Physician Shareholder Agreement: Everything You Need to Know
A physician shareholder agreement may not seem like necessary business protection if you're opening a practice with your best friend, Dr. Smith.3 min read
2. Rules for Handling Shares
3. Sales and Transfers
4. The Shareholders' Financial Relationship
5. Death or Disability
6. Decision-Making Guidelines
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.
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.
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.
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.
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.
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