A New Generation of Joint Ventures ANCILLARY OPERATING AGREEMENT MODEL

Transcription

1 A New Generation of Joint Ventures ANCILLARY OPERATING AGREEMENT MODEL 10/20 22/2013 Douglas M. Mancino OPERATING AGREEMENT This Operating Agreement (the "Agreement") for XYZ Hospital Surgical Center, LLC, a California limited liability company (the "Company"), is made and entered into effective as of October 21, 2013 (the "Effective Date"), by the Company s sole Member, XYZ Health Services, Inc., a California nonprofit corporation ("XYZ") doing business in Los Angeles, California as XYZ Hospital Center ( Hospital Center ). The Agreement shall be binding upon those persons who may be, from time to time, admitted to the Company as a Member pursuant to the terms of this Agreement. ARTICLE I DEFINITIONS * * * * * * ARTICLE II ORGANIZATIONAL MATTERS 2.1. Name. The name of the Company shall be XYZ Hospital Surgical Center, LLC. The business of the Company may be conducted under that name or, upon compliance with applicable laws, any other name that the Company deems appropriate or advisable. The Company shall file any fictitious name certificates and similar filings, and any amendments thereto, that the Company considers appropriate or advisable Purposes of the Company. The purposes of the Company are: (a) To engage in the business of operating a licensed ambulatory surgery center in a manner consistent with XYZ's tax exempt status and charitable purposes; (b) To obtain management and administrative services as required; (c) To purchase, lease or contract for space, equipment, personnel, supplies and other services, and to acquire leasehold improvements, as determined by the Board of Managers to be necessary for the cost-effective and efficient operation of the ASC; (d) To undertake any other activities necessary to accomplish or reasonably related to the above; and (e) To undertake any other activities permitted by law.

2 2.3. Company Philosophy. The Company shall be operated in accordance with the following philosophy and values at all times: (a) The Company will operate the ASC in accordance with clinical best practices and evidence-based medicine. (b) The Company has adopted and shall adhere to a written conflict of interest policy with respect to contracts and other dealings between the Company and Members requiring full disclosure of all conflicts. (c) The Board of Managers shall include, as part of the Company's annual operating budget, a reasonable level of free or below cost care to be provided to those patients who are unable to pay for the full cost of services at the ASC in accordance with Hospital Center s indigent or charity care policy as in force from time to time. (d) Any duty to maximize profits shall not override the Company s obligation to operate in a manner consistent with XYZ s charitable purposes and mission, as described in Section 2.8 of this Agreement. (e) The ASC shall participate in all governmental health care financing programs applicable to its business, including, without limitation, the Medicare and Medicaid programs, and shall treat all patients receiving medical benefits or assistance under any Federal health care program in a nondiscriminatory manner. (f) Prior to commencing operations, the Company shall adopt and thereafter adhere to a compliance program to assure compliance with all state and federal laws governing the delivery of health care services. (g) All medical decisions and all policies and procedures relating to the delivery of medical services at the ASC shall be made by those physicians who are members of the Medical Staff of the ASC, as provided in the Medical Staff bylaws of the ASC, and the ASC shall maintain an open medical staff, as set forth in Section 2.7 below. (h) All patients shall be referred to the ASC only by physicians or other appropriate health care professionals Health Care Issues. All decisions as to where surgeries should be performed will be made by the patient and the patient's physician, and nothing in this Agreement is intended to require that patients be referred to the ASC, any hospital or other health care facility or service operated by XYZ, including but not limited to Hospital Center, or any other health care provider. The Board of Managers shall be responsible for determining the ancillary health care services needed for the ASC; provided, however, that, subject to patients' medical requirements and preferences, the Company shall contract with the Hospital Center an initial term of ten (10) years, at the Hospital Center's rates then in effect, and as adjusted periodically, for laboratory, radiology and other ancillary services required by ASC patients to the extent not provided at the ASC. Following the expiration or earlier termination of such contract, Hospital Center will have a right of first refusal to provide such ancillary services on the terms, including price, contained in a bona fide written proposal received by the Company from a third party vendor. Hospital - 1 -

