Mid-Atlantic Health Law TOPICS

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MDs, PPMCs and the SEC

Health care providers are long used to living with and talking in acronyms, from M.D. and Ph.D., to CT and EKG. In recent years, financial acronyms, such as HMO, PPO, MSO, and PPMC, have also become part of the everyday jargon of health care providers.

It is time for doctors to become familiar with another acronym, that is, "SEC," which stands for the U.S. Securities and Exchange Commission. Among other things, the SEC regulates the sale of stock to the public.

As medical practices affiliate, whether by outright sale to a large group or contracting with some form of a physician practice management company (PPMC). physicians are being offered various types of consideration for giving up some of their management autonomy Often, this consideration takes the form of stock in the practice management company, which may be a publicly-traded company or, more likely, has plans to go public within a few years following the affiliation.

Perhaps most perplexing to potential physician/stockholders are the complex securities rules affecting the physician's right eventually to sell his or her stock. These rules are described below.

A. Sale Restrictions

 First, it is common for the practice management company to restrict contractually the ability of the physician to sell or transfer his or her stock. If the practice management company is not yet public, the restrictions might include a prohibition against selling or transferring the stock for a one or two year period following an initial public offering. Such a restriction shows the public that the founders have faith in the practice management company.

In addition to this contractual restriction, federal securities laws (administered and enforced by the SEC) and state securities -- or "blue sky" laws (administered and enforced by state securities regulators) prohibit the sale of the stock, unless the stock or transaction is either registered with the SEC and applicable state securities authorities, or exempt from registration.

Importantly, even if the management company is or goes public, that does not mean that the physician's shares in the management company can be traded publicly. If the physician's shares themselves are not "registered," then such shares are called "restricted securities," and they may not be sold, unless exemptions from federal and state securities laws are available.

B. Registration

Often, the acquisition or affiliation agreement between the physician and the practice management company will grant the physician who receives restricted securities "registration rights," whereby the practice management company undertakes to register the physician's stock at some future time.

Registration rights can take the form of either "demand" rights requiring the company to register the stock on the physician's demand (if the company is public) -- or "piggyback" rights -- allowing the stockholder to join in (or "piggyback" onto) another registration statement which the company may file in the future.

Registration rights agreements are very important, and they have become quite creative. There are many different options and issues for physicians to consider when these agreements are being crafted.

C. Rule 144

What if the contractual restriction period has passed and the management company is already public or becomes a public company before the physician's stock is registered? One of the more common exemptions which would allow a physician to sell his or her non-registered stock is the SEC's Rule 144.

Rule 144 allows the owner of restricted securities to sell limited amounts of the stock, from time to time, through a stockbroker provided the stock has been owned and fully paid for at least one year prior to sale (recently reduced from two years) and certain company information is publicly available prior to the sale (which, for all practical purposes, means that the company: must have been public for at least 90 days prior to the sale; and has filed all requisite information with the SEC). In addition, a (simple) report of the sale may be required to be filed with the SEC. I

f the stockholder is not an officer, director or otherwise someone who may be considered an "affiliate of the practice management company (and has not been for at least three months prior to the sale), and the stock has been owned and fully paid for at least two years prior to sale (recently reduced from three years), then an unlimited amount of the stock may be sold, and no SEC filing is required.

D. Conclusion

The foregoing merely touches on some of the nuances physicians should consider when accepting restricted stock as payment for a practice. Since a substantial portion of the value a doctor has built in his or her practice may lie in the shares of stock received from the new owner or from the practice management company it is critical to consider these complex issues carefully.