Why shareholder, unitholder and service agreements are crucial to avoiding disputes within a medical practice

Key takeaways

  • Shareholder/Unitholder Agreements are essential to avoiding disputes within a practice, especially in relation to profit sharing and the entry/exit of partners from the business
  • The legal costs of a shareholder/unitholder dispute will far outweigh the cost of putting Shareholder/Unitholder agreements in place
  • A strong Service Agreement should operate in conjunction with a Shareholder/Unitholder Agreement to address issues, including how much each doctor should be paying in service fees and which costs will be borne by the doctors or the practice respectively

In any business where partners and staff are involved, it’s important the ground rules are put in place early.

Medical practices are no different.

The last thing anyone wants is a dispute within a practice, but at least if there are legal agreements in place, everyone knows their rights and obligations.

Partners need a framework governing how major decisions will be made and how responsibilities are shared.

Partners in a practice need to have a clear understanding of what share of the business they own, how much it is worth and ongoing funding arrangements.

Similarly, doctors working in the practice need to have a clear picture of the service fees they will have to pay towards the day-to-day running of the business and the policies and procedures they will be expected to adhere to and other critical matters such as who owns the patient records, IP and referral relationships.

When a company or a trust is established through a lawyer, accountant or an incorporation service, a company constitution or trust deed will be created. These are a basic set of rules that provide some general guidance.

But these documents are very generic and will not cover the specifics of operating your distinct practice.

That is where a Shareholder/Unitholder Agreement is vital in stating how the jointly owned practice will operate and providing a mechanism to implement changes without needing to enter into variations of the constitution or trust deed.

Variations of a company constitution or trust deed are more expensive and time consuming than having a Shareholders/Unitholders Agreement in the first place - and not as effective.

And the financial dangers of not having an agreement can be large.

The legal costs of major shareholder disputes are significant and exceed the cost of effective documents being put in place many, many times over.

Those figures don’t take into account the time lost and focus from running the business and treating patients, and the stress and animosity that can arise from being involved in disputes.

It is prudent business practice and risk mitigation to document your arrangements with your business partners and other staff working in the practice.

Shareholder/Unitholder Agreements should at least cover the following issues:

  1. How the parties will share in profits of the business (will profits be shared equally, on a performance basis or a hybrid of the two?).
  2. Entry and exit of shareholders/unitholders.
  3. Valuation of shares/units.
  4. Ongoing funding arrangements.
  5. Composition of the board of directors and board meeting procedures.
  6. Determining which key decisions for operation of the company will be made by ordinary resolution, special resolution or unanimous resolution.
  7. Drag and tag along clauses.
  8. Death or permanent disability of a shareholder/unitholder and paying out their share of the practice.
  9. Restraints of trade.
  10. Ownership of patient records and data (a very common cause of dispute)

Please note that is not an exhaustive list. Service Agreements are equally important as they govern how a practice will interact with the doctors working there. That includes partners and other doctors, either employed or locums.

Doctors will commonly have their own trading entities that provide services to patients. The practice will lease premises, own plant and equipment and employ administrative and nursing staff to support the doctors in treating patients.

The practice is entitled to charge a fee for those services.

A Service Agreement is a very simple and effective tool for the management of a practice that has flow-on taxation benefits to individual doctors.

A strong Service Agreement should operate in conjunction with a Shareholder/Unitholder Agreement to address issues such as:

  1. How much each doctor should be paying in service fees. There are a number of different ways of determining fees, including percentage of revenue, fixed pricing, a combination of fixed and variable or “cost plus”. Each method has its own advantages and disadvantages).
  2. What services are in scope and what services are out of scope?
  3. What costs the practice will bear and what costs are for the doctors to pay.
  4. Outlining the policies and procedures that each doctor is expected to adhere to.
  5. Controlling ownership and access to intellectual property and patient records.

Once again, this is not an exhaustive list.

Having a strong Service Agreement that provides clarity around such matters goes a long way towards effective business operations and reduces the potential for disputes.

The information in this blog is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.