3 Center shall bill patients or third party payors, as applicable, at Hospital Center's rates then in effect and as adjusted periodically, for laboratory, radiology, durable medical equipment and other ancillary health care items and services required by ASC patients before or after surgery that are not included with the Medicare ASC payment rate, in compliance with the federal physician self-referral law and other applicable laws. The Company and the Hospital Center shall enter into a transfer agreement pursuant to which all non-pediatric ASC patients requiring inpatient hospitalization or outpatient services not provided at the ASC shall be transferred to Hospital Center, subject to the patient's medical requirements and preferences. All Members shall provide written disclosure of their ownership interest in the Company to patients as required under applicable laws. All Members agree to treat patients receiving medical benefits or assistance under any governmental health care program or pursuant to the Company's indigent or charity care policies and procedures in a nondiscriminatory manner ASC Medical Staff.. Membership on the Medical Staff of the ASC shall be open to all qualified physicians, oral surgeons and podiatrists who have or agree to obtain medical staff privileges at the Hospital Center and who meet such membership requirements as are set forth in the Medical Staff bylaws of the ASC and any credentialing policies and procedures developed by the Board of Managers. Membership in the Company shall not be a requirement of admission to the Medical Staff of the ASC Tax-Exempt Status of XYZ.. For so long as XYZ (or any other Affiliate of XYZ that is tax exempt under Section 501(c)(3) of the Code) is a Member, the ASC shall be operated and managed in a manner that furthers the charitable purposes of XYZ and its tax-exempt Affiliates by promoting health for a broad cross-section of the community. Specifically, the ASC shall be operated and managed in a manner: (a) that provides access to patient care services based on medical necessity, without regard to the patient's race, creed, national origin, gender, payor source or ability to pay; (b) that provides access to patient care services to individuals covered by Medicare, Medicaid and other government health care programs; and (c) that will not, in the reasonable opinion of XYZ, on advice of XYZ's legal and/or tax counsel, cause XYZ or any of its tax-exempt Affiliates to act other than exclusively in furtherance of its respective tax exempt purposes or adversely affect its tax exempt status under Section 501(c)(3) of the Code. All Members are aware of the limitations on the actions of the Company due to XYZ's tax exempt status and charitable purpose, as well as the purpose of the Company, and each Member hereby agrees that any decision of the Board of Managers to forego to take an action which would be inconsistent with the tax exempt status of XYZ, or any decision of the Board of Managers to take an action which furthers the charitable purposes of XYZ over any profit-making motives of the Company, shall not cause a member of the Board of Managers or XYZ to breach the duty of care or the duty of loyalty or any other fiduciary duty that any member of the Board of Managers (including representatives of XYZ) or XYZ may owe to the Company, notwithstanding that any such decision is or may not be in the best or immediate financial interest of the Company

4 ARTICLE III * * * * * * ARTICLE IV MEMBERS 4.1. Limited Liability. Except as provided under the Act or as expressly set forth in this Agreement or in another agreement, no Member shall be personally liable for any debt, obligation or liability of the Company, whether that liability or obligation arises in contract, tort or otherwise Members Have No Managerial Authority. The Members shall have no power to participate in the management of the Company except as expressly authorized by this Agreement, the Articles or as expressly required by the Act. Unless expressly and duly authorized in writing to do so by the Board of Managers, no Member shall have any power or authority to bind or act on behalf of the Company in any way, to pledge its credit, or to render it liable for any purpose Related Party Transactions. The Company shall purchase any items or services from any Member or entities controlling, controlled by or under common control with a Member or a Member Affiliate at the reasonable Fair Market Value charge for such items and services. Subject to the foregoing, the Company shall enter into contracts for the following purposes: (a) ASC Lease. The Company