Why majority control is so important

June 10, 2011

Physicians seeking to become partners or shareholders in their medical practices frequently confront physician practice owners, employers, administrators, medical practice consultants, recruiters and brokers with the demand that "they want a position where they can have some control."

Key Points

This situation differs significantly from the current trend of hospitals seeking control of physicians in their communities via acquisitions of medical practices. Most medical practices are still private practices of five or fewer physicians. Control issues in these smaller practices are far different from those of the mega-groups.

Associates want control for several reasons, including increased income, job security via ownership, the ability to choose their own midlevels, input in selecting an electronic health record (EHR) system, and making changes in their personal work environment. These are all legitimate desires that can be resolved by ownership control, even though they might be more easily and effectively addressed by improved communications or by an employment contract.

The associate hears the scuttlebutt in the physician lounge at the hospital that "medical practices aren't worth anything anymore." It usually takes professional analysis to determine a medical practice's fair market value. Rarely, though, do the participants consider the value of "control" unless a medical practice valuation expert is involved.

MAJORITY VOTE PREVAILS

When a medical practice has multiple owners, issues about control always will exist. These control issues may be determined by a combination of state law, federal law, shareholder agreements, and contracts. When one physician has 51% or more of the ownership, he or she likely has 100% control, even though the minority shareholder likely has some legal rights. When there are two owners-each with 50% ownership-neither can force control over the other, nor can they have control forced on them, so neither has full control. In a group of three or more physicians-each having less than 50% ownership-control begins to respond to the democratic rule that the majority vote prevails.

In medical practices, control decisions may include compensation for individual physicians, employment and pay scale of family or others, election of directors and officers, appointment of management and the powers of management, acquisition or sale of assets, relocation, payment or allocation of profits and dividends, the incurring of debt, sale of the practice to a hospital, or closing the practice. Other factors related to control of a medical practice are commonly described as "senior doctor rights" (SDRs). For example, a physician-seller transferring an equal 50% ownership to an associate might stipulate in the sales agreement certain SDRs, including:

Picture this investment scenario. You are offered 49% ownership of a corporation that has a sole asset of a $1 million piece of land, with no other assets or liabilities, and a single shareholder. That shareholder offers to sell you that 49% interest in the corporation for $250,000. On the surface, it appears to be a good deal because of the underlying $1 million asset. But you are not buying 49% of the asset; you are buying 49% of the entity that owns the asset. The 51% owner has 100% control.

Digging deeper, you find out that the current sole owner used to have five such parcels of land in the corporation, but lost the other four gambling. The owner plans to take your $250,000, go back to the gaming table, and try to win back the other four parcels, and you would be able to do nothing about it due to your lack of control. How much would you be willing to pay/risk on such an investment? Little to nothing, I suspect.