South Florida Hospital News
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January 2008 - Volume 4 - Issue 7

Why a Physician (or Anyone) Needs A Shareholders’ Agreement

Imagine you have decided that it is time to start your own medical practice. It happens that, at the same time, you see your colleague, Dr. Smith, at a medical society meeting. Dr. Smith is in the same practice specialty and you often have consulted with him on difficult patient cases. The two of you get along well. Dr. Smith is also thinking about opening his own practice, so you propose that the two of you open a practice together. After speaking with your accountants, you and Dr. Smith decide to structure your new practice as a professional corporation, or "PA." In the interest of saving costs and since filing the documents with the Florida Department of State to form your professional corporation seems to be a relatively simple task, you decide not to seek the advice of your lawyers. You and Dr. Smith do not enter into a Shareholders’ Agreement for the new PA [or, if you have selected a limited liability company, ("LLC"), you and Dr. Smith do not enter into an Operating Agreement for the new practice – this article applies equally to any entity].

You and Dr. Smith proceed to find office space, take a bank loan to finance your new practice, sign a lease, hire administrative staff and get down to the hard work of growing a medical practice together. After a year or two of hard work, the new practice is beginning to be successful. Then Dr. Smith begins to change. He’s often late to come into the office and some days he doesn’t even show up. One morning you get a letter from Dr. Smith telling you that he is getting a divorce, he’s decided that he simply won’t be practicing with you anymore and wishes you the best of luck. In a panic, you call your lawyer and ask her what you should do…you’ve signed a long term lease on office space that is too large for a single physician practice to support, you each had personally guaranteed the repayment of the bank loan that financed the new office and you no longer have a second physician to help support the financial obligations of the practice!

The first question your lawyer asks you is, "send me your Shareholders’ Agreement." You respond that you don’t have one. Unfortunately, your lawyer tells you, there’s not a lot she can do to force Dr. Smith to honor his financial and other obligations relating to the practice. In Florida, you can’t force Dr. Smith to sell or return his shares in the PA. You (and the bank or landlord) may be able to force him to honor any personal guaranty he entered into, but that requires the PA first to default on its obligations, which you don’t want to have happen. And, if Dr. Smith decides that he would rather file for bankruptcy, there’s not much you can do. As they say, you can’t squeeze blood from a turnip. Maybe Dr. Smith decides that he wants to sell his shares to another physician, one with whom you compete or simply don’t get along, or worse, to a non-physician, which will invalidate your PA under Florida law! Again, without a Shareholders’ Agreement, you won’t be able to prevent him from doing so.

Or maybe, since Florida no longer prohibits the corporate practice of medicine for osteopathic and allopathic physicians, you and Dr. Smith had decided originally to structure your practice as a regular business corporation ("Inc."), rather than a PA, so you could offer ownership to your office administrator or technician at a later date. [Note: As of July 1, 2008, chiropractic physicians may not be employees or independent contractors of a corporation or other business entity owned by anyone other than chiropractic physicians and their immediate relatives, with limited exceptions.] Dr. Smith later dies, passing his shares in the practice corporation to his wife, who is not a physician. Now, you will be faced with having Dr. Smith’s widow as a shareholder in your medical practice, entitled to the benefits of ownership while not contributing to the bottom line. Or, should Dr. Smith decide to leave his shares in the practice to someone other than his spouse or immediate family member, Florida law will force you also to get a clinic license and be regulated by AHCA to lawfully continue operating your practice! Or, maybe it will be you who decides to pursue another opportunity. We can imagine a multitude of other scenarios, but the point is, Shareholders’ Agreements allow physicians calmly to plan in advance how the PA (or Inc) will deal with common events like retirement, divorce, disability, death, or just moving on, any of which can have a significant impact on the operation and life of their practice and the remaining shareholders.

In summary, the invaluable purpose of a Shareholders’ Agreement [or Operating Agreement of an LLC] is to provide, in advance of any crisis or major event, a blueprint for the practice and all of its shareholders to follow, so you will be able calmly to handle common business events and more complicated situations in the way you have planned, not "while the barn is burning" or when one or more shareholders may have stronger bargaining power. Without a proper document, you and your fellow shareholders are left, by default, with only the rights and remedies provided in Florida statutes, which may not provide you or the practice with the desired protection or outcome. When a major event impacts your practice, such as Dr. Smith’s divorce in our hypothetical, the relatively small investment in a well drafted and thought out Shareholders’ Agreement that you made at formation, or as early as possible in the life of your practice, will far outweigh the stress and expense of the protracted litigation and/or negotiations needed to unravel the situation you will face without it.

Sandra P. Greenblatt is an AV rated, Board Certified Health Lawyer and President of the health law firm of Sandra Greenblatt, PA, in Miami, FL. She acknowledges the assistance of Joel Schuessler, Esq., a former Associate of the firm in preparation of this article. Greenblatt may be reached at (305) 577-9995 or
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