Restricted Stock Transfer Agreements: What You Need to Know

A restricted stock transfer agreement can prevent your medical director’s departure from throwing your management services organization (MSO) into chaos. Discover whether such an agreement can benefit you.

Imagine building a successful business to manage a healthcare practice, investing considerable time, energy, and resources. Now imagine that the medical director you brought into the relationship decides to leave, selling the practice to another physician unfamiliar or unsuitable to you. Does this scenario sound alarming? If so, consider entering into a restricted stock transfer agreement.

What is a Restricted Stock Transfer Agreement?

A restricted stock transfer agreement is a contract that limits a business owner’s ability to sell or transfer some or all of their ownership. Examples of the restrictions include:

• requiring one party to obtain the consent of another party before any ownership transfer takes place;
• limiting to whom the transfer of ownership can be made; and
• restricting who can change governing documents such as corporate bylaws or operating agreements.

Who Uses Restricted Stock Transfer Agreements in Healthcare?

Across industries, there are many reasons that businesses use restricted stock transfer agreements. We’ll focus on their relevance to independent healthcare practices.

In healthcare, you’ll often find restricted stock transfer agreements between management services organizations (MSOs) and professional entities such as medical practices, which we’ll call “friendly PCs.” 

The MSO, typically a corporation or limited liability company (LLC) formed by unlicensed individuals, enters a contractual relationship with a friendly PC owned by one or more licensed providers. By performing only business-related functions and structuring their fees appropriately, MSO owners or members can participate in practice operations without violating state laws such as the corporate practice of medicine.

Benefits of Restricted Stock Transfer Agreements for MSOs

Typically, MSOs seek to restrict the sale of ownership interests in the friendly PC. That is, the MSO owners or members will want to require their consent before any transfer occurs. Sometimes, the MSO may even want the power to designate who can assume an interest in the friendly PC.  Why is this important?

Say there’s a dispute with the licensed owner of the friendly PC, often known as the “medical director.” Or let’s say the medical director dies or decides to retire. The MSO will want to prevent the medical director from transferring their practice ownership to someone not approved by the MSO.

By placing such limits, the MSO can minimize the impact of ownership changes on business operations and other agreements. For example, restricting the transfer of ownership can reduce disruptions to insurance contracts and shorten the time required for insurance re-credentialing.

And again, a restricted stock transfer agreement can also prevent the medical director from altering the corporate bylaws (in the case of a professional corporation) or operating agreements (in the case of an LLC or PLLC) against the MSO’s wishes. 

Do You Need A Restricted Stock Transfer Agreement?

If you have questions about how such an agreement could benefit you, seek out a healthcare attorney in your area. If you operate in a state where we have licensed attorneys, Jackson LLP can provide you with guidance. We offer a free consultation to determine if we’re a good fit for your needs.

This blog is made for educational purposes and is not intended to be specific legal advice to any particular person. It does not create an attorney-client relationship between our firm and the reader. It should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.