The thrill of starting a practice can be intoxicating. However, just because you are an owner does not mean you can control the day-to-day running of the business. In this episode, we share the story of three dermatologists who started a medical practice and the strain that arose when two of them wanted to expand the practice. Tune in as we discuss the fiduciary duties of board members to the practice and how the owners could have avoided this situation.
Listen to the full episode using the player below, or by visiting one of the links below. If you have any questions or would like to learn more, email us at firstname.lastname@example.org.
Intro: [00:00:00] Welcome to Legal 123s with ByrdAdatto. Legal issues simplified through real client stories and real world experiences, creating simplicity in 3, 2, 1.
Brad: Welcome back to another episode of the Legal 123s with ByrdAdatto. I’m your host Brad Adatto with my cohost Michael Byrd.
Michael: As a business and healthcare law firm, we meet a lot of interesting people and learn their amazing stories. This season’s theme is hard conversations. We’ll take real client stories, of course we’ll scrub the names, and build these stories around confronting and having hard conversations. Now, Brad, they don’t all have great outcomes, but there are plenty of teachable moments.
Brad: You know, Michael, it just occurred to me, you and I often have to have lots of hard conversations with our wives and spouses because we end up traveling a lot. So it doesn’t always go over really well. You’re leaving again? For that, we get to travel a lot. Michael, I’m just curious, have you ever left a [00:01:00] hotel and hours or even days later you realize you left something behind?
Michael: Well, that’s a loaded question, Brad. You know the answer to this because you experienced what I know you want me to talk about, which is an infamous trip to Shreveport a few years ago.
Michael: Oh, it’s been probably eight years ago, but yes, brad, you and I drove to Shreveport to give a lecture…
Michael: And we were entertained by our host. That night, very late into the evening…
Michael: We were, this is in our younger year, so we were a little bit more spry than we are these days.
Michael: I did not feel great the next day.
Brad: No, you didn’t.
Michael: But we still needed to get back to the office. We packed up, got in the car, and got about halfway back to Dallas before I realized that I had left my suit, and my shoes, and my shirt and a couple other things in the hotel room.
Brad: [00:02:00] Belt.
Michael: My belt, yes.
Brad: The nice stuff.
Michael: Yeah, and so we faced the dilemma, Do we turn around and go back and get it?
Brad: Context audience, we’re halfway through a five hour drive, I think.
Brad: A four hour drive.
Michael: Yeah, it was a very small dilemma.
Michael: We were like, “No, we’re going.” Thankfully, the hotel was very gracious, and not too long later, I got a big shipment to the office with a bunch of my clothes.
Brad: Yes, very proud moment for you. When I was asking that question, I knew the audience was probably begging for me to have a great story about what I left behind in a hotel, and I actually don’t have one. In fact, this morning when I was preparing for the podcast, I asked my wife, I was like, she’s known me for 30 years, and I said, can you think of any time I’ve left something behind a hotel?
She’s like, no, not really, but what about the time you left your iPhone in the car? I was like, oh yeah, that one was pretty [00:03:00] bad. Audience members, I was in Chicago, and I had left the Chicago office going to the airport, and I was on a conference call, so I had my earbuds in and I was just sitting there chatting and I had put my phone on top of my backpack. I had already told the driver I had to get a conference call, so he knew. I pulled up, and the driver was very kind. He got out, got my bag, and stuck me curbside. I waved at him, grabbed my backpack, got into the airport, and I stood to the side so I could keep talking without having to hang up. As I was talking they started kind of breaking up on me a little bit, and then all of a sudden they weren’t there, and that’s when I realized I had left my phone in the car. I even did the whole airport scene where I’m chasing with my bag trying to run after the car as it peels off. I was like, oh God, so then I ran to find a payphone. Audience members, payphones don’t exist. They do. You just got to really dive deep and I tried to call the [00:04:00] office because they had luckily got the car service for me. I tried to call my wife to see if she could track my phone. I mean the number of different phone calls I made off the payphone was pretty high and pretty crazy. Eventually with the Face Timing on my iPad, I was able to get ahold of some people, and believe it or not, audience members, the driver as he drove off, heard talking in the backseat and came back around and the whole 30 minutes I spent trying to find the driver, he was out front. So I did get my iPhone back. Moral of the story is, luckily we had a good driver. You know, Michael, that made me think, oh, on the flight home, you and I had recently, been on some trips, and I happened to read this article about items left behind. It’s funny, you know, listening members, in this article items left behind in hotels and from articles that kind of cover stuff from all around the world and, you know, the typical things, books and [00:05:00] laptop chargers and phone chargers, and sometimes clothing items, Michael Byrd. However, this article really noted some strange things that hotel maids found.
