I previously wrote that one of the most difficult periods in the lifecycle of a closely held business is the period following the death of an owner, due to the tension between the remaining owners wishing to continue the business and the estate of the deceased owner wishing to liquidate his or her interest at any cost.  When it comes to professional corporations, the retirement of a shareholder may present even greater challenges. 

That is because under Section 1510 of the Business Corporation Law, the death or disqualification of a shareholder in a professional corporation triggers the PC’s obligation to redeem the deceased shareholder’s shares at their book value.  But in the 2010 case of Lubov v Horing & Welikson, P.C., 72 AD3d 752 [2d Dept 2010] (covered in this post), the Second Department declined to extend BCL 1510’s mandatory redemption requirement to shareholders of a professional corporation that voluntarily retire from the practice.

This means that absent a written redemption agreement, retired shareholders of a professional corporation may face an uphill climb in their efforts to have the corporation redeem their shares—especially if they hold less than the 20% threshold required to bring an oppression-based dissolution claim under BCL 1104-a.  A less-than-20% shareholder of a professional corporation with no written redemption agreement may be stuck unable to liquidate their shares for any value.

Despite those potentially long odds, the plaintiffs in a recent case from the Supreme Court, Albany County, Wang v Schenectady Pulmonary & Critical Care Assoc., P.C., 79 Misc 3d 1210(A) (Sup Ct, Albany Co. 2023), successfully forced a redemption of their shares in a medical practice, even without petitioning for dissolution and without an express agreement governing that redemption, thanks to an implied-in-fact redemption agreement.

SPCC and its Shareholder-Employees

Schenectady Pulmonary & Critical Care Associates, P.C. (“SPCC” or the “Practice”) is a professional corporation of physicians specializing in critical care, pulmonary critical care, internal medicine, pulmonary disease, and sleep medicine.  Upon SPCC’s formation, its initial five shareholders were each issued 30 shares of stock in the corporation.  The original shareholders executed a Stock Purchase Agreement setting forth the conditions (including retirement) under which the Practice would be required to redeem a shareholder’s shares, and a formula for calculating the redemption price.

Over the years, SPCC admitted new shareholders, but the new shareholders never became signatories to the Stock Purchase Agreement.  The new shareholders were not required to “purchase” their shares, but their initial bonuses as shareholders were reduced to account for any receivables that had accrued prior to their becoming shareholders. 

It was in this way that the plaintiffs in this action became shareholders.  The Practice hired Dr. Robert Wang as an employee in 2009, and he became a shareholder in 2010.  Dr. Anthony Iannuccillo was hired as an employee in 2010, and he became a shareholder in 2012. 

All of SPCC’s shareholders were also employees.  They executed employment agreements with SPCC, and all of their compensation was paid as wages (i.e., base salary and bonuses).  Those wages were dependent on the days the shareholder worked—not the number of shares owned.  The Practice has never paid a dividend to its shareholders.

Likewise, over the years, certain of the original shareholders retired from the Practice.  In accordance with the Stock Purchase Agreement, each of those original shareholders (with one exception, where the record was unclear) upon their retirement was paid based on the formula set forth in the Stock Purchase Agreement, book value plus the shareholder’s share of adjusted accounts receivable.

Drs. Wang and Iannuccillo Commence Suit Seeking Mandatory Redemption

Dr. Wang resigned from the Practice at the end of 2013; Dr. Iannuccillo resigned in 2014.  The parties dispute whether the Practice at the time of their resignation tendered any payment to either doctor, but SPCC did not redeem either doctor’s shares.

In 2019, Drs. Wang and Iannuccillo sued SPCC, alleging that they each still own 14.29% of SPCC’s outstanding shares (more on this later), and that upon their retirement, the Practice wrongly failed to redeem their shares.  Drs. Wang and Iannuccillo also sought damages for alleged underpayment during the periods that they were non-shareholder employees and during the time they were shareholders.

Drs. Wang and Iannuccillo’s complaint sought money damages equal to the current fair value of their shares in SPCC. 

At their depositions, however, both doctors conceded that (i) there was no written agreement requiring the SPCC to repurchase their shares, and (ii) neither doctor ever had a discussion with anyone else at SPCC concerning how their shares would be treated in the event of their resignation.

