Must Professional Corporations Redeem Shares of Retired Shareholders? | Pharrell Fritz, PC

Retirement


I previously wrote One of the most difficult times in the life cycle of a privately held business is the ownership of the property due to tensions between the remaining owners who wish to continue the business and the property of the deceased owner who wishes to liquidate. It is the period after death. Get her attention no matter what. For specialist companies, shareholder exits can be an even bigger challenge.

because it is below Article 1510 of the Business Companies Act, in the event of the death or disqualification of a shareholder of the professional corporation, the PC becomes obligated to redeem the shares of the deceased shareholder at book value. But for 2010, Lubov v Halling & WericksonPC, 72AD3d752 [2d Dept 2010] (covered by this mailbox), the Second Department refused to extend the mandatory redemption requirements of BCL 1510 to shareholders of professional corporations who voluntarily retire from the business.

This means that in the absence of a written redemption agreement, retired shareholders of a specialty company may face a difficult situation in an effort to get the company to redeem their shares. Especially if their shareholding is less than 20% of the threshold required to file a dissolution claim based on repression.under BCL1104-a. His less than 20% shareholders in specialized companies who do not have written redemption agreements may no longer be able to liquidate their shares at any value.

Despite these long-term prospects, plaintiffs in a recent Albany County Supreme Court lawsuit: One vs. Schenectady Pulmonary and Critical Care Association, computer79 Miscellaneous 3d 1210(A) (Sup Ct, Albany Co. 2023)), by virtue of an implied de facto redemption agreement, to force the redemption of its shares in a medical practice without a petition for dissolution and without an explicit agreement governing its redemption. was successful.

SPCC and its shareholders/employees

Schenectady Pulmonary & Critical Care Associates, PC (“SPCC” or “Clinic”) is a professional corporation of physicians specializing in critical care, critical pulmonary medicine, internal medicine, pulmonary medicine and sleep medicine. Upon formation of SPCC, his first five shareholders were each issued 30 shares in the company. the original shareholder Stock purchase agreement It prescribes the conditions (including retirement) under which the firm is required to redeem stocks of shareholders and the formula for redemption price.

Over the years, the SPCC has accepted new shareholders, but has never been a signatory to a stock purchase agreement. New shareholders were not required to “buy” shares, but their initial bonus as a shareholder was reduced to account for any receivables accrued prior to becoming a shareholder.

Thus, the plaintiffs in this lawsuit became shareholders. The Practice hired Dr. Robert Wang as an employee in 2009 and became a shareholder in 2010. Dr. Anthony Iannuccilo was hired as an employee in 2010 and became a shareholder in 2012.

All SPCC shareholders were also employees. They signed an employment contract with his SPCC and all remuneration was paid as wages (in short, base salary and bonus). These wages depended on the number of days the shareholders worked rather than on the number of shares they owned. The Practice has never paid a dividend to shareholders.

Likewise, over the years, some of the original shareholders have retired from the business. Pursuant to the share purchase agreement, at the time of retirement of the original shareholders (with one exception whose record is unclear), based on the formula set forth in the share purchase agreement (book value plus the shareholder’s equity in the reconciliation account). was paid. I can receive it.

Doctors.Mr. Wang and Mr. Ianuccilo Launch Lawsuit for Compulsory Redemption

Dr. Wang retired from the practice at the end of 2013. Dr. Ianuccilo resigned in 2014. The parties dispute whether the clinic made any payments to either doctor at the time of his resignation, but the SPCC did not redeem either doctor’s shares.

In 2019, Drs. Wang and Iannuccilo sued SPCC, each still owning 14.29% of SPCC’s outstanding shares (more on this below), and the practice wrongfully failing to redeem its shares upon retirement. . Doctors. Mr. Wang and Mr. Ianuccilo also sought damages for alleged underpayments during their periods as non-shareholder employees and as shareholders.

Doctors.One and Ianussiro Complaint It sought monetary damages equal to the current fair value of SPCC shares.

However, both doctors said in depositions that (i) there was no written agreement requiring the SPCC to repurchase their shares, and (ii) neither doctor had any knowledge of how the SPCC would treat their shares. admitted that he had never spoken to anyone else. event of their resignation.