shall enter into a lease of the ASC, including necessary common areas and parking, from the XYZ (the "ASC Lease"), which has an initial term of ten (10) years commencing as of the date of licensure and shall be renewable for two (2) additional terms of five (5) years each. The initial fixed rental rate is Twenty Dollars ($20.00) per rentable square foot per year, a rental rate that has been determined by Wellspring Partners to be consistent with fair market value, taking into account the costs associated with the ASC facilities and equipment in place at the commencement date of the ASC Lease. The rental shall be increased annually by three percent (3%). In addition, the rental shall be rebased to fair market value every five (5) years. (b) ASC Contribution Agreement. The Company has entered into a Contribution Agreement with the XYZ pursuant to which XYZ has agreed to contribute the assets and operations of the ASC, other than those provided under the ASC Lease. The value was determined by appraisal by Wellspring Partners. The Company believes the valuation represents the fair market value of all such assets taking into consideration the fact that the Members, upon termination or non-renewal of the ASC Lease, shall no right to receive any compensation for any then-existing intangible assets or terminal value as provided in Section 10.7 of the Agreement. (c) Management Agreement. The XYZ shall provide certain administrative and other support services as determined by the Board of Managers to be necessary for the costeffective and efficient operation of the ASC, including, without limitation, general managerial services, housekeeping, trash removal, maintenance and biomedical services in exchange for five - 3 -

5 percent (5%) of its net revenues from operations, excluding any gains or losses from the sale of any equipment or other fixed assets. The amount of compensation to be paid for such management services has been determined by Wellspring Partners to represent the fair market value for such services. ARTICLE V MANAGEMENT AND CONTROL OF COMPANY 5.1. Board of Managers. (a) Number, Term and Qualifications. The Company shall have a five (5) person Board of Managers. Hospital Center shall designate two (2) persons from Hospital Center (or XYZ) to serve on the Board of Managers (the Hospital Managers ), and the remaining Members (the Physician Members ) shall designate (as provided herein) one (1) person to serve on the Board of Managers (the Physician Manager ). The Company s Executive Director and Medical Director each shall serve as ex officio members of the Board of Managers with a vote. The persons designated by Hospital Center shall serve at the pleasure of Hospital Center, and unless such persons resign or are removed by Hospital Center, such persons shall hold office until a successor shall have been designated. The person designated by the Physician Members shall be elected each year by such Physician Members in accordance with the preceding two sentences at an annual meeting of the Members, and unless such person resigns or is removed, that person shall hold office until a successor shall have been designated. Ex officio Managers shall serve as long as they hold their positions. A Physician Manager must also be a Member. The persons serving on the Board of Managers may serve for an unlimited number of consecutive terms Management of the Company. (a) General. The Board of Managers shall oversee the day-to-day affairs of the Company, as they are managed pursuant to the Management Services Agreement, consistent with the purposes of the Company and subject to the ultimate oversight authority of the Members. Said affairs shall be operated in a manner consistent with the tax-exempt charitable purposes of XYZ, consistent with Sections 2.5, 2.6, 2.7 and 2.8 of this Agreement. Except for situations in which the approval of the Members or XYZ is expressly required by the Articles or this Agreement, the Board of Managers acting by Majority Vote of the Board of Managers at a meeting at which a Quorum is present shall have, subject to this Agreement, the ultimate oversight authority of the Members (including as provided in Section 4.3), and applicable law, full, complete and exclusive authority, power and discretion to manage and control the business, property and affairs of the Company, to make all decisions regarding those matters and to perform any and all other acts or activities customary or incident to the management of the Company's business, property and affairs; provided, that the Board of Managers may, in its discretion, delegate authority to Board committees (to the extent permitted under the Act) and to XYZ (as provided in Section 5.3(c)). The Board of Managers (acting through its agents) shall be responsible for obtaining, on behalf of the Company, all necessary licenses, permits, certifications, billing and provider numbers and accreditation certificates, and shall coordinate with XYZ to seek necessary waivers of licensure requirements to enable the optimization of the use of services to minimize duplication and maximize the sharing and coordination of functions, such as medical records, subject to the requirements of licensure, tax-exemption, fraud and - 4 -

