Understanding Cross Option Agreements: Safeguarding Your Business and Providing Peace of Mind

When running a business, it's crucial to prepare for unforeseen circumstances, including the death of a shareholder. One way to address this concern is through a cross option agreement, which provides a structured plan for managing the transfer of shares on death. In this blog post, we'll explore the concept of cross option agreements, their types, and their benefits to both shareholders and the business.

What is a Cross Option Agreement?

A cross option agreement is a contract entered into by the shareholders of a company either separate to, or in addition to a shareholder agreement, that outlines the options available to each party if a shareholder dies.

Typically a cross option agreement will allow the family of a deceased shareholder to force the sale of shares back to the business. The agreement determines how those shares will be distributed amongst the remaining shareholders and the amount each shareholder will pay to buy them.

The agreement contains a corresponding option that gives surviving shareholders the right to buy back the shares of the deceased shareholder.

How to Establish a Cross Option Agreement

Cross option agreements can be included in shareholder protection agreements or insurance policies taken out by the shareholders. Alternatively, they can be incorporated into the company's articles of association during its establishment if shareholder protection insurance is not immediately obtained. It's essential to review these agreements regularly, as the value of shares and the business's needs may change over time.

Impacts of Cross Option Agreements on Business Property Relief

Unlike some other agreements, cross option agreements require that Business Property Relief for Inheritance Tax be held over the value of each shareholding. It's essential to seek professional tax advice from an accountant when drafting a cross option agreement to ensure you don't lose Business Property Relief in the event of a share sale after a death or illness.

Benefits of Cross Option Agreements

Cross option agreements provide for peace of mind to both the remaining shareholders and the family or estate of the deceased shareholder. They ensure the smooth transition of shares back to the business, protecting the livelihoods of employees. Additionally, they provide for a fair market price for shares sold by the deceased shareholder's family or estate.

Having a cross option agreement in place alongside insurance provides the necessary funds for the transfer of shares. Without insurance, the remaining shareholders may face financial pressure if forced to purchase shares without the available funds.

Seeking Professional Help

It's crucial to obtain professional assistance when drafting shareholder protection and cross option agreements to avoid confusion or conflicts. At Glanvilles Damant, our team of experienced solicitors can help you explore the options available to safeguard your business's future in the face of unexpected events. Contact us today, and we'll guide you through the process, ensuring that you make informed decisions to protect your business and its stakeholders.

FAQ's: Common Questions About Cross Option Agreements

Here are some frequently asked questions about cross option agreements:

Is a cross option agreement legally binding?

While cross option agreements outline the options for buying and selling shares, they are not legally binding sale contracts on their own. They rely on the parties involved actively initiating proceedings to buy or sell shares for the agreement to take effect.

What is the time limit for a cross option agreement?

Cross option agreements do not typically have a specific time limit. However, it's essential to review and update them regularly to account for changes in the company's value and shareholders' needs.

How do option agreements work?

Option agreements provide shareholders with the right to buy or sell shares under specific conditions such as death. They outline the terms, conditions, and procedures for the transfer of shares, ensuring a smooth process in the event of unforeseen circumstances.

Who can enforce the sale if a partner dies under a partnership cross option arrangement?

Under a partnership cross option arrangement, the estate or family of the deceased partner can enforce the sale of shares back to the remaining partners or the business itself.

Conclusion

In summary, cross option agreements serve as a vital resource for businesses and shareholders, helping them prepare for unexpected occurrences, such as the death of a shareholder. These agreements establish a transparent structure for share transfers and provide for a fair market value, providing reassurance and financial stability for both the remaining shareholders and the deceased shareholder's family. Additionally, these agreements contribute to maintaining business continuity and safeguarding the interests of all parties involved, including employees.

Given the intricate nature of creating and executing cross option agreements, it's crucial to obtain expert legal guidance. At Glanvilles Damant, our team of skilled solicitors is committed to assisting you throughout this process, ensuring that your business is shielded from potential unknowns. By choosing our services, you'll be able to make well-informed decisions and feel confident that your business and its stakeholders are well-equipped to handle any unexpected challenges life may present.