You’ve just set up a new venture with a business partner. You will each own 50%. You’ve got a great product, you have a freshly minted company registered at Companies House, and you’ve mapped out years of success to come on the back of a gold-plated business plan. Feeling optimistic and excited about your new business, you’re ready to go full steam ahead, work hard and achieve that success.
And guess what; you are successful, and you’re feeling pretty proud of what you’ve achieved. And hopefully, your hard work has helped to provide the kind of life and financial security for you and your family that you hoped it would. Even better, you still get on with your business partner.
The Crisis
But what if you get a phone call one morning on the way to work. The person who is your business partner, fellow 50% shareholder and no doubt your close friend has just passed away suddenly. Not only will this be a huge shock on a personal level, the reality is you now no longer own your company with your fellow shareholder, but with the beneficiaries of their estate. This will likely mean you are now in business with their spouse, partner, or children.
In the alternative, if it was your loved ones receiving a call that morning to say you had passed away, it is now your family that is in business with the surviving shareholder and dependent on them instead of you to safeguard the wealth you have created.
Solution
So how can you and your fellow shareholder take steps now to ensure that in this worst-case scenario, the surviving shareholder can run the company free of the involvement of the deceased’s estate and the deceased shareholder’s family can extract the true value of the shares from the company?
The good news is that a solution to this scenario exists in the form of a “Cross-Option Agreement”. This document contains two key elements:
- An option for a surviving shareholder/s to require the deceased shareholder’s family to sell the shares to them; and
- an option for the deceased shareholder’s estate to require the surviving shareholders to buy the shares from them.
This means that either the continuing shareholders or the deceased’s estate can activate the relevant option, hence the options cross. The important thing is that whichever party triggers the option, the end result is the same; there is a contractual agreement that the shares will be sold by the deceased’s family according to a process and time frames agreed in the Cross-Option Agreement.
So, everyone has agreed what will happen to a deceased shareholder’s shares. But how can you be sure there is the money to pay for the shares? Under the Cross Option Agreement, the continuing shareholder is a) contractually bound to buy the shares and b) they want to do right by the deceased’s family. However, imagine your company has just spent a significant sum rolling out new infrastructure and there simply isn’t the cash to buy the deceased’s shares.
This is why Cross-Option Agreements are underpinned by life insurance policies taken out on each shareholder’s life. The Cross-Option Agreement will refer to the relevant policies. Once these insurance policies are in place the Cross-Option Agreement will achieve its aim. Not only have the shareholders agreed that the deceased shares will be purchased, but there is also now a pot of money that will allow the deceased’s family to get fair value.
However, the whole purpose of the Cross-Option Agreement will fail if the insurance does not cover the value of the shares. If your company is growing (as we hope it is) it is vital to make sure the life insurance policies are kept under regular review to make sure the value of the insurance keeps up with the value of the company.
While we’ve discussed a new venture here, it’s never too late to put a Cross-Option Agreement and supporting insurance in place to both safeguard the company you have built and protect your loved one’s financial security.
Blacks Solicitors have a wealth of experience acting for owner-managed businesses and assisting with Cross-Option Agreements. Please get in touch by email or phone on 0113 207 0000 if you would like to discuss such arrangements with a member of our Corporate Team.