6 abuse, self-referral, tax-exempt financing and other applicable laws and regulations. Notwithstanding and without in any manner limiting the foregoing, the following actions cannot be delegated and require the prior approval by Majority Vote of the Board of Managers: (i) The establishment and approval of the annual operating and capital budgets of the Company, which budgets shall include a meaningful level of indigent care to be provided to those patients unable to pay in accordance with Hospital Center s indigent care policy; provided, however, that XYZ shall have authority to revise the budgetary allocation for indigent care in its sole discretion. (ii) The approval of any contract, lease, loan, borrowing, asset purchase or other business arrangement to be entered into between the Company and any person or entity. (iii) The approval of expenditures that were not included in, or that otherwise exceed the amounts set forth in, the Company's annual operating and capital budgets by more than Twenty Thousand Dollars ($20,000). (iv) The waiver of a right to expel, or the expulsion of a Member for failure to make a capital contribution. (v) The approval of any borrowing for more than Fifty Thousand Dollars ($50,000) in a 12-month period, if not previously approved as part of the annual business plan. (vi) A decision to distribute the Company's Distributable Cash to the Company's Members, in excess of the Tax Distribution (as defined in Section 6.4 below), subject to such appropriate and prudent working capital and other reserve levels as the Board of Managers shall establish from time to time; (vii) The structuring of any additional capitalization of the Company (other than an additional capital call) as either an equity offering or debt financing (subject to Sections 3.2, 3.5 and 3.6); (viii) The approval of admission of additional Members (subject to Sections 3.1 and 3.6); ASC; (ix) (x) (xi) The establishment of a joint venture with another person or entity; The change of scope of services provided or to be provided at the The annual Fair Market Value Determination; (xii) The required redemption, without cause, of the Units held by a Physician Member pursuant to Section 8.2; (xiii) The approval, entrance into, amendment, renewal or termination of any agreement with XYZ, Hospital Center, any XYZ Affiliate or other Member; - 5 -

7 (xiv) (xv) (xvi) The amendment of the Operating Agreement; The amendment of the Medical Staff Bylaws. The approval of additional capital calls; and (xi) A decision to require that all Members guarantee a loan, lease or other obligation incurred by the Company. Any matters that cannot be decided by a Majority Vote due to a dead-lock of the Board of Managers shall be submitted to non-binding mediation. In the case of an arbitrable dispute, the dispute shall if necessary be submitted to binding arbitration following thirty (30) days of non-binding mediation. (b) Concurrent Authority of XYZ. Notwithstanding anything in this Agreement to the contrary, XYZ has the exclusive right to establish all charity and indigent care policies for the Company in consultation with the Board of Managers. (c) Management Agreement. The Company shall enter into a management agreement with XYZ, as described in Section 4.6(c), 5.3. Payments to Persons Serving on the Board of Managers. Persons serving on the Board of Managers may only receive compensation for their services in such capacity if approved by the Board of Managers. Such persons may receive fair and reasonable compensation for services rendered to or for the Company in a capacity other than as a member of the Board of Managers and shall be reimbursed for all legitimate business expenses incurred while rendering such services upon presentation of receipts or other appropriate documentation of such expenses Devotion of Time. Persons serving on the Board of Managers are not obligated to devote all of their time or business efforts to the affairs of the Company. Such persons shall devote whatever time, effort and skill the Board of Managers deems to be reasonably appropriate for the operation of the Company. * * * * * * ARTICLE VI TRANSFER AND ASSIGNMENT OF INTERESTS 6.1. Transfer and Assignment of Interests. Except as provided in Sections 7.2(d) and Article VIII, no Member may Transfer any Units for a period of five (5) years after acquiring a Unit and then only as provided in this Agreement. The Members acknowledge that the restrictions on Transfer of Units set forth in this Agreement are necessary to preserve the Members' right to determine with whom they share ownership of the Company. Any attempted Transfer of any Units in violation of this Agreement shall be null and void and of no force and effect

