The Role of Put and Call Options in Shareholders’ Agreements

Put and call options are powerful tools within shareholders’ agreements, offering shareholders strategic mechanisms to manage share ownership and ensure orderly transitions. These provisions balance flexibility and obligation, enabling shareholders to buy or sell shares under specific circumstances or on demand.

This article explores the purpose, structure, and application of put and call options in shareholders’ agreements, highlighting their importance in corporate governance and shareholder relations.

Shareholder Obligations and the Role of Options

Absent specific provisions in a shareholders’ agreement or a company’s memorandum of incorporation (MOI), shareholders are generally under no obligation to sell their shares or purchase the shares of others.

Put Options

A put option allows a shareholder to compel another party—whether another shareholder or the company itself—to purchase their shares at the shareholder’s discretion. This mechanism is particularly useful for facilitating exits, providing shareholders with a predetermined or expert-determined value for their shares.

Typical Features of a Put Option Clause

Designated Buyer: The clause identifies the party obligated to purchase the shares and loan accounts, such as a specific shareholder or the company.

Exercise of the Option: The clause outlines the procedure for exercising the option, typically requiring written notice by the shareholder intending to sell.

Pricing Mechanism: The clause either specifies a fixed price for the shares or refers to a fair value determined by an expert as set out in the shareholders’ agreement.

Transfer Obligations: The clause sets timelines and responsibilities for completing the transfer of shares and loan accounts, including payment of the purchase price.

Example Application

A shareholder may invoke a put option during a specified period, ensuring a smooth exit while avoiding disputes over valuation or timing.

Call Options

A call option, in contrast, grants a shareholder or the company the right—but not the obligation—to purchase another shareholder’s shares on demand. This tool is often used to consolidate ownership or address changes in shareholder relationships.

Typical Features of a Call Option Clause

Designated Seller: The clause identifies the shareholder(s) whose shares may be purchased.

Exercise of the Option: Similar to the put option, the clause specifies how the option is exercised, often through written notice.

Pricing Mechanism: The clause determines the share price, either fixed or based on fair value as per the shareholders’ agreement.

Transfer Obligations: The clause includes steps to facilitate the transfer of shares and loan accounts, ensuring clarity on timing and payment.

Example Application

A company may exercise a call option to buy back shares from a shareholder whose continued involvement is no longer aligned with the company’s goals.

Timeframes and Expiry

Both put and call options are typically subject to defined time periods. If the option holder does not exercise their right within the specified period, the option and its associated rights expire. This time limitation ensures that options remain relevant to the company’s circumstances and shareholder intentions.

Drafting Considerations

Effective drafting of put and call option clauses is critical to their enforceability and practicality. Key considerations include:

Clarity on Obligations and Rights: Clearly distinguish between obligations (put options) and rights (call options).

Pricing Mechanisms: Specify how share value will be determined, whether fixed, formula-based, or by expert valuation.

Procedural Requirements: Outline clear steps for exercising the option, completing the transfer, and effecting payment.

Alignment with Shareholders’ Agreements: Ensure consistency with other provisions to avoid conflicts or ambiguities.

Conclusion

Put and call options are indispensable elements of modern shareholders’ agreements, offering shareholders the ability to manage their investments with certainty and flexibility. Whether facilitating exits or consolidations, these clauses promote fairness and stability in shareholder relationships. Properly tailored and drafted, they are key to achieving a balanced and efficient governance framework.