SPCC primarily disputes redemption obligations

Citing the lack of explicit agreements governing the reimbursement of PhDs. The SPCC argued that Wang and Iannuccilo’s shares could not be forcibly redeemed. Regarding implied consent, our clinic argued that Drs. Mr. Wang and Mr. Iannuccilo were unable to identify any factual basis for suggesting the terms of such a contract, including the redemption price.

In the absence of such an agreement, the clinic argued that the doctors’ only option was to sell their shares on the open market, but the public listing of the shares of a non-dividend-paying professional corporation was unacceptable. It is hardly conceivable, so it cannot be called a concession.

As to the exact ownership of the shares, our clinic agreed with Dr. et al. Wang and Iannuccilo each owned approximately 14.29% of SPCC’s outstanding shares. However, the details were unclear. According to The Practice, as of December 31, 2012, Drs. Wang and Iannuccilo each owned 25.71 out of 180 shares outstanding or 21.42 out of 150 shares outstanding. , both equivalent to about 14.29%.

Finally, as a clear sign of good faith, this practice uphold a motion for summary judgment I proposed to Dr. et al. to extend the acquisition terms of the stock purchase agreement. One and Iannuccilo. Physicians will be paid a share of the book value and adjusted accounts receivable. Doctors. Wan and Iannuccilo rejected the offer.

Implicit de facto redemption agreements carry today

Albany County Department of Commerce Judge Richard Platkin Summary judgment was entered in favor of Dr. Wang and Ianussiro realized that the Practice was contractually obligated to redeem the shares.

Although no written or express oral agreement existed, Judge Platkin concluded that based on the firm’s past treatment of other retiring shareholder employees, there was an “implied de facto reimbursement agreement.” certified. The court held that:

The court concluded that plaintiffs entered into an implied agreement obliging SPCC to redeem its shares in a manner consistent with the firm’s treatment of other departing shareholders. “

But how much? The court found that the only evidence supporting an implied de facto agreement to redeem retired doctors’ shares was the SPCC’s practice of redeeming shareholders according to the formula in the stock purchase agreement, so that formula applies here. concluded.

According to this historical practice, the retired shareholder’s shares were redeemed by (1) the book value calculated under the SPA and (2) the payment (or bid) of the retired AAR shareholder’s shares at the time. be regarded as a thing. Time of resignation/retirement. “

Plaintiffs were able to force the redemption of their shares, but that was the price that followed the practice, not the fair value they claimed.

Finally, Judge Platkin found insufficient documentary evidence to calculate the purchase price, so he left the matter to trial. He also dismissed most of the PhDs on time. Wang’s and Iannuccilo’s other allegations related to alleged undercompensation during their time as employees and shareholder-employees.

Claims of Implied Contracts and Shareholder Repression

Those in charge of business divorce litigation may be wondering what the Dr. Wang and his Iannuccilo would have had a better chance of obtaining the fair value of their shares had they filed for dissolution under BCL 1104-a. The practice acknowledged that Dr. Wang and Dr. Iannuccilo each own 14.29% of SPCC’s outstanding shares, which together exceed the 20% threshold for 1104-a claims.

If they did, Dr. Mr. Wang and Mr. Ianussillo would have had to prove that the firm’s failure to redeem the shares upon retirement had violated reasonable expectations of shareholding (see details for suppression criteria). here)—perhaps a standard similar to the burden they had to bear to prove the existence of an implied de facto redemption agreement.

I can’t say why the doctors chose to go that route, but my guess is that even if the doctors prove by appealing to shareholders’ suppression based on their failure to redeem their shares upon retirement, the court will not. It means that they must consider a drastic rescue plan rather than dissolution. Redemption may be considered in accordance with past practice. In that sense, the dissolution motion may have put doctors in the same position as Judge Platkin’s finding of an implied de facto contract.

in any case, king provides guidance to help retirement professional corporate shareholders who do not meet the 20% shareholding threshold for BCL 1104-a claims. If retired shareholders can point to the past practice of redeeming other retired shareholders, it could possibly be a de facto implied benefit. Contracts can fill the gap left by BCL 1104-a.

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