable Trusts," effective September 1, 1997) under which mergers or acquisitions involving healthcare charitable trusts are made subject to extensive review by the Director of Charitable Trusts.3 Over the last several years, the Director has twice been involved in acquisition transactions involving healthcare charitable trusts, first in 1997 with regard to the acquisition of the Matthew Thornton Health Plan by Blue Cross Blue Shield of New Hampshire,4 and then in 1999 under RSA 7:19-b concerning the subsequent acquisition of Blue Cross Blue Shield of New Hampshire by Anthem Insurance Companies. In each of these acquisition transactions, the Director required, through cy pres, the establishment of a monetary trust to ensure, as nearly as possible, the continuation of the charitable missions of the acquired entities.5

During 2001 and 2002, however, the state faced the first actual merger of two charitable hospitals following the Optima matter and the enactment of RSA 7:19-b. The process by which the directors and officers of both Lakes Region General Hospital ("LRGH") and Franklin Regional Hospital ("FRH") approached, analyzed, and negotiated the transaction, as well the corporate and charitable structure fashioned collectively by both organizations for the merged entity (now known as "LRGHealthcare") provides a lesson in the importance of emphasizing charitable principles in any healthcare merger or acquisition transaction. Moreover, the process by which the Director and the Probate Court reviewed the proposed merger, and the criteria applied by each institution to its review provide an important roadmap for practitioners and executives who may contemplate a merger or change of control6 of a New Hampshire charitable healthcare entity in the future.


Twenty-six of New Hampshire's twenty-eight community hospitals are charities, organized at various times over the last century and more by community groups, religious organizations, or pursuant to bequests by individuals. As such, community hospitals are specifically subject to the common law, equitable, and statutory principles that govern a charitable institution's establishment, conduct, and, in certain cases, a termination or change from its original charitable mission. In the high-tech, high-pressure environment of modern healthcare, it may seem anomalous that principles of charitable regulation developed more than a century ago still control the actions and decisions of a hospital's board of trustees and professional management. But the experience of the last five years in New Hampshire clearly demonstrates the continuing relevance of such traditional principles, as well as the importance of current statutes intended to adapt those principles to modern times and transactions. The example of Optima Health may demonstrate that trustees ignore those principles at great peril to their organizations. Hopefully, the recent FRH/LRGH transaction will demonstrate the measure of public good that can be achieved by respect for, and adherence to, traditional notions of what it means to be a charity in New Hampshire.


Cy pres is a traditional equitable power exercised by the Probate Court, which is codified at RSA 547-d.7 When property is given in trust for a charitable purpose, and the specified purpose of the trust has become impossible, impracticable or illegal, the doctrine of cy pres allows the property to be applied to another charitable purpose as similar as possible to the original purpose of the trust.8 The purpose of a cy pres proceeding is to allow the Probate Court to determine what the original purpose of the charitable trust is; whether that purpose has become impracticable, impossible or illegal; and if so, what other purpose would be the most closely comparable.9

RSA 7:19-b

In many ways, RSA 7:19-b embodies and extends the principles of cy pres within a modern regulatory structure. The statute works in two separate, but complementary ways. First, it imposes on the trustees of a healthcare charitable trust which is the subject of an "acquisition transaction"10 the duty to certify to the Director and to the public that:

  1. The proposed transaction is permitted by applicable law, including, but not limited to, RSA 7:19-32, RSA 292, and other applicable statutes and common law;
  2. Due diligence has been exercised in selecting the acquirer, in engaging and considering the advice of expert assistance, in negotiating the terms and conditions of the proposed transaction, and in determining that the transaction is in the best interest of the health care charitable trust and the community which it serves;
  3. Any conflict of interest, or any pecuniary benefit transaction as defined in this chapter, has been disclosed and has not affected the decision to engage in the transaction;
  4. The proceeds to be received on account of the transaction constitute fair value therefor;
  5. The assets of the health care charitable trust and any proceeds to be received on account of the transaction shall continue to be devoted to charitable purposes consistent with the charitable objects of the health care charitable trust and the needs of the community which it serves;
  6. If the acquirer is other than another New Hampshire health care charitable trust, control of the proceeds shall be independent of the acquirer; and
  7. Reasonable public notice of the proposed transaction and its terms has been provided to the community served by the health care charitable trust, along with reasonable and timely opportunity for such community, through public hearing or other similar methods, to inform the deliberations of the governing body of the health care charitable trust regarding the proposed transaction.11

Importantly, these certifications are described as "minimum standards;"12 and the statute specifically provides that the traditional charitable doctrines of cy pres, deviation and termination continue to apply to healthcare charities, notwithstanding compliance with the statute.13

The second aspect of the statute provides that the Director shall review all acquisition transactions for compliance with at least the minimum standards set out above.14 This review is ordinarily triggered by the acquired party's filing of a notice of the transaction with the Director. The Notice must identify all parties to the transaction and:

[S]hall set forth all material terms thereof, including, without limitation, any changes in control or ownership of assets, any acquisition price, any change in the capital structure and management, and any and all compensation paid or to be paid in connection therewith; shall include a copy of the minutes and other documents evidencing the decision of the governing body of the health care charitable trust, including documentation of steps taken to comply with paragraph II(g) of this section and any changes in the proposed transaction resulting therefrom, any relevant community needs assessment developed by the health care charitable trust, and a copy of the acquisition agreement and financial statements of all parties; and shall include a certification signed by those members of the governing body or other person approving the acquisition on behalf of the health care charitable trust that the standards set forth in paragraph II of this section have been considered in good faith and complied with, together with such explanations and other documentation as may be necessary to demonstrate such compliance. The notice shall also include a statement from the acquirer specifying the manner in which it proposes to continue to fulfill the charitable objects of the health care charitable trust. Any information submitted pursuant to this section shall be subject to RSA 91-A.15

Under the statute, the Director has 120 days to review this comprehensive submission.16 The Director may require additional information, and may retain expert assistance to fully address financial or other issues raised by the proposed transaction. The reasonable fees of any such expert are to be paid by the parties proposing the transaction.


