Obtaining approval for a stock purchase can be problematic if the target has a large number of shareholders. Unless there are agreements in place before finalizing a deal, buyers cannot force shareholders to sell. Thus, a holdout shareholder could refuse to sell to the buyer. This result can be very undesirable for buyers and could ultimately cause the deal to fall apart.
Buyers may have less preferential tax treatment in a stock purchase. However, in certain circumstances, buyers can elect to treat the stock purchase as an asset purchase, thus securing a desirable tax treatment.
In a merger, two separate legal entities become one surviving entity. Under state law, the assets and liabilities of each are then owned by the new surviving legal entity. There are several structures that mergers can take.
The simplest is a forward merger, whereby the selling practice merges into the purchasing practice, and the purchasing practice survives the merger.
Sometimes, buyers will wish to keep the target practice as a separate legal entity for liability reasons, so the buyer will instead merge the target into a wholly-owned subsidiary corporation of the buyer, called a forward triangular merger. When complete, the subsidiary survives the merger, holding all of the assets and liabilities of the target practice.
Both a forward and a forward triangular merger generally require consent from third parties, as the target practice ceases to exist after the merger and all of its assets are owned by the surviving entity.
A reverse triangular merger is similar to a forward triangular merger, except that the target practice is the surviving entity, instead of the wholly-owned subsidiary of the buyer.
How a merger is taxed depends on its structure. Generally, forward and forward triangle mergers are taxed as asset purchases while reverse triangular mergers are taxed as stock purchases.
In terms of required corporate approvals, mergers generally require approval only of the seller's board of directors and a majority of its shareholders (absent other requirements in its charter documents). This lower threshold is particularly appealing when a target practice has multiple shareholders. However, shareholders who vote against the merger will generally have appraisal rights under state law. Appraisal rights, or Dissenters' Rights, enable dissenting shareholders to petition a court to obtain the fair market value of their shares. This can complicate transactions and increase the buyer's costs.
Clearly, medical practice transactions can be complicated. Consequently, it is imperative that physicians have an experienced and competent team consisting of a consultant, accountant, and attorney who help you review all of your options and choose the one that ensures your practice’s continued success.
Nick Hernandez, MBA, FACHE, is the CEO and founder of ABISA, a consultancy specializing in strategic healthcare initiatives for physician practices. His firm helps devise and implement strategies that will allow practices to remain competitive and solvent. E-mail him here.