A share option is an agreement between the holder of shares and a third party. An option gives one party the right (and not an obligation) to purchase or sell shares. If the option is exercised then the other party is obliged to buy or sell the option shares - depending on whether the option is a put or call option.
A call option gives a third party the right to purchase the shares subject to the option in the circumstances and at the price established by the option agreement.
A put option gives the holder of shares the right to force a third party to buy the shares subject to the option in the circumstances and at the price established by the option agreement.
Cross-options are option agreements which comprise multiple put and / or call options. In the case of owner managed businesses, cross-options are often granted in combination with life assurance policies to ensure that in the event of the death of a shareholder the surviving shareholders purchase his / her shares, and have the funds to do so.
WHAT IS IN A SHARE OPTION AGREEMENT?
Our share option agreements are drafted in accordance with your instructions. They typically set out detailed terms in respect of the shares, the option and the circumstances in which the option can be exercised, including a clear statement of:
- The grant of the put or call option.
- The shares subject to the option.
- Any payment to be made on grant of the option.
- Any conditions that must be satisfied before the option can be exercised.
- The period in which the option can be exercised.
- The method by which the option is to be exercised.
- The option price and how it is to be calculated – e.g. will it be a fixed price or determined in accordance with a specified formula.
- Any circumstances in which the option will lapse.
- Whether the shareholder will give warranties in respect of the shares.
- Any restrictions on the shareholder while the option is in effect.
- Whether any reorganisation of share capital will affect the option (ie to ensure that the option shares are not diluted).