Failing to do Succession Planning in New York Based Professional Corporations May Cause Big Problems Later

Authored by: David L. Fox

It is common for lawyers to advise their clients when setting up a professional corporation to adopt a shareholder’s agreement. Such agreements, if well prepared, will provide a road map on how to resolve disputes when they arise, and provided a means for orderly succession when one or more of the professional shareholders leaves the business, becomes incapacitated or dies.

While many lawyers give such advice, a surprising number of professionals fail to adopt such agreements. Even those that do adopt such agreements may fail or refuse to make the hard choices in these early days of their business relationships. Our advice: Don’t Be One of Those People.

Those of us who litigate business divorce cases for a living are familiar with the common problems that owners of a close corporation may encounter when deadlocks or succession issues arise. But these problems are greatly multiplied and made more difficult when the close corporation is also a professional corporation.

In the typical close corporation, where a business divorce is needed, one party may buy out the other, the family of a deceased shareholder may buy out other shareholders, shares can be sold to third parties  and business like decisions may be made.

By contrast in a professional corporation, if one shareholder-professional dies, his interest is not readily saleable, because no one other than a professional can own the decedent’s stock, the surviving professional may object to such sale, refuse to partner with the incoming buying professional or otherwise seek to limit or impair the decedent’s family from realizing the value of the shares left to them.

In one recent matter, we represented the estate of a decedent in an action against the surviving professional shareholder just to obtain a copy of the books and records of the Company and to recover money that the surviving shareholder had borrowed from the Company.  The standing of the estate to bring such an action was affirmed by the Appellate Division Second Department (Bernfeld v. Kurlineko 2012 Slip Opinion 00741 (Second Dept, Jan 31, 2012).   Because there was no adequate shareholder’s agreement, the surviving minority professional had been freezing the estate out the operation of the business and blocking any sale of the estate’s majority interest to a third party.

All of those problems might have been avoided if the parties had entered into a shareholder’s agreement which provided for a business like solution to the problem- such as providing insurance to cover the cost of the survivor buying the shares of the decedent, or providing for an appraisal of the value of the shares and a structured payout arrangement.  These of course are only two of many alternatives one should consider.  If you are a professional shareholder in a professional corporation and have not yet faced and dealt with these issues, you should consider seeing your lawyer to deal with them now.

Leave a Reply

Share via
Copy link
Powered by Social Snap