It was within this statutory and regulatory framework that, beginning in February 2000, the Boards of Trustees of Franklin Regional Hospital and Lakes Region General Hospital began a process which would culminate effective July 1, 2002 with the formation of a merged entity, known as LRGHealthcare, the stated mission of which was to provide healthcare services to communities located throughout the Lakes Region and Central New Hampshire by the maintenance and operation of acute care hospitals in both Laconia and Franklin, New Hampshire.


Located in Central New Hampshire, Franklin Regional Hospital is a community hospital which was founded in 1909 as a not-for-profit charitable corporation by the Franklin Ladies' Hospital Aid Society, with the stated charitable purpose of providing acute healthcare services to residents of the City of Franklin and surrounding communities. In the years preceding the opening of the Franklin Hospital, the Society maintained medical supply boxes in various mills in Franklin and supported a District nurse for care of the sick at home. In 1909, the Ladies' Hospital Aid Society purchased a mansion known as the Aiken Homestead which opened its doors as the site of the first Franklin Hospital on January 1, 1910. From that time to the present, the Franklin Hospital grew into the Franklin Regional Hospital with a focus on serving the greater Franklin community.

Prior to the merger with LRGH, FRH's governance was provided in a Board of Trustees elected by the Franklin Regional Hospital Association, a membership organization consisting of several hundred community representatives. Beginning in February 2000, in response to growing pressures within the healthcare industry and FRH's progressively declining financial performance, the FRH Trustees, consistent with the doctrine of cy pres, determined that the organization could not continue to carry out its charitable mission indefinitely without assistance. Accordingly, they established a Task Force on Strategic Alliances to conduct a formal analysis of the appropriateness and feasibility of strategic alliances with other healthcare providers. The Trustees retained a professional consultant to assist them in evaluating their options.17

The study conducted by FRH was a comprehensive examination of its then current and forecasted financial condition, along with an analysis of its standing in the marketplace and other demographic trends in its service area. As a result of that process, the Trustees of FRH determined that due in part to its relatively small size, the burden of its existing debt, the effects of certain third party payor contracts, as well as competition from other healthcare service providers, it was and would be difficult or impossible for FRH to amass or borrow sufficient financial capital to invest in the technology, equipment, facilities and programs required to meet local healthcare needs. This conclusion compelled them, in order to preserve FRH's charitable mission of service to Franklin and surrounding communities, to seek a strategic partnership with an entity capable of providing FRH with management services, absorbing its current obligations, and furnishing it with capital and operating support over time.

Critical to the Trustees' evaluation was the fact that, prior to beginning the process, they had articulated specific concerns and goals which served as criteria for evaluating proposals. Chief among these was a commitment to assist FRH in its goal of maintaining an acute care hospital within the City of Franklin. The FRH Trustees then embarked on a process of soliciting proposals from other local and national healthcare organizations. The process consisted of requests for expressions of interest, and ultimately, requests for proposals from a handful of interested and qualified entities. The Trustees held a series of informational meetings with their potential partners.

The proposals presented to the FRH Board of Trustees ranged from loose affiliations with other community hospitals to outright acquisition by a for-profit entity. At the end of the day, however, FRH chose to accept the proposal of LRGH to effectuate a strategic alliance between the Hospitals via a full asset merger, with the avowed intent of maintaining both the Franklin and the Lakes Region hospitals as acute care community facilities.

Like FRH, LRGH had operated as a community hospital serving the Lakes Region for more than a century. It was organized in 1893 as the Laconia Hospital Association (the "Association") under and pursuant to a principal bequest from the estate of Rhoda Ladd. Its hospital facility was first opened in 1898, under the name "The Cottage Hospital." In 1908, the hospital opened a new facility on its present site on Highland Street, renaming the facility "Laconia Hospital." In 1966, as a reflection of the growing reach of the hospital's care beyond the City of Laconia, the Association's Articles of Agreement were amended to change the name of the Association to Lakes Region General Hospital Association, and the name of Laconia Hospital to Lakes Region General Hospital (now collectively "LRGH"). Like FRH, LRGH was organized as a membership organization under which the Lakes Region Hospital Association, made up of local citizens, retained final control over a community-based Board of Trustees.

From the perspective of LRGH, a strategic alliance between FRH and LRGH constituted an appropriate extension of LRGH's charitable mission. The service areas identified by both organizations overlapped and their clinical services appeared to be compatible.18 Additionally, most physicians practicing within the service areas of the two hospitals had privileges and practiced at both institutions. Each hospital's emergency room was staffed by contract with the same provider group. In addition, the hospitals had a history of cooperation in community ventures. Accordingly, after a round of negotiations and preliminary due diligence, the management of the two hospitals drafted and executed a Letter of Intent ("LOI") dated April 4, 2001.


What is interesting from a healthcare policy and regulatory perspective is the fact that the proposed merger, even in its embryonic stages, was motivated more by charitable principles than by pure economics. From the FRH perspective, the process was driven by the Franklin Regional Hospital's Trustees' explicit goal of preserving FRH as an acute care community service institution. LRGH, on the other hand, faced the issue of whether its Trustees could prudently extend that organization's resources and charitable mission to embrace Franklin and surrounding communities without jeopardizing its own financial performance and consequent ability to carry out its primary mission in Laconia. For an organization which, like most community hospitals, had been battered by the Balanced Budget Act and other declining revenues in recent years, this was no idle question. Thus, in fashioning the merger of these two institutions, the Trustees of each Board posed themselves the difficult query of whether a combined organization could simultaneously remain faithful to the distinct missions of its constituent entities and continue to be fiscally sound.


