Shareholder Protection Cross Option Agreements
Posted on March 5th, 2011 in All Posts, Business Protection, Shareholder Protection Insurance. An appropriate agreement is needed between the shareholders for the disposal of shares on death or critical illness. It must not be a binding agreement for sale otherwise business property relief from inheritance tax will not be available. Further information on business property relief can be sought from your adviser.The business’s legal adviser (should draw up the cross option agreement to make sure it does not conflict with the articles of association or an existing partnership agreement. The agreement works by creating a ‘sell’ option for each owner in the event of their death and/or critical illness and a ‘buy’ option for the co-owners in the event of death only. The exercise of the ‘sell’ option will mean the surviving owners must buy the dead or critically ill owner’s share; the ‘buy’ option will require the deceased owner’s personal representatives to sell the deceased’s share to the surviving co-owners.
If the arrangement is to include options on critical illness you need to consider whether they only want an owner who suffers a critical illness to have a single option allowing them to sell, or if they also want the other owners to have an option to buy.
If they choose a single option on critical illness, the owner who suffers a critical illness cannot be forced out of the business against their will. This gives that owner the opportunity to continue in the business if they recover and are able to return to work. But it also means that if they are unable to return, the remaining owners have no right to buy their share of the business. This could mean that the ill person is still entitled to their share of any profit even though they are no longer contributing to the business.
Alternatively you could choose to include a double option in the event of a critical illness. However, this would operate differently to the cross option on death. In the event of an owner suffering a critical illness, they have an immediate option to sell. If they exercise that option the other owners must buy that share of the business. But the other owners would not be able to force the ill owner out immediately. Instead they would have an option to buy only if the ill owner does not return to their normal duties within a specified period, usually 12 months. This gives the ill owner the opportunity to return to the business if they are able, and the other owners the security of being able to remove an owner who is no longer able to contribute.
To find out which are the best options for your business please ring Damian on 0800 612 3367. Alternatively make an enquiry using the form.
We have sample cross option agreements to save expensive legal costs.
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