What is a Cross Option Agreement?
If a shareholder dies, it gives the surviving shareholder(s) the option of buying back a deceased’s business owners share or it gives the executor of the deceased business owners estate the option to sell the shares to the surviving shareholder(s).
Why enter into a Cross Option Agreement?
Mr Smith owns a 20% share in X Limited. Mr Green owns a 40% share and Mr Taylor also owns a 40% share.
Mr Smith dies leaving a Will in which he leaves his entire estate including his 20% shareholding in X limited to his wife Mrs Smith.
Mrs Smith needs liquid assets to care for herself and the children following her husband’s death and she therefore wants to sell the shareholding. Can Mrs Smith easily do this? No!
The only way to guarantee that Mrs Smith will be able to sell the shares and get what they are actually worth is to enter into a Cross Option Agreement.
How does a Cross Option Agreement Work?
The business owner who owns a minority share in a business and the other shareholders should enter into a Cross Option Agreement.
The Cross Option Agreement is usually backed by insurance such as a life insurance taken out by each shareholder which will ensure that there is always a pot of cash available to purchase the shares and avoid cash flow issues.
Not only does a Cross Option Agreement allow flexibility for the other shareholder(s) and the executor of a deceased shareholders estate, it will prevent disruption to a business of a company.