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Practice Transitions - Process and Substance

William M. Mandell - Monday, January 22, 2018
Pierce & William Mandell

When buyers and seller of dental, medical and other professional practices begin to think about practice sales, associate buy-ins, mergers or other major acquisition events, most of the focus is on the substantive terms. What is the value of the practice? What is being purchased and sold and what is the purchase price? How will the deal be structured and what are the tax consequences? Will there be major conditions involving financing, lease assignments or building or condo acquisition or purchase rights? What about any post-closing seller service commitments and/or restrictive covenants?

All such substantive terms are essential to practice transitions. But what should be given as much thought and consideration is the process of the transaction as well. How will the parties communicate? Who else will be involved and when and how will they be deployed? What are the steps and what is the sequencing of taking those steps?

If any step of the process is missing or rushed it can often lead to unnecessary delays, additional costs and even a break-down of the anticipated transaction.

The most important first step of the process for both buyer and seller is to identify the professionals needed and to line them up as early as possible. Buying or selling a professional practice is a major life cycle event for the solo or small practice owner. It is important to understand where you will need professional help and guidance and seek it out early so that you have advisors who exclusively represent your interests, who have specific experience with health and dental professionals, as the deal is forming to provide insight and guidance.

No transaction is like any other and a variety of different advisors may be needed during the process. Some sellers and buyers need transition consultants/brokers to find the right transaction counterpart. All buyers and sellers, no matter how large or small, need their own legal counsel and CPA/tax and financial advisor who are not conflicted and can give their client independent advice. Lender financed practice and/or real estate acquisitions warrant an early role for bank representatives. Other professionals that can play a crucial role in certain deals include insurance advisors, practice managers and technology experts.

There are different phases to every transaction but almost all practice transitions have three major phases: establishing the essential terms; drafting and negotiating binding legal documents; and, consummating the transaction or “closing”.

During the initial phase of establishing the essential terms, it is highly productive to first work on a simple initial written description of the material terms. This type of document can be called an offer letter, a memorandum of understanding or “MOU”, a letter of intent or “LOI” or term sheet, among other names. They are all basically the same thing: a short but comprehensive written recitation of the essential terms of the transaction. Having such a preliminary term document is very helpful and desirable. But, having your advisors in place at the start of the preliminary negotiations is vital, as these documents can be non-binding, binding or even both at the same time. It all depends on the language used in the document. Such a critical part of the transaction should not be pursued, and such a document should not be signed, without prior legal and financial/tax review. Buyers and sellers who wait until it is time to work on the actual legal agreements to retain their advisors often find out some important material terms were not addressed effectively leading to regrettable consequences.

After the initial negotiations lead to a preliminary transaction written summary, the parties will generally set forth a scheduled time frame to complete due diligence, negotiate and enter into formal binding legal agreements, satisfy closing conditions and close the transaction.

Due diligence involves the investigation and review of the financial, regulatory and liability facts of the other party. Financial review can begin even before the initial term sheet is created. Prior to any disclosure of financial and proprietary information to the other party it is customary and advisable to enter into a confidentiality or non-disclosure agreement, to protect the disclosing party and its information from improper re-disclosure and often to keep the existence of the negotiations themselves confidential. Many confidentiality agreements or “NDAs” are presented with hidden binding clauses, such as a “no shop” clause that prohibits a seller from talking to other parties about a practice sale, or a clause that may prematurely bind a buyer to a purchase. So legal review of any NDA or confidentiality agreement for all parties is very important.

Ultimately, every transaction will require binding agreements between buyer and seller setting out all of the terms and conditions of the transaction. Depending upon the nature of the sale these may include purchase agreements for assets, equity, goodwill and real estate. The main purchase agreements (often referred to as the “P&S”) should cover all aspects of the transaction: how the purchase price is to be allocated, if it is an asset or stock/equity purchase, what happens to names and phone numbers, the conditions of closing, including financing, and office leases, post-closing covenants, such as employment and non-compete of the seller, patient letters and practice management.

