Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice, contact me (Michael Carabash) or David Mayzel.
We here at DMC LLP don’t generally recommend dentists form into 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 something, 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
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:
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 are 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:
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, and 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:
Here are some of the general terms that I’ve typically found in Shareholder Agreements (and other agreements for that matter):
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.
David Mayzel is your legal risk manager. He is a trained courtroom lawyer and has spent many years resolving disputes both in and out of court. He knows how to prepare documents and execute transactions in a way that avoids or mitigates legal risks. He can be reached at 416.528.5280. or firstname.lastname@example.org.
Michael Carabash is your business law adviser. He is an entrepreneur at heart who helps you see the big legal picture. He drafts clear and effective agreements that protect your rights while promoting your interests. He can be reached at 647.680.9530. or email@example.com.
Ljubica Durlovska is your transition lawyer. She helps you with staff and associates, maintaining your corporation, and other business matters. She can be reached at 416.443.9280, extension 206 or firstname.lastname@example.org.
Jonathan Borrelli is your employment lawyer. He helps you with staff and associates matters, including hirings, terminations, switching staff to written contracts and resolving disputes. He can be reached at 416.443.9280, extension 204 or email@example.com.
Benjamin Kong is an experienced business law clerk. He assists David and Michael with corporate matters and purchase / sale transactions. He can be reached at 416.443.9280, extension 207 or firstname.lastname@example.org.
Julie Whitehouse is an experienced business law clerk. She assists David and Michael with corporate matters and purchase / sale transactions. She can be reached at 416.443.9280, extension 203 or email@example.com.
David, Michael, Ljubica, Jonathan, Ben and Julie are a truly dynamic team. Their diverse knowledge, skills, and experiences will help you get the best deal possible while promoting your interests and protecting your rights. You can read dentist testimonials here.