We at DMC LLP don’t generally recommend dentists form partnerships or create dentistry professional corporations with other dentists. This is because not everyone works well with everyone else. It comes down to things like personality types (whether they are compatible or not), what resources each dentist is bringing to the table (e.g. money, management skills/experiences/knowledge, clinical skills/experiences/knowledge, etc.), and managing expectations. Assuming these things can all be worked out and that the dentists are a good fit for each other, then a partnership agreement or – if the dentists are creating a dentistry professional corporation together – a shareholders agreement will become very important.
The dentist shareholders of a dentistry professional corporation should think through all of the issues and have a shareholders agreement in place right from the beginning. Then they should tuck it away and not think about it. Hopefully, nothing bad will happen, and it will not be resorted to any time soon. But sometimes, it may be needed to be called upon to help the parties understand their legal rights and obligations to each other as shareholders of one dentistry professional corporation.
So what exactly is a Shareholders Agreement?
A shareholders agreement is a private agreement between the dentist shareholders of a dentistry professional corporation. It deals with things like restrictions on share transfers, day to day operating policies, methods of resolving conflicts or deadlocks, employment matters, advances to the Corporation, under what circumstances a dentist shareholder can buy the shares of another dentist shareholder (e.g. in the event of death, disability or divorce), restrictive covenants (e.g. non compete / non solicit), etc. A dentist who violates the shareholders’ agreement may be sued for breach of contract.
Shareholder agreements are important to have early on in the Corporation’s life because it details the rights and obligations of each shareholder, including management issues and share transfer provisions. It puts expectations on the table early on. Shareholder agreements are much harder to enter into between shareholders later on when progress (which carries with it political jealousies and potential infighting) has been made.
Factors affecting the complexity of the Shareholders Agreements
- Who are the parties (e.g. voting and non-voting shareholders)?
- What mechanism will be used by the shareholders to elect or appoint board members (keeping in mind that only dentists can be directors)?
- What mechanism will be used by the shareholders to vote for their shares?
- What mechanisms will exist for shareholders to sell or transfer their shares (e.g. shotgun, put/call, consent sales, auctions, piggyback, drag along, etc.)?
- What about compensation for shareholders who become working shareholders/directors?
- What about working shareholders who become inactive? How will their shares be treated upon inactive?
- What about confidentiality, non-solicitation, and proprietary information provisions? Are these needed?
- How will the agreement be terminated? Can dissolution result from a shareholder complaining about a breach of the agreement?
- General provisions such as notice, entire agreement, currency, assignment, severability, waiver, independent legal advice, etc.
So with these things in mind, let’s review some of the terms of a shareholders agreement, shall we?
Make sure to properly identify the parties. You should have the correct spelling of the parties’ names. If you have too many parties, you may want to use a Schedule, where all of the parties for example are holders of a particular class of shares, etc.
Here, you’ll want to put some basic information about the Corporation, the parties, and the reason for their entering into a unanimous shareholder agreement. It’s pretty common to see something in this section like:
- The authorized capital of the Corporation is X;
- The issued and outstanding shares of the Corporation is X;
- The parties want to enter into this agreement to fix and determine their respective rights, duties, obligations, etc. with respect to each other and the Corporation.
Operation and Control of the Corporation
Here, it’s typical to find provisions that say that the discretion and powers of the directors to manage and supervise the management of the Corporation is being restricted and usurped by the Shareholders. Essentially, the Shareholders are relieving the Directors of their powers. The provisions in this section go on to provide details – often akin to the Corporation’s by-laws – on how the Shareholders as both the Directors and the Shareholders will conduct meetings (e.g. nominees, notice, quorum, casting votes, elections and appointments, passing resolutions, etc.). The provisions in this section may also include specific requirements for the Corporation to enter into contracts (e.g. X number of Directors required) or for the Corporation to do things with respect to issuing shares, borrowing money, selling or leasing Corporate property, amending the Corporation’s articles, continuing the Corporation in another jurisdiction, winding up or dissolving the Corporation, etc. These things may require special majorities (i.e. majorities which are not specified anywhere in the Act). You’ll also find provisions in this section of the unanimous shareholder agreement dealing with things like who the officers of the Corporation will be, keeping proper books of account, appointing a banker, etc.
Restrictions on the Issue and Transfer of Shares
This is a very important part of any shareholder agreement: restrictions on share transfers. There are many ways to restrict transfers on shares, some of which include:
- General prohibition against the Corporation and the Directors for issuing new shares
- General prohibition against existing shareholders from transferring, selling, assigning, etc. their existing shares
- A requirement that any party that does, through one of the permissible ways of acquiring shares, acquire shares becomes bound to and a party of the unanimous shareholder agreement
Here are some of the ways in which share transfers are permitted/restricted:
Consent Sale: a shareholder can transfer their shares after obtaining the consent of a pre-determined number or percentage of other shareholders.
Right of First Refusal: a shareholder who receives an offer from a third party for the purchase of their shares must first offer the other existing shareholders the opportunity to purchase those same shares on terms, for example, that are equivalent to the third party’s offer.
