Cross Option Agreements
The death of a shareholder who is also a director can have a major impact on any business if the company has not made plans for such an event.
It is a particular concern for owners/managers of small and medium-sized companies, since the shareholder’s death can potentially give rise to a host of adverse consequences for the business.
What is a cross option agreement and does my business need one?
When business owners enter into a company protection policy such as a shareholder or partnership protection policy, a cross option agreement can come into play. Also known as a double option agreement (or single option agreement in the case of critical illness cover) this type of agreement can help guarantee the transaction between the life insurance payout and the business shares.
A cross option agreement is an agreement entered into by all the shareholder. It is put in place to ensure that the sale of the share goes smoothly. Each shareholder takes out a policy on either themselves, where the money goes to the remaining shareholders or on each other, where the money goes back to themselves.
This agreement is then put in place for shareholders to grant each other put and call options over the shares. Each partner agrees to co-operate fully during a claim. It also gives each shareholder the option to purchase life insurance to protect the business.
The Plan will have no cash in value at any time, and will cease at the end of the term. If premiums are not maintained, then the cover will lapse.