Cross Option Agreement – what is it and can it help me?
The death of a director / shareholder of an owner managed company can seem catastrophic, but with good planning this does not need to be the case.
When a person dies the deceased’s assets (including shares) will be inherited by whoever they have detailed in their will (or if no will, then to whom the intestate rules stipulate, for example a spouse). This could be a person that has no knowledge, interest or experience in being a shareholder and no knowledge of the business.
In these circumstances having a cross option agreement would mean the spouse would benefit from exiting the company and receiving a cash payment (a fair price for the shares) and the company and its remaining shareholders would benefit from the company being led by knowledgeable and engaged parties. However, for the shareholders, finding what could be a very large amount of money to purchase the shares may prove impossible without forward planning.
A cross option agreement allows for a procedure whereby the shareholders of the company are able to buy the shares back from the deceased’s estate thus benefiting both the beneficiaries and the remaining shareholders.
The method of achieving this is for each shareholder of a limited company to enter into a cross option agreement which permits the other shareholders to buy his shares upon his death, known as a call option. It further allows for the personal representatives of the deceased shareholder to require the other shareholders to buy their shares, also known as a put option.
When a cross option agreement is backed by an appropriate life assurance policy (written in trust) there is no doubt that the sum required to purchase the shares will be available when the time comes. This reduces the stress on the remaining shareholders as they know they will not be required to come up with, what could be a significant sum of money, at short notice. The insurance policy is payable upon the death of a shareholder and is automatically held on trust in accordance with the terms of the cross option agreement.
A correctly drafted cross option agreement, backed by insurance policies, will ensure that the option to buy or sell the shares is just that – an option, rather than an obligation, ensuring that the parties take the most tax efficient route to achieving their wishes in the event of a shareholder dying. The end result is that the surviving shareholders keep control of the entire company without having to find funds to purchase the deceased’s shares whilst the beneficiaries of the deceased’s estate get a fair value for those shares.
If you are an owner / manager of a small or medium sized limited company the answer to whether a cross option agreement can help you is almost definitely yes.
If you would like to speak to us about creating a cross-option agreement, call our company commercial team today on 01752 203500 or email james.peterson@GAsolicitors.com.