What will happen when you or one of your facility's physician-owners is ready to retire? What if, down the road (literally and figuratively), another surgical facility opens, and you want to perform cases there? While you're setting up your ASC, divesting the investors that you're trying to bring in and other what-ifs are probably the furthest things from your mind. But not preparing while you're in the developmental stages of your ASC could result in share dilution, leadership disputes and competitive disagreements.

It's up to your governing documents (also known as operating, shareholders or partnership agreements) to prevent these scenarios by detailing ownership rules, share valuation, redemption events and other crucial matters. In short, your partnership agreement structures and governs your center. Here are the key elements it should cover.

1 Eligibility for membership, types of members
Your partnership agreement should specify who can invest in your ASC and establish separate membership categories for physician and non-physician investors. Non-physician investors include hospital executives or representatives and corporate partner representatives.

Physician members normally have to satisfy some conditions not applicable to hospitals and other non-physician investors, such as compliance with the ASC Anti-kickback Statute and Stark Act and maintenance of medical staff privileges.

2 Board of managers
The partnership agreement should provide for a governing body, typically a board of managers, and the composition of this body. Will managers be elected or appointed? By whom? How often? What will be the required approval threshold when the board of managers acts on behalf of the company: majority (more than 50 percent) or supermajority (typically, more than at least two-thirds, if not three-quarters, of members) approval? Because you'll have two different member classes, the partnership agreement should also determine how many board members each class will get to appoint or elect.

3 Board powers and member powers
A well-drafted partnership agreement will distinguish between actions requiring board approval and those that require the approval of the members. For example, many of the day-to-day business issues and operational matters, including staff-related decisions and clinical issues, are usually handled by the board of managers or an operating committee of the board without anyone's consulting the members.

More substantial matters typically require a vote of the members. Such actions include amending the partnership agreement, selling a facility, spending in excess of a predetermined budget, and requiring members to make additional capital contributions or guarantee debt.

4 Special member powers
If one or more investors is a tax-exempt entity - such as a non-profit hospital in a joint-ventured ASC - the partnership agreement should grant that member unique rights to veto actions that could jeopardize its tax-exempt status. The non-profit hospital should also have the power to use the venture to serve its charitable purposes and provide a community benefit.

These charitable purposes should be clearly articulated, either in the body of the agreement or in an addendum that is referenced throughout. Particularly when a for-profit, public company collaborates with a tax-exempt organization, this approach can help ensure the tax-exempt member that the venture will support its mission and values by serving charitable purposes regardless of the for-profit member's preferences.

5 Non-competition covenant
Many partnership agreements, including those used by ASCs, include limited non-competition covenants that preclude members from owning, operating or receiving compensation from a competing venture. In the case of an ASC, this usually means a competing surgical center or, in some cases, an office-based practice that provides surgical procedures or even a hospital. The covenant usually includes a mileage radius and specifies the time period during which the restrictions will apply, usually during membership and for between one and three years thereafter.

Non-competition covenants are often limited by carveouts and exceptions that let members compete in clearly specified circumstances. For example, a physician may be allowed to perform more complicated cases at a competing facility (as long as he isn't an owner of the competing center and doesn't have any financial relationship with the center) or perform procedures in his own office.

6 Redemption and withdrawal
Your agreement should specify the events that would let the company formed by the venture buy back a member's shares. Breach of the agreement, failure to meet eligibility requirements, death, disability and retirement are among the events that could trigger redemption. The agreement should distinguish between events that will trigger mandatory redemption of units and those that merely create an opportunity for the venture to buy back units at its option.

7 Valuation
A partnership agreement should set forth the means of valuing a member's shares when redemption or withdrawal occurs. Using a formula amount for valuation is one common approach. The formula may be based on a multiple of EBITDA (net income before deduction of income, taxes, depreciation and amortization) multiplied by the partner's percentage ownership of the venture. Another option is to use book value or to obtain an appraisal to determine the value of units upon redemption.

8 Admission of new members
Your agreement should establish parameters for admitting new members, including the threshold level of member or board approval required for it to take place. Will members have the right to acquire new shares, in order to prevent dilution of ownership, when a new investor is added? If so, which class?

In many ventures involving physicians and a hospital or a corporate partner or management company, the non-physician member agrees to dilute its ownership in connection with this event. But the non-physician members may not be permitted to fall below a certain threshold - 20 percent is the lowest many corporate partners will usually go - and this partner should reserve the right to acquire more units to prevent dilution below that specified level.

9 Dispute resolution
Many agreements designate either litigation or arbitration as the method for resolving disputes among the members. Arbitration is often quicker and more cost-effective than litigation, but it tends to lack the formality, and sometimes the professionalism, of litigation. Further, it's often more expensive than the parties anticipate.