Imagine Dr. Miller, a distinguished orthopedic surgeon, and the founding partner of a flourishing medical practice, celebrating the addition of Dr. Gomez, a third shareholder. The excitement surrounding this new partnership, however, quickly gives way to tensions as disagreements emerge over decision-making processes, compensation structures, and divergent visions for the practice’s future. What was once a harmonious collaboration now risks fragmentation. This scenario is, unfortunately, far too common in the healthcare industry, where the complexity of day-to-day operations frequently outpaces the legal frameworks intended to govern them.

For physician-practice owners, entering into a shareholder agreement is not a mere formal obligation; it is an essential strategic tool to preserve the integrity and future success of the practice. While many legal resources address basic governance principles and equity distribution, several critical components are often overlooked, leaving room for ambiguity, confusion, and, ultimately, conflict. In this article, we examine these key yet frequently neglected elements of a physician-shareholder agreement, offering insight into how a comprehensive and well-crafted contract can fortify your practice against operational challenges.

Decision-Making Authority and Voting Rights

A common oversight in many shareholder agreements is the assumption that decision-making authority should be directly proportional to ownership percentage. While this approach may suffice for some businesses, medical practices require a more sophisticated framework due to the dual nature of their operations—both clinical and commercial.

Certain decisions, such as adding a new partner or investing in substantial medical technologies, can significantly alter the trajectory of the practice. It is prudent, therefore, to introduce “supermajority” voting thresholds for decisions of critical importance, typically requiring a 66% or 75% majority, to prevent stagnation while ensuring that significant matters receive the appropriate level of deliberation. Furthermore, delineating which decisions require unanimous consent (e.g., the sale of the practice) versus a simple majority vote (e.g., administrative changes) fosters clarity in governance and ensures operational agility.

Compensation and Profit Distribution

While many shareholder agreements provide for profit sharing in proportion to ownership interests, the issue of compensation can be far more nuanced. Practices often fail to address compensation for non-clinical duties such as administrative oversight, leadership roles, or business development activities.

A thorough agreement should account for these contributions by including clauses that compensate physicians for their time and efforts in non-medical areas. Furthermore, the implementation of a hybrid compensation model that integrates base salaries with performance-based incentives—linked to productivity metrics, patient satisfaction, or the expansion of services—can motivate shareholders to prioritize long-term practice growth over short-term financial gains. This dual model encourages alignment with the practice’s broader strategic goals and cultivates a culture of sustained success.

Non-Compete and Non-Solicitation Clauses

Non-compete clauses are a standard feature in most medical partnership agreements, but their enforceability varies greatly by state. For instance, states like New Jersey and California have stringent rules governing how and when non-compete clauses can be enforced in the medical field. A poorly drafted non-compete clause could be unenforceable, leaving the practice exposed to risks that were meant to be mitigated.

Non-Compete Clauses: A non-compete clause prevents departing shareholders from opening or joining a competing practice within a defined geographical area and time period. However, state law often limits the enforceability of these clauses, especially for physicians, who are protected by public policy considerations aimed at ensuring patient access to care.

Example:

• In New Jersey, a non-compete clause for a physician must be “reasonable” in terms of time, geographic scope, and the type of medical practice. A non-compete that prohibits a physician from practicing within a 50-mile radius for 5 years would likely be deemed unenforceable.

Non-Solicitation Clauses: A more enforceable alternative is the non-solicitation clause, which prevents former partners from actively recruiting employees or patients from the practice. Non-solicitation clauses are typically more enforceable than non-compete clauses because they protect the practice’s operational integrity without limiting a physician’s ability to provide care within a certain geographic region.

Capital Contributions and Buy-In Provisions

Physicians who join a practice as shareholders often contribute significant capital, not only in terms of equity but also in the form of expertise and patient goodwill. Yet, many agreements fail to address how future capital contributions will be handled, particularly when new partners join or when the practice faces financial exigencies requiring additional investment.

An effective agreement should clearly stipulate how new shareholders’ buy-ins will be determined—whether based on a practice valuation or a predefined formula reflecting the fair market value of the practice. Additionally, mechanisms for handling future capital contributions should be delineated, ensuring transparency and equity in all financial matters.

Exit Strategy and Valuation Methods

One of the most critical provisions in any shareholder agreement is how the departure of a partner—whether voluntary, involuntary, or due to death or disability—will be handled. Without clear guidelines, these events can lead to protracted disputes or financial instability.

Buyout Clauses: The agreement should clearly state whether the remaining partners have the right of first refusal to purchase the departing partner’s shares. Additionally, the method for determining the value of those shares must be explicitly defined. Common methods include:

• Independent Appraisal: Using an independent third-party appraiser to determine the fair market value of the practice at the time of departure.
• Predefined Formula: Alternatively, some agreements specify a formula based on revenue, earnings, or a multiple of profits, which provides a more predictable valuation process.

Dispute Resolution Mechanism

Disagreements among partners are inevitable, and without a clear dispute resolution mechanism, these conflicts can become costly and protracted. Instead of leaving disputes to be resolved through lengthy litigation, consider including a clause that mandates mediation or arbitration.
Having a clear process for addressing disputes not only reduces tension but also saves time and legal costs. Many practices find that having an agreed-upon mediator or arbitrator can resolve conflicts more efficiently than traditional court proceedings.

Succession Planning

In the hustle of day-to-day practice management, succession planning often takes a backseat, but it’s a critical part of any shareholder agreement. How will the practice transition leadership when a key partner retires or leaves? Developing a detailed plan that includes mentorship, leadership development, and timelines for transition ensures the longevity of your practice.

Conclusion

A well-crafted physician-shareholder agreement is far more than a legal formality; it is a crucial tool for ensuring the long-term success and stability of a medical practice. By addressing key issues such as decision-making, compensation, capital contributions, and dispute resolution, you create a framework that will guide the practice through challenges and changes with clarity and fairness.

Investing the time and effort to draft a detailed, tailored agreement provides protection for both the practice and the physicians involved, safeguarding the interests of all parties and ensuring that the practice can continue to serve its patients with excellence long into the future.