IMPORTANT UPDATE: COVID-19

Recently we have seen an increase in enquiries from clients about putting in place cross option agreements.

It is not uncommon for the shareholders of a private limited company, often those run by owner-managers, to take out insurance policies on their own lives which pay out on the death of the insured shareholder. Those policies are usually written in trust for the benefit of the other shareholders. The idea is that the surviving shareholders are given a right to purchase the deceased shareholder’s shares and have the money to pay from them, with the purchase price being funded by the insurance proceeds.

Good reasons for putting in place such arrangements are as follows:-

  • To enable the shareholders to have cash available through the life insurance policies, to buy the shares of a deceased shareholder.
  • There is certainty as to what will happen with the shares held by a shareholder following his or her death.
  • Without the benefit of insurance proceeds, shareholders may not have enough money to purchase those shares, and bank or other sources of funding may not always be available.
  • The estate of a deceased shareholder has a way of realising cash for the shares quickly.
  • They help avoid the potential uncertainty which may result from the estate of the deceased shareholder being left holding the shares.
  • The surviving shareholders can focus on the business of the Company rather than negotiations with the estate of the deceased shareholder.

In order to implement such arrangements, the shareholders usually grant to each what are known as ‘put and call’ options over their shares. These options, depending on the nature of the policies, tend to be exercisable on the death of a shareholder and are usually contained in a legal document known as a cross option agreement. The ‘put and call’ options usually give the surviving shareholders the right to purchase the deceased shareholder’s shares and give the right to the personal representatives of the deceased shareholder to compel the surviving shareholders to purchase those shares.

For more information on anything covered in this article, please contact a member of our Company and Commercial Law team by email at info@ramsdens.co.uk or call 01484 821 500.