Shot Gun Buy-Sell: a shareholder can name a price at which it is willing to either buy or sell its shares. The offer is then presented to other shareholders who have a specific amount of time to decide whether to accept the offer.
Right to Come Along (Piggy-Back): when a shareholder who sells to a third party, the other shareholders are entitled to have their shares sold on, for example, the same terms to that third party.
Right to Take Along (Drag Along): when a shareholder sells to a third party, the other shareholders are forced to have their shares sold on, for example, the same terms, to that third party.
Option to Purchase (Call Option): this right gives a shareholder/Corporation the option to purchase shares in certain circumstances (these are called Triggering Events) from the Corporation/shareholder.
Option to Sell (Put Option): this right gives a shareholder/Corporation the option to sell shares in certain circumstances from the Corporation/shareholder.
Auction: an auction is a mechanism whereby shares are sold to the highest bidder (or on certain terms of the auction) to third parties.
In each of these circumstances, there are a few common variables: timing or an event occurring, valuing the shares, rights/obligations affecting the other shareholders, closing provisions, identification of the buyer/seller/third parties (if any), etc.
If a Shareholder receives Confidential Information (which should be a defined term) in the course of being a Shareholder, Director, Officer, employee, etc. then they should be restricted in what they can do with that information. I’ve previously blogged about confidentiality agreements, so you can refer to that blog for more information about drafting, understanding and negotiating confidentiality agreements here.
This section will impose restrictions on a dentist shareholder’s ability to compete with the dentistry professional corporation by setting up shop within a set period of time and within a set geographic distance of the dental practice where the dentistry professional corporation operates from and at.
Dispute Resolution Clauses
If you want to avoid the cost, time, headache, and uncertainty of litigating disputes in respect of the Shareholder Agreement, you might want to include a dispute resolution clause. These clauses can say something like: the parties agree that any and all disputes and questions that arise between any of the parties in connection with the Shareholder Agreement (or construction or interpretation or application thereof), any section of the Shareholder Agreement, or any document, act, omission, etc. related to the Shareholder Agreement shall be resolved by mediation or arbitration (or perhaps mediation fist, and then arbitration). In either case, you should specify how many mediator(s) and arbitrator(s) will be appointed, who will pay for them, where the mediation or arbitration will be held, how the procedure will be determined (by the parties or by the mediator or arbitrator?) and whether an appeal is available from the decision of the arbitrator (mediator decisions are generally non-binding).
Here, provisions may be put in place to initiate termination of the agreement where:
- There is only one shareholder left.
- A shareholder dies, becomes disabled, or goes bankrupt, etc.
- There is a breach of the shareholder agreement.
- A specific number or percentage of shareholders mutually agree to terminate the agreement.
Here are some of the general terms that I’ve typically found in Shareholder Agreements (and other agreements for that matter):
- Notice (how do the parties give notice under the agreement for things like termination).
- Further Assurance (sometimes, you need the parties to the agreement to give additional representations and warranties such that they say they have all the requisite power and authority to do everything they’ve promised to do under the agreement and that they will do those things as promised).
- Assignment (e.g. is this to be done by the parties having to consent in writing?).
- Survival of terms (i.e. if a term is found by a court to be void, should the rest of the agreement survive?).
- Governing Law (which jurisdiction governs the interpretation and enforcement of the agreement?).
- Amendment (how is this to be done?).
- Entire agreement (i.e. this agreement supersedes all other agreements – whether oral or written – relating to the same subject matters in the agreement)
- Waiver (e.g. no failure or delay of a party to enforce or exercise its rights under the agreement constitutes a waiver, etc.).
- Interpretation (singular vs. plural; masculine vs. feminine, section headings, etc.)
- Power of Attorney (shareholders sometimes require that, if any shareholder neglects or refuses or is unable to execute or deliver any document required to be delivered, then they shall be deemed to have appointed the Corporation as his or her lawyer attorney and agent for such purposes).
- Independent Legal Advice (an acknowledgment by the parties that they have been told to and have received independent legal advice concerning the nature and substance of the Shareholder Agreement).
- Severability (in case one provision is struck down and rendered invalid doesn’t mean the rest of the agreement is).
- Currency (in which currency do dollar amounts referenced in the Shareholder Agreement pertain to?).
Please keep in mind that there are many other kinds of terms and conditions you can find in the general terms section of this agreement. You should consult with a lawyer to address these general terms.
The final section of the agreement (other than any schedules or exhibits) requires that the parties, or duly authorized representatives of the parties with the power to bind, execute the agreement. It is sometimes a requirement that witnesses be present and sign their names alongside the parties’. In conclusion, this blog has discussed a basic unanimous shareholder agreement template. You should note, however, that the particular details of a unanimous shareholder agreement vary depending on the needs of the shareholders and the business. These documents should be put together by lawyers (such as myself) who are trained, knowledgeable, and experienced professionals.