One of the core enterprise value determinants of a medical group is its governance. Many governance standards apply to large corporations and small medical practices, alike. A group’s governance documentation will be closely scrutinized as part of any transaction. It is common for medical groups to have multiple entities with different ownership structures. This can create a compounding effect. If you wait until the transaction has started to get documentation in order, it could be too late. You could run into challenges caused by non-compliant providers, owners or former owners, risk retention post-closing, holdbacks and other concessions; all at a cost. An advance review and update of fundamental governance documentation is prudent
Organizational Documents and Authorizations. Corporations and limited liability companies will have articles on record with their secretary of state and should also have either bylaws or an operating agreement in place as well. These documents contain the structural requirements for the organization. They provide conditions which allow officers to act alone, and actions which require a vote of a majority, or a vote of a supermajority, of either their boards or their owners. Meetings should be held in conformance with these documents and all of the actions requiring authorizations should be documented and retained. Elections of officers and board members, actions of the board, significant loans, land and equipment purchases and leasing, litigation settlements, and extraordinary transactions should have documented approvals in the minute books.
Ownership. The practice should have an updated shareholder register (or its equivalent) which is a list of all of the owners of the entity. Depending on the complexity of the organization, it may also have a cap table which reflects the proportionate equity interests of the owners, and their respective ownership interests. As a corporation, shareholder interest should be confirmed through certificated stock. Ownership interests in other entities could be simply documented by contract, such as an operating agreement for an LLC. When preparing for a transaction, it is very important to have this information current and accessible, with appropriate authorizations and signatures in place. Transaction parties will want confirmation of who the owners are for purposes of documenting authorizations, distributions, voting and verifying compliance with any corporate practice of medicine restrictions.
Shareholder Agreements. Shareholder agreements describe rights of owners that extend beyond the bylaws. For LLCs or LLPs, the rights of owners are defined by contract. Some of the issues which may be addressed include provisions such as requiring an owner to tender his interest when employment has terminated, capital contributions, profit distributions, and voting. Without an agreement which requires an owner to cede his interest at the time of termination of employment, the professional organization could progress to an interminable conflict.
Employment Agreements. The primary asset of a provider based organization is its physicians. Unlike most other types of businesses, professional organizations need licensed professionals to be economically viable. Employment agreements are a necessity for every physician, and in some cases for the advanced practice providers as well. They set forth the terms of employment, such as compensation, vacation, benefits, and service and licensure requirements. Additionally, they will often contain restrictive covenants, such as confidentiality about business operations, and restrictions against competing, and against soliciting patients and staff. Failure to have the guardrails in place can result in significant risk to the practice, and to any successor entity.