Michael: Brad, I’m not going to say what my 13 year old brain is wanting to speculate right now as to what items are left behind. And I know you are giggling on the inside too, so please know that when you share the list that I may not be able to handle it, so I hope you kind of cold through it.
Brad: Yes. Well, and I have a little faith in your 13 year old brain because just like you, I’m probably going to the same places. Audience members, here are some items that were left behind. A bucket of snails were left behind in a hotel in Budapest. The note said, “Cats, cats everywhere”, and a hundred dollar tip with a note that said, “Thanks for taking care of these guys. Be back in a week”. The guests never came back.
Michael: That was not me, but it could have been.
Michael: Not a cat person.
Brad: In Washington, DC, a live snake was found [00:06:00] just chilling out in this guest room and apparently was very large. And another, this was actually in Arizona; a police officer neglected to take his gun and badge.
Michael: That’s not surprising that that has happened.
Brad: Yes. A man once left his wife behind in a Prague hotel.
Michael: That probably didn’t turn out too well.
Brad: No, and another man forgot his mom, and left without her.
Michael: Oh my goodness.
Brad: So here are a few more funny ones that I thought would really juice our audience up. A dead alligator in a hotel room.
Michael: As one does.
Brad: A goat dressed as Abraham Lincoln.
Michael: What does that even mean? Does it have a top hat?
Brad: I don’t know, I wasn’t there. A suitcase full of prosthetic legs.
Michael: Okay. No dad jokes, Brad.
Brad: It’s so hard. A land deed entitled to land in the Scottish Highlands.
Brad: Six full size, fully decorated Christmas [00:07:00] trees.
Michael: That had to be a practical joke.
Brad: A hot pocket in the safe with a note that said “microwave broken”.
Michael: I think someone was really angry that their hot pocket was not hot.
Brad: A glass eye in a glass of water.
Michael: Again, no dad jokes of what they didn’t see.
Brad: All the room furniture nailed to the ceiling, and I guess technically they left behind nails. Does that make sense?
Michael: Yeah. That kind of reminds me of an incident I had in college with a joke played on me.
Brad: Finally last, but certainly not least, a Shetland pony.
Michael: Okay, well it was relatively clean, so I’m thankful for that. I am curious, Brad, what this has to do with today’s conversation and today’s hard conversation?
Brad: Well, as our audience members may have heard, Michael, you and I just got back from Las Vegas where we recorded our first live show in Las Vegas at the 2023 Med Spa Show at the Win Hotel. And Michael, I think I left it all in [00:08:00] the field during that live show.
Michael: Oh man, you’ve got too much going on here, metaphor wise, Brad. Generally you leave it all on the field or a court for a sports event. I don’t know that you’re actually leaving anything behind during a podcast episode, but I like your belief in yourself. Let’s get on with today’s show.
Brad: All right, Michael. Our client in the story starts with three dermatologists and they started their own private practice. We’ll call them by their first names, Hickory, Dickery, and Doc.
Michael: Why, Brad, why?
Brad: Well, we’ve all heard the nursery rhyme about three blind mice, and when I was thinking about the story, it kind of reminded me of the three blind mice. However, if you know the nursery rhyme, the mice have no name, which led me to the next nursery rhyme about a mouse running up a clock, and the rest is history.
Michael: Ah, well, now I have a little bit too much inside into your brain. [00:09:00] There was a comedian from our young adulthood who ruined this nursery rhyme for me, so I’m hoping that your story with these names will restore it. No pressure, but let’s kind of reprogramed my brain with Hickory, Dickory, and Doc.
