Dental Service Organizations (“DSOs”) have become increasingly active in the Canadian dental market. Their structures can allow dentists to access centralized management, capital, and administrative infrastructure while allowing DSOs and other investors to participate economically in the growth of dental businesses.
Ontario, however, imposes important restrictions on who may own and control a dentistry professional corporation.
For DSOs, investors and dentists considering a partnership, the key question is therefore not simply whether a non-dentist can invest in the dental industry, but how the relationship can be structured without transferring professional ownership or control in a manner that conflicts with Ontario law or the dentist’s professional obligations.
1. Who Can Own a Dentistry Professional Corporation?
A dentistry professional corporation (“DPC”) is a professional corporation authorized to practise dentistry in Ontario.
Under Ontario’s professional corporation framework, voting shares of a DPC must be owned, legally and beneficially, directly or indirectly, by members of the Royal College of Dental Surgeons of Ontario (“RCDSO”).
Ontario also permits certain non-voting shares to be owned by prescribed persons, including certain family members of a voting dentist shareholder, subject to the applicable regulatory requirements.
This distinction is important.
A third-party investor or DSO cannot simply acquire voting shares of a DPC in the same way it could acquire shares of an ordinary Ontario corporation.
As a result, DSO transactions in Ontario often require a structure that separates the professional practice of dentistry from certain non-clinical business assets and services.
2. The DSO Model: Separating Clinical Dentistry From Business Operations
A common DSO structure involves two distinct businesses:
The Dentistry Professional Corporation
The dentist-owned professional corporation carries on the professional practice of dentistry and remains responsible for matters requiring professional dental judgment and compliance with the dentist’s regulatory obligations.
The Management or Services Company
A separate corporation may provide non-clinical infrastructure and administrative services to the dental practice.
Depending on the particular arrangement, those services may include:
- premises and lease administration;
- equipment and technology;
- bookkeeping and administrative support;
- procurement;
- marketing;
- human resources support;
- information technology;
- billing administration; and
- other non-clinical business services.
The relationship between these entities is typically documented through one or more agreements, including a management or administrative services agreement.
However, simply calling an entity a “management company” does not make the structure compliant.
The actual rights granted to the DSO, and how those rights operate in practice, matter.
3. The Dentist Must Retain Professional Independence
A fundamental principle of any Ontario DSO structure is that the dentist remains responsible for complying with their professional, legal and ethical obligations.
A commercial agreement cannot transfer those responsibilities to a DSO.
Accordingly, a DSO arrangement should not give a non-dentist the ability to improperly control matters requiring professional judgment.
Those matters may include decisions relating to:
- diagnosis and treatment;
- clinical standards;
- patient care;
- professional judgment;
- patient records and privacy obligations;
- referrals;
- professional conduct; and
- other matters regulated by the RCDSO.
A well-structured DSO arrangement therefore needs to distinguish between business management rights and professional dental decision-making.
4. Management Fees and Fee Sharing Require Particular Attention
The economics of the management arrangement are also important.
Ontario’s professional misconduct rules restrict certain forms of fee or income sharing involving dentists and persons who are not authorized recipients.
As a result, the method used to calculate compensation payable to a DSO or management company should be carefully reviewed.
A management fee that effectively gives a non-dentist an impermissible share of professional fees may create regulatory concerns even if the payment is described contractually as a “management fee.”
The commercial arrangement should therefore be structured and documented with the professional misconduct rules in mind.
5. Patient Records Are Not Simply a Commercial Asset
Dental practice transactions frequently allocate significant value to goodwill.
However, patient records should not be treated like ordinary commercial property.
Dentists and other health information custodians have obligations relating to the custody, security, access and transfer of personal health information under Ontario privacy legislation and RCDSO requirements.
When a dental practice is sold, the transfer and ongoing custody of patient records must therefore be handled in accordance with those obligations.
This is particularly important in DSO transactions because the DSO’s commercial interest in the business does not eliminate the dentist’s professional and privacy responsibilities.
6. What About Goodwill?
Goodwill is often one of the most valuable assets associated with a dental practice.
It may reflect factors such as the practice’s reputation, location, established operations, patient relationships, workforce, branding and other characteristics that allow the business to generate earnings beyond the value of its tangible assets.
Goodwill should not, however, simply be equated with ownership of patient records.
Patient information is subject to a separate statutory and professional framework.
In a DSO transaction, the parties should carefully determine:
- which entity owns each business asset;
- which assets are being acquired or financed;
- how goodwill is being valued and allocated;
- who has custody and control of patient records;
- which rights remain exclusively with the dentist or DPC; and
- how the structure operates following a future sale or other exit.
