I am researching Shareholder Protection Insurance. What is the purpose of a cross option agreement and what does it mean for my business?
What is a Cross Option Agreement?
Also known as a double option agreement or put and call agreement, a cross option agreement it the preferred vehicle for Shareholder Protection Insurance.
If a shareholder dies, it gives the surviving shareholder(s) the option to buy back a deceased business owner’s shares.
Moreover, in addition to giving the surviving shareholders the ability to buy the shares, the legal representatives of the deceased’s estate also have the option to sell the shares to the remaining shareholders.
In either case, whether the remaining business owners want to buy the shares or the legal representatives want to sell, the agreement ensures the option is exercised.
You must set up a cross option agreement to ensure there is no binding sale. This means in certain circumstance neither party could exercise their option. You set it up this way so as to preserve business property relief for inheritance tax purposes.
You should set up a cross option agreement with all the directors / partners in the business.
Firstly, doing so enables the remaining directors / partners to purchase the share of the business from a deceased shareholder’s estate.
Secondly, this agreement in turn provides the dependents with a willing buyer and with cash, instead of shares or an interest in the business, which could cause its own issues.