8 6.2. Rights of First Refusal. Each Member hereby grants to the Company, and, if or to the extent not exercised by the Company, then to XYZ, a right of first refusal to purchase the Units of that Member which are the subject of a bona fide offer for purchase (the "Offer") received and not rejected by that Member from a bona fide third party purchaser who meets the Physician Member Eligibility Requirements described in Section 7.4 below. (a) Notice. Promptly after receipt by the Member of an Offer which such Member does not intend to reject, such Member shall give written notice to the Company, which shall in turn provide a copy of such notice to XYZ, within three (3) business days (the "Notice of Offer"), stating the full terms, conditions and details of the Offer received and not rejected by such Member, including, without limitation, the name of the qualified third party purchaser which made the Offer, the number of Units covered by the Offer, the payment terms (whether for cash or on credit, and, if on credit, the time for payment and the interest rate) and any and all other consideration to be received or paid in connection with the Offer. (b) Exercise of Right of First Refusal. Exercise of the right of first refusal granted in this Section 7.2 by the Company or XYZ or both shall be accomplished by giving written notice (the "Notice of Purchase") to the selling Member within ten (10) business days after its receipt of the Notice of Offer. In the event that (i) the Company and XYZ do not exercise rights of first refusal within the appropriate time period or (ii) the Company or XYZ or both fail to consummate the purchase of Units pursuant to Section 7.2(d) below, the selling Member thereafter shall have sixty (60) days to sell all of the Units on the terms and conditions of the Offer. If such Member does not consummate such sale within such sixty (60) day period, the rights of the Company and XYZ shall be reinstated and the Notice of Offer procedure in this Section 7.2 must be repeated in the event of any continuing or new bona fide offer to purchase the Units of such Member. (c) Purchase Price. The purchase price shall be the price set forth in the Notice of Offer; provided, that the Company and/or XYZ shall be entitled to substitute cash in an amount equal to the Fair Market Value of any non-cash portion of the consideration set forth in the Notice of Offer. The purchase price shall be payable, and the purchase of the selling Member's Units shall be consummated, within thirty (30) days of the giving of a Notice of Purchase under Section 7.2(b) above or such later date as determined by mutual agreement. (d) Exception for Certain Permitted Transfers. Notwithstanding the foregoing provisions of this Section 7.2, no right of first refusal shall apply to any Transfer of Units (i) by XYZ to an Affiliate or to a transferee who meets the Physician Member Eligibility Requirements set forth in Section 7.4 below, or (ii) by any individual Member to another individual member of such individual Member's group practice provided that such transferee satisfies the Physician Member Eligibility Requirements set forth in Section 7.4 below and the Board of Managers has approved such proposed transfer Substitution of Members. A transferee of a Membership Interest shall have the right to become a substitute Member only if (a) the requirements of Section 7.2 above have been met, (b) the transferee (if an individual) satisfies the Physician Member Eligibility Requirements set forth in Section 7.4 below, (c) such Person executes a joinder to this Agreement in the form attached hereto as Exhibit B and incorporated herein by this reference, and (d) such Person pays any reasonable expenses of the Company in connection with such Person's admission as a new - 7 -

