I recently presented a lecture entitled “Doctors Orders: Know your Shareholder Agreement” to a group at Piedmont hospital. This article summarizes some of the questions after the presentation ended and my answers. I hope the questions and answers give you some insight into the legal issues that arise now that physician’s move from practice to practice with much greater frequency.
Q: Is there any difference in the enforceability of a non compete in an employment agreement versus a shareholder agreement?
A. Yes. A court reviewing a non-compete in an employment agreement will apply a higher level of scrutiny which makes it tougher for the practice to enforce the agreement against a physician employee. A non-compete in a shareholder agreement, on the other hand, has a lower level of scrutiny applied to it as Georgia Court’s view physician shareholders as having much more bargaining power than physician employees. When I represent practices whose shareholder physicians’ also have employment agreements, I recommend having a non-compete in both the employment and shareholder agreement. The basis for this is the difference in the scrutiny levels applied by Georgia courts.
Q: What is the typical time period for the enforcement of a restrictive covenant in a shareholder agreement?
A: Non-competes should never go past two years, although the shorter the time period the more enforceable the non-compete. Each situation is different as time period is only one component of the three part test a Georgia Court will apply when assessing the enforceability of a non-compete. The three element test consists of the: (1) non-compete time period; (2) geographic limitation of the non-compete; and (3) scope of the activities limited by the non-compete.
Q: What methods are typically used to calculate the buyout price when a shareholder physician retires or otherwise leaves the practice?
A: The methods I see used to calculate the purchase price vary but there are three common themes. One method is the board of directors setting a share price that will be used for the year until the board meets again to set the price for the following year. Another method is agreement on a purchase price formula based upon the Doctor’s collections during a period of time or book value of assets (although many practices have few assets other than accounts receivable) or other agreed upon measure. The third method is to hire an appraiser who will calculate the value of the practice at the time of the buyout. Each of these methods has benefits and drawbacks. Many boards do not meet regularly to discuss the buyout price so it can get stale over time. Purchase price formula’s often work well but I have seen disagreements that such formula’s do not accurately reflect non-monetary services that bring value to the practice such as community involvement or practice management. Appraisals are typically very accurate but are usually the most expensive method and if not drafted properly can lead to disputes over who pays the appraiser.
Q: My partners and I have been together 17 years without a shareholder agreement why is it that important now?
A: The medical landscape has changed dramatically as most physicians may change jobs many times over the course of their careers. Business divorces, unfortunately, remain a common feature of today’s medical landscape. I know an anesthesia practice that had no agreement in place for buying out a departing physician because no one had thought about it. One day a physician decided to leave and demanded to be bought out. With no agreement in place, the parties, as you probably guessed, got into a dispute over the value of the buyout of the shares. They spent many months arguing over the buyout before resolving their dispute. The dispute also led to many stressful contentious hours away from treating patients. It is still fairly common for me to see multi-physician practices that have no shareholder agreement. They typically only see the folly of this omission after being dragged through an expensive litigation that is time consuming and exhausting.
Q: When I become a shareholder at a practice what do I really care about in the Shareholder Agreement?
A: You should understand all aspects of your shareholder agreement but the following are three areas of particular concern: (1) the buy in and the buyout; (2) how management decisions are made; and (3) restrictive covenants. When you review the buy in and buyout you want to know how the price is calculated, but you also want to know if you will pay or receive the purchase price at once or over time. When it comes to management decisions, do certain fundamental decisions such as buying an office building, selling the practice or hiring a new shareholder physician require a mere majority or a supermajority. I have seen other shareholder agreements vest most management decisions with the board and curtail involvement by shareholders. Finally, it’s important that you understand the impact of restrictive covenants when you are a shareholder physician as Georgia Courts look upon their enforcement more favorably than they do with respect to physician’s who are merely employees.
I hope the answers to these frequently asked questions assist you when considering the legal issues that arise as physician’s frequently change practices in Atlanta.
Justin S. Daniels is a health care partner at the law firm Wagner Johnston & Rosenthal, P.C. in Sandy Springs, and can be reached at (404) 261-0500.
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