Avoiding Disputes and Resolving Disputes in Partnerships – Part 1
Partnership agreements may contain a provision appointing a mutually agreed non-binding arbitrator, although mediation or arbitration may be final and binding. The purpose of non-binding arbitration is to give partners the tools to resolve what is bothering the disputing partner and to help partners operate their partnership effectively and profitably over the long term. In this regard, the chosen arbitrator must understand the business of dentistry and the partners.
The arbitrator should be asked whether he accepts the arbitration assignment before signing the agreement. If a dispute arises, the disputing partner will submit a written complaint to the arbitrator for determination. The non-disputing partner must also address the complaint in writing. The arbitrator then renders a written decision. All time constraints in the terms of the agreement must be adhered to.
However, a more optimal outcome can be found through effective dispute resolution mechanisms to resolve disagreements and vote blockages, particularly if ownership is equal. One or more dispute resolution mechanisms should be included in any buy-sell, closed company, or other limited liability company shareholding or operating agreement.
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An effective method of resolving disputes is an offer to buy and sell. One partner submits an offer to buy out the other and if the offer is not accepted, the partner who received the offer is obligated to buy out the offering partner on the same terms contained in the offer.
As an alternative to the buy-sell offer, a disputing partner may choose to enter into a split-venture under Section 355 of the Internal Revenue Code. Under a business division, the company is divided into separate practices on a tax-deferred basis if certain technical requirements are met. The tax-deferred nature of corporate division makes it a very desirable tool when appropriate. In a corporate division, the litigation partner leaves and the non-litigation partner remains. Often shareholders have two locations, especially specialist practitioners, which makes it highly desirable for each shareholder to maintain one location.
A real estate buyout, usually as part of an operating agreement, must be in place for practice real estate if it is owned by more than one of the partners.
If the senior partner is significantly older than the junior partner, a dispute clause could be included in the buy-sell agreement(s) whereby the junior partner buys out the senior partner under the terms of the provision , usually for the full value of the senior partner’s interest. If, on the other hand, the senior partner is not approaching retirement age, the senior partner may have the option of buying out the junior partner in accordance with the terms of the buy-sell agreement(s) if the senior partner no longer wishes to work with the junior partner.
Multiple partner practices
Multi-partner firms should have provisions for either the partnership to expel a partner for specific reasons, including performance, or a partner to leave. The purchase price and payment terms depend on whether the outgoing partner will operate within the restricted radius under the covenants of the partnership or outside of the radius.
For non-family partners in family practices, as long as the non-family partner has paid for their interest in the practice, that partner should have the ability to leave the practice without the covenants applying to patients customarily treated by the non-family partner. family. Such an arrangement is relatively straightforward for general dentists, provided patients are assigned by the treating dentist, but more complex in specialty practices due to referral sources.
Summary and thoughts
The Senior Partner should never relinquish decision-making control or the deciding vote until they are ready to do so. The junior partner should appreciate the valuable mentorship of the senior partner. As long as the profitability of the practice remains healthy and the distribution of the Junior Partner’s compensation cannot be changed without a unanimous vote, the Junior Partner will be fine. All partners should ensure that partnership agreements contain effective dispute resolution mechanisms where a disgruntled lead partner can kick out a junior partner or a disgruntled junior partner can walk away unscathed as a last resort.
Editor’s note: This article appeared in the July 2022 print edition of Dental economy magazine. Dentists in North America can take advantage of a free print subscription. Register here.