The P & S will generally include many other vital and binding agreements that will be negotiated at the same time as the P & S but will not be executed and become effective until the closing date. These can include, documents of transfer, patient record custody agreements, restrictive covenant agreements, assumption of leases and contracts, and new partnership agreements if there will be two or more owners going forward.

The final phase -- from execution of the binding purchase agreements to the closing -- will involve satisfaction of closing conditions, often involving third parties (e.g. lenders for financing; landlords for new or assigned leases; payers for credentialing; government agencies for regulatory approval in sales involving licensed facilities; and creditors for payoffs and release of liens).

Needless to say planning for the process of a practice transaction is as important as the substantive terms.

For assistance with the sale or purchase of professional practices, including dental and medical practices, William Mandell, Esq. can be contacted at bill@piercemandell.com, or 617-720-2444.

Pierce & Mandell, P.C. at Yankee Dental Congress 2018

William M. Mandell - Wednesday, January 17, 2018

For the ninth consecutive year, Pierce & Mandell, P.C. is proud to be part of the Yankee Dental Congress, January 25th through January 27th at the Boston Convention & Exhibition Center.

Yankee Dental Congress is an educational program and convention that draws thousands of dental professionals each year. Pierce & Mandell attorneys who focus on representing dental professionals and practices with dental practice transitions and sales, associate buy-ins, leases, employment and service agreements, and staff employment issues will be at our booth (814) on the Exhibit Hall.

Pierce & Mandell Health and Dental Law Practice Area leader, Bill Mandell will be featured at two educational programs at this year’s Yankee Dental Congress. On Thursday, January 25, from 2 to 4 pm, he will be presenting “Legal Issues in Practice Transitions”.

On Friday, January 26, form 10 am to 12 noon, Bill will be a panelist on “Taking the Fear Out of Buying or Selling a Practice: Ask the Experts”.

If you are planning on attending Yankee Dental come by our booth and say hello.

Click here for more information on the 2018 Yankee Dental Congress. For more information on our services for dental practices contact Pierce & Mandell, P.C. or email Bill Mandell at bill@piercemandell.com.

Curtis Dooling Promoted to Counsel at Pierce & Mandell

William M. Mandell - Friday, January 12, 2018

Pierce & Mandell, P.C.Curtis B. Dooling was recently promoted to counsel at Pierce & Mandell, P.C. Curt has been practicing law for ten years and has been with the firm for over five years. Curt is a skilled litigator who has tried three cases to verdict in the last year and a half.

Curt has a robust litigation practice that encompasses a wide range of matters, including complex commercial and business litigation, construction, personal injury, zoning and land use disputes, health care, and insurance defense and coverage issues.

Pierce & Mandell Attorney Sam Hoff Explains the Distinctions in Tax-Exempt Status Choices

William M. Mandell - Tuesday, December 05, 2017

501(c)(3) v. 501(c)(6): What Every Non-Profit Incorporator Needs to Know

Sam Hoff, Pierce and Mandell, P.C., Boston, MABy Sam Hoff

One question that we often receive from clients seeking to form a new non-profit corporation is “Should I apply for 501(c)(3) or 501(c)(6) tax-exempt status?” The short answer is that it depends! The type of tax-exempt status that a corporation can obtain is influenced by its stated purpose, if it intends to engage in political activity, its Board structure and membership, and several other factors. Understanding the differences between 501(c)(3) and 501(c)(6) tax-exempt status, which are explained in greater detail below, is critical in order for your corporation to operate legally and efficiently.

Before exploring the differences between 501(c)(3) and 501(c)(6) tax-exempt status, it’s useful to understand the difference between forming a non-profit corporation and obtaining tax-exempt status. The formation of a corporation occurs at the state level, according to state law. In Massachusetts for example, a corporation is formed by filing Articles of Organization with the Massachusetts Secretary of State and registering with the Massachusetts Attorney General’s Office, the Department of Revenue, and the Department of Unemployment Assistance. Once the corporation is formed, it may apply for tax-exempt status at the federal level with the Internal Revenue Service (“IRS”) by filing Form 1023 if it seeks 501(c)(3) tax-exempt status, or Form 1024 if it seeks 501(c)(6) tax-exempt status.

