Not having a ‘Cross Option Agreement’ could cause serious problems for your business!

What happens in the event of serious illness or death of a controlling shareholder?

Every business should have a plan in place. Normally illness and capacity will not change the voting rights but death will.

Usually the companies articles of association will contain rules which authorise the executors of a deceased shareholder to register as the share owners until they transfer them to the beneficiaries. This is often not the best solution.

A better way is to prepare a shareholders agreement which sets out what will happen.

Its worth considering:

1. pre-emption rights – these arrange automatic transfer to named shareholders
2. purchase rights – these will allow the company to buy back the shares from the beneficiaries
3. cross option agreements -According to Jerry Thomas, a specialist in business insurance: “If a company does not already have a Cross Option Agreement in place, the owners should give this serious and urgent consideration because they could be leaving themselves wide open to an unnecessary risk. It sets out in legal terms what happens to the shares if an owner dies and ensures they are kept within the company rather than passing to the beneficiary of the deceased, or worse still get purchased by a competitor! The agreement can also be written to include Critical Illness. The pre-agreed lump sum payment goes to the beneficiary and an insurance policy is normally put in place to save the remaining owners having to fund what could be a considerable sum of money, without warning. The policy should be written in trust so the beneficiary receives the payment without the delays of probate etc, and to protect them from Inheritance Tax deductions“

steve@bicknells.net