If a cross-option contract is backed by an appropriate life insurance policy (underwritten in trust), there is no doubt that the amount required to purchase the shares will be available in due course. This reduces stress for the remaining shareholders, knowing that they will not have to raise a significant amount of money in the short term. The insurance policy is payable on the death of a shareholder and is automatically held in trust under the terms of the cross-option agreement. A cross-option becomes very useful in both cases. The remaining shareholders could exercise it and force the new shareholders to sell. In this way, they would avoid losing control of the company to an external party. This would benefit new shareholders as much as they would likely prefer cash. Alternatively, the new shareholders could force the remaining shareholders to buy. A cross-option gives each shareholder both the legal right to sell their shares and the right to buy the shares of another shareholder (and possibly others) in certain circumstances. The cross-option does not require the purchase or sale of the shares in the circumstances, unless one of the shareholders exercises the option. Once the option is exercised, certain things must happen.

For example, it may be necessary to provide a discount or to apply for and receive the proceeds of life insurance. The cross-option agreement ensures that, in any of these circumstances, one or more shareholders would be willing to purchase the shares. A fair way of doing business that gives the remaining shareholders the opportunity to buy the shares of the owner or other shareholder of the company while giving the beneficiaries of the deceased the opportunity to sell them to them. Click here to download a cross-option agreement template. The method to achieve this is for each shareholder of a limited liability company to enter into a cross-option agreement that allows other shareholders to buy their shares after their death, which is called a call option. In addition, the personal representatives of the deceased shareholder may require other shareholders to purchase their shares, also known as a put option. When the company enters into the policy, it is usually held in trust between them for the remaining shareholders. The proceeds of the policy do not fall into the estate of the deceased shareholder and are therefore not subject to inheritance tax.

In addition, in the event of a buyout by the company itself at the time of the purchase (i.e., at the time of exercise of the option and not only at the time of closing the agreement), sufficient distributable reserves are available in the Company. My Key Finance Limited is here to help! With affordable shareholder protection insurance from a number of major UK brands, you`re guaranteed to find the insurance that`s right for you. Offer security with our cross-option agreements and give your fellow shareholders and loved ones the support they need. The key is to agree on how the company will be evaluated at the same time as the option agreement. When a single person takes out life insurance, the policy is usually registered in a discretionary trust. The full tax relief (called business property relief or BPR) is available when transferring shares of the company to inheritance tax. There are three types of taxes that should be considered when shareholders want to fill out an agreement. These are inheritance tax, capital gains tax and income tax. If the shares benefit from a 100% reduction in the ownership of the company, the estate will not be charged an inheritance fee on the value of the share.

Cross-options can be specifically designed to ensure this. The main benefits of a cross-option agreement, insurance policy, and business ownership facilitation are as follows: While it adds an extra layer of complexity, it is possible to treat critical illnesses in the same way as death, with put and call option agreements and critical health insurance. Deciding whether or not to include a cross-option in a shareholders` agreement is a decision on whether the risk of shares falling into unwanted hands outweighs the cost of the insurance premium. It is therefore important that an option be used because an option does not create an obligation for either party to buy or sell the shares unless the other party exercises the option. A cross-option agreement (often referred to as a double option agreement) is an agreement that can be included in shareholder protection insurance that ensures that the sale of their stake goes smoothly if a shareholder becomes ill or dies. It can be completed by all the shareholders within the team and each of the shareholders decides on his or her relevant share of the shares. Shares can be valued in three ways (which will be discussed below), and the cross-option agreement is carefully formulated so that no unforeseen tax burden is incurred after the death of the shareholder. While a cross-option can be introduced in a stand-alone document, it is typically included as a clause in the shareholders` agreement alongside other methods to ensure business continuity when a shareholder leaves. A cross-option agreement includes both put options and call options. To maintain corporate relief ( of inheritance tax), both options must work sequentially rather than simultaneously, so the structure usually looks like this: As mentioned above, if you have a shareholders` agreement, if the business owner or another shareholder of the company dies, the surviving owners can buy the shares.

This process will run smoothly, as the purchase price of the shares will be financed by the completed life insurance. It may also be held by a trust whose shareholders are the beneficiaries. The shares given to the children are held in trust because the children are minors. The trustees are the sisters of the deceased who want the company to maximize dividends to pay for schooling. Although the trustees together do not control the company (they control less than 50% of the shares), they have the largest stake and are therefore very influential. While there are many advantages to option agreements, it`s important to think about the disadvantages as well. Shareholder agreements are not a binding purchase agreement. If the agreement of purchase and sale includes an agreement to buy and sell, the relief of commercial property, under which the portion of the business is eligible, could be lost. Although documents relating to insurance-backed cross-option agreements generally do not address this situation, a separate shareholder agreement and/or interdependent articles often provide that an outgoing owner-manager is required to offer his or her shares for purchase by or at the direction of the remaining shareholders. Before the entry into force of the agreement enters into force of the agreement enters into force, each shareholder should take out life insurance or a policy for critical illness. It is written in a comprehensive fiduciary document that is returned to shareholders in the event of unexpected death or illness. The value of the life insurance policy or critical illness insurance policy should reflect the value of each shareholder`s interest in the corporation.

If you are the owner or manager of a small or medium-sized limited liability company, the question of whether an option contract can help you is almost certainly yes. With a qualified and experienced team, we have helped 1000 companies across the UK. Want to know more? Call us today and we can guide you through the process and give you an offer of shareholder protection insurance. While the company`s existing articles of association automatically bind each new shareholder, a new owner-manager shareholder is only bound by an agreement if he expressly accepts it and/or if new agreements are concluded. All insurance-based cross-option agreements should be reviewed here. The purpose of a cross-option agreement is to grant surviving shareholders a “call option”, i.e. an option (i.e. not a mandatory obligation) to purchase the deceased`s shares at market value, while the deceased`s personal representatives are also granted a “put option”, which is an option (i.e.

again not a mandatory obligation), sell the shares to the surviving shareholders at market value. A cross-option agreement allows for a process by which shareholders of the corporation can redeem the shares of the estate of the deceased, which benefits both the beneficiaries and the remaining shareholders. In such circumstances, difficulties may arise if the surviving shareholders cannot afford to buy the deceased`s shares. Second, an option cross-agreement backed by the appropriate shareholder protection life insurance policy is important. In the event of the death of the owner, the agreement gives his personal representatives the opportunity to sell the shares of the company within six months of the death. .