Interestingly, the regulatory and legal framework posed by RSA 7:19-b and the underlying doctrines of cy pres and deviation proved to be more an aid than a regulatory hurdle in the context of these issues. This is so because the statute and charitable doctrines provided the Trustees and management of each institution with both a procedural roadmap and a guide to the criteria by which the questions raised by the merger could be addressed in a manner consistent with their fiduciary duties.


For example, RSA 7:19-b requires reasonable public notice of a proposed acquisition transaction and an opportunity for meaningful public input.19 Here, immediately following the public announcement of the LOI, the hospitals themselves organized two community forums, one in Laconia and one in Franklin. Each was adequately publicized and drew sizeable numbers of concerned citizens, who were given an opportunity to question management and the Trustees and to express concerns about the implications of the merger. Notably, each forum was also attended by the Director of Charitable Trusts. It is important to emphasize that neither was this process window dressing, nor was it focused exclusively or primarily on achieving technical compliance with the statute. To the contrary, the process elicited significant comment, particularly within Franklin, about the importance placed by the community on the preservation of FRH's role in the City's life, as well as expressions of support laced with concern within Laconia regarding the financial feasibility of the merger. In a genuine way, these public forums informed the judgment of the Trustees and management in negotiating a Definitive Agreement which would itself be subject to the RSA 7:19-b mandated public hearings. It was, frankly, profoundly difficult for the Trustees, who take their roles as community stewards seriously, to remain unaffected by the depth of concern and loyalty to the two institutions which was evident throughout the public forum process.

Thus, at a basic human level, the forums probably served to emphasize and crystallize in the minds of all the Trustees that the transaction would not enjoy widespread public support unless the Trustees could devise a fiscally sound structure which would support the preservation of FRH as a hospital and as an institution. It is, therefore, safe to say that the public sessions did in fact "inform the deliberations of the governing bod[ies]"20 of these two charities, and that the statutory process would later contribute to the Trustees' informed and considered exercise of their fiduciary duties as they structured the proposed merger, precisely as intended.


The LOI was, in essence, a document which simply outlined the intentions of the parties and the broad parameters of the planned merger. In the wake of the public forum process, the Trustees were required to take on the harder tasks of analyzing the fiscal prudence of the proposed transaction and creating a lasting structure for the merged entity.


On the fiscal side, LRGH engaged outside auditors to conduct an extensive due diligence review of FRH's financial condition. While the methods and level of due diligence review was obviously typical of any merger between moderate-sized ongoing businesses, whether in a for-profit or not-for-profit context, the emphasis of LRGH's review was again clearly driven by the fundamental charitable issue faced by its Trustees: whether the merged entity could realistically support two hospitals without endangering the charitable corpus of either.21 FRH also retained its own outside auditors to evaluate the ability of LRGH to perform the transaction anticipated.

In addition, early in the process, the CEO of FRH chose to take retirement. In light of the ongoing merger talks, and in view of the existing interrelations with LRGH, FRH invited LRGH to enter into an Interim Management Services Agreement ("IMSA") to provide FRH with substantive and financial management during the interim period. Under ordinary circumstances, the assumption of management duties by a potential acquirer prior to the consummation of a proposed merger is fraught with antitrust implications. In this case, however, the financially precarious position of FRH posed a significant and ongoing risk to FRH's charitable assets, which necessitated rapid action by management to address ongoing fiscal issues prior to the consummation, or even the completion, of a final agreement to merge. Accordingly, the parties notified both the Director and state Antitrust Counsel of their intent to enter into such an agreement, and neither official objected.

One fortuitous side effect of the IMSA was the fact that LRGH officials had gained an unusually comprehensive understanding of the business and financial issues faced by FRH prior to the merger. This knowledge both augmented the usual level of information available from a due diligence process and allowed management to move quickly, both before and after the merger, to address pressing issues faced by FRH and to formulate a reasonable business plan for the merged entity.

Simultaneously with the due diligence process, the parties engaged in several months of negotiations - principally through negotiating subcommittees made up of selected Trustees - aimed at structuring the merged entity. The negotiating teams adopted three approaches to this goal: first, the enshrinement of the joint mission of the hospitals to each of the traditional constituencies of FRH and LRGH; second, the establishment of several specific obligations of the merged entity intended to effectuate the merger's intended purpose of preserving FRH as a viable acute care hospital; and third, the careful structuring of a balanced system of internal governance intended to ensure that the merged entity remained faithful to the charitable missions of each of its constituent hospitals.

It is important to note that, although the results of these negotiations are presented below in summary fashion, the process of reaching these results was arduous and involved significant efforts, first by the members of the negotiating teams and ultimately, by the Trustees of both institutions to understand, adjust to, and compromise over, the points of view, values and goals of the other. The length and difficulty of this process should not be underestimated in approaching any merger of charitable entities; and in this case is evidenced by the fact that the date for execution of a Definitive Plan and Agreement of Reorganization and Merger ("Definitive Agreement") established by the LOI was extended three times. A Definitive Agreement merging the two entities was not reached until September 28, 2001, more than five months after execution of the LOI. The merger was not finally consummated until July 1, 2002, after all necessary regulatory approvals were obtained.


At a fundamental level, the Trustees agreed that the merged entity, which was to be formally named LRGHealthcare, would be governed by a mission statement which was intended to preserve, to the greatest extent possible, the charitable missions of each institution within the surviving entity and included, in relevant part, the following language:

To promote and support all aspects of quality health care for all people in the communities located in the service area defined in Article II, Section 2 of the By-Laws ("Service Area") that is available, affordable and accessible to all persons regardless of ability to pay; and in furtherance thereof:

  1. To maintain and operate acute care hospital facilities in Franklin and Laconia, New Hampshire, each offering emergency medical care facilities, to provide diagnosis, care and treatment of the sick, injured and infirm throughout the Service Area; and to establish, operate and maintain such other facilities for inpatient, outpatient and home care as the Trustees may, from time to time, determine is in the best interest of the community.


