Court of Appeals Addresses Enforceability of Prior Stock Restriction Agreement

Court of Appeals Addresses Enforceability of Prior Stock Restriction Agreement

      In a recent decision from the Kentucky Court of Appeals, considered the enforceability of a fourth shareholder agreement that, it had been intended, would be superseded by a fifth agreement. The plaintiff is this action, Rogers, asserted that, in that the fifth agreement was invalid, he was not bound by any shareholder agreement. The Court of Appeals, consistent with the decision of the trial court, would hold that the fourth agreement still bound his shares. Rogers v Family Practice Associates of Lexington, P S.C., No. 2015-CA-001991-MR and No. 2016-CA-000040-MR, 2017 WL 5180395 (Ky. App. Nov. 9, 2017).

      Not long before this decision, the Kentucky Court of Appeals issued a decision involving the plaintiff Rogers and the LLC related to Family Practice Associates. HERE IS A LINK to my review of that earlier decision.

      In this instance, all of the shareholders in the Family Practice Associates of Lexington executed, from time to time, a shareholder agreement. This agreement was apparently amended and restated each time a new doctor was admitted to the practice. The third and subsequent agreements provided that, upon ceasing to be employed by the practice, the shareholder would sell and the practice would purchase the shares at a price set pursuant to the formula detailed the agreement. Rogers clearly signed the fourth amended agreement containing that formula.

       Thereafter, a fifth amended agreement was prepared in connection with the addition of a new shareholder to the practice. That agreement was not, however, signed by the requisite percentage of the shareholders, and for that reason never became effective. Several years later, the practice advised Dr. Rogers that he was being terminated from the practice. Rogers refused to cooperate in the redemption of his shares, asserting that he had never signed the fifth amended agreement and it could not be enforced against him. In addition, he asserted that his shares would have to be repurchased as provided by the PSC statue, particularly KRS §§ 274.095(2), (4). The practice asserted that, even if the fifth agreement was unenforceable against him, the shares could be redeemed at the formula price set by the fourth amended agreement. Ultimately, Rogers sued the Family Practice and each of its shareholders on a variety of theories.

      Responding to cross-motions for summary judgment, the court held in favor of the Practice and the enforcement of the fourth shareholder agreement against the Rogers. In addition, it rejected notions that Rogers could make a claim against the directors and officers of the Corporation for breach of a fiduciary duty owed to him where those duties are owed to the corporation itself.

      On appeal, while it was agreed that the fifth shareholder agreement could not be enforced against Rogers, the fourth agreement still could be. The Court of Appeals found that:

[T]he Fourth Amended Agreement states that “no change, modification, addition or termination of this Agreement shall be enforceable unless in writing and signed by the party against whom enforcement is sought.” (Emphasis added by the Court of Appeals). No party is submitted any evidence of a signed writing terminating the Fourth Amended Agreement. Presumably, the Fifth Amended Agreement was meant to terminate and supersede the fourth; however, the Fifth Amended Agreement cannot work to terminate the Fourth Amended Agreement because Rogers, the party against whom enforcement is sought, never signed that agreement.

      The Court of Appeals never addressed the question of to whom the fiduciary duties of corporate directors and officers are owed.