Want to share ownership of a dentistry practice with another dentist? Great! But beware – it’s not as simple as just shaking hands and starting to work together. First, you’ll need to make sure you have a solid agreement in place between yourself and your fellow owners. This type of agreement called, a shareholders agreementwhen co-ownership is through a company, includes things like how you will run the business and what happens if someone wants to leave. This agreement can help you avoid unnecessary conflict in the future.
In this post, we look at some key things to consider when setting up your shareholders agreement and why it’s so important.
What Is a Shareholders Agreement?
A shareholder agreement is a legally binding contract between the owners of a corporation (shareholders) that sets out the rights and responsibilities of each owner and how they will share ownership and control of the corporation. It also includes details about how they will manage their relationship with each other and with third parties such as patients, suppliers and new investors.
Why Is a Shareholders Agreement Necessary?
The purpose of a shareholder agreement is to protect the interests of shareholders and help prevent disputes between them. It’s about setting expectations about each owner’s role, how decisions should be made and establishing rules and procedures for how to run your practice(s). Without a written agreement, you could end up with misunderstandings or disputes leading to costly lawsuits that take years to resolve!
For example, suppose a few years down the road, your co-owner wants to invite their daughter to join the practice by selling a portion of their shares to her. However, you don’t think an additional owner would be good for the practice overall. If there isn’t an understanding between you on how this decision should be made, then one person may feel like they’ve been left out or taken advantage of by another. A shareholders agreement can help ensure everyone has an equal voice in such situations while respecting each person’s opinions and ideas.
We also recommend having these details set out in a written shareholders agreement from the beginning. Once the practice is off and running, what once seemed clear can be clouded by the day-to-day stresses of running a practice. You will find it can be much more difficult to agree upon critical issues like how profits will be split after revenues have already begun to flow into the practice.
What Is In a Shareholders Agreement?
A well-drafted shareholders agreement aims to ensure everyone’s interests are protected and clarifies how each shareholder will contribute to the success of the business. And while many of these agreements contain the same core provisions, they can vary significantly, depending on what you are trying to achieve and the people involved. Those varying details within a shareholders agreement have a lot to do with the structure of the relationship among shareholders. With that in mind, let’s explore some areas you should consider when drafting your shareholders agreement.
- Ownership and Profit Sharing
- Operation and Control of the Corporation
- Issue and Transfer of Shares
- Dispute Resolution Clauses
Ownership and Profit Sharing
One of the most significant decisions you and your co-owners will need to make is how ownership of your DPCDentistry Professional Corporation is split between you. Some things to consider are:
- What are the terms of each person’s investment? How much money are they contributing to start-up costs and ongoing expenses? Do they contribute equally or unequally?
- How many shares does each person receive?
- Are all shares equal, or do some have special rights (e.g., voting rights)?
- Who owns which assets, like equipment and furniture?
How you allocate shares to each shareholder can play an important piece in how profits are shared. However, there are more considerations to agree upon when it comes to profits, including:
- How often will profits be distributed between us?
- Is there a minimum amount required before any profit is distributed?
- Will we pay ourselves a salary or an hourly rate?
Operation and Control of the Corporation
It’s typical to find a section in a shareholders agreement that provides details on decision-making procedures and how the practice’s daily operations will be managed. For example, this section will lay out things like who the directors and officers of the corporation will be, how books of account will be kept, and how shareholders will conduct meetings. It will also detail your chosen decision-making process (e.g. nominees, notice, quorum, casting votes, elections and appointments, passing resolutions, etc.). When determining this, it is necessary to consider the following:
- Which decisions will require a vote, and which will not? For example, who gets to make decisions like hiring employees, buying new equipment or expanding into new markets?
- Who can vote on which issues, and how much say will each shareholder have? Will it be based on shares owned or votes cast? How many votes does each partner have?
- What happens if there’s a tie? What happens if people don’t attend meetings when a vote is held?
This section may also include specifics on each owner’s roles and responsibilities in the daily operations of the practice. For example:
- Which partner will handle marketing, and which will be responsible for employees?
- Will we agree on an annual budget together before we start work each year?
- How much time should each of you spend doing what kind of work (for example, administrative tasks versus clinical work)?
- Who can make decisions about the business’s day-to-day operations (this might be different than who owns majority shares)?
Issue and Transfer of Shares
While everyone is on board today, there may come a time when one owner wants to leave. Or someone may want to bring in an additional shareholder. Things to decide here include:
- Can one person sell all or a portion of their shares, and if so, at any time?
- How is that cost determined?
- Do they have to get approval from other shareholders?
- Can new shares be issued to new or existing shareholders?
Here are some of the ways in which share transfers can be permitted/restricted within the shareholders agreement:
- 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 to purchase their shares must first offer the other existing shareholders the opportunity to purchase those same shares on terms equivalent to the third party’s offer.
- Shot Gun Buy-Sell: a shareholder can name a price at which it is willing to buy or sell its shares. The offer is then presented to other shareholders, who have a specific amount of time to decide whether to buy or sell at the named price.
- Right to Come Along (Piggy-Back): when a shareholder sells to a third party, the other shareholders are entitled to have their shares sold on 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 the same terms to that third party.
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 should specify the following:
- How will disputes be handled (for example, mediation or litigation)?
- How many mediators/arbitrators will be appointed?
- Who will pay for mediators/arbitrators?
- Where will the mediation or arbitration be held?
- How will the procedure be determined (by the parties or the mediator/arbitrator)?
- Will an appeal be available from the arbitrator’s decision (a mediator’s decisions are generally non-binding)?
- Will we need independent legal advice?
While it may seem wrong to consider termination of your DPCDentistry Professional Corporation before you even begin, it is essential to set out the process before any emotions are involved. This section should include provisions to be put in place to initiate termination of the agreement where:
- There is only one shareholder left.
- A shareholder dies, becomes disabled, goes bankrupt, etc.
- There is a breach of the shareholder agreement.
- A specific number or percentage of shareholders mutually agree to terminate the agreement.
Though not exhaustive, these are some important areas of a well-drafted shareholder’s agreement. Of course, the provisions that should be in your shareholders agreement will vary depending on your situation. So, consult your dental lawyer to ensure that your agreement includes all relevant provisions for your dental practice.
Sharing ownership of a dental practice isn’t for everyone. It all comes down to whether the people involved have compatible personalities, resources and goals. However, assuming the dentists involved are a good fit and aware of each person’s abilities and limitations, it can be a very successful way to run a dental business. A formal shareholders agreement will ensure clear and realistic expectations of one another and keep everyone on track to business success.
If you are considering co-owning a corporation with another dentist, contact us today. DMC has been successfully helping dentists with their businesses for over a decade, and we can help you establish a solid shareholders agreement tailored to your particular circumstances. Send us an email or give us a call at 416-443-9280.