In furtherance of this declared mission, the Trustees also agreed on a set of express continuing obligations for the merged entity. These included (i) best efforts to fund the capital requirements of the Franklin Regional Hospital Campus of LRGHealthcare, which the parties estimated at roughly $10,000,000;22 and (ii) best efforts to continue to operate acute care community hospitals at each of its Franklin Regional Hospital and the Lake Region General Hospital campuses, including the provision at each campus of primary care, adult inpatient medical and surgical care, outpatient medical and surgical care, emergency services (including EMS services), and obstetrics.

In addition, the parties agreed that, subject to its unified business plan and in accordance with the Trustees' fiduciary duty to the merged organization as a whole, LRGHealthcare would include the FRH campus in its business planning and physician recruitment efforts, and as a location for new programs and services. Also, LRGHealthcare would conduct a unified needs assessment evaluation for both hospital-served communities, and would make efforts to ensure that charitable services, including uncompensated care, remained at pre-merger levels at both institutions, that the merged organization would conduct fundraising directed at both institutions, and that management of LRGHealthcare would maintain a presence at FRH and LRGH.


After extensive negotiation, the hospitals arrived at a unique governance structure designed to balance the interests and perspectives of Franklin area members with those of members from LRGH's traditional service area while preserving the fiduciary responsibilities of all members and Trustees to the merged organization as a whole. The Bylaws of LRGHealthcare established two distinct classes of members, designated Class FRH and Class LRGH. The members were assigned to each class based on residence (or preference), with FRH members generally residing within FRH's traditional service area and LRGH members residing in that of LRGH.

The Board of Trustees for the new organization was set at nineteen elected seats.23 Of these, four seats were reserved for FRH-affiliated Trustees and fifteen for LRGH-affiliated persons - a ratio established by the ratio of assets brought by each organization to the merged entity. Initially, this ratio was achieved by creating a Board made up of sitting FRH and LRGH Trustees,24 who were accorded three classes of staggered terms to ensure annual turnover.25 Going forward, Trustees are nominated by a Nominating Committee, which consists of two subcommittees. One subcommittee is made up of at least three elected Trustees who are Class FRH Members and at least one Class FRH Member who is not an elected Trustee. The other subcommittee consists of at least three elected Trustees who are Class LRGH Members and at least one Class LRGH Member who is not a Trustee.26 The subcommittees are empowered and encouraged to consult with their respective member classes in choosing nominees.

The immediate goals of this process were to ensure (i) that the Board of Directors remains balanced at the initial ratio of Class FRH Member Trustees and Class LRGH Member Trustees, and (ii) to preserve distinct roles for Members in each of the FRH and LRGH classes in the nominating process. The larger goal was to ensure that the merged Board would be informed and renewed on a regular basis by the "voices" and concerns of the communities represented by each Member class. Importantly, however, the power to elect Trustees is reserved to the Membership as a whole. This provision was intended to emphasize to Members and Trustees that their overriding loyalty and fiduciary duties must be directed, not toward either constituent class, but to LRGHealthcare as a single merged institution.

Nevertheless, the parties also agreed that, although most major business decisions to be reached by the Trustees would be by simple majority vote,27 certain corporate actions which would disproportionately affect the FRH component of the merged entity could only be taken by a "special" supermajority vote of the Trustees (defined as two-thirds (2/3) of the voting Trustees in favor of the action, with those voting in favor including at least three (3) of the Class FRH Trustees), plus prior consultation with the Members of the LRGHealthcare Association. These decisions include: (i) eliminating emergency room, obstetrical or acute inpatient services from the Franklin campus; (ii) selling LRGHealthcare, or selling substantially all of LRGHealthcare's assets, to a for-profit or a not-for-profit entity; and (iii) amending those provisions of the Bylaws and Articles of Agreement that were (a) intended to establish the organization's commitment to the Franklin campus, or (b) the organization's provisions relating to the establishment of membership classes, the election of Trustees or the existence of the "special" supermajority requirement itself.

These provisions can be viewed as an almost direct reaction to the Optima Healthcare experience in Manchester, although that reaction was carefully balanced against the need for the LRGHealthcare organization to preserve its own overall financial integrity in the future. The intended effect of the "special" supermajority is, quite clearly, to guard against the possibility that a future Board could make decisions to close or drastically curtail services at FRH without a significant public debate, and without arriving at a Board consensus broad enough to include Trustees associated with Class FRH Membership. However, and importantly, such decisions are not rendered impossible. Under appropriate circumstances - including circumstances which could not possibly be forecast at the time of the merger - the Trustees, acting pursuant to their fiduciary duties to the organization as whole - couldmake such hard decisions.28 This was an imperative of any corporate structure to which LRGH could prudently accede. It was responsive to that Board's overriding fiduciary duty to LRGH of ensuring that the merged institution would have sufficient flexibility to protect the sizeable charitable corpus that LRGH was bringing to the transaction.


The hospitals entered into a Definitive Agreement embodying these principles on September 28, 2001. Consistent with the requirement of public input under RSA 7:19-b, II(g), the hospitals convened a second round of public forums in Laconia and Franklin to disclose and discuss with their respective communities the form and structure of the merger documents, and the commitments and governance prerogatives established for LRGHealthcare. Significantly, the Trustees did not ratify the Definitive Agreement until after this second round of public comment, and they specifically reserved the right to alter or amend the Agreement or the governing documents in light of public comment. In the end, the groundwork laid by the institutions in the first set of public meetings, combined with the comprehensive manner in which the Trustees had addressed the issues raised in those meetings, resulted in all but universal expressions of public support for the merger.


Finally, LRGHealthcare undertook the obligation, as part of the Definitive Agreement, to continue its dialogue with its community (now defined as the traditional service areas of both organizations) by issuing an annual report on the status of the institution and the progress made in achieving the goals and commitments underlying the merger. This is intended as a public document, which will be available at community locations and filed with the Director of Charitable Trusts.