501(c)(3) tax-exempt status. An organization that is organized and operated exclusively for the purpose(s) of religion, charity, science, public safety, literature, education, amateur athletics, and/or the prevention of cruelty to children or animals may file IRS Form 1023 to apply for 501(c)(3) tax-exempt status. To qualify, the organization must generally be a corporation, trust, or fund. An individual or partnership will not qualify. Contributions to corporations with 501(c)(3) tax-exempt status are deductible as charitable contributions on the donor’s federal income tax return.

The assets of a corporation with 501(c)(3) tax-exempt status must be permanently dedicated to one or more of the “exempt” purposes stated above. This means that, should the corporation dissolve, its assets must be distributed in a manner that benefits the exempt purpose(s). The assets cannot be distributed to members of the corporation or private individuals or for any purpose other than the corporation’s exempt purpose(s).

A corporation with 501(c)(3) tax-exempt status may not engage in political activity, such as campaigning for or against a national, state, or local candidate, and generally may not devote a substantial part of its activities to lobbying.

501(c)(6) tax-exempt status. An organization that is a non-profit business league, chamber of commerce, real estate board, or board of trade may file IRS Form 1024 to apply for 501(c)(6) tax-exempt status. No part of the net earnings of a corporation with 501(c)(6) tax-exempt status may inure to the benefit of any private shareholder or individual. The corporation must be primarily engaged in activities or functions that are the basis for its exempt purpose(s). It must be supported by membership dues and other income from activities substantially related to its exempt purpose(s).

Unlike a corporation with 501(c)(3) tax-exempt status, contributions to a corporation with 501(c)(6) tax-exempt status are not deductible as charitable contributions on the donor’s federal income tax return. Such contributions may be deductible, however, as a trade or business expense if they are ordinary and necessary in the conduct of the donor’s business. Further, a member may be able to deduct the dues that he or she pays to the corporation from his or her taxes depending on what the dues are used for.

Unlike a corporation with 501(c)(3) tax-exempt status, a corporation with 501(c)(6) tax-exempt status may generally engage in political activity and lobbying and work toward the enactment of laws which advance the common business interests of the corporation’s members.

So, which is the correct tax-exempt status for you? As you can see, a variety of factors go into the determination of whether your new non-profit corporation should apply for 501(c)(3) or 501(c)(6) tax-exempt status. If you find yourself wondering which tax-exempt status is correct for your corporation and how to obtain it, the experienced Business Law and Non-Profit Organizations attorneys at Pierce & Mandell are here to assist you.

Recent SJC Decision Establishes That Insurer’s Duty to Defend Does Not Include Counterclaims

William M. Mandell - Monday, November 20, 2017

Curtis B. DoolingBy Curtis B. Dooling

Under Massachusetts law, an insurer’s duty to defend its insured is broad. An insurer has a duty to defend its insured if the allegations against the insured are “reasonably susceptible of an interpretation that states or roughly sketches a claim” that falls within the defense obligation’s scope. Billings v. Commerce Ins. Co., 458 Mass. 194, 200 (2010).

Even where some claims against an insured are not covered by insurance, if some of the claims are covered, an insurer has a duty to defend the insured against all claims. This is commonly referred to as the “in for one, in for all” doctrine.

Until recently, the law was unsettled in Massachusetts as to whether an insurer had a duty to pay the legal costs associated with a counterclaim filed by an insured in response to a covered claim against the insured. In the case of Mount Vernon Fire Insurance Company v. Visionaid, Inc., the Supreme Judicial Court, in a 5-2 opinion, held that an insurer is not required to pay for its insured’s counterclaim. Massachusetts has joined the majority of jurisdictions that don’t obligate an insurer to cover the costs of an insured’s counterclaim, even where the counterclaim is related to and assists in the defense of the underlying case.

The defendant/insured, Visionaid, Inc., argued that the duty to defend included all reasonably necessary steps to reduce the liability of the insured, including the costs of a counterclaim. The SJC relied on the plain meaning of the insurance policy and held that the policy did not impose an obligation on the insurer to fund a counterclaim.

