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Chapter 2A of Michigan Business Corporations Act Amended to Clarify Inconsistencies

On June 24, 2018, amendments to the Professional Service Corporation Provisions (Chapter 2A) of the Michigan Business Corporations Act (BCA) will be in effect. In 2013, the Professional Service Corporation Act was incorporated into the body of the BCA as Chapter 2A, but was drafted in a way that created conflicting language between multiple provisions. According to Justin Klimko from the Corporate Laws Committee (Business Law Section), the main goal of amending Chapter 2A this year is to clarify that entities may be shareholders in Professional Corporations (PCs) if all of their owners are properly licensed. The amendments also clarify when individuals must sever their relationships with a PC.

The inconsistent language in Chapter 2A of the BCA created confusion as to whether entities may or may not be shareholders of PCs. Various sections were amended to address the discrepancies.

Under the previous language, PCs were prohibited from issuing shares “to anyone other than an individual who is licensed…” This language was inconsistent with other sections of Chapter 2A because it seemed to exclude entities. Thus, the new amendments resolve this contradiction by clarifying that a PC may issue shares to “an entity that is directly or beneficially owned only by persons that are licensed persons in 1 or more of the professional services provided by the professional corporation.” Furthermore, the amendments added to the definition of “licensed person” to allow the entity itself to be a licensed person if the entity is licensed to practice a professional service.

Section 2A also explains when persons must terminate their relationship with a PC. Before the amendments, the language provided that a person “who becomes legally disqualified to provide the professional services provided by the corporation… must sever within a reasonable period all employment with and financial interests in the corporation.” This language is ambiguous because “disqualified to provide the professional services” could mean disqualified from providing a single professional service, or all professional services provided by the PC. The amended language now clarifies that a person must dissociate only if they are no longer authorized to provide any of the professional services provided by the PC. Thus, if a PC provides multiple licensed services and the individual becomes disqualified from providing one or more of the services, but remains eligible to provide one or more of the other services, the owner would not be required to terminate their relationship with the PC.

The prior language is also ambiguous because it doesn’t address what happens when an entity is a PC shareholder and one of the entity’s owners becomes disqualified. The amended language provides that if an entity is a PC shareholder and one of its owners becomes disqualified, that individual would be required to dissociate from the entity and then the entity could remain a shareholder. If the entity itself was a licensed PC shareholder, and the entity itself became disqualified, the entity would be required to sever its ties with the PC. Importantly, the amended language also allows a person or entity who became disqualified from being a shareholder but regained authorization to provide at least one of the professional services provided by the PC within 90 days, to not have to sever their connection with the PC.

Overall, the amendments revised the requirements for owning shares in a Michigan PC, particularly with regards to entities. The amendments also modified the provisions applicable to severing employment and financial interest in a Michigan PC. For over 30 years, Wachler & Associates has represented healthcare providers and suppliers nationwide in a variety of healthcare compliance matters. If you or your health care entity has questions or concerns about Chapter 2A of Michigan’s Business Corporations Act, please contact an experienced healthcare attorney at 248-544-0888 or wapc@wachler.com.