Monday, 13 February 2012

Cross Options & Shareholder Agreements Every Business should have them.



But most don’t ……

When you set up a business, there are a million and one things to do and inevitably some things get pushed to the back burner. Shareholders and Cross Option agreements are prime examples of the things we all should have, but never get round to.

I was sitting with an accountant the other day and asked one of my favourite questions – ‘What happens to the business if something happens to you?’ He turned and tapped the desk of his office manager and said ‘He gets it’ my second question threw him off balance ‘How will that happen because your shares will go to your wife?’

Cross Options

It may not be a comfortable thought, but at some point a business may be confronted by the critical illness or death of one of its founders. A cross option agreement gives surviving shareholders the right (but not the obligation) to require the deceased shareholder’s personal representatives to sell the shares to them. It also gives the personal representatives the right (but not the obligation) to require the surviving shareholders to buy the deceased shareholder’s shares. By combining these options in a single agreement each side has the option of ‘forcing’ a sale of the shares. Cross option agreements should also oblige each party to insure their lives under a life insurance policy for a value which reflects the value of their shares. The proceeds of the policy should be held on a trust for the other shareholders who will be the beneficiaries. These proceeds provide the remaining shareholders with the cash to buy the shares of the deceased shareholder.
The structure of the cross option is vitally important for taxation planning purposes.  Important tax reliefs for both inheritance tax and capital gains tax can be lost if the documentation is not properly structured.

Shareholders Agreements

These often get missed but are critical to the running of a business if a dispute ever arises A shareholder's agreement is a contract between the shareholders of a company in which they agree how the company will be run. They all agree that they will use their voting power in the company to ensure that the terms of the agreement are complied with for as long as they are all shareholders. A shareholders' agreement should always be considered when there are between two and twenty shareholders in a company.

Shareholder agreements vary widely, but the typical agreement is designed to protect all the parties against a majority using their voting power to the detriment of the others. Without such an agreement, a company is under the control of those who hold a majority of the votes at a directors' or shareholders' meeting. Majority decisions are all very well for day to day matters, but where something goes to the heart of running the company, most shareholders want to have their say or be able to block a major change. A shareholders' agreement will specify decisions which require unanimity.

If you need any advice on your cross option and shareholder agreements call us on 01778 341490.