Chief Justice Gants dissented and noted that an insurer can’t fulfill its duty to defend without prosecuting related counterclaims that reduce its insured’s liability. The majority disagreed and held that an affirmative counterclaim did not fall within the definition of “defend” under the policy.

Practically speaking, an insured who believes that it has valid counterclaims may still assert the claims, but will have to do so at its own expense. When this scenario occurs, insurance defense counsel will have to work closely with the insured’s personal counsel to both defend the case and prosecute the counterclaim.

Pierce and Mandell’s insurance and litigation attorneys are well-versed in these areas and can assist both insurers and policyholders in assessing what claims are covered under an insurance policy.

Pierce & Mandell’s SJC Victory Could Have Lasting Impact on Trust and Estates Law in Massachusetts

William M. Mandell - Tuesday, November 14, 2017
Pierce Mandell - SJC Victory

The SJC’s recent decision in Ajemian v. Yahoo, overturning the grant of summary judgment against Pierce & Mandell’s clients, continues to reverberate in the legal community. A link to the Lawyer’s Weekly article entitled “SJC Ruling Could Have Significant Implications for T&E Law” can be found here.

SJC Ruling Provides New Remedies for Shareholders of Deadlocked Corporations

William M. Mandell - Monday, November 13, 2017

Sam Hoff, Pierce & Mandell, P.C.By Sam Hoff

In its recent ruling in Koshy v. Sachdev, the Massachusetts Supreme Judicial Court issued an early holiday gift to any shareholder of a deadlocked Massachusetts corporation. Thanks to the SJC’s ruling, such shareholders now have available to them several alternative forms of relief which may allow them to regain control of their corporation, as opposed to taking the “extreme” measure of dissolving their corporation.

The facts in Koshy are all too familiar to any shareholder who has experienced the frustration of corporate deadlock before. Two friends, Koshy and Sachdev, co-founded a corporation which provided computer aided design services. They split the corporation’s shares 50/50 and served as its only two directors. After some initial growth and success, Koshy’s and Sachdev’s relationship began to deteriorate. They differed in opinion on a variety of issues including strategic business decisions, the amount and frequency of distributions, and managerial hiring. Their inability to compromise with one another on these issues eventually caused business to grind to a halt. Koshy and Sachdev each attempted to buy the other out and, as a last resort to get out of business with Sachdev, Koshy brought suit claiming that the corporation was deadlocked and must be dissolved. A Superior Court judge found that no deadlock existed, and Koshy appealed the finding.

Koshy is the first case in which the SJC has been called to interpret Section 14.30 of the Massachusetts Business Act (the “Act”). The Act allows any shareholder who holds 40% of the combined voting power of a corporation’s outstanding stock to petition the Superior Court to dissolve the corporation in the event that its directors are deadlocked. The SJC determined that the Act applies only in cases of “true deadlock” and set forth four factors which are relevant in determining whether true deadlock exists:

(1)Whether irreconcilable differences have resulted in a “corporate paralysis,” which is defined as a stalemate between the directors concerning a primary function of management (e.g., payroll, client services, hiring and retention of employees, and/or corporate strategy).

(2)The size of the corporation at issue, with deadlock more likely to occur in a small or closely held corporation, particularly one where ownership is divided on an even basis between two shareholder-directors.

(3)Any indication that a party to a lawsuit has manufactured a dispute in order to engineer a true deadlock.

(4)The degree and extent of distrust and antipathy between the directors.

Where true deadlock exists, relief is available under the Act so long as the shareholders cannot work around the deadlocked directors and irreparable injury is threatened to or being suffered by the corporation as a result of the true deadlock. The SJC found this to be the case in Koshy. Further, the SJC found that the relief available to shareholders of a deadlocked corporation is not limited to the “extreme” measure of dissolution, but includes alternative remedies such as a court-ordered buyout of one shareholder by another or the sale of the corporation to a third-party buyer. The appropriate remedy must be determined by the Superior Court on a case-by-case basis.