Thus, the result of the months-long negotiations conducted by the Trustees of FRH and LRGH was to create a merged organization which (i) has an avowed commitment to maintain fidelity to the charitable missions of each institution; and (ii) has institutionalized that commitment through governance structures intended to ensure that the decisions reached by its Trustees - now and in the future - will be taken with due regard for the role and contribution of each institution to the joint and unified charitable purposes of LRGHealthcare. The highly public nature of the process, including multiple, well-attended - and meaningful - public forums, together with LRGH's ongoing commitment to public reporting, engendered significant public support for the merger within all of the affected communities. Perhaps more importantly, the open nature of the process provided a potentially reassuring sense that the Trustees running the resulting charitable organization would remain cognizant of their public role as stewards of a community charity with an extensive history in, and obligation to, all of its served communities.


We noted at the outset of this article that RSA 7:19-b is intended primarily to assist trustees contemplating a major acquisition transaction in focusing on critical charitable issues, and that the process outlined by the statute can ideally provide a roadmap and guidelines for trustees facing such a transaction. It is our view that the statute worked in this instance to assist the Trustees in addressing exactly the kinds of questions regarding the blending of charitable missions and the economic prudence of the transaction that must be asked in the context of any charitable merger, whether of hospitals or of other forms of charitable trusts or corporations. It is therefore not surprising that the government regulatory process - the Director's review under RSA 7:19-b and the Petition to the Probate Court for cy pres relief - was in a sense anticlimactic. In this instance, the Trustees had done their jobs well. As a result, significant portions of the evidence necessary to secure these approvals were already in place. Nevertheless, each stage of the regulatory process brought another level of clarity to the transaction.


Under RSA 7:19-b, the only party required to file a notice and certification with the Director is the "acquired party." Because the proposed FRH & LRGH transaction contemplated a full asset merger and the expansion of the charitable missions of both organizations, the hospitals chose to make a joint submission to the Director, with both Boards providing all required certifications. Under the statute, the Director is specifically charged with ensuring that the standards established for Trustee evaluation of an acquisition transaction have been satisfied.29 However, the statute also states that it does not supplant the common law authority of the Director or the Probate Court.30 In this case, the Director - who had been kept apprised of the status of the transaction throughout negotiations, and had attended all four community forums - appeared satisfied relatively early in the process that the fundamental standards established by RSA 7:19-b were being complied with.

Consequently, his review instead concentrated on the economics of the merger, the extent of the parties' due diligence, and, in particular, the reliability of their financial projections for LRGHealthcare. In doing so, the Director exercised his discretion under the statute to hire expert legal or financial advisors in transactions involving more than $5,000,000 in charitable assets.31 In essence, the Director chose to extend his statutory role under 7:19-b to exercise a more general common law power of oversight of charitable trusts by examining the financial prospects of the merged organization. In essence, the Director took the position that his responsibility included not only the determination that the minimum standards for compliance with RSA 7:19-b had been met, but also a requirement that he satisfy himself that the transaction would not put the charitable corpus of either organization at unreasonable risk.32

The issue of whether this stance - particularly as regards financial projections - exceeds the intended scope of review under the statute was the subject of some discussion between the parties and the Director. In the end, however, the parties did not contest the Director's exercise of discretion regarding the scope of his review. This decision was motivated in part by the knowledge that the due diligence process had in fact provided the Trustees with sufficient information to prudently evaluate the projected performance of the merged entity. In addition, as discussed above, the parties to this transaction were the beneficiaries of the more than usually intimate knowledge of FRH's finances and performance afforded by the IMSA.

The Director retained Dr. Nancy Kane of the Harvard School of Public Health as his consultant in this financial review process.33 Dr. Kane sought access, on a confidential basis, to the parties' due diligence records, to back-up documentation relied on by the parties, and to specific financial records which she used to test the parties' projections. She and the Director traveled to Franklin Regional Hospital for a full day's worth of interviews with management, including the CEO, the Executive Vice President, and the Chief Financial Officer of LRGH (each of whom was also acting in that capacity for FRH under the IMSA), and with members of each of the Boards of Trustees and Negotiating Committees. She ultimately provided the Director with a report critiquing the parties' financial projections to some degree and providing suggestions for alternative strategies for enhancing future performance. On the basis of that report and the parties' joint submission under RSA 7:19-b, the Director issued a statement approving the merger on February 20, 2002.

It is true that the Director's generally supportive stance with regard to the merger was a factor in establishing the cooperative nature of the review process, and the parties' acquiescence to a limited financial review. There was, throughout his examination, a sense communicated by the Director that his financial review was intended not only to provide him with reassurance that the RSA 7:19-b standards had been met, but to provide the parties with the potential benefit of an objective expert review of their plans and analyses. It is possible to envision scenarios in which the parties to a transaction would not consider this depth of review helpful or desirable. It is questionable, however, whether parties who could not withstand such scrutiny would have fully complied with the procedures and guidelines of RSA 7:19-b.


In addition to complying with the strictures of RSA 7:19-b and undergoing a review by the Director of Charitable Trusts, the parties needed to obtain approval from several different regulatory boards and governmental agencies to ensure that LRGHealthcare would be properly licensed and authorized to do business after the merger.34 This process involved working with both state and federal regulatory agencies, which among others, included the New Hampshire Board of Pharmacy;35 the Drug Enforcement Agency;36 the New Hampshire Health Services Planning & Review Board;37 the federal Department of Health and Human Services, Center for Medicare and Medicaid Services;38 and the New Hampshire Consumer Protection and Anti-trust Bureau.39


The last step in the charitable regulatory process was the parties' Joint Petition to the Probate Court for cy pres relief. In fact, because Franklin and Laconia are in different counties, the parties initially submitted duplicate petitions to the Probate Courts of both Belknap and Merrimack Counties. By prearrangement with the clerks of the two Courts, they also submitted a joint motion for consolidation and transfer to Merrimack County. Merrimack County was chosen primarily because it was the venue for FRH, which was the acquired party, and the institution more clearly altered by the proposed merger. The Director submitted a statement of support for the proposed merger and appeared with the parties at a chambers conference at which the parties presented the Petition to Justice Hampe.

