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Majority-Minority Relationships in Practice Appraisals

Disparate Principles Affect Medical Practice Worth

Dr. David Edward Marcinko; MBA, CMP™

[Publisher-in-Chief]

Did you know that majority shareholder-doctors in a medical practice have a fiduciary obligation to minority shareholders-doctors?

Actions Scrutinized

Yes, it’s true. In fact a minority medical practice owner is entitled to scrutinize every action made by the majority owner. In particular, majority shareholders have fiduciary obligations to minority shareholders. The majority owner physician cannot favor his or her best interests over the best interests of either the business or the minority shareholders. Often, however, the majority’s actions are supported by the business judgment rule.

Business Judgment Rule

Under the business judgment rule, the majority’s good faith decisions regarding management or governance of the practice business-entity are presumed to be valid. However, acts of self-dealing and self-preference shift the burden of proof concerning the fairness of certain decisions back to the majority shareholders. Disagreements often arise when the majority decides to sell all of the practice’s business’s assets.

Sale of Assets

In a sale of assets, the only recourse of the minority shareholder physician may be to exercise dissenter’s rights concerning the fairness of the purchase price. The minority usually cannot block such a transaction. However, if the minority owns more than 10%, some states can make it difficult for the majority to squeeze out the minority.

In most cases, the minority will be unsuccessful in getting a higher price if they are squeezed out unless the majority is receiving special additional payments (non-competition agreements or medical consulting clauses).

If the minority cannot be squeezed out, they can block any sale (20% ownership may be sufficient to block a sale).

Minority owners may attempt to expand their rights to participate in the affairs of a practice in a manner disproportionate to the ownership rights.

Purchase of Additional Shares

If the majority shareholder buys additional shares when capital is needed, the minority will be diluted. In this case, the minority may challenge the purchase price or seek to have a bank loan expanded, for example.

Compensation

Salaries and bonuses are also subject to fiduciary obligations. Disagreement can arise if minority shareholders believe compensation for their services (as opposed to share ownership) is too low.

Assessment

Although some young doctors are not even aware of majority-minority shareholder disparities, other areas of dispute include new practice opportunities and retaining and compensating key employees. In addition, expansion through acquisition is often a disputed subject.

Conclusion

Your comments are appreciated as either a mature [majority shareholder], or emerging new [minority shareholder] physician. And, please be sure to tell us about your experiences, good or bad.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com  

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