9 Member. The admission of a substitute Member shall not result in the release of the Member who transferred or assigned the Membership Interest from any liability that such Member may have to the Company Physician Member Eligibility Requirements. Each Physician Member shall be required to: (a) be a resident of the State of California, (b) be duly licensed to practice medicine, oral surgery or podiatry in the State of California; (c) be an anesthesiologist, surgeon, oral surgeon, podiatrist or other specialist physician who performs and remains in a position to perform Procedures of the type properly performed at the ASC on a regular basis; (d) maintain an active medical staff membership and unrestricted clinical privileges in the physician s medical subspecialty at both Hospital Center and the ASC; (e) meet the requirements of the ASC safe harbor (the ASC Safe Harbor ) promulgated under the federal anti-kickback statute (codified at 42 C.F.R (r)) as closely as is feasible; (f) have and maintain adequate levels of professional malpractice insurance; (g) refer cases to the ASC in a nondiscriminatory manner (i.e., referrals should reasonably reflect the types of patients seen in the normal course of the physician s practice); and (h) meet all other investor suitability standards established by the Company from time to time, including, without limitation, compliance with all federal and state securities, physician self-referral, anti-kickback and other applicable laws and regulations. Without limiting the foregoing, each Physician Member shall affirm in writing, in connection with the initial acquisition of his or her ownership interest in the Company and annually thereafter, by execution and delivery to the Company of an Annual Eligibility Affirmation Statement substantially in the form attached hereto as Exhibit C, representing that he or she: (a) agrees to inform each patient that he or she refers to the ASC of his or her investment interest in the ASC; (b) derived at least one-third of his or her medical practice income earned during the prior 12-month period from the performance of Procedures (as defined in Section 1.38); (c) performed at least one-third of his or her Procedures (as defined in Section 1.38) at the ASC during the prior 12-month period (or, if a new Physician Member, he or she expects to perform at least one-third of his or her Procedures at the ASC each year); (d) agrees to treat patients receiving medical benefits or assistance under any federal health care program (including Medicare and Medicaid) in a nondiscriminatory manner; and (e) continues to satisfy the Physician Member Eligibility Requirements (as defined below). The investment criteria and the representations and covenants set forth above, as well as the requirement to make such representations and covenants annually in the form attached hereto as Exhibit C (as such may be modified from time to time), are referred to as the "Physician Member Eligibility Requirements." ARTICLE VII REDEMPTION EVENTS 7.1. Mandatory Redemption. The Company shall be required to repurchase all of the Units of a Physician Member, upon the terms and conditions set forth in this Article VIII, upon the occurrence of any of the following events: (a) The Physician Member no longer satisfies the Physician Member Eligibility Requirements (including, without limitation, failure to execute and deliver an Annual Eligibility Affirmation Statement). (b) The Los Angeles Anesthesia LLC contract to provide anesthesiology services at the ASC is terminated for any reason by either party

10 (c) The Involuntary Redemption of a Member s Units (as defined below). (d) The divorce of a Physician Member; provided, however, that if pursuant to a prenuptial agreement, divorce settlement, divorce decree or otherwise such Physician Member s spouse will not become a partial owner of the Units as a result of the divorce, the Mandatory Redemption provision of this Section 8.1 shall not apply. (e) (f) Article XV below. The Bankruptcy of the Physician Member. The Physician Member fails to comply with the terms and provisions of Each of the events referred to in this Section 8.1 shall hereinafter be referred to as a "Redemption Event" and each such Member is sometimes referred to herein as the "Terminating Member." 7.2. Involuntary Redemption. Upon the Majority Vote of the Board of Managers, a Physician Member shall be required, without cause, to offer his or her Units back to the Company for redemption at Fair Market Value (an Involuntary Redemption ) Purchase Price. Upon a redemption of a Member s Units pursuant to Section 8.1(a)-(e) above, the purchase price of the Terminating Member's Units shall be equal to the Fair Market Value of the Units on the date of redemption. Upon a redemption of a Member s Units pursuant to Section 8.1(f) above, the purchase price of the Terminating Member's Units shall be as set forth in Article XV below Payment of Purchase Price. Within sixty (60) days after the Company gives written notice to the Terminating Member (or the Terminating Member's successor-in-interest) of the occurrence of a Redemption Event or such later date as determined by the Company and the Terminating Member, the Company, at its option, shall pay to the Terminating Member either: (a) cash in an amount equal to the total purchase price to be paid for all of the Terminating Member's Units, or (b) cash in an amount equal to not less than thirty-four percent (34%) of the total purchase