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Owners Agreements

Whenever there are two or more owners of a business, regardless of the form of entity chosen, there should be a written agreement between or among them setting forth their respective rights and obligations. The preparation of such an agreement presents an ethical problem for the clinic which will find it difficult to represent all of the owners who, at least theoretically, may have conflicting interests. This is true even in a case where the owners are a husband and wife or a father and son.

One possibility is to ask the owners to sign a consent authorizing the clinic to draft the required agreement. The Rules of Professional Responsibility on this subject vary from state to state and must be carefully studied before this approach is taken. However, because the matter is so risky for the faculty and students involved, it is recommended that some other approach be found.

Some clinics have adopted the practice of providing what might be described as a more or less “standard” owners agreement in draft form with the recommendation that each owner should consult with his or her own private attorney, or some other advisor, on the contents of the draft—with a statement from the clinic that it can go no further in working out the final agreement. In such cases it is well to advise the owners in writing of what has been recommended and to secure their written consents to proceeding in the manner suggested in this paragraph.

Owners’ agreements are complex and sophisticated legal documents. Sample shareholders agreements and LLC operating agreements have been provided and are accessible at Owners Agreements. As with other samples made available through this Web site, it should be understood by the user that these are samples only and that substantial changes will be required in order to reflect the particular fact situation with which the user is dealing and the requirements of applicable local law.

One of the most commonly encountered issues in drafting an owners’ agreement and explaining it to the client is to determine what mechanism should be included in the agreement to resolve disputes between and among the owners, particularly where each is to have an equal ownership interest. Experience has shown that there is no completely adequate way in which to handle this situation. In fact, the closely held business is akin to marriage: if you are concerned about disputes with your business partner, it may be better not to get married.

Where one owner has voting control, it is quite common to protect the minority owner by requiring a unanimous or super-majority vote on certain key issues, e.g., the distribution of profits, the sale of ownership interests to other persons, amendments to the certificate of incorporation or articles of organization, and sale or liquidation of the business.

LLC operating agreements are particularly difficult for many transactional clinics to handle because they typically include elaborate provisions under the partnership provisions of the Federal Income Tax laws. Even if the clinic undertakes to prepare a final document for signature by all parties involved—as opposed to only a “first draft” —the parties should be advised to have it reviewed by a tax advisor before it is signed.

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