Cross Option Agreements (frequently referred to as double option agreements) are designed to “future proof” a private limited company and its share-holdings.
The purpose of Cross Option Agreements
The idea is that the shares are kept “in the family” i.e. in a restricted group of existing shareholders and to prevent the shares otherwise falling into the hands of a shareholders spouse or partner through his or her Will.
There are two component parts, the first being the legal agreement, the second being the life policy (this can be extended to cover critical illness, but this will depend on the wishes of the individuals involved).
The idea is that the legal agreement grants the other shareholders the option to call for the deceased’s shares in the event of that shareholder’s death (or where relevant critical illness).
If the agreement is properly drafted it will cover provisions dealing with valuation of the company and thus the shareholding. The second component part is the life policy which will pay out the required amount to enable the surviving shareholders to buy the shares when the option is exercised.
There are 4 main benefits:
- The shares in the company stay “in the family” of current shareholders.
- The money is available for the cash purchase of the shares through the life and where appropriate critical illness cover.
- The agreement should include provisions to review the valuation of the company from time to time and thus the amount of the life/ci cover.
- The scheme is designed to avoid the tax difficulties that might otherwise arise by having a binding agreement in place.
We will work with our Clients financial advisors on such arrangements. If you are interested in such a scheme and do not have a financial advisor we would be happy to recommend.