Brad: Yeah, and no connection by the way. So Hickory, Dickery, and Doc had known each other since actually we were residents and were around the same age. Doc was just a few years older, and each had practiced at another dermatology practice before they decided to start their own clinic. Which we’ll call HDD dermatology. They decided to jump quickly and form a medical practice, and they were all equal owners and they were all served on the board of HDD to manage it.
Michael: I hear the word jump quickly in quotes and I am thinking that this can’t be good.
Brad: Well, you might get a gold star from Riley with that kind of good insight there, Michael. When the dermatologist practice opened, Hickory, Dickery, and Doc were actually the only medical providers, and they had a small staff to help book the patients.
Michael: And this sounds pretty typical [00:10:00] for a small practice startup.
Brad: Yeah. So let’s fast forward to 10 years and HDD Dermatology grew at a steady pace adding other staff and medical providers. By year 10, they actually added two more partners. Both these partners were non-voting owners.
Michael: Okay. Again, not that uncommon. You’ll hear, especially as practices scale and they have multiple owners, one way that they’ll try to keep some sort of centralized voice on decision making is through having voting and non-voting share. So someone may be an owner or a partner, but they don’t have a seat at the table, so to speak, on making decisions directionally for the business.
Brad: Yeah. Sometimes you might hear that there’s just pure equity owner or something like that.
Brad: All right. Around the same time, HDD Dermatology started adding cash-based services for like injectables, like toxins and dermal filters, [00:11:00] and that quickly gained traction. Their patients started asking about other elective services like body contouring. Sometimes you might hear cool sculpting or even fractural resurfacing, like Halo and other full, blade of, laser like services. Michael: Again, this is common with dermatology practice to at some point add elective aesthetic services. There’s a huge draw in medicine whenever cash based services can be offered and physicians don’t have to deal with the headache of working with insurance.
Brad: Yeah, fair assessment. Now, with this new flow of cash, paying patients, all the partners started to increase their take home pay because they had cash paying patients. Dickery and Doc thought it’d be a great time to really expand the practice by increasing the square footage of the practice, and with the space they would solely focus on this new space, you know, more elective like med spot-like services to capture this new revenue source. And even the two non-voting members also agreed that it was a good idea. [00:12:00]
Michael: Well, though irrelevant because they’re non-voting, it is a voice and kind of some momentum on directionally where people want to go with the business. I noticed that you didn’t mention one person, Hickory.
Brad: Wow. Riley put another gold star on Michael’s chart for paying attention. Correct, Michael. Dickory and Doc were ready to scale this elected practice for HDD Dermatology by taking on that more space and hiring more employees, but Hickory just did not want to grow the practice.
Michael: Is this where there was a hard conversation?
Brad: Hold on, we’re not done. As I mentioned, in the start of the story, Hickory, Dickory and Doc were all equal owners and board members, and the company agreement they had put together provided that all decisions of the board must be unanimous.
Michael: Ah, I call this the ride or die strategy. The owners either all solve a problem together or it doesn’t happen. This is somewhat common with two owner practices, but [00:13:00] it starts getting unusual for obvious reasons when you have a three plus person practice.
Brad: Yeah, and you’ll see as it plays for months Hickory would not budge and know that unless she agreed they cannot move forward and without taking on this extra space or hiring these new employees, and as you can imagine audience members, this put massive strain in the relationship between all the owners, including the non-voting owners.
Michael: Well, was Hickory concerned with having to execute a personal guarantee on the new space or had some other concerns, like the cost of hiring these new employees?
Brad: No, actually, well, that’s a good question. The new space that they were going to acquire, because they had been in the space so long, they were going to actually just go next door basically, and was not requiring a personal guarantee, and the other owners had already worked through the business plan. Most of which was being managed actually, by Dickery and Doc. So, Hickory wasn’t even that involved in it, but it actually started getting into extremely unhealthy relationships between the parties, [00:14:00] Dickory and Doc and the other non-voting members actually started to meet without Hickory on how to continue forward with this new space. They would then meet with Hickory, present why they had to move forward with this new space and how this new space was. The problem for Hickory was that this new space really wasn’t in her vision of the practice, and so she was just against it.
