When is it the right time for a business to look at Cross Option Agreements seriously?
The death of a shareholder can have a major impact on the running of a private company, particularly where there are few shareholders and those shareholders are also directors, who are intimately involved in the running of such a company.
Typically, it will be undesirable for the shares of a deceased shareholder in such a company to be transferred under the provisions of a will to their family members, or indeed any other third parties. A transferee may be inexperienced in business and have no desire to become involved in the company. Therefore, to avoid a new, unknown shareholder being introduced into their midst on the death of an existing shareholder, the shareholders of a private company may all choose to enter into a cross-option agreement. The purpose of the agreement is to provide a mechanism for the transfer of the legal and beneficial ownership of each shareholder’s shares in the event of their death; it ensures that their fellow shareholders have the opportunity to purchase those shares before they are transferred to third parties. Each shareholding will be subject to a call option and a put option:
• a call option, being a right (but not an obligation) of the remaining shareholders to purchase the deceased shareholder’s shares from his personal representatives; and
• a put option, being a right (but not an obligation) of the deceased shareholder’s personal representatives to require the remaining shareholders to purchase the deceased shareholder’s shares
• It is important to ensure that the options are drafted as rights rather than obligations in order to avoid the transfer of shares on the death of the deceased shareholder being deemed to be subject to a binding contract for sale. If the transfer is deemed to be subject to a binding contract for sale, it will be treated as being a transfer of cash for inheritance tax purposes.
If the time is right for you to think about Cross Option Agreements for you business, please contact us on 01270 211567 or email firstname.lastname@example.org for a free 1/2 initial consultation.