From a legal standpoint, the SJC’s ruling in Koshy is a major break from the prior understanding of the Act, as it opens the door for alternative equitable forms of relief. The key takeaway for shareholders of Massachusetts corporations is that they need not resign themselves to the dissolution of their corporation should it become truly deadlocked. This is especially good news for shareholders of small or closely-held Massachusetts corporations, many of whom have built their business from scratch and are personally invested in the goodwill and future success of the corporation. It is understandable that any such shareholder may be reluctant to dissolve his or her corporation. In light of the SJC’s ruling in Koshy, they may now bring suit and argue before the Superior Court that they should be allowed to regain control of their corporation and continue business by buying out their fellow shareholder(s).

Being a shareholder of a deadlocked corporation can be stressful and harmful to your bottom-line. If you find yourself in this situation, please contact the experienced business litigation attorneys at Pierce & Mandell to learn more about your rights and secure the future of your corporation.

Pierce & Mandell Lawyers Secure Landmark Supreme Judicial Court Victory

William M. Mandell - Wednesday, October 25, 2017

Pierce and Mandell LawyersBy Robert L. Kirby, Jr. and Thomas E. Kenney

The Massachusetts Supreme Judicial Court (“SJC”) recently issued a landmark ruling in a case of first impression, overturning a probate court judgment against Pierce & Mandell’s clients. Robert L. Kirby, Jr. argued the case before the six-justice panel, and Thomas E. Kenney assisted in preparing the appellate briefs.

The case concerned the efforts by Pierce & Mandell’s clients, personal representatives of their deceased brother’s estate, to secure access to the content of their brother’s email account with Yahoo! Yahoo! refused to provide the email content to the personal representatives asserting, among other defenses, that the federal Stored Communications Act (“SCA”) prohibited it from disclosing the email communications. The Norfolk County Probate Court entered summary judgment in Yahoo!’s favor, ruling that the SCA did prohibit such disclosure.

After Pierce & Mandell filed an appeal on its clients’ behalf, the SJC on its own initiative granted direct appellate review. Following oral argument, the SJC reversed the decision of the Norfolk Probate Court and vacated the judgment entered against Pierce & Mandell’s clients, unanimously holding that the SCA did not prohibit Yahoo! from disclosing the email communications to the personal representatives.

The issue before the SJC was whether any of the statutory exceptions to the SCA’s prohibition of disclosure of the email communications applied. Acknowledging that the issue was one of first impression – no appellate court had previously decided whether the SCA barred disclosure of the decedent’s email communications to estate representatives – the SJC held that the SCA’s exception for disclosure “with the lawful consent of the originator or an addressee or intended recipient” of the electronic communications applied to permit Yahoo! to disclose the contents of the email communications to the personal representatives.

In so holding, the SJC rejected Yahoo!’s argument that “lawful consent” under the SCA must be the actual consent of the user of the email account. The Court reasoned that “interpreting lawful consent in such a manner would preclude personal representatives from accessing a decedent’s stored communications and thereby result in the preemption of State probate and common law.” Because nothing in the statutory language or legislative history of the SCA indicates Congress’ intent to preempt state probate law, and because there is a presumption against preemption in areas of traditional state regulation such as family law, the SJC ruled that the only reasonable interpretation of the “lawful consent” exception is that it permits personal representatives to consent to disclosure on behalf of the decedent in connection with their duties to the probate estate.

The SJC further stated that requiring the actual consent to disclosure of the account user “would significantly curtail the ability of personal representatives to perform their duties under State probate and common law.” Additionally, and “[m]ost significantly, this interpretation would result in the creation of a class of digital assets – stored communications –that could not be marshalled.” Thus, “since e-mail accounts often contain billing and other financial information, which was once readily available in paper form, an inability to access e-mail accounts could interfere with the management of a decedent’s estate.”

As a result of its decision, the SJC remanded the case to the Norfolk County Probate Court for a determination as to whether Yahoo!’s terms of service are binding on the personal representatives and, if so, whether those terms of service would permit Yahoo! to delete the contents of the email account rather than turn it over to the personal representatives.

Pierce & Mandell attorneys Robert L. Kirby, Jr., and Thomas E. Kenney regularly litigate in state and federal courts throughout Massachusetts. They handle a variety of cases including probate court litigation, business disputes and intellectual property matters.

A full copy of the opinion can be found here.