Michael: And I’ll just note that it’s relatively common, but always an unhealthy sign when you start to have meetings before the meetings. It’s a good warning sign that there may be trouble in the relationship that needs to be dealt with.
Brad: Yeah, and Michael, it actually started getting worse. They actually reached out to a litigation council on how they could force Hickory to move forward.
Michael: Well, I’m going to state the obvious and say that if you contacted a litigation attorney that that’s not good.
Brad: Yeah, so they even spoke with us, and this is where we kind of [00:15:00] came into the picture with starting a new separate med spa in which Dickery, doc, and the other non-voting members would be the sole owners of it. And when we learned more about them, we started discussing their fiduciary duties owed by the board members to their current practice.
Michael: I think we have a vocabulary word there, Brad, Mr. Fancy. For those that don’t know, if you are on a board of the company or a practice, you have what’s called a fiduciary duty. It’s a duty of loyalty and care to the company, so this means that you have to put the interest of the company ahead of your own. You hear the term, you know, fiduciary duties, and so you have to be really careful if you are serving in that capacity and have this fiduciary duty and you want to go and start doing something that [00:16:00] competes with or is not in the best interest of the company.
Brad: Yeah, and this is when it kind of started spiraling a little bit because the conversations were, “we’ll just break up the company” or “we’re just going to do it anyway and violate the terms” or “we don’t really care about fiduciary duties”, and honestly it is just kind of when they started getting into an impasse.
Michael: So what happened? Did they have the hard conversation with Hickory or did they go the avoidance strategy?
Brad: Dun, dun, dun. They actually put on their big girl pants and they actually ended up having a hard conversation with each other as to what to do with their dermatology practice. All the owners, including our firm, actually sat down and we had a very, very long whiteboard meeting. Honestly, Michael, it felt more like a mediation than an actual meeting. But at this meeting they asked us to lay out the facts, and so we gave them all their options as we saw it based on their current governing documents and then other things that you [00:17:00] could do, such as keep everything the same status quo, or they can modify the current company agreement by changing the process in which people would have to prove certain things all the way to dissolving the entity and starting over.
Michael: Well, first, just note that this sounds like just such a great example of actually sitting down and talking about something hard can really help deescalate a situation. Which is awesome, but you mentioned the approval process. For our audience, we’re discussing voting actions, and I think we should give the audience some examples of what we’re talking about here.
Brad: Yeah, and voting actions are all over the place. It’s about approving an action of the entity, and that’s what the boards typically do. So in this particular case, it could be approving, opening, maintaining a banking account, or establishing a committee, or delegating what power that committee has, or adding new owners, or selling the entire [00:18:00] business. And each such action could require a majority approval, or a super majority approval, and sometimes a unanimous approval.
Michael: All right, well, there’s a lot you just said. Brad, I think we should go to break. And then on the other side, let’s break down some of the differences between these different decision makings, kind of approaches, and learn some lessons from HDD Dermatology. I’m curious to hear what happened after the hard conversation.
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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host Brad Adatto, with my co-host Michael Byrd. Now, Michael, this season our theme is hard conversations and HDD dermatology, they had to have a hard conversation on control of that practice.
Michael: Yeah, yeah, no doubt. I mean, if we kind of reset the story a little bit, We have three doctors who are friends, they start their practice together, at the beginning, it’s just a small deal, and they kind of default into what I call the ride or die strategy, but it was basically like, “Hey, we’re in this together and we’re going to figure things out. And so, we’ll make decisions together”. You know, what’s hard with the ride or die strategy is that it puts pressure on making [00:20:00] decisions, and what they confronted here is the business started to evolve in a way that they probably didn’t dream of.
Michel: They didn’t probably anticipate the aesthetic kind of aspect to their revenue stream that they were going to add. They started getting some momentum with this kind of cash based revenue stream, and so there was a disconnect and it put pressure on the relationship. So much so that they started taking some unhealthy actions, like secret meetings and talking to a litigator to figure out all these worst case scenarios. Ultimately, thankfully, with you playing mediator/whiteboard leader, they had a meeting.
