San Diego Medical Professional Corporations: What Fiduciary Duties are Owed?
In San Diego, medical professionals — healing arts practitioners — are able to form Professional Corporations pursuant to the Moscone-Knox Professional Corporation Act. See Cal. Corp. Code, § 13400 et seq. As with all corporations, the main purpose of setting up a Professional Corporation is asset protection: the corporation will shield personal assets from business creditors.
At the same time, certain fiduciary duties are imposed by law, particularly with respect to self-dealing and fairness towards other shareholders. With respect to Professional Corporations, those fiduciary duties are heightened because the Moscone-Knox Act severely limits who may be a shareholder. Only specified medical professionals can be shareholders, officers, directors, or professional employees of medical corporations in their own and related fields.
California Professional Corporations: Duties Owed to Other Shareholders
Under California law, all officers, directors, and majority shareholders owe certain fiduciary duties to other shareholders. In general, those duties fall under two broad categories – duty of loyalty and duty of fairness. Specifically, those translate to the following:
- Duty to use best efforts for the Professional Corporation
- Duty to use assets for the benefit of the Professional Corporation
- Duty to not divert or delay a business opportunity to oneself or a competitor
- Duty to not poach employees upon separation
- Duty of good faith in dealings with other shareholders particularly when dissolving the corporation
- Duty of transparency with respect to corporate business and financial records
Under some circumstances, these duties are heightened by California courts because of unique and special facts of individual cases.
California Professional Corporations: Case Example — Le v. Pham
The case of Le v. Pham, 180 Cal. App. 4th 1201 (2010) is a good example showing how fiduciary duties are owed with respect to San Diego Professional Corporations. Le was a case dealing with a Pharmacy Corporation. The owners were Tien Le and his wife Dieu-Hoa Le (50%) and Lieu Pham (50%). The pharmacy was called Newland Pharmacy. The corporation’s bylaws required any shareholder to give the other written notice of any intent to sell or transfer shares, with the other shareholder having a right of first refusal.
In this case, Mr. and Mrs. Le decided to sell their 50% share to Paul and Kimngang Hoang for a total of $70,000, cash upon transfer. The Le’s sent a certified letter per the bylaw notice requirement. In response, Pham indicated that she would buy the shares at that price, but that she would need 30 days to obtain the cash or financing.
In the meantime, the Le’s proceeded with their sale to the Hoang’s, but the price that was paid was $24,000 and involved seller financing; that is, the Le’s allowed the Hoang’s to pay the $24,000 in installments. The Le’s never informed Pham of the new price or the installment financing option.
Later that year, Mr. Hoang showed up for a corporate board of director’s meeting, but Pham refused to recognize him as a legitimate director and shareholder and would not allow him to review the corporation’s books and records. Because of the dispute and the failure to file various forms with the California State Board of Pharmacy, the State Board issued a “cease and desist” order that closed the pharmacy down for about three months and then put the pharmacy on probation for an additional year. Litigation ensued.
At trial, Pham won her claim that the sale to the Hoang’s was null and void since the Le’s had violated the bylaws. The court found the violation to be obvious since the Le’s had attempted to sell the shares to the Hoang’s for a better price ($24,000 as distinct from $70,000) and on better terms (installments rather than cash) than had been offered Pham in the notice of intent to sell.
As for Pham’s claim that the Le’s had breached their fiduciary duties, the trial court ruled against her.
However, on appeal, the California Court of Appeals reversed. Normally, fiduciary duties are owed only by MAJORITY shareholders to minority shareholders. The Le’s argued here, that they were co-owners (50%-50%) and, as such, owed no fiduciary duties to Pham. The court rejected this claim. By virtue of owning 50% of the shares and given the regulatory regime related to pharmacies and ownership of pharmacies, by their actions alone, the Le’s were able to undermine the purpose of the corporation. Indeed, as a result of the improper sale to the Hoang’s, the pharmacy was closed by the regulatory board. As such, the Le’s owed fiduciary duties to Pham.
The Court of Appeals remanded the case for determination of damages flowing from the breach of fiduciary duties.
California Professional Corporations: Legal Lessons
First, it is important to follow your corporate bylaws. They govern your corporation and will be enforced by California courts. Second, seek legal counsel if a dispute arises among the shareholders. Competent legal advice usually results in resolution and can help avoid litigation. Third, understand your legal responsibilities.
Contact San Diego Corporation Law Today
If you would like more information about your duties as a shareholder in a California corporation, or if you need legal assistance with business contracts, forming corporations, partnerships, or limited liability companies, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. In 2017, Mr. Leonard has been named yet again a “Rising Star” by SuperLawyers.com. This is three years running. Mr. Leonard has the experience and knowledge to help your business succeed. Mr. Leonard can be reached at (858) 483-9200 or via email.