Vendor take-backs on the sale of a dental practice in Ontario

A vendor take-back, where the seller is repaid part of the price over time, looks the same on paper in a dental practice as in any other business. What differs is what surrounds it: a corporation whose shares only certain people may hold, patient charts that a regulator says contractual arrangements should not keep from patients, and a seller who may keep treating patients after closing. This page covers only those differences and only Ontario, and it does not say whether a take-back suits anyone. For the wider loan picture, see financing a dental practice acquisition.

A note is a debt, but a share pledge is an ownership question

Section 3.2(2) of the Business Corporations Act, subject to the regulations under section 3.2(6), requires all the issued and outstanding shares of a professional corporation to be legally and beneficially owned, directly or indirectly, by one or more members of the same profession. The Royal College of Dental Surgeons of Ontario (RCDSO) states that holding companies may not own shares in a dentistry professional corporation. A seller who is no longer a College member, or who holds through a company, should ask a lawyer whether taking or holding shares as security for the note fits those limits. This page does not answer that, and the ownership rules themselves are set out in who may own shares in an Ontario dental corporation.

Two further provisions matter if the note comes with a shareholder agreement. Section 3.2(4) makes void an agreement or proxy that gives someone who is not a shareholder the right to vote a share. Section 3.2(5), subject to section 3.2(6), makes a unanimous shareholder agreement in respect of a professional corporation void unless each shareholder of the corporation is a member of the professional corporation. Section 3.2(3) adds that no act done by or on behalf of a professional corporation is invalid merely because it contravenes the Act.

Security over the practice’s assets

Ontario’s Personal Property Security Act defines a purchase-money security interest to include a security interest taken or reserved in collateral, other than investment property, to secure payment of all or part of its price. Section 30(1) provides that, if no other provision of the Act is applicable, priority between security interests perfected by registration is determined by the order of registration regardless of the order of perfection; section 33 sets separate priority rules for purchase-money security interests. So if a bank is also lending, ask your lawyer how the seller’s registration and the bank’s will rank, and whether the seller must agree to subordinate. Whether a particular dental asset can be covered at all is a question for the lawyer who drafts the security.

Where the federal small business loan stops

The Canada Small Business Financing Program guidelines say that when a vendor finances part of the purchase price, the amount of that financing is not eligible for a CSBF loan. The take-back and a program-backed bank loan therefore cover different parts of the price. Ask the lender how it will treat the note, whether it wants the note postponed behind its own loan, and what the program’s current guidelines say about the rest of your purchase.

Patient charts and the note

The RCDSO says that under the Personal Health Information Protection Act, 2004 the selling dentist is responsible for transferring patient records to another health care custodian, and that disputes between practitioners or contractual arrangements should not affect the future treatment of patients, restrict their right to choose a dentist, or limit their access to their charts. Section 42(2) of that Act allows a custodian to transfer records to its successor if it makes reasonable efforts to give the individual notice before the transfer or, if that is not reasonably possible, as soon as possible after. Ask the lawyer whether any security or default wording for the note touches patient records, given what the RCDSO says about access to charts. The sale mechanics are in how to sell a dental practice in Ontario.

The seller who stays on

If the seller keeps working in the practice while the note runs, the registered sources here say nothing about how an associate agreement should connect to the note, so it is a point to settle in writing. The RCDSO’s guidance says to review each patient’s ongoing treatment before the sale and identify those part-way through, and it says the purchase and sale agreement typically gives the vendor a right of access to records if needed to defend a complaint or claim. The RCDSO also says dentists continue to be protected indefinitely under its Professional Liability Program for claims arising from professional services provided in Ontario while they were College members.

Questions to put to a lawyer before the note is signed

• Can the seller hold shares, or a share pledge, as security under section 3.2 of the Business Corporations Act and the regulations, given the seller’s own College status and any holding company?
• How will the seller’s registration under the Personal Property Security Act rank against the bank’s, and what does the subordination wording say?
• How does the lender treat the note alongside a Canada Small Business Financing Program loan, given the guideline that vendor financing is not eligible?
• What happens to the note if the seller leaves an associate role early, and is that written in both agreements?
• Does any security or default clause depend on patient records, and if so, how is it rewritten so charts stay available to patients?