Michael: And they engaged in it and talked about it, and it at least sounded like where we left off in the story, that things took a turn for the better. But we really just left off with [00:21:00] the different ways you can solve for decision making. So let’s pause and kind of talk about some of the legal issues that have been raised.I know that we speak with a lot of people buying into a business and often they don’t think about what happens on the decision making side of it or the control side of it after the fact.
Brad: Yeah, and that’s a great point, Michael. We’ve discussed this tool that we use. We often call the four Cs, but again, for audience members who might be hearing this for the very first time, what are the four Cs?
Michael: Yeah, so broadly you have cost, ccompensation, control, and contingencies. Our prior two episodes focused in on the cost and compensation elements, and today we’re talking about control. Ultimately what we’re talking about is decision making.
Brad: Yeah, that’s right. So today’s story really is focused on decision making. And as a reminder, the [00:22:00] thrill of starting a practice can be intoxicating. I mean, you’re starting a business that allows you, as a physician, to own something that’s yours. And there are these key individuals on your side, you’re launching a brand, and all these great ideas. However, just because you’re an owner doesn’t mean you actually have control over the day to day running of that business. And these powers are generally left to the board of directors, and in this case in our story, the board of managers.
Michael: Yeah, and it’s probably helpful to think about the typical, we’ve talked about this in the past, that people wear different hats. Ultimately, when three people start a business, they at a minimum have two hats. This is probably what they had in this story, you would know for sure. But they had their hat as the owners of the business; and assuming they were equal owners, they had that; and then they had their hat as the board of [00:23:00] managers. This is, in a traditional corporation, think about the board of directors and the board of managers, you know, kind of philosophically works at the pleasure of the ownership group, and then a lot of times when you set up the infrastructure, the board of manager will delegate day-to-day decisions to the officers. So within this infrastructure, it’s important to kind of think through and plan out, how are you going to have checks and balances on who can make what decisions? And who has kind of the ultimate say so? But a shortcut around that is what they did, which is to say we’re all going to agree or not.
Brad: Yeah. Well, Michael, in this story, we actually started to discuss what should be acquired by the owners, and other times we will talk with our clients about majority approval or super majority approval or unanimous approval. Maybe for our audience members who just think they understand what that means, but [00:24:00] could you clarify a little bit, what’s the difference between these different types of approvals?
Michael: Yeah, so, they’re kind of levels of participation by the people that have a decision, on some decision. So a more routine decision might be a majority approval, which is, oftentimes if there’s three people on the board, then two people or 51% would be enough to get a majority or you can actually base it on your percentage of ownership in the vote. A super majority is a higher level. So let’s say you had four people that were on the board, it might take three of those four people to pass that decision. It’s a much bigger decision.
Michael: And of course, unanimous is what these had, and that’s everyone has to make that decision. So you may actually delegate [00:25:00] some basic decisions like who’s going to buy the staples or pay the bills on deposit checks and the functions of running a business to someone that probably is an officer and has a fiduciary duty that we talked about to do these things so that you’re not having to have a vote every time. And then you can get to the board level where you have some bigger decisions, and then a lot of times you’ll put the really, really big decisions back on the owners to say, “Hey, if we’re going to sell the company, or something big like that, then this needs to be an ownership vote”.
Brad: Yeah, and a lot of times we have people who have unanimous, and you’ve heard me talk about this before, I’m just not a fan of any organization having unanimous requirements. Even in the case you referenced or sometimes you and two people, that’ll have a unanimous agreement because they can’t move forward. Well, one of the reasons I don’t like that, audience members, is often the [00:26:00] cases, you have a unanimous clause in there and then you add a second, third, fourth person and you just forgot that approval is unanimous. And unfortunately, I’ve seen this not work many, many times. And, I’ve even had groups tell us, oh yeah, we’re all the founders, and if we don’t agree to it and it’s not unanimous, we’re not going to move forward. And unfortunately, as the groups get bigger, I’ve seen this crush groups as they add younger owners or people don’t have the same philosophy if they have. An example I’ll give real quick, and this is just another aside, a story that I had, which was a fairly large orthopedic practice. The founders had unanimous for everything that the board had to decide basically. And as they grew, unfortunately, they had this young orthopedic physician who had extremely abusive behavior towards their practice staff and the hospital staff who’d been warned multiple times by senior doctors. Hey, get your act together, you cannot behave this way. What all came crashing down when the main hospital that they were [00:27:00] affiliated with kicked him off the staff. So now he couldn’t go operate at the main hospital and he still had staff complaining so that the physician’s like, well, we need to get rid of him. Well, fast forward to the board. The board had one of the younger docs on it, who guess what, his best friend was that doctor who he helped recruit to that group, and he’s like, I’m not going to vote against him, and they spent tons of time trying to convince this doc that they needed to get rid of him. And he refused to and said, you can’t and I can’t. You can’t let me kick him out because it has to be unanimous. And so that was a time in which the litigation did it eventually come about because they had that unanimous approval, and if they had a simple majority, or even a super majority, that guy could have still voted against it and said, Hey buddy, I try to protect you but they outvoted me. And so it’s just another demonstration of why you have to really protect yourself as an organization and not get locked in on a unanimous.