The Joint Petition, like the parties' RSA 7:19-b submission, was an extensive document which set out the history of the two institutions as public charities, as well as the justification under the doctrines of cy pres and deviation for the proposed merger and change of mission for each institution. Accordingly, where the Director's review had focused on the financial viability of the merged organization going forward, the Probate Court's review was directed more at the statutory and common law issues of (i) whether it had become impossible, impracticable, or illegal for FRH to continue to fulfill its charitable mission; and (ii) whether it was appropriate to allow LRGH to expand its mission and expend its charitable funds on objects beyond the scope of its own mission, as delineated by its history and Articles of Agreement.40

For FRH, the issue was clear-cut. Its Trustees had reasonably concluded, on the basis of expert advice, that its financial performance and prospects put it at risk of failure and loss of its entire charitable corpus. While the Director's review had not directly addressed this question, Dr. Kane's financial analysis was anything but inconsistent with this finding. Moreover, the community commitments assumed by LRGHealthcare, together with the governance structure chosen to effectuate those commitments, ensured that the expanded mission of LRGHealthcare would preserve, as nearly as possible, the traditional mission of FRH.41

For LRGH, the question was muddier. There was no imminent threat to its business or charitable corpus, nor had its mission become impossible, impracticable or illegal. Rather, the parties argued, the potential failure of FRH would deprive LRGH of a long-time partner in the delivery of healthcare services in central New Hampshire, and would impose stresses on LRGH's services and facilities which could have an adverse effect on its own quality of service and charitable funds. At the same time, the parties noted that the potential loss of the medical services offered at and by Franklin Hospital would necessarily adversely effect the residents of its service area.

Therefore, the parties asked the Court to enter a finding that it was not inconsistent with LRGH's traditional mission to extend its service area, as LRGHealthcare, to the communities traditionally served by FRH; and that it would be inconsistent with its mission and potentially prejudicial to the public interest for LRGH to reject the opportunity to preserve hospital services in the Franklin region, when after extensive analysis, as well as objective review by the Director's expert, it had concluded that it could do so.42

It is customary for a petition for cy pres relief to be heard in open court. In this case, the parties presented the Joint Petition in chambers and the Court held open the possibility of convening a hearing at a later date. In the end, however, perhaps persuaded by the extensively public nature of the process conducted by the parties in compliance with RSA 7:19-b, the Court approved the parties' petition without further hearing and issued an order permit ting the merger on May 22, 2002. The merger was then officially completed, with an effective date of July 1, 2002.


It took almost two and a half years from the date that FRH's Trustees determined that fidelity to its charitable mission required it to seek a merger with or acquisition by another healthcare entity for FRH and LRGH to finalize their merger into LRGHealthcare. It may be said that the process of complying with the statutory requirements of RSA 7:19-b and the doctrine of cy pres imposed an excessively long time frame on a relatively exigent situation, that, were the parties to the transaction not charities, could have been accomplished far more quickly and efficiently than by the process discussed above.

The simple response to this suggestion is that both FRH and LRGH were charities, as is LRGHealthcare, the institution which emerged from the merger of these entities. As such, their Trustees owe specific duties of stewardship to their communities. Both the doctrine of cy pres and the standards and procedural requirements established by RSA 7:19-b are intended to, and in this case did, both provide a guideline for the conduct of a merger of charitable hospitals, and serve as a brake on any impetus toward haste at the expense of an honest consideration of the charitable issues raised by this transaction. It is important to note that, to the extent the process worked in this case, it worked in no small part because the Trustees and management of both institutions were mindful of, and predisposed to address the implications of the transaction on their institutions as charities, and remained so throughout the process.

Moreover, it should be emphasized that, because the parties actively involved the Director from the formative stages of the merger through its consummation, the actual time involved in the regulatory process itself was minimized to less than two months under RSA 7:19-b, and less than a month from filing to approval of the Joint Petition for Cy Pres Relief. Accordingly, as counsel for the parties, it is difficult to argue with the proposition that the regulatory process in this case constituted an appropriate, expeditious, and profoundly helpful adjunct to the work of the participants. If the Optima matter, with which we were also both involved as counsel, serves as a cautionary tale for trustees of charities considering mergers, it is our hope that the above description of a more successful process will demonstrate how trustees and management, working together in genuine good faith, can be assisted by the Director, the Court and the law itself, in their efforts to get it right.



The Attorney General's Report of Optima Health can be found at the Attorney General's web site, (on file with the authors).


See In re Optima Healthcare, Inc., et al. No. 99-339, (Hills. Cty. Probate Ct. 1999). For a more detailed discussion of the reaffirmation of the importance of charitable principles following the Optima disaffiliation, see Walter L. Maroney on behalf of the HB 112 Study Committee, New Hampshire's Community Hospitals in Transition: A Regulatory Analysis at 8-11,  B(iii) (Sept. 26, 2001) at (on file with the authors).


RSA 7:19-b was enacted as a result of a months-long process of drafting involving a broad group of individuals and stakeholders, who collaborated to produce a draft statute which was substantially enacted into the present law. The statute has since served as a principal model for a model multi-state healthcare conversion act promulgated by the National Association of Attorneys General in 1998. See generally, M. Delucia, Crafting the Healthcare Conversion Act, N.H. B. J. (no. 4), 54-57 (Dec. 1998).