SPCC Disputes its Redemption Obligations, Mostly

Citing the absence of any express agreement governing the redemption of Drs. Wang and Iannuccillo’s shares, SPCC argued that it could not be forced to redeem their shares.  As to an implied agreement, the Practice contended that Drs. Wang and Iannuccillo failed to identify a factual basis for implying the terms of any such agreement—including the redemption price. 

Absent such an agreement, the Practice contended that the doctors’ only option was to sell their shares on the open market—hardly a concession, since it’s difficult to imagine much of a public market for shares in a professional corporation that does not pay dividends.

As to their precise share ownership, the Practice agreed that Drs. Wang and Iannuccillo each owned approximately 14.29% of SPCC’s outstanding shares.  But it was not sure about the specifics.  According to the Practice, as of December 31, 2012, Drs. Wang and Iannuccillo each owned either 25.71 of 180 outstanding shares or 21.42 of 150 outstanding shares, both equating to about 14.29%.

Finally, apparently as a gesture of good faith, the Practice in support of its motion for summary judgment offered to extend the buyout terms of the Share Purchase Agreement to Drs. Wang and Iannuccillo; it would pay the doctors book value plus their share of adjusted accounts receivable. Drs. Wang and Iannuccillo rejected that offer.

Implied-in-Fact Redemption Agreement Carries the Day

Albany County Commercial Division Justice Richard Platkin granted summary judgment in favor of Drs. Wang and Iannuccillo, finding that the Practice was contractually bound to redeem their shares.

Despite the absence of any written or express oral agreement, Justice Platkin found an “implied-in-fact redemption contract” based on the Practice’s past treatment of other departing shareholder-employees.  The Court held:

The Court concludes that plaintiffs have established an implied-in-fact contract that obliges SPCC to redeem their shares in a manner consistent with the Practice’s treatment of other departing shareholders.”

But at what price? The Court concluded that because the only evidence in support of an implied-in-fact agreement to redeem the retired doctors’ shares was SPCC’s practice of redeeming shareholders pursuant to the formula in the Share Purchase Agreement, that formula governs here:

Under this past practice, the shares of a departing shareholder shall be deemed redeemed upon the payment (or tender) of: (1) the Book Value, as computed under the SPA, together with (2) the departing shareholder’s share of the AAR at the time of their resignation/retirement.”

While plaintiffs were able to force a redemption of their shares, it was at the price amenable to the Practice, not at the fair value that they insisted upon.

Finally, Justice Platkin found insufficient evidence in the record to calculate the buyout price, so he left that issue open for trial.  He further dismissed as time-barred most of Drs. Wang and Iannuccillo’s other claims related to alleged underpayment during the time that they were employees and shareholder-employees.

The Implied-in-Fact Contract vs. Shareholder Oppression Claim

Business divorce litigators may be wondering whether Drs. Wang and Iannuccillo would have had a better chance at obtaining fair value for their shares if they petitioned for dissolution under BCL 1104-a. The Practice conceded that Dr. Wang and Dr. Iannuccillo each own 14.29% of SPCC’s outstanding shares, which together gets them over the 20% threshold for an 1104-a claim.

Had they done so, Drs. Wang and Iannuccillo would have been required to prove that the Practice’s failure to redeem their shares upon retirement defeated a reasonable expectation of share ownership (more on the oppression standard here)—arguably a similar standard to the burden they were required to carry in order to prove the existence of an implied-in-fact redemption contract.

Though I can’t say why the doctors chose the path they did, my guess is that even if they did plead and prove shareholder oppression based on the Practice’s failure to redeem their shares in retirement, a court bound to consider remedies less drastic than dissolution might consider a redemption in accordance with past practices. In that sense, a dissolution claim may have put the doctors in the same position as Justice Platkin’s finding of an implied-in-fact contract.

In any event, Wang offers some helpful guidance for retired professional corporation shareholders that do not meet the 20% share ownership threshold for a BCL 1104-a claim: if the retired shareholder can point to a past practice of redeeming other retired shareholders, perhaps the implied-in-fact contract can fill the gap left by BCL 1104-a.

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