client alert june 06 roderick
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8/14/2019 Client Alert June 06 Roderick
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Corporate Law CLIENT ALERTJune 2006
Corporate Law CLIENT ALERT
When two or more people form a business, theynaturally focus on things like generating revenue andhiring the right employees. With all their energyfocused on operations, the owners sometimes pay toolittle attention to the development of an agreementamong themselves. A recent court case illustrateswhat can and often does go wrong.
The case involved three doctors who formed anorthopedic surgery practice. At the beginning of his33-page opinion, the judge offered the followingwistful summary:
The doctors appear to be gifted and talented physicians. However, in their zeal to focus ontheir developing medical practice, they appear to
have paid little, if any, attention to the business management aspects of their practice thecorporate structure, office policies and controls,
and particularly, developing an agreementshould there be a death, divorce, or departure of
one of their colleagues. This case stands as astark and clear example for all doctors to heedthe biblical admonition set forth in Luke 4:23:Physician, heal thyself.
To my knowledge, there are no biblical passagesdealing with exporters, consultants, homebuilders, or technology companies. But no matterwhat the business, the lessons are the same.
The doctors in this case were indeed highly trained,skilled, and successful. They left the world of academic
medicine to start a private practice with every indicationthat the practice would be lucrative. Although they metwith a lawyer to form a professional corporation, forone reason or another the lawyer did not prepare ashareholders agreement. The consequences becameapparent when one of the doctors decided to leave thepractice and move to Mississippi.
Questions immediately arose: Should the departindoctor receive money as a buyout? Was thergoodwill in the practice and, if so, how much? Wathe departing doctor bound by a restrictive covenanif she decided to return to the area? Who owned thaccounts receivable? Had the doctors entered intan oral contract about anything?
Meeting followed meeting, lawyers got involvedand eventually the lawsuit was filed.
By the time the court sorted through the testimony, is fair to say that no one walked away happy. The coufound that there was goodwill in the practice, but nomuch. The departing doctor was owed something foher shares, but this was more than offset by the moneshe owed back to the corporation. Various claimmade by the doctors against one another and thirparties were dismissed.
Based on our experience with similar situationsthe case probably had consequences beyonthose described in the judges opinion. For onthing, the dispute probably destroyed the personand professional relationships that brought thpartners together in the first place. For anothething, it consumed an enormous amount of thetime and energy, with a high financial cost and aemotional cost (stress, anxiety) that cannot bcalculated. Finally, it would not be surprising if thpartners incurred legal fees in excess of $100,000
The lesson of the case was stated succinctly b
the judge: This case highlights the need for shareholder agreement to be in place at the outseso that the valuation upon leaving is determined bconsensus on day one of the firm and not imposeby a court.
The Importance of Shareholder Agreements Between OwnerBy Markley S. Roderick, Esq.
The Importance of Shareholder Agreements Between Owner
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CHERRY HILL, NJ EGG HARBOR TOWNSHIP, NJ MORRISTOWN, N
TRENTON, NJ VINELAND, NJ PHILADELPHIA, PA WILMINGTON, D
Telephone: 856-661-1900 / Fax: 856-661-1919
www.flastergreenberg.com
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PRSRT STD
U.S. POSTAG
PAIDBellmawr, N
Permit No. 61810 Chapel Avenue WestCherry Hill, NJ 08002-4609
Business and Corporate ServicesBusiness and Corporate Services
Choosing the Right Form of Business
Structuring the Arrangement Among Owners
Corporate Control
Liability of Officers and Directors
Shareholder Disputes
Contracts
Mergers and Acquisitions
Securities and Corporate Finance
Integration of Tax and Business Services
We are pleased to send you our Corporate Law Client Alert. The attorneys at Flaster/Greenberg will periodcally review recent developments to keep you informed about current issues in the law. The content should nobe interpreted as rendering legal advice on any matters. Specific situations may raise additional or differeissues and such information should be coordinated with professional legal advice. Please contact the author tdetermine how this information may affect your own circumstances.
If you or anyone else in your company would rather receive these bulletins by e-mail, please:
Send an e-mail with your contact information to [email protected]; or
Go to our website at: http://www.flastergreenberg.com/newsstand/nl_signup.cfm; or
Call 856-661-2281.
In truth, valuation is just one of the issues that should beaddressed by a shareholders agreement. Othersinclude:
Dealing with these issues when a business is formedtakes a little time, costs a little money, and can be a
little uncomfortable, precisely because the issueare important and the partners may come to thtable with different assumptions. As the recent casillustrates, however, the cost of not dealing witthese issues is many times greater. Partners whstart their business relationship on a solid foundatioare, in my experience, far less likely to encountedifficulty in the future.
Please let me know if you would like to discuss thior learn more about what a good shareholderagreement can do.
Flaster/Greenberg shareholder Markley S. Rodericis chair of the firms Corporate Law Practice GroupHe can be reached at 856-661-2265 or by email a
O How much money or other property eachpartner will contribute, now and in the future
O Ownership percentagesO The compensation of the partnersO Management and decision-makingO Restrictive covenants (non-compete agreements)
O Time commitmentO Profit distributionsO Buy-sell issues (buyouts on death, etc.)
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