These questions should be addressed at the beginning of the transaction rather than after the commercial terms have already been finalized.
7. Can a DSO Own the Dental Practice?
This question requires some precision.
A non-dentist DSO generally cannot simply acquire the voting shares of an Ontario dentistry professional corporation.
That does not mean that DSOs cannot participate in Ontario’s dental industry.
Instead, DSO transactions may involve ownership of, or contractual rights relating to, non-professional aspects of the business while the dentist or dentist-owned professional corporation retains the ownership and control required by Ontario’s professional corporation and regulatory framework.
Depending on the transaction, the DSO’s investment may relate to assets, infrastructure, contractual rights, financing arrangements, management services or other components of the broader dental business.
The exact structure matters.
8. Control Matters Just as Much as Ownership
One of the most important considerations in a DSO transaction is control.
A structure should not be analyzed solely by looking at the corporate share register.
The agreements between the dentist and DSO may contain:
- approval rights;
- restrictive covenants;
- management rights;
- security;
- purchase rights;
- termination provisions;
- financial covenants;
- transfer restrictions; and
- rights triggered by a future sale or other exit.
These provisions need to be considered together.
An arrangement that technically leaves voting shares with a dentist but effectively transfers inappropriate control over the professional practice to a non-dentist can create regulatory risk.
For that reason, DSO transactions should be reviewed as an integrated structure rather than as a collection of independent agreements.
9. Buying or Selling a DSO-Affiliated Dental Practice
DSO transactions are often more complicated than conventional dental practice acquisitions.
Depending on the structure, a transaction may involve several agreements, including:
- a share or asset purchase agreement;
- a management or administrative services agreement;
- a shareholders’ agreement;
- an associate or professional services agreement;
- a lease or sublease;
- equipment arrangements;
- financing and security documents;
- restrictive covenants; and
- transition arrangements.
Each agreement may be commercially reasonable when viewed independently but problematic when considered together.
For example, rights granted under a management agreement, shareholders’ agreement and security agreement may collectively give one party substantially more control than appears from any individual document.
This is why DSO transactions require both corporate transaction analysis and healthcare regulatory analysis.
10. Key Considerations for DSO Investors
Before investing in or acquiring the non-clinical components of an Ontario dental business, a DSO should consider:
Corporate Structure
Who owns the DPC, management company and relevant business assets?
Professional Control
Which decisions remain exclusively with the dentist?
Management Economics
How are management fees determined and do they comply with professional restrictions?
Assets
Who owns the equipment, leasehold interests, intellectual property and other non-clinical assets?
Patient Information
Who is the health information custodian and how will patient information be accessed and protected?
Financing and Security
What collateral can the investor or lender legitimately take security over?
Restrictive Covenants
Are non-competition and non-solicitation provisions reasonable and compatible with the dentist’s continuing professional obligations?
Exit Rights
What happens when the dentist retires, dies, becomes disabled, loses their licence or wishes to sell?
Change of Ownership
How will a future purchaser acquire the economic interests while maintaining a compliant professional structure?
11. Key Considerations for Dentists Partnering With a DSO
Dentists should understand that a DSO transaction is often much more than a practice sale.
The dentist may be simultaneously:
- selling certain business interests;
- becoming a shareholder or economic participant in another entity;
- entering into a long-term management relationship;
- continuing to practise as an associate or contractor;
- agreeing to restrictive covenants; and
- participating in a future exit strategy.
The headline purchase price therefore tells only part of the story.
The management agreement, shareholder rights, compensation structure, restrictive covenants and exit provisions can have significant long-term consequences.
The Bottom Line
Ontario does not prohibit DSOs.
It does, however, regulate the ownership of dentistry professional corporations and impose continuing professional obligations on dentists that cannot simply be contracted away.
A properly structured DSO arrangement should preserve the dentist’s required professional ownership and independence while clearly defining the DSO’s legitimate economic and management rights.
There is no single structure that works for every transaction.
The appropriate structure will depend on the parties, the assets involved, the economics of the transaction and the degree of control and participation contemplated by the DSO.
For dentists, DSOs and investors entering the Ontario dental market, these issues should be addressed before the transaction structure and valuation are finalized.
This article provides general information about Ontario dental practice and DSO transactions and does not constitute legal advice. DSO structures are highly fact-specific and should be reviewed against the legislation, regulations and professional requirements applicable at the time of the transaction. Please contact Hani Al-Dajane or a lawyer at Emerge Law for more information at 416-704-8667