price to be paid, and shall deliver a promissory note for the balance of the purchase price providing for two (2) equal payments of principal and interest accrued thereon over a period not to exceed three (3) years from the date of delivery, with the first payment to be made eighteen (18) months after the date of delivery and the second payment to be made on the maturity date (unless prepaid sooner, without penalty, at the Company s sole option). Such promissory note shall bear interest at the lesser of the "Prime Rate" as published from time to time by The Wall Street Journal, plus one percent (1%) per annum, or the maximum rate permitted by California law, compounded annually on the basis of a 365-day year. ARTICLE VIII * * * * * * ARTICLE IX HOSPITAL BUYBACK PROVISIONS - 9 -

11 If (a) in the opinion of nationally recognized health care or tax counsel for the Company, it is determined that more likely than not any federal or state legislation, or any decision from a court of law having jurisdiction over the Company, could (i) prohibit ownership in the ASC by a Member or prohibit a Member from making any patient referrals to the ASC, (ii) limit, restrict or prohibit the Company from billing for items and services provided to any patients referred to the ASC by a Member, (iii) jeopardize XYZ's, or any of its tax-exempt Affiliates', tax-exempt status under Section 501(c)(3) or public charity status under Section 509(a)(1) of the Code, (iv) result in XYZ or such tax-exempt Affiliate recognizing more than an insubstantial amount of unrelated business income with respect to its distributive share of net income or loss, (v) jeopardize the exemption from taxation of any interest payable with respect to bonds issued on behalf of XYZ or any such tax-exempt Affiliate, or (vi) result in the imposition of excise taxes on any Member (or its shareholders, members, officers, directors or trustees) or the Board of Managers pursuant to Section 4958 of the Code, or (b) in the event that the Internal Revenue Service ("IRS") proposes to revoke XYZ's tax exemption, or (c) if any individual Member, in his or her exercising its powers directly or through the Board of Managers, has exercised its powers in contravention of the Company's commitment to support and promote XYZ's charitable purposes as set forth in Section 2.8 hereof, then if requested by XYZ, the Members shall negotiate in good faith to restructure the Company to the limited extent necessary to remove the concern identified by counsel while preserving to the maximum extent possible the economic and other arrangements among the Members. If following thirty (30) days of good faith negotiations, the Members are unable to reach an agreement, XYZ (alone or together with an Affiliate) may, but shall not be required to, repurchase each Member's Units, within ninety (90) days following the delivery of such letter from nationally recognized health care or tax counsel but no later than the effective date of any such federal or state legislation or within sixty (60) days following receipt of notice from the IRS that it proposes to revoke the tax exemption of XYZ or characterize XYZ's distributive share of profits and losses as unrelated business income, for an amount equal to the Fair Market Value of such Member's Units. The Company, at the direction of XYZ, shall use its best efforts to provide written notice to each Member at least ninety (90) days prior to the effective date, if practicable, of any such federal or state legislation, or upon receipt of such notice from the IRS, stating the effective date of any repurchase pursuant to this Article XIII and including a copy of the written letter from nationally recognized health care or tax counsel or IRS notice, as applicable. The closing of such purchase by XYZ shall take place in accordance with the mechanism set forth in Section 8.3 above. ARTICLE X CONFIDENTIAL INFORMATION During the term of this Agreement, each Member will have access to and may become acquainted with various trade secrets, consisting of business accounts, fee schedules, strategic plans, budgets, financial information and other records of the Company, which items are owned exclusively by the Company and used in the operation of its business (the "Trade Secrets"). Each Member hereby acknowledges that the Trade Secrets are secret, confidential and proprietary to the Company and will have been disclosed to and/or obtained by such Member in confidence and trust for the sole purpose of using the same for the sole benefit of the Company. During and after the term of this Agreement, no Member shall divulge any Trade Secret to any other person or entity, or use any Trade Secret for his, her or its own benefit or for the benefit of any other person or entity without the prior written consent of the Company; provided, that (a)

