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The Florida Bar Journal
October, 1997 Volume LXXI, No. 9
The Shareholders' Agreement--Don't Leave Your P.A. Without It

by Glenn J. Waldman

Page 57

The focus of this article concerns an attorneys’ professional service corporation’s1
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. §621.13 makes applicable F.S. Ch. 607 to a P.A., except to the extent that the 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. §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. §607.1430, may order a purchase of a shareholder’s shares in accordance with the cumbersome requirements of F.S. §607.1436. However, the purchase of shares under F.S. §607.1436 presupposes that either the P.A. or one or more shareholders elect to purchase the shares owned by the petitioning shareholder. If neither the P.A. nor another shareholder wishes to make such purchase, then the departing shareholder is without a statutory remedy.

Absence of Judicial Remedy

Have the Florida courts created nonstatutory judicial relief to provide remuneration to the departing attorney-shareholder for his or her equity, capital investment, pro rata share of the receivables, and goodwill5 (less pro rata share of bad debts, equipment leases, line of credit balances, future lease payments, salary advances, etc.)? The answer is clearly, no!

The only Florida appellate decision to deal squarely with this issue was Corlett, Killian, Hardemon, McIntosh and Levi, P.A. v. Merritt, 478 So. 2d 828 (Fla. 3d DCA 1985). In that case, the question presented to the court was “whether a Florida professional association engaged in the practice of law can be compelled to redeem shares held by minority shareholder-attorneys upon termination of their employment with the corporation where neither a statute, the articles of incorporation, nor any agreement provides for such redemption.”6

In Corlett, Killian when three attorney-shareholders voluntarily left the firm and were unable to amicably resolve their claim that the successor P.A. must redeem all of their shares, they sued for this specific relief. At the end of a nonjury trial in the Dade County Circuit Court, the trial court determined that the P.A. was required to redeem their shares of corporate stock at the fair value/underlying book value as of the date the attorney-shareholders departed from the firm.

On appeal, the Third District Court found the lower court’s decision entirely “unsupportable.”7 The court reiterated that there is no statutory requirement of redemption and no statutory requirement that a shareholder even be an employee of a P.A. in which he or she owns shares. The court further stated that whether in the setting of a close corporation or a P.A., if, as in Florida, there is no statutory requirement of redemption, the obligation and authority of a for-profit corporation to redeem its stock must be found either in its articles of incorporation or in some other agreement. “Absent such provision for redemption, courts will not write such an agreement for the parties, see Lane, Gelety, Woolsey & Centrone, P.A., Inc. v. Woolsey, 377 So. 2d 743, 745 (Fla. 4th DCA 1979), cert. denied, 388 So. 2d 1120 (Fla. 1980) (“Courts may not interfere with the freedom of contract or substitute their judgment for that of the parties thereto and re-write a contract in order to relieve one of the parties from the apparent hardship of an improvident bargain.”), or interfere with the internal affairs of corporate management, see Freedman v. Fox, 67 So. 2d 692 (Fla. 1953).” 478 So. 2d at 831.

In Corlett, Killian the departing attorney-shareholders had argued that a P.A. engaged in the practice of law is so extraordinary that its very nature invests a court with the power to compel redemption—whether or not there is an agreement or a provision of the articles of incorporation requiring it. However, the Third District Court disagreed, and stated:

However, we are not persuaded by either the arguments advanced or the authorities cited by the [departing shareholders] . . . that, as a matter of public policy, the court should impose a requirement of redemption upon every professional service corporation (or its majority shareholder) engaged in the practice of law.8


* * *

That a professional who resigns from the corporation could well be left in the unfortunate position of owning unmarketable shares of stock is generally true of the minority shareholders in all close corporations. But rather than being a compelling reason in favor of a court intervening, the distinct probability of this unfortunate state of affairs arising is a compelling reason why parties must agree in advance on a redemption provision.9

Conclusion

At present, there is neither a statutory nor a nonstatutory judicial remedy providing a departing attorney-shareholder in a P.A. with redemption rights in respect of the shares he or she owns. According to the Third District Court of Appeal, an attorney should know better when choosing to join in a P.A. with one or more other attorneys and acquire shares. In this regard, the court stated that:

Where an employee who purchases such shares for valuable consideration either lacks the foresight or the bargaining power to insist upon a redemption agreement in the event of his resignation, it is not incumbent upon the courts to protect him from his own improvidence or lack of strength.10

But, what of the departing attorney-shareholder who does not voluntarily “resign”? It would seem that it is for the Florida Legislature to create such a redemption entitlement, if at all, in that circumstance so as not to leave the oppressed or exploited minority shareholder without a remedy. Until that remedy becomes law, the better practice is to insist upon, negotiate, and execute a shareholder’s agreement ab initio.q

