Unlocking a Deadlock: How to Resolve Dental Partnership Disputes
In many contexts, a 50/50 split is a sign of fairness and equity. But when equal owners of a dental practice find themselves at loggerheads over significant issues, a 50/50 split can lead to paralysis, tension, and acrimony that threatens the relationship between the owners and the future of the practice itself.
Whether a practice is a partnership, professional corporation (PC), or limited liability company (LLC), deadlocks are always a distinct possibility where equity interests and voting rights are evenly split among partners, shareholders, or members. Unless the practice owners have established a mechanism for resolving deadlocks, they may wind up in court asking for a judicial dissolution of the practice to resolve the stalemate. This is rarely in any party’s best interest. The best way to minimize existential disagreements and avoid such a litigious outcome is to include deadlock resolution provisions in the partners’ operative agreements.
Not Every Disagreement Equals a Deadlock
Rarely an hour goes by without a dental practice owner making some kind of decision involving the practice. But most day-to-day choices don’t require the assent or approval of a majority or all shareholders or members, nor do they implicate the direction or future of the company. Two practice owners with equal voting rights may disagree on what type of cake to order for an office party, but that is hardly the type of deadlock that a clause in a shareholder or operating agreement is there to address.
The kinds of matters that can lead to consequential deadlocks usually involve actions taken outside the ordinary course of business or that affect the fundamental direction of the practice, such as a merger, joining a dental service organization, or the sale of substantially all of the practice assets. That is why a deadlock provision should clearly define the types and scope of issues and disagreements that could trigger its resolution mechanisms.
Deadlock Resolution Mechanisms
The sports world has many different ways of resolving ties – overtime, extra innings, shootouts, and sudden death, to name a few. Similarly, practice owners have many options for deadlock resolution provisions in their governing documents. Three of the most common include:
Shotgun/Russian Roulette
Thankfully, the name of this type of deadlock provision is metaphorical. In reality, it is far less dramatic and simply refers to a “buy-sell” agreement or arrangement that can be triggered in the event of a deadlock.
Such provisions essentially allow one owner to offer to purchase the interest of the other deadlocked owner at a set price and terms. The offeree must then either accept the given price and terms or purchase the offeror’s interest for the same price and terms (assuming equivalent percentage interests).
A shotgun provision is a pretty blunt instrument. Often, the mere possibility that either of the deadlocked practice owners may find themselves out on the street (again, metaphorically) after the clause is triggered is enough motivation to find a way to settle their differences.
Auction
An auction is often a very workable solution when two or more practice owners compete for control amid a deadlock. It is similar to a shotgun approach in that the offering owner may have the chance to pay a price of their own choosing, even to pay a premium. However, it is very different from a shotgun because the auction process does not penalize the owner making a low offer since the other member only has to make a higher offer to avoid an unfair transaction.
Sealed Bid/“Texas Shoot-Out”
In this colorfully named cousin of a shotgun deadlock provision, each owner submits a sealed offer for the others’ shares to an independent third party. That third party opens the bids simultaneously and the highest sealed bid "wins," meaning the owner who had a higher bid will be required to purchase the others’ shares at the stated bid price.
Third-Party Tie-Breakers
When practice owners take their dispute to court, they are essentially putting their fate in the hands of a third party who may know the law but may or may not have adequate knowledge of the practice or the dental industry as a whole. While a tie-breaking deadlock mechanism gives a third party the authority to make the call as to how to resolve the deadlock or value the parties' interests, that third party is usually someone with more industry knowledge. That party can be the board of an affiliated entity, external or internal professional advisors such as dental broker, one or more mediators/arbitrators, or a dental industry expert.
Given the very real likelihood of deadlock among practice owners, and the existential threat that a stalemate can pose to a dental practice’s ongoing viability, owners should ensure that their shareholder or operating agreement contains robust and precise deadlock provisions.
Grogan Hesse & Uditsky: Lawyers For the Dental Profession
At Grogan Hesse & Uditsky, P.C., we focus a substantial part of our practice on providing exceptional legal services for dentists and dental practices, as well as orthodontists, periodontists, endodontists, pediatric dentists, and oral surgeons. We bring unique insights and a deep commitment to protecting the interests of dental professionals and their practices and welcome the opportunity to work with you.
Please call us at (630) 833-5533 or contact us online to arrange for your free initial consultation.
Jordan Uditsky, an accomplished businessman and seasoned attorney, combines his experience as a legal counselor and successful entrepreneur to advise dentists and other business owners in the Chicago area. Jordan grew up in a dental family, with his father, grandfather, and sister each owning their own dental practices. This blend of legal, business, and personal experience provides Jordan with unique insight into his clients’ needs, concerns, and goals.
Speak to an Attorney
