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Cross option agreements

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Joanna Convey

Solicitor

Commercial law

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What would happen if one of your shareholders died unexpectedly?

Would you be able to finance the purchase of their shares?

Without a cross option agreement, the unexpected death of a major shareholder in a private limited company can create a raft of problems for the remaining directors and the family members. In particular, problems can arise if the financial security of that shareholder’s family has not been adequately planned for, or if shares are passed to someone who does not share all the directors’ vision for the business.

If the remaining shareholders wish to purchase the shares of their former colleague, then further issues can arise. What happens if they do not have sufficient funds available? How is a fair market price determined for the shares?

Putting a cross option agreement in place means that such an eventuality will be discussed and a course of action is agreed amongst all the shareholders. This will provide a clear guide in the event of an untimely death and will prevent any disputes arising between shareholders and beneficiaries. Usually, life insurance policies are taken out at the same time to ensure that there is no funding shortfall.

In the absence of a cross option agreement, the shareholders would have to refer to the original articles of association and any pre-emption rights set out in it. This is fertile ground for litigation.

Based in Stoke-on-Trent, Staffordshire, our commercial solicitors have a reputation for providing accurate advice, and dealing with complex problems in an efficient manner.   To find out more, contact us on 01782 577000.

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