Key Takeaways

  • A physician shareholder agreement sets rules for ownership, share transfers, financial rights, and governance in a medical practice.
  • These agreements prevent disputes by clarifying valuation methods, buyouts, and decision-making procedures.
  • Common provisions cover buy-in terms, exit strategies, compensation structures, and restrictions on outside activities.
  • Without a written agreement, physicians risk conflicts over ownership rights, retirement, or disability buyouts.
  • The agreement ensures compliance with laws requiring shareholders of professional corporations to be licensed physicians.

A physician shareholder agreement may not seem like necessary business protection if you're opening a practice with your best friend, Dr. Smith. But if a messy divorce happens, you want the legal cushion that a shareholder agreement offers.

What a Shareholder Agreement Contains

As a rule, a shareholder agreement addresses three main topics:

  • Rules for handling shares, including sales and transfers
  • The shareholders' financial relationship to each other
  • Guidelines for decision-making

If your practice is organized as a professional corporation, you are legally required to file articles of incorporation with the state in which you practice. These articles and your shareholder agreement offer legal protection to all partners.

Importance of Tailoring for Medical Practices

While shareholder agreements are common in many industries, a physician shareholder agreement must account for the unique legal and operational requirements of medical practices. For example, only licensed physicians can hold shares in a professional corporation, which means estate planning, divorce settlements, or transfers to non-physicians are restricted. The agreement should also address liability issues, referral practices, and compliance with state medical board rules. By tailoring the document to the healthcare environment, physicians safeguard both their ownership interests and their patients’ continuity of care.

Rules for Handling Shares

One of the key issues addressed in the shareholder agreement is stock ownership. Usually, your initial capital contributions will determine your ownership percentage, but not always. A shareholder's agreement spells out the contribution terms and what individual shareholders receive in return for contributions.

How this is resolved depends on the company and agreement. A common method is an ownership determined by capital contribution, though some companies allocate shares based on a combination of factors like seniority, the amount of the contribution, etc.

Although the agreement creates guidelines about contributions, it cannot be used to force another shareholder to contribute beyond their agreed-upon amount. Shareholders can contribute more, as this often comes with additional shares that boost their voting interest.

Physician Buy-In Agreements

When a new doctor is invited to become a shareholder, a buy-in agreement outlines how that physician acquires equity. This may involve:

  • Valuation method: whether based on book value, fair market value, or an agreed-upon formula.
  • Payment structure: lump sum, installment payments, or payroll deductions.
  • Goodwill considerations: some agreements require physicians to purchase a portion of the practice’s goodwill in addition to tangible assets.
  • Trial or probationary periods: allowing physicians to demonstrate their long-term commitment before full ownership.

Establishing clear buy-in terms ensures fairness to existing owners while giving new physicians a transparent path to partnership.

Sales and Transfers

What about the opposite situation — a group of shareholders decides to sell and another group decides to buy?

Unless specified in the agreement, a shareholder may not be allowed a say without direct participation. Conversely, the agreement may state that such a sale cannot occur unless the shareholders all agree.

There's also the issue of what happens when new partners join the fold. Most agreements allocate a set number of shares to founding partners, with the remainder distributed among new partners.

The Shareholders' Financial Relationship

We've spoken a great deal about the beginning. What happens if you resign, or you're fired?

The shareholder agreement will address what happens in this situation, including the price (if any) that the firm must use to buy back your stocks. Without this protection, the corporation is under no obligation (or may not have any right) to buy you out.

That said, when most partners leave, they usually want to wash their hands of the whole affair, which usually means they forfeit all rights and responsibilities outside of specific financial considerations.

If you retire, the same situation applies.

Depending on the terms of the agreement, you may not need to forfeit your shares in retirement (and, conversely, the other shareholders may not be obligated to buy you out). It depends on the state in which you practice.

Regardless, the physicians who still actively practice may not be willing to share profits after you retire (for obvious reasons), which means the other shareholders will probably want to buy you out anyway. Without a shareholder agreement, you may not get a fair market value for your stocks (assuming you can agree on a fair market value at all).

Because of this, a well-designed agreement should outline how to determine such a value and ensure that the shareholders have the funds to buy you out, even if the fair market value is far higher than your initial investment.

Compensation and Profit Distribution

Compensation in a physician shareholder agreement is often more complex than in other businesses. Agreements may distinguish between:

  • Salary or guaranteed draw for clinical services.
  • Profit distributions based on ownership percentages.
  • Performance-based bonuses tied to productivity or collections.
  • Reinvestment requirements where a portion of profits must remain in the corporation to fund growth or cover liabilities.

Physicians should also decide whether certain expenses (e.g., CME, malpractice insurance, or administrative duties) are reimbursed before profits are distributed. Without clear financial terms, disagreements over pay equity and workload can strain relationships.

Death or Disability

Unfortunately, similar issues arise if a shareholder dies or becomes incapable of practicing due to a disability. Legally, an estate can often hold the stocks of the deceased while the estate is being dealt with.

However, due to the nature of a physician's professional corporation, only a licensed professional can be a shareholder, not an estate. Because of this, the shareholder agreement will address two key problems: the repurchase price, and a method to ensure that funds are available for the repurchase.

Retirement and Exit Strategies

Beyond death or disability, physician shareholder agreements should plan for voluntary retirement, resignation, or forced departure. Key issues include:

  • Valuation of shares at retirement and whether discounts apply.
  • Non-compete clauses restricting retirees from opening competing practices nearby.
  • Notice requirements so remaining partners can prepare financially and operationally.
  • Funding mechanisms such as life or disability insurance policies to ensure buyouts are affordable.

By clarifying exit strategies, the agreement reduces financial surprises and ensures smooth transitions for both physicians and patients.

Decision-Making Guidelines

In a corporation, a board of directors is responsible for making decisions. In a PC, that role falls to the managing partner. The board is elected by shareholders with a defined percentage of stock, and the board, in turn, chooses the officers of the practice.

If you don't have a shareholder agreement and you don't have stocks within that defined percentage, you won't get a vote in basic things like the type of corporation you form.

Conflict Resolution and Governance

Disputes are inevitable, but the agreement can define how conflicts are handled. Common approaches include:

  • Supermajority votes (e.g., 70% approval) for critical decisions like admitting new shareholders or selling the practice.
  • Mediation or arbitration clauses to resolve disputes without costly litigation.
  • Defined officer roles (e.g., medical director, CFO, managing partner) to streamline authority.
  • Restrictions on outside business activities that could create conflicts of interest.

Clear governance provisions help maintain stability and prevent power struggles that could disrupt patient care and business operations.

Frequently Asked Questions

  1. Why do physicians need a shareholder agreement?
    It sets rules for ownership, finances, and governance, preventing disputes and ensuring compliance with laws restricting ownership to licensed physicians.
  2. How is a physician’s buy-in amount determined?
    Typically through fair market valuation, book value, or a formula agreed upon by the partners, sometimes including goodwill.
  3. Can a physician’s shares be transferred to family after death?
    No, only licensed physicians can hold shares in a professional corporation. The agreement typically requires a buyout of the deceased’s shares.
  4. How are profits usually distributed?
    Profits may be split by ownership percentage, productivity, or a combination. Agreements also clarify whether certain expenses are reimbursed first.
  5. What happens if physicians disagree on practice decisions?
    The agreement often requires supermajority votes and may mandate mediation or arbitration to resolve disputes without litigation.

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