Lawyer for Dentists, Dental
Corporations and Group Dental Practices
By Matt Dickstein
Shareholder buy-sell
agreements for dental corporations
Thank you for finding my suite of articles on
the basic corporate, business and contract law issues for
dental corporations and group dental practices in
California. The articles in this suite are:
In this article I explain shareholder
buy-sell agreements for dentists and dental corporations. A
buy-sell agreement (also called a shareholders agreement)
protects the corporation from the dentist / shareholders,
specifically their death, loss of license, disability and
dispute.
Freeloaders and Malcontents
A dental practice needs a buy-sell
agreement because (1) California law requires buy-sell
provisions in the case of a dentist’s death or loss of
license, and (2) the reality of group practice demands a
resolution to common problems, specifically, dentists (like
all of us) bicker, lose interest in the practice, go away,
die, get run over by trucks etc. You need resolution for
all of these scenarios.
Sometimes a dentist gets tired and stops
putting time into the practice. The dentist becomes a
freeloader, and you must cut him or her out of the
compensation structure. Sometimes a dentist is such a
malcontent that you must be rid of him or her. Or a dentist
might die or lose his or her license, in which case
California law requires that you buy-back the dentist’s
shares in the dental corporation. In all these cases and
other cases, the practice needs a structure for the orderly
and fair removal of dentists.
See my prior article -
Compensation structures for group dental practices
for a definition of freeloader and malcontent.
If you don't have a good buy-sell
agreement, usually the only way to resolve shareholder
disputes is through the courts; see my article
Using Involuntary
Dissolution to Resolve Shareholder & Partner Disputes.
The Economic Divorce
Enter the buy-sell agreement. When
changes among the dentists put the practice in danger, the
buy-sell agreement gives a fair resolution. I call this the
economic divorce – if the practice cannot survive a
particular dentist, the buy-sell agreement gets you a
divorce on terms that are fair to everyone.
4 D's
Dentist buy-sell involves what I call
the 4 D’s– death, disqualification, disability and
dispute.
Death and Disqualification.
Under California law applicable to dental corporations, if a
dentist dies or becomes disqualified (that is, loses his or
her license), the corporation must buy-back the dentist’s
shares. Usually you pay a death buy-back in one lump-sum
using the proceeds of life insurance.
Disability. Similar to
death (except without the finality) if a dentist becomes
disabled, the dental corporation can buy-back his or her
shares. The practice can pay a disability buy-back using a
promissory note, or if cash-flow is sufficient to fund a
disability policy, using the proceeds of disability
insurance.
Disputes. Sometimes two
dentists just can’t get along. To deal with this situation,
you use “shotgun” procedures. This means that, between the
two warring dentists, the first offers to buy out the
second, and the second has the choice, either be bought out
or turn around and buy out the first on identical terms
(i.e. I cut, you choose). Either way, a price is fixed for
the buy-out, and one of the warring dentists leaves the
practice group.
Buy-Out Price
The buy-out price is crucial. A high
buy-out price gives the exiting dentist a windfall. A low
buy-out price is unfair and leads to litigation. The trick
is finding a procedure that ensures a fair price – for
example, using a neutral appraisal process to fix a price.
A dental practice also can use an accounting formula to fix
the buy-out price.
Wildcard - Personal Guaranties
As a final note, be careful about personal
guaranties. These are the wild cards in an exit structure.
An effective exit structure must fairly compensate and/or
protect dentists for their guaranties.
Non-Competition Clauses
To learn about non-competition clauses for
dentists, see my next article,
May a
dentist compete
against his or her former practice?
I’ve tried to make buy-sell easy in this
article. But that doesn’t mean you can do it yourself. Get
a competent business attorney to help you.
Call me to schedule a
legal consultation: 510-796-9144 | 