Cross-Option Agreement

This Cross-Option Agreement template is designed for shareholders in small or medium-sized private companies in England and Wales. It facilitates the transfer of shares upon a shareholder's death, ensuring that the remaining shareholders have the first opportunity to purchase the shares, thereby avoiding third-party involvement. The agreement is funded by life insurance policies, which must be written under trust to avoid inheritance tax. Compliance with the Companies Act 2006 is required. 

The cross-option has the following features:

1. Purpose: A cross-option agreement ensures that the remaining shareholders have the opportunity to purchase the shares of a deceased shareholder before they are transferred to third parties.
2. Call Option: This is a right (but not an obligation) for the remaining shareholders to purchase the deceased shareholder’s shares from their personal representatives.
3. Put Option: This is a right (but not an obligation) for the deceased shareholder’s personal representatives to require the remaining shareholders to purchase the deceased shareholder’s shares.
4. Avoiding Binding Contracts: The options are drafted as rights rather than obligations to avoid the transfer being deemed a binding contract for sale, which would affect inheritance tax relief.
5. Financing the Purchase: The purchase of the deceased shareholder’s shares is financed by funds from an insurance policy covering the life of the deceased shareholder.
6. Insurance Policy: Each shareholder should enter into a life assurance policy written under trust, with fellow shareholders as beneficiaries, to ensure proceeds fall outside the deceased’s estate and are not subject to inheritance tax.
7. Premiums: The shareholders, not the company, typically meet the cost of the premiums for the life assurance policies.
8. Term of Policies: Life assurance policies are typically for a fixed term, and the agreement should consider whether it terminates upon the expiry of such term.
9. Market Value: The market value of the option shares may fluctuate, so life assurance policies should be reviewed periodically to ensure adequate funds for purchasing the shares.
10. Exercise Period: Call options can be exercised within a specified period (commonly three to six months) after the death of the shareholder.
11. Dividends: The agreement should specify who is entitled to dividends during the period between the shareholder’s death and the completion of the share transfer.
12. Completion: The sale and purchase of the option shares must be completed by a longstop date, typically calculated from the date the insurance proceeds become available.
13. Warranties: The agreement includes warranties that the option shares will be sold free from encumbrances and third-party claims.
14. Reorganisation: The agreement applies to any shares held by a shareholder following a reorganisation, ensuring no residual shares are left with the deceased’s personal representatives.
15. Governing Law: The agreement is subject to the law of England and Wales, and includes provisions for notices, costs, and other standard contractual clauses. 

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Publisher’s Notice:

Note: This publication does not necessarily deal with every important topic, nor cover every aspect of the topics with which it deals. Templates do not include or provide legal or other advice to users. They are designed to provide a head-start to the development of a commercial agreement and are not the finished article. They require careful reading, analysis and customisation in order to meet the particular needs of the parties to the document. 

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