The shareholders' agreement - don't leave your P.A. without it.

• Author: Waldman, Glenn J.
• Position: Florida

What happens to an attorney shareholder's shares when the attorney leaves the P.A.? Does it make a difference if the departing shareholder is terminated or voluntarily leaves the firm?

The focus of this article concerns an attorneys' professional service corporation's[1] obligation (or lack of one) to redeem the shares of a departing shareholder in the absence of an independent redemption agreement among the shareholders found in a shareholders' agreement or in the corporation's articles of incorporation.

P.A. as a "Close" Corporation

Current membership records of The Florida Bar reflect that over 45,600 attorneys are admitted to practice and are located in Florida. Another 10,750 members of the Bar are located outside of the state or are foreign members. As to the in-state members, two-thirds are in a firm or legal workplace with at least one other attorney. The overwhelming majority of the attorneys who are not sole practitioners, in-house corporate counsel, or government employees are believed to be employed in a law firm professional association (P.A.). P.A.'s are, invariably, structured as "close" corporations.[2]

While there are various definitions of the term "close" corporation, perhaps the most widely accepted definition describes it as "a corporation whose shares are not generally traded in the securities markets."[3] Because of the unusual and intimate relationship between shareholders and the actual operations of the close corporation, many courts have recognized that control of this entity is peculiarly susceptible to misuse or abuse by the majority shareholders--commonly referred to as minority shareholder oppression or exploitation--including the majority shareholders' failure to declare dividends, unfair distribution of business profits to the majority shareholders in the form of salaries or bonuses, and the discharge of a minority shareholder as a corporate employee. The illiquidity of the shares of a close corporation, combined with a lack of control over management, leaves minority shareholders in close corporations susceptible to what is commonly known as a shareholder "freeze-out."

There are many actions that majority shareholders can take that will freeze-out minority shareholders. A common form of freeze-out in a law firm P.A. is the termination of the minority shareholder's employment.[4] Apart from those circumstances in which the majority or controlling shareholders oppress or exploit the minority shareholder who is, or remains, employed by the P.A., what becomes of the minority attorney shareholder's shares who is forced, or even elects, to depart the P.A.? Further, does it make any difference whether the departing attorney-shareholder is terminated versus having voluntarily disassociated from the P.A.?

Absence of Statutory Remedy

F.S. [sections]621.13 makes applicable F.S. Ch. 607 to a P.A., except to the extent that tie provisions conflict. F.S. Ch. 621, itself, does not provide for the redemption of a minority shareholder's ownership interest, whether such shareholder voluntarily withdraws, is involuntarily terminated, or becomes incapacitated or disabled. F.S. [sections]607.1434(3) does provide, in certain limited circumstances, that a court, upon a showing of sufficient merit to warrant such remedy and in connection with a dissolution action pursuant to F.S. [sections]607.1430, may...