RSA 7:19-b had not yet been adopted when the Matthew Thornton Health Plan sale was taking place, and consequently regulatory approval proceeded under common law theories. RSA 7:19-b was adopted as the transaction was halfway done, and the parties and Director of Charitable Trusts agreed that RSA 7:19-b would not apply to it.


For example, the mission statement of the Endowment for Health, which was funded from the proceeds of the Blue Cross transaction, can be found at the Attorney General's web site,


RSA 7:19-b applies to any transaction in which a "transfer of control, direct or indirect, of a health care charitable trust, or of 25 percent or more of the assets thereof" occurs. "'Control' of a health care charitable trust means the power to elect a majority or more of the membership of the governing body thereof, or otherwise to direct the affairs thereof." RSA 7:19-b does not apply to "changes in membership of the governing body of a healthcare charitable trust occurring through regular election or filling of vacancies in accordance with the bylaws" of a healthcare charitable trust.


RSA 498:4-a permits the superior courts to exercise the doctrine of cy pres.


RSA 547:3-d reads:

If property is or has been given in trust to be applied to a charitable purpose, and said purpose or its application is or becomes impossible or impracticable or illegal or obsolete or ineffective or prejudicial to the public interest to carry out, the trust shall not fail. Upon petition by the trustee or trustees or the attorney general, the probate court may direct the application of the property to some charitable purpose which is useful to the community, and which charitable purpose fulfills as nearly as possible the general charitable intent of the settlor or testator. In applying the doctrine of cy pres, the court may order the distribution of the trust assets to another charitable trust or to a charitable corporation to be held and administered by it in accordance with the terms of the governing instrument as said terms may be modified by the application of cy pres under this section and RSA 547:3-e.


In addition to cy pres, common law and New Hampshire statute also invest the Probate Court with the power to invoke the charitable doctrines of deviation, by which a charitable trust may change its mission, if that mission has itself become infeasible, and termination, by which the Court may oversee the winding-up of a charitable trust.

RSA 547:3-c ("Deviation from Terms of Trust"):

In all cases where by reason of a change of circumstances which has occurred, shall occur, or is reasonably foreseeable, subsequent to the creation, heretofore or hereafter, of a trust by any deed, will or other instrument, compliance by the trustee or trustees with the terms of the trust relating to the property or the kinds of classes of property which may be held under the trust would defeat or substantially impair the accomplishment of the purposes of the trust, the court may, upon the filing by the trustee of a bill in equity for instructions and upon notice to all parties in interest, enter a decree permitting the trustee to deviate from such terms of the trust and directing the trustee, if necessary to carry out the purposes of the trust, to sell all or any part of the property held under the trust and to invest the proceeds of such sale in kinds or classes of property which are lawful investments for trustees of estates. No such decree, after its entry, shall thereafter operate to relieve any trustee of any duty imposed by law relating to the investment of trust funds and the exercise of reasonable care for the preservation thereof. This section shall not be construed to limit or restrict the general equitable jurisdiction of the court over the trustees, trusts or trust funds.

RSA 547:3-h ("Termination of Charitable Trusts"):

If the probate court, upon application by the trustee or trustees, finds that the continuance of a charitable trust is impracticable or unfeasible, and that the charitable purpose of the settlor or testator can be accomplished by a transfer of the trust assets to another charitable trust or corporation, or to the beneficiaries of said trust, the trust is subject to termination by the court upon such terms and conditions as it may impose. This section shall not be construed to limit or restrict the general equitable jurisdiction of the court over trustees, trusts or trust funds.


Under the statute, an acquisition transaction is defined as:

[the] transfer of control, direct or indirect, of a health care charitable trust, or of 25 percent or more of the assets thereof, including, but not limited to, purchases, mergers, leases, gifts, consolidations, exchanges, joint ventures, or other transactions involving transfer of control or of 25 percent or more of assets.

RSA 7:19-b, I(a).


RSA 7:19-b, II, (a)-(g).


RSA 7:19-b, II.


RSA: 7:19-b, VI(b):

This section shall not supplant or restrict the general powers of the probate courts with respect to charitable trusts pursuant to RSA 498, RSA 547:3 through 547:3-h, or at common law. Nor do the standards set forth in paragraph II of this section supplant or restrict the standards that may lawfully be applied in connection with the doctrines of cy pres, deviation, and termination as applicable by the probate courts of this state in such proceedings.


RSA 7:19-b, III, IV.


RSA 7:19-b, III.


RSA 7:19-b, IV.


The consultant retained by FRH was SDG Consultants, Tucker's Wharf, 67 Front Street, Marblehead, MA 01945. For additional background information regarding FRH, see Suzanne Amidon, Nonprofit Community Hospitals: Keeping the Community in Healthcare, 39 N.H. B. J. 22, 28-29 (Dec. 1998).


In January 2001, LRGH adopted the trade name LRGHealthcare to signify the further expansion of its services into a coordinated healthcare system providing healthcare services to residents of communities throughout Central New Hampshire. For more background information on LRGH see Judith Buswell, Lakes Regional General Hospital, 37 N.H. B. J. 28 (Dec. 1996).


RSA 7:19-b, II(g).




Thus, for example, no analysis was ever undertaken to determine the liquidation value of FRH or any portion of its assets because the charitable thrust of the merger effectively precluded any such option.


Included in this commitment was the stated intent to go forward with capital improvements, including an operating room renovation and construction of a medical office building for which FRH had received a Certificate of Need, but had been unable to commence building due to its financial difficulties.


In addition, as is typically the case with hospital boards, the Board of Trustees included three ex officio members: the President/CEO of LRGHealthcare, the President and Vice President of the Medical Staff; and six ex officio non-voting members: the Chief of the Medical Staff; the Co-Chairs of the Advisory, Council; and the Presidents of the following auxiliary organizations: Lakes Region General Hospital Auxiliary, Lakes Region General Hospital Nursery Guild and Franklin Regional Hospital Auxiliary.