Michael: Yeah, I mean, that’s a great illustration of the risk with unanimous. I personally don’t have a [00:28:00] strong of an aversion to the rider die strategy.
Michael: When there’s two owners involved. And it really starts with this, just acknowledging that when you have two people, there’s no glamorous or smooth choice.
Michael: You either have to both agree or pick someone who’s going to be the decision maker, or my least favorite is have some outsider break a tie.
Brad: Yeah, I agree.
Michael: And so, I like it if there’s a way that you can have, okay, the final choice is so-and-so’s because you’re going to avoid these scenarios like you just described a moment ago, but a lot of times they’re equal coming into it. And if I sense that they have a good relationship and there’s good communication, you know, we’ll talk about it and we’ll talk about these scenarios if they go right or die, on their decision making and understand the risk they’re putting [00:29:00] on the business, but ultimately they’re betting on each other to solve things. And to your point, if they add another owner, they’ve got to change that because then the risk skyrockets. But in any event, whether you do it or you don’t do it, the risk is great. And so, it requires a lot of thought and conversation before you set up your decision making. I’m curious what happened between Hickory, Dickory and Doc?
Brad: So after that whiteboard meeting, it actually started progressing. We had a few more calls and meetings, but it was progressing because they had that hard conversation and eventually Hickory, Dickery, and Doc did agree that they needed to modify the agreement. And they realized that this was not an easy pass for any of these founding members. But they certainly decided that certain business decisions like buying equipment or hiring more employees, are adding more space. If 51% of people really agreed, they would go forward with that. But then they said, well, if a [00:30:00] essential decision, like a personal guarantee or selling all the business or something like that, then they would agree that 75% or super majority would require that approval. So finally, the other thing they actually did was they actually added the other non-voting members to become voting members. There’s a lot of things happening in that organization. Believe it or not, Hickory eventually accepted that with that super majority approval that she would be okay with those results. And fast forward to the present day; the practice is booming. Hickory is still an owner and audience members, believe it or not, this week we just added a new owner to the practice, and so all is good. Michael, I think we’re almost out of town time, so what is your final takeaway?
Michael: Well, I mean, I think the way that one would leave a crocodile in their hotel room is they’re in a hurry, and they don’t slow down. I think the similar thing that we saw in today’s story and you see with people that are starting a practice is the fast way to deal with decision making is [00:31:00] just to go with this default ride or die strategy. Everyone has to approve or not, and if they would just slow down and think about the variables and the vision for how they want to run the organization, They would probably come up with a better solution on how decision making could happen, especially when you have three people. And you know, going back to it, they would’ve run back to the room and grabbed that dead crocodile and not left it behind.
Brad: Well, audience members, next Wednesday’s show, we have a special, our first live podcast from the 2023 medical spa shows, and it’ll be spotting the legal red flags. It’ll be released, and audience members, it’s good. It’s a lot of fun. We got audience interaction, audience questions, and everyone in the audience saw that I was better than Michael.
Outro: Thanks again for joining us today. And remember, if you like this episode, please subscribe, make sure to give us a five-star rating, and share with [00:32:00] your friends. You can also sign up for the ByrdAdatto newsletter by going to our website ByrdAdatto.com. ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues.