In volume 88 of The Professional Advisory I wrote about ‘dental service organizations’ (DSO) purchasing dental practices. This is Part 2 of the article and will continue to explore what vendor dentists need to know when selling their dental practice to a DSO.
TIn terms of legal structure, the DSO purchase typically involves a two-stage process:
1. The dentist, who is affiliated with the DSO, purchases the goodwill from the vendor dentist or the vendor dentistry professional corporation (PC) by way of asset purchase;
2. The DSO (non-dentists) purchases all other assets from the vendor dentist or all of the shares of the PC. Where shares of the PC are sold, immediately after closing, the PC must cease carrying on the practice of dentistry.
Many dentists have a PC which owns their dental practice. In step 2 above, it is desirable for the vendor dentist to sell shares of the PC to take advantage of the capital gains exemption on the sale of PC shares.
If structured and planned properly, the dentist’s qualified family members are also shareholders of the PC. Such family members will also sell their shares to the DSO to use the capital gains exemption when they sell their PC shares. However, to ensure non-dentist family members can enjoy such a benefit, it is critical to plan well in advance as such plans may require years to implement properly.
As I have discussed in previous articles of The Professional Advisory, the laws permit family members of a dentist to be non-voting shareholders of the dentist’s PC. The dentist controls the PC by holding all voting shares.
A “family member” is defined as a dentist’s spouse, child or parent. A “spouse” is defined as someone to whom the dentist is married or with whom the dentist is living in a conjugal relationship outside marriage. “Child” is not defined but is generally taken to mean the dentist’s natural born children and those the dentist legally adopts. However, it is important to note that only the dentist’s parents but not parents-in-law or grandchildren qualify as family members.
If family members receive shares that are not redeemable by the PC, it is essential to have a shareholder’s agreement. Your dental practice is your livelihood. It is critical that you, the dentist, and not your family members have absolute control of the PC and practice at all times. A properly drafted shareholder’s agreement will ensure you have such control.
Non-voting shares have voting rights under the Business Corporations Act (Ontario) in certain cases. In some circumstances, shareholders of each class are entitled to vote separately as a class, whether or not that class of shares carry the right to vote. If, for example, you need to reorganize your PC share structure but your rebellious family member will not agree, then this is a serious problem. This can be dealt with in the shareholder’s agreement by family members giving a power of attorney to the dentist relating specifically to the PC shares.
At some point in your career you will sell your practice by asset sale or a sale of all the PC shares, whether to a DSO or a dentist purchaser. The vendor dentist must be assured that all the PC shares or assets will be sold, whether or not the other shareholders (your family members) wish to sell or agree on the sale price or sale structure. The shareholder’s agreement should provide that the dentist has the right to ‘drag along’ the other shareholders on the sale of the practice.
Consider other events such as the death of a family member, divorce or separation from your spouse. Those events are stressful enough. The shareholders agreement should specify what happens to the family member’s shares. For example, the shares might be redeemed by the PC or purchased by the dentist. The shareholder’s agreement should deal with how these shares are going to be valued and the terms of payment.
The dentist must remain in control of the PC regardless of changing circumstances and in anticipation of an eventual sale of the dental practice. A properly drafted shareholders agreement will ensure this. The ideal time to complete the shareholders agreement is at the beginning of the process when the non-voting shares are being issued to family members.
If the vendor dentist and his/her family members are to enjoy the capital gains exemption on the sale of their PC shares to the DSO, careful legal and tax planning is required years in advance. And to do that, dentists are well advised to retain professional advisors who focus on advising dentists. As my former colleague, Barry Spiegel, Q.C. used to recommend and I still do: Surround yourself with experts in their field, they will serve you well.