The nineteen member board was already large by ordinary standards, yet too small to accommodate all sitting Trustees. Any current Trustee not included in as a voting member of the LRGHealthcare Board was accorded the opportunity to sit as a non-voting member.


The terms of the initial groups of Trustees expires on a staggered basis at the annual meeting of members held in January of 2003, 2004 and 2005 respectively.


The Chair of the Nominating Committee and the President of the Corporation also serve on each subcommittee of the Nominating Committee.


A two-thirds supermajority vote is required for extraordinary business and charitable decisions, such as (i) merging or affiliating with another entity; (ii) adopting strategic and/or business plans; (iii) acquiring assets having a fair market value in excess of One Million Five Hundred Dollars ($1,500,000); (iv) amending the By-Laws (except for those provisions subject to the "special supermajority" voting requirements discussed in the text); and (v) dissolving the Corporation.


To the extent these "hard decisions" might lead to a significant departure from the charitable mission of LRGHealthcare, they may also be subject to Probate Court review and approval.


RSA 7:19-b, IV.


RSA 7:19-b, VI(a).


See, RSA 7:19-b, IV. The rationale for this provision is that, for large transactions, the Attorney General's Office may not have in-house expertise sufficient to allow the Director to make informed decisions regarding complex financial or legal issues. Accordingly, the Director has routinely employed financial experts to assist him in his review of large transactions, including the Matthew Thornton /Blue Cross and the Blue Cross/Anthem acquisitions. Under the statute the costs of such expert assistance are borne by the parties. To his credit, the Director exercised diligence to ensure that, in this case, the fees borne by the parties for expert financial review remained modest.


See, RSA 7:19-b, VI (statute does not derogate common law authority of the Director or the Probate Court).


Dr. Kane was the principal author of an extensive report entitled The Health of New Hampshire Hospitals, issued in May 2000 by the New Hampshire Department of Health and Human Services, based on financial and economic data for the period between 1993-1999.


For a general discussion of healthcare merger considerations see Neil Castaldo, Healthcare Consolidation: The Urge to Merge, 26 N.H. B. J. 17 (Dec. 1995).


RSA 318:38 states that an institutional pharmacy license shall expire upon the change of ownership of a pharmacy, and that any pharmacy that continues to operate after a change in ownership must be relicensed upon that change of control.


The Controlled Substances Act, codified in relevant part at 21 U.S.C. 821 et seq., requires that persons who dispense controlled substances register with the Attorney General. The corresponding regulations may be found at 21 C.F.R. 1301.01 et seq.


Pursuant to RSA 151-C:5, II(b) and He-Hea 1201.01, a Certificate of Need ("CON") must be obtained by a hospital if it plans to "transfer more than 50% of its total assets [and] if it is not certified under Title XVIII or Title XIX of the Social Security Act at the time of transfer of ownership." He-Hea 1201.01. Additionally, the identity of FRH as the holder of an existing CON for construction of improvements at FRH necessitated a change of identity to LRGHealthcare, as FRH was transferring all of its assets to LRGHealthcare in the merger. In this case, the Health Services Planning & Review Board granted the hospitals' petition stating that the merger was not subject to CON review because both hospitals were certified under Title XVIII or Title XIX of the Social Security Act, and approving the change in identity of FRH's acute care hospital CON to LRGHealthcare as a change of scope pursuant to RSA 151-C:12, IV-a (a)(3) and He-Hea 301.13(a)(3).

The CON Board also approved an expansion of the of the scope of the CON to the original plan, which included operating room renovations, construction of a medical office building and other improvements. Prior to the merger, FRH had sought to downsize the scope of the CON because it lacked funds sufficient to complete its original plans.


Clearly, the resolution of Medicare reimbursement issues was of particular importance to the proposed merger as it was necessarily a major factor in the Trustees' analysis of its fiscal soundness and prudence. Prior to the merger, each of FRH and LRGH had obtained favorable treatment status for the purposes of Medicare and Medicaid reimbursement. Upon application to the federal Center for Medicare and Medicaid Services, LRGHealthcare was permitted to operate the FRH and LRGH campuses of LRGHealthcare under their preexisting provider numbers. Additionally, because the hospitals were permitted to continue operations under their pre-existing provider agreements, the hospitals were also allowed to continue to take advantage of their favorable reimbursement categories.


RSA 356:2 and :3 specifically prohibit monopolies and agreements made in restraint of trade. In part because of the recent trend in increasing enforcement of state and federal anti-trust laws against healthcare organizations, and in part to provide the highest degree of protection to LRGHealthcare from a possible future enforcement action by New Hampshire's Attorney General, FRH and LRGH sought approval of the merger from the Assistant Attorney General, Consumer Protection and Antitrust Bureau, by submitting to it a detailed economic analysis of the service areas of the two hospitals as they existed prior to the merger and as they were projected to be affected by the merger.


See RSA 547:3-d.


RSA 547:3-d.


RSA 547:3-d; see also RSA 547:3-c (regarding the doctrine of deviation).

The Authors

Ovide M. Lamontagne is a shareholder in the law firm of Devine, Millimet and Branch. Walter L. Maroney is an attorney with Gallagher, Callahan and Gartrell. Previously, Mr. Maroney was Chief of the Consumer Protection and Antitrust Bureau of the Attorney General's Office. Mr. Lamontagne represented Catholic Medical Center, and Mr. Maroney represented the State of New Hampshire in connection with the dissolution of Optima Healthcare in Manchester. In the transaction discussed in this article, Mr. Lamontagne served as principal counsel for Franklin Regional Hospital, while Mr. Maroney was one of a team of lawyers at the Gallagher firm representing Lakes Region General Hospital. His principal role in the transaction was to represent Lakes Region in connection with antitrust and charitable trust issues. The authors would also like to thank Abigail J. Sykas, an associate at Devine, Millimet and Branch, for her assistance in preparing this article for publication.


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