You have asked this office for an unofficial opinion on the question of whether state law allows a professional corporation to issue stock to an employee stock ownership plan (hereinafter "ESOP") established as a trust, where some of the beneficiaries of the trust are employees who are not licensed to practice the profession of the corporation. For the reasons stated below, it is my unofficial opinion that a professional corporation may not issue stock to such a trust.

As you are aware, O.C.G.A. § 14-7-5(a) provides that:

Shares in a professional corporation may only be issued to, held by, or transferred to a person who is licensed to practice the profession for which the corporation is organized and who, unless disabled, is actively engaged in such practice as an active practicing member of the issuing corporation, except as otherwise permitted under this Code section.

In 1975, my predecessor issued an opinion which stated that this provision (or, more precisely, a substantially similar provision contained in 1970 Ga. Laws 243, 246) did not prohibit a professional corporation from issuing stock to a trustee for an ESOP in circumstances where the trustee and all the beneficiaries of the trust were licensed professionals. 1975 Op. Att'y Gen. 75-61. The basis for that conclusion was that, while title to the shares may be split between legal and equitable holders, i.e., the trustee and beneficiaries respectively, the holders of the complete title were all licensed professionals.

In addressing the question which you pose, the first step is to determine the legislative intent for imposing such a requirement on a professional corporation's stock. Gazan v. Heery, 183 Ga. 30 (1936). Most other states have similar restrictions on a professional corporation's stock. See Fla. Stat. Ann. § 621.09 (West Supp. 1994); Idaho Code § 30-1308 (Supp. 1994); N.C. Gen. Stat. § 55B-6; Tenn. Code Ann. § 48-3-610 (Supp. 1994); Va. Code § 13.1-544 (Michie Supp. 1994). It is generally held that such restrictions are aimed at protecting the ethical standards of the profession, and avoiding interference in management decisions by nonprofessionals interested in maximizing the return on their investments. Model Business Corp. Act (1984), Professional Corp. Supp. § 22, official comment; 1985 Op. Att'y Gen. 85-65 (Ohio). Implicit in this concern, is the possibility that the interests of a nonprofessional owning stock in a professional corporation can be opposite to the interests of a professional owning such stock.

Since it is not unreasonable to believe that the Georgia legislature had similar concerns, the question then becomes: Will issuing stock to a trust whose beneficiaries are nonprofessionals, even though the trustee is a licensed professional, implicate the legislative concern? I believe that such a possibility exists.

ESOPs are authorized pursuant to federal law, primarily for tax purposes, and without reference to trust relationships and fiduciary duties. 26 U.S.C.A. §§ 401(a) and 409. Consequently, the relationship between the trustee(s) and beneficiaries is governed by state law. Rockefeller v. First Nat'l Bank, 154 F. Supp. 122, 126 (S.D. Ga. 1957). Under Georgia law, a trustee has a fiduciary responsibility to the beneficiaries of the trust and owes them an absolute duty of loyalty. See generally 1982 Op. Att'y Gen. 82-82, pp. 165-66 (citing various authorities on the duty of loyalty). As such, the trustee of a professional corporation's ESOP owes the trust's beneficiaries his undivided loyalty and "can not place himself in a position which would subject himself to conflicting duties, or expose him to the temptation of acting contrary to the best interests of the [beneficiaries]." Perdue v. McKenzie, 194 Ga. 356, 369 (1942). This duty of loyalty is considered the most fundamental duty of a trustee. George Taylor Bogert, The Law of Trusts and Trustees, § 543 (rev. 2d ed. 1978).

Allowing a corporation to issue stock to an ESOP trust with nonprofessional beneficiaries could result in a conflict of interest situation for the trustee. Since the statutory limitation under consideration implies that the best interests of the nonprofessional beneficiaries may be contrary to the professional standards of the corporation, the trustee could be faced with either acting contrary the standards of the profession to advance the interests of the beneficiaries, or violating his duty of loyalty to the beneficiaries by not acting in their best interest. While some trustee standards can be limited or waived by the trust instrument, Perling v. Citizens & S. Nat'l Bank, 250 Ga. 674, 676-78 (1983), no provision of the trust can relieve the trustee of liability for an intentional breach of trust. O.C.G.A. § 53-12-194.

Therefore, keeping in mind that shares of a professional corporation are transferable only to a limited extent to begin with, see Model Business Corp. Act, supra, and in light of the basic public policy behind the duty of loyalty owed by the trustee to his beneficiaries, it cannot be said with certainty that the legislature intended O.C.G.A. § 14-7-5(a) to allow the scenario which you have described. For these reasons, it is my unofficial opinion that a professional corporation is prohibited by state law from issuing stock to an employee stock ownership plan, established as a trust, where some of the beneficiaries of the trust are not licensed in the profession of the corporation.

Prepared by:

Assistant Attorney General