The New Massachusetts Pregnant Workers Fairness Act

William M. Mandell - Tuesday, October 03, 2017

Pierce & Mandell, P.C.By: Lena J. Finnerty

On July 27, 2017, Governor Baker signed into law the Massachusetts Pregnant Workers Fairness Act (the “MPWFA”) which extends the protections afforded pregnant workers in Massachusetts beyond those currently provided under federal law. The Act, which will go into effect April 1, 2018, will amend the current anti-discrimination statute in Massachusetts, to prohibit workplace and hiring discrimination related to pregnancy, nursing, and other pregnancy-related conditions.

Current federal law protects pregnant and new mothers from discrimination in the workplace under the Americans with Disabilities Act and Title VII of the Civil Rights Act, as amended by the Pregnancy Discrimination Act. If an employee is temporarily unable to perform their job due to a medical condition related to pregnancy or childbirth, the employer must treat that employee in the same way it treats other temporarily disabled employees. However, the ADA does not consider pregnancy itself a “disability.” Rather, only conditions or impairments resulting from pregnancy may be considered covered disabilities.

Massachusetts has expanded these protections under the new MPWFA to provide all pregnant and nursing employees with reasonable accommodations without having to establish that they have a covered medical condition. The language of the MPWFA will be codified with the current Massachusetts anti-discrimination statute, M.G.L. c. 151B, stating that it is an unlawful practice for employers to discriminate based on “pregnancy or a condition related to said pregnancy, including, but not limited to, lactation, or the need to express breast milk for a nursing child . . .”, and to deny a reasonable accommodation for an employee’s pregnancy or any condition related to the employee’s pregnancy, unless the employer can show that the accommodation would impose an undue hardship that requires significant difficulty or expense on the employer’s program, enterprise or business.

Requirements under the MPWFA

(1.) Engage in the Interactive Process

The employer and employee must engage in a timely and good-faith interactive process to determine effective reasonable accommodations to enable the employee to perform the essential functions of their job.

(2.) Reasonable Accommodation

Examples of reasonable accommodation under the MPWFA include:

  • More frequent or longer paid or unpaid breaks;
  • Time off to recover from childbirth with or without pay;
  • Acquisition or modification of equipment or seating;
  • Temporary transfer to a less strenuous or hazardous position; and
  • Private non-bathroom space for expressing breast milk.

(3.) Documentation

An employer may request documentation from an appropriate health care or rehabilitation professional about the need for a reasonable accommodation, unless the request is for the following pregnancy accommodations: (1) more frequent restroom, food or water breaks; (2) seating; (3) limits on lifting over 20 pounds; and (4) private non-bathroom space for expressing breast milk.

(4.) Notice

Covered employers must provide written notice to all employees of their rights under the MPWFA in the form of a handbook, pamphlet, or other written means, including the right to be free from discrimination based on pregnancy and related conditions, and the right to reasonable accommodations. Written notice must be provided to:

  • New employees at or prior to the start of employment;
  • Existing employees by April 1, 2018; and
  • Within ten (10) days of the date an employee informs the employer of their pregnancy or related condition.

Who is Covered

  • Employers with six (6) or more employees; and
  • All employees, regardless of sex or gender.

What Employers Should do Now

  • Provide written notice to all current employees by April 1, 2018; to new hires upon the date of hire; and within ten (10) days to any employee who informs employer of pregnancy or related condition;
  • Review and amend employee handbooks and policies to reflect compliance with requirements of MPWFA;
  • Train human resources personnel, managers, and staff about the requirements of the MPWFA; and
  • Consult counsel with any legal compliance questions regarding the MPWFA.

If you are an employer with questions on how to best comply with the new MPWFA and other statutory obligations, or an employee that believes their employment rights have been violated, contact the experienced employment law attorneys at Pierce & Mandell.

Pierce & Mandell Partner Dennis Lindgren Featured in Lawyers Weekly Profile

William M. Mandell - Friday, August 04, 2017
Dennis Lindgren

Pierce & Mandell Partner Dennis Lindgren shared his legal insights and tips in Lawyers Weekly Profile. Read more...

 

 

 


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