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Cross-Option Agreements: A Key Tool for Business Continuity

Introduction


A cross-option agreement is a contract between shareholders (and sometimes the company) that gives the surviving shareholder(s) or the company an option to buy the shares of an incapacitated or deceased shareholder. An insurance policy covering the life of each of the shareholders is often taken out which ensures the sum required to buy the shares is available in such circumstances.


The Agreement


Cross-options will sometimes be a part of a more general shareholders’ agreement but will often be a separate agreement. The use of a cross-option agreement provides protection to a business, the remaining shareholder(s) and the families of a deceased/incapacitated shareholder. Drafted correctly, it can also be a tax efficient way of dealing with shares upon the death of a shareholder.


Cross-option arrangements can take two forms:


  • Covering the buyback of shares by the company (the company is a party to the agreement along with the shareholders); or

  • Covering the purchase of shares by the surviving shareholders (the shareholders are parties to the agreement).


Upon the death or incapacity of a shareholder, the following may be considered benefits of having a cross-option arrangement in place:


  1. The surviving shareholders/directors maintain control of the business rather than risk involvement from beneficiaries who may be unqualified and/or inexperienced in the business of the company;

  2. If an insurance policy is taken out, the company/shareholders have comfort in the knowledge that the insurance would pay for the shares;

  3. There may be inheritance tax advantages; and

  4. The beneficiaries of a deceased shareholder or the family of one that becomes incapacitated have comfort as they are able to sell the shares for an appropriate return and relinquish the responsibility of business ownership.

 

 

To learn more about the services we provide, visit https://www.clariclegal.co.uk/university-contracts or contact Richard Jenkins on 024 7698 0613 or richard@clariclegal.co.uk




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