We never like to discuss or think about our own mortality but as a business owner, it’s important to consider what will happen to the ownership of your business if you or one of your co-owners dies or becomes seriously ill. It’s healthy to include these issues as part of your planning in relation to business continuity and risk and your own personal situation.

Many business owners assume that their families will benefit from the value built up in the business in the event of their death, but that is not automatically the case. The default position is usually that shares in a company will pass to the estate of the deceased, leaving family members with shares and not cash, and surviving co-owners with new shareholders who often have little or no working knowledge of or interest in the company. Cross-option agreements are a good way to avoid this situation arising.

What are they?

A cross-option agreement is a contract between the shareholders of a private limited company. It gives the other shareholders the option to purchase the shares of a shareholder who is incapacitated or has passed away. This option allows the surviving shareholders to retain control of the business without having to introduce new shareholders.

The agreement will also provide the beneficiaries of a deceased shareholder (very often the spouse, children or other close family members) a similar option to require the surviving shareholders to purchase the deceased’s shares, just in case they don’t exercise their own option to buy.

Because these are drafted as options, the parties can stick with the status quo and don’t have to exercise their option rights. This will leave the shares to be inherited in accordance with the relevant will or intestacy rules and any applicable shareholders agreement.

The options are very often backed by life insurance policies that are taken out by each shareholder. This is so that where an option is exercised there is a binding obligation to buy shares, the purchasers have sufficient cash available to make the necessary payment.

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What is the benefit?

Having an insurance-backed cross-option agreement in place means you can plan for your family to be financially secure if the worst should happen. The additional benefit is that it provides certainty to the surviving shareholders and can minimise disruption to the business should a shareholder die or become seriously unwell.

Could a co-option agreement benefit you? Make an enquiry.

What if things change?

Circumstances do change and businesses evolve, so, just like shareholders' agreements, a cross-option agreement together with the insurance policies will need to be regularly reviewed to ensure they remain suitable and provide appropriate comfort and protection to shareholders and their loved ones.

Call today and speak to a member of our Commercial Property team

If you would like to know a little more about what the team do or believe they can make a positive difference to you/your family then please call us on 0151 282 1700, request a callback at your convenience or message us your enquiry.