12 each Member may disclose such Trade Secrets to its professional advisors, subject to the foregoing confidentiality requirements, and (b) this Article shall not apply to any Trade Secret information which becomes publicly available other than from a source which the Member knows to be bound by a confidentiality obligation with respect thereto. ARTICLE XI NONCOMPETITION Each Physician Member agrees that such Physician Member shall not, directly or indirectly (including, without limitation, through such Member's shareholders, physicians members and/or principals), in any manner, own (whether as member, shareholder, partner, joint venture, sole proprietor, or in any other status), operate, manage, provide administrative services to, or be connected in any way with the ownership, management, operation, control, or activities of, any individual, group, corporation, partnership, joint venture, or any other entity or organization which engages in the operation of a licensed ambulatory surgery center or outpatient surgical department of an acute care or specialty hospital within a thirty (30)-mile radius of Hospital Center and the ASC (the Radius ); provided, however, that if an individual who satisfies the Physician Member Eligibility Requirements is in the process of divesting himself or herself of an interest in a competing facility on the Trigger Date, the Company will accept such Physician Member as a Member as long as such Physician Member can provide evidence that such sale will be completed within ninety (90) days of the Trigger Date. The Trigger Date shall be a date thirty (30) days after such individual returns a completed Subscription Agreement to the Company. Failure to comply with the non-competition provisions of this Article XV shall result in the mandatory redemption of the Physician Member s investor Units, as provided in Section 8.1 above. Nothing in this Article XV shall prohibit any Member from referring any patient to any person or entity, or from providing professional medical services to any person, nor shall it prevent XYZ from conducting any hospital operations, including, but not limited to, outpatient surgery, in, Los Angeles or Orange County, California. In addition, this Article XV shall not apply to space within a private office of a Member used to perform surgical procedures if, subsequent to the Member's purchase of Units, such office (or a portion thereof) is required to become licensed as an ambulatory surgery center under California or other applicable laws. This Article XV shall remain the obligation of each Physician Member for the entire term of Unit ownership plus two (2) years following the transfer of any Physician Member s ownership interest in the Company, except in the event of the termination of this Agreement or the expiration without renewal of the term (including renewal terms, if any) of the ASC Lease (other than due to XYZ's refusal to renew the ASC Lease on the same terms and conditions but at a rental equal to the then-fair Market Value). The Physician Members agree that the noncompetition provision in this Article XV shall remain in full force and effect and be binding upon the Physician Members to the fullest extent allowable under law. If any portion of said noncompetition provision is deemed invalid by a court of law or other governmental body, then such court or governmental body may modify and enforce these covenants to the extent that is deemed reasonable by such court or governmental body. The Physician Members acknowledge that the damages stemming from a breach of this noncompetition provision would be difficult to calculate, and, therefore, upon any such breach, in addition to any other remedy which may be available to the Company or another Member, the Company shall be entitled to immediate injunctive relief. The Members agree that, if for any reason, a Physician Member violates this noncompetition provision, such Physician Member's Units shall be subject to mandatory repurchase in accordance with Article VIII of this Agreement for an amount equal to the

13 lesser of: (a) the then-fair Market Value of such Physician Member s Units or (b) such Physician Member's Capital Account balance calculated as of the last day of the first full month of the Company's operations immediately prior to the date of such repurchase plus interest compounded annually (on the basis of a 365-day year) from the date of such Member s initial Capital Contribution (the Buy-in Date ) at a per annum rate equal to the Prime Rate as published in The Wall Street Journal on the Buy-in Date, as liquidated damages and not as a penalty. The foregoing represents the parties' reasonable best efforts to determine the damages that would stem from a Physician Member's breach of this Article XV EMF_US v2-12 -