Alternatively, the two practices could merge into a newly formed entity, Medical Institute of Acme. In this scenario, Acme Rheumatology and Acme Medical Center distribute their assets (while the practices each retain their respective receivables and liabilities) to their respective owners. The owners of the two practices then transfer the assets to Medical Institute of Acme. The appeal of this approach is that it provides a cleaner break between the old and the new in terms of past reimbursements, malpractice, and so forth. With this approach, the owners of Acme Rheumatology are less concerned with the contingent claims of Acme Medical Center (and vice versa), such as tax issues, employment-related claims, and payer audits. However, the new entity may not shield the owners from past claims where Acme Rheumatology or Acme Medical Center are empty “shell” entities. Another concern with this approach is that provider numbers will need to be obtained for Medical Institute of Acme (possibly causing initial cash-flow delays). Additionally, this new entity approach may trigger taxation at both the entity and individual levels. While there are advantages from a liability standpoint, the creation of a new entity likely creates additional planning and cash-flow considerations. Conversely, the new entity approach may be more advantageous from a liability and “start fresh” perspective.
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Explore This IssueMay 2012
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Another matter to address is how much autonomy each practitioner will have postmerger. Who will make the key decisions on behalf of the practice? Are there decision-making committees with members from both Acme Rheumatology and Acme Medical Center?
Noncompetition and Buyout Provisions
In general, either all or none of the parties to a merger should be subject to a noncompetition clause. A less restrictive alternative to a noncompetition clause is a limitation on future buyouts. The departing physician may have the right to leave and compete, but it comes at the disincentive of a reduced buyout price to the departing physician. Such a provision acts as an incentive for the physicians to stay with the merged practice.
Initial Exit Plans
Parties often want a “bail out” clause, which permits a merging party to reverse or “unwind” the transaction within an initial period of time (typically no more than 18 months) if a party feels that the merger is not working out as intended. This helps place both groups as close to their premerger state as possible. Remember that after the merger closes there will likely be assets that have been acquired as well as duplicative assets that have been disposed. A bail-out clause should address such matters by orderly allocating assets between the parties in the event of a “de-merger.”