Skip to main content

Media Centre

Home / Media Centre / Blogs / How cross option agreements can help you protect your business

How cross option agreements can help you protect your business

Patricia Obawole | Cross Option Agreements | Corporate Law

Patricia Obawole, an associate in our corporate team explains how cross option agreements can assist upon the death of a shareholder or in the event that they become too ill to work for your company.

Do you have plans in place to protect your business in case a shareholder dies or becomes critically ill? It’s not something that any of us like to think about but unless arrangements have been made, a company and the surviving shareholder(s) can quickly become exposed to undesirable situations if the worst does happen.

The next of kin of the deceased/unwell shareholder may wish to become involved in the business and not want to part with the shares, for example. Without protections, it can be difficult to obtain these shares.

What is a cross option agreement?

If a shareholder becomes too unwell or dies, a cross option agreement:

  • gives the surviving shareholders the option to purchase their shares, and
  • gives the next of kin the option to sell the shares to the surviving shareholders.

How does a cross option agreement work?

Typically, a cross option agreement will be backed by a life insurance policy taken out in the individuals’ names but written into trust for the benefit of the surviving shareholders. Should the options be exercised and the policy triggered, this will provide the surviving shareholders with adequate funds to purchase the shares for market value. The estate of the deceased/unwell shareholder benefits from a cash injection and the shares stay within the company.

A cross option can also be between individuals and the company, whereby the company buys back the shares of the deceased/unwell shareholder. While this may appear the more desirable course of action as the company pays the insurance premium, care must be taken to prevent the company from falling foul of the buyback procedures such as incorrect payment terms or the company not having sufficient distributable reserves.

Cross option agreements and other documents

A well drafted cross option agreement must dovetail with the articles of association and any shareholder agreements already in place. Failure to do so could end up with conflicting provisions and lack of direction at an already distressing and sensitive time for the company and its shareholders.

How can we help?

If you are a shareholder and your company does not have shareholder protection in place, you may need to enter into a cross option agreement to ensure you have adequate protections in place for the future.

Patricia can work with you to prepare the relevant agreement, liaise with the right people and ensure that the matter is dealt with as efficiently as possible. She will update you regularly and proactively so you are aware of the matter’s progress.

To discuss preparing a cross option agreement, call Patricia on 0113 2247 896 or alternatively you can email her at ku.oc1720864653.fcl@1720864653elowa1720864653bop1720864653.

Get in touch