At Kutner Law we are seeing more and more dentists teaming up to purchase or start new dental practices. In many instances this type of arrangement is beneficial to the dentists, it spreads the risk a
among multiple dentists, eases the burden of operating the practice and provides greater comfort to banks looking to finance. These arrangements however do come with certain risks. We have seen many instances where dentists who have gone into business with other dentists realize that the relationship isn’t working out. In many ways this is similar to a divorce. The best way to guard against these issues (or at least make them as manageable as possible) is to enter into a shareholders agreement. This blog post will take you through some of the clauses you may come across in a shareholders agreement.
Operation of the Practice
An important item that shareholders should come to an agreement on is how the practice is going to be operated. Are the dentists going to have equal voices in the operation? Which decisions will require all of the shareholders vote (i.e. unanimous resolution)? How will profits be split up? Will the shareholders receive associate fees for their work at the practice? Is the practice being purchased as an investment practice where none of the dentist shareholders are expected to work or are there minimum hours for each dentist to work at the practice?These are all items which needs to be considered by the dentist shareholders prior to entering into a shareholder agreement. The more you are on the same page with the other shareholders the less there will be to argue about in the future.
Exit Strategies
A shareholder agreement’s main purpose is to provide mechanisms to resolve disputes between shareholders. Often the only way to resolve these dispute is to have certain exit strategies. These may include a “Right of First Refusal”, “Put or Call right”, “Buy –Sell otherwise known as a shotgun clause”. These clauses provide methods for a shareholder to either sell his shares or buyout the other shareholder(s). When you are starting a venture it is hard to see the need for these type of clauses but if you ask any advisor whether they are necessary all would tell you that they will save you time and aggravation down the road should a dispute arise. We always advise our clients who are not getting along or where one dentist wants to leave to try to work these matters out amicably 1st without exercising rights of exit set out in the agreement.
Non-Competition/Non-Solicitation Clauses
It is important to include a non-competition/non-solicitation clause in the shareholder’s agreement. Without one if you buy out a shareholder what would stop that dentist from opening up a new practice down the street and taking all of the patients? When preparing the shareholders agreement it is important that you discuss with the other shareholder(s) the length of time and the radius of the non-compete.
Death or Permanent Disability
A shareholder agreement will also provide for what occurs if a shareholder were to die or become permanently disabled. Generally the remaining shareholder will have the right to purchase the deceased/disabled dentist’s shares at fair market value. This will resolve an issue that would arise where the spouse or children of the deceased is gifted the shares which would be of little value to the family members. The Dentistry Professional Corporation may want to obtain insurance to ensure there is sufficient funds in the event that one of the dentists were to die.
Conclusion
For the above noted reasons it is very important that you have a shareholder agreement in place. If you don’t you should contact your lawyer to discuss preparing one.This blog is for informational purposes only and should not be construed as legal advice.