1 The Florida Professional Service Corporation Act, which became effective on September 1, 1961, created an exception to the traditional Florida rule prohibiting corporations from being licensed to practice a profession. See Ch. 61-64, §16, 1961 Fla. Laws 93. The act, itself, prohibits the use of any word or abbreviation other than “Professional Association,” “P.A.” or “Chartered” in the firm name. For purposes of this article, only the acronym “P.A.” is used. In Garden v. Frier, 602 So. 2d 1273 (Fla. 1992), the Florida Supreme Court held that the definition of a “profession” within the meaning of the statute of limitations in malpractice actions is any vocation requiring, at a minimum, a four-year college degree before licensing is possible in Florida. Although no Florida appellate court has contravened the plain language of the act, the Florida Supreme Court has made it clear that the practice of law through a P.A. is always subject to the approval and conditions imposed by the court. See In re The Florida Bar, 133 So. 2d 554 (Fla. 1961).
2 In a recent decision describing how the P.A. should operate, the Third District Court of Appeal in Porlick, Poliquin, Samara, Inc. v. Compton, 683 So. 2d 545, 548 (Fla. 3d D.C.A. 1996), citing, In re The Florida Bar, 133 So. 2d 544, 556 (Fla. 1961), stated: “As we read the subject statute and the implementing rules proposed . . ., a corporation organized under the statute and rules will meet substantially the requirements of the aforementioned regulations of the Internal Revenue Service. The members will be associated as stockholders. They will have as their objective the conduct of the affairs of the corporate entity with a division of profits. There will be continuity of life and centralization of management.”
3 O’Neill, Close Corporations §1.02 (2d ed. 1971). See also Bahls, Resolving Shareholder Dissension: Selection of the Appropriate Equitable Remedy, 15 J. of Corp. L. 285, 289 (1990) (noting that this is the preferable definition because it focuses on the illiquidity of the shares, which is the primary problem of shareholders in close corporations). Not only are its shares not traded in an established securities market, a close corporation is also generally characterized by having a relatively small number of shareholders who are customarily involved in the management of the corporation.
4 Manipulating a freeze-out may include the withholding of perquisites, the use of the P.A.’s earnings for the majority shareholders’ own benefit, the prevention of the minority shareholder from participating in the management of the P.A., and the arrangement by the majority shareholder to have the P.A. repurchase only his or her shares on highly favorable terms.
5 At common law, goodwill was the likelihood that customers would return to a location. Cruttwell v. Lye, 34 Eng. Rep. 129, 134 (1810). In Thompson v. Thompson, 576 So. 2d 267 (Fla. 1991), the Supreme Court established the method for valuing goodwill attributable to professional practices for the purpose of making an equitable distribution of marital assets. Generally, personal goodwill is not included in the valuation of the professional practice for purposes of equitable distribution.
6 Corlett, 478 So. 2d at 829. The Third District Court noted that while Fla. Stat. ch. 607 pertains to corporations generally, and contains several provisions that implicitly apply to redemption of shares, “none of these provisions imposes an affirmative duty upon the corporation to redeem the shares of a terminated corporate employee.” Id. Because the Third District Court of Appeal is the only appellate court in Florida to have decided this issue, the trial judges in Florida are presently bound to follow that decision. Accord, Special’s Trading Co. v. International Consumer Corp., 679 So. 2d 369 (Fla. 4th D.C.A. 1996), citing, Pardo v. State, 596 So. 2d 665 (Fla. 1992).
7 Corlett, 478 So. 2d at 829. It is noteworthy that the decision of the court was not unanimous. Judges Pearson and Hendry constituted the majority, while Judge Hubbart dissented with an opinion. Judge Hubbart thought that “a professional service corporation which renders legal services is under a legal obligation to purchase the stock of its resigning attorney-stockholders, else it is in violation of Section 621.06.” Id. at 835. Further, Judge Hubbart believed that “the majority attorney-stockholders in such a professional service corporation are under an ethical obligation enforceable by law to vote their stock so as to require the corporation to redeem the stock of any of its resigning attorney-stockholders—else they may be parties to serious violations of the Florida Bar Code of Professional Responsibility.” Id.
8 Corlett, 478 So. 2d at 833-34. The court even noted that an attorney’s legal disqualification from the practice of law—such as Fla. Stat. §621.10 would require on becoming a judge—does not impose upon the P.A. a duty to redeem the shares of the departing attorney/sitting judge. This is so because the decision to become a judge is a voluntary decision, just as the attorney-shareholders in Corlett, Killian voluntarily resigned their employment. The analysis of the fairness in not redeeming a departing attorney’s shares becomes more difficult where the employment is involuntarily terminated and otherwise bears the markings of minority shareholder oppression or exploitation.
9 Corlett, 478 So. 2d at 833-34. The supreme courts of other states such as Arizona and Tennessee have reached contrary results, but those states have statutes that specifically require a P.A. to buy back the shares of any shareholder who leaves the corporation. See, e.g., Vinall v. Hoffman, 651 P.2d 850 (Ariz. 1982); Vawter, Kennedy & Kennedy v. Vawter, 776 SW.2d 520 (Tenn. 1989).
10 Corlett, 478 So. 2d at 834. Where the departing attorney-shareholder voluntarily disassociates from the P.A., it would seem unfair or inequitable to foist upon the P.A. the sudden, unexpected, and, perhaps, financially crippling obligation to redeem his or her shares. In this circumstance, no remedy should be afforded.

Glenn J. Waldman is a shareholder in Waldman & Feluren, P.A., in Ft. Lauderdale. He received his bachelor’s degree, magna cum laude, and his law degree, cum laude, from the University of Florida. He is a civil trial lawyer and a state and federal court mediator.

This column is submitted on behalf of the Young Lawyers Division, Adam G. Adams III, chair, and Kim Bonder, editor.

[Revised: 02-10-2012]