Business Protection Cross Option Agreements

Instead of an option contract, shareholders may decide to enter into a single option agreement. The reason is that other shareholders, with a cross-option contract, could insist that the seriously ill shareholder sell his shares after a payment in case of critical illness. This could be against the will of the shareholder, who feels he is recovering and returning to the company. Among the elements of an option agreement is the corresponding life insurance policy, which is used to pay for the deceased`s shares and fiduciary activities, which indicates that the proceeds of the policy will be used to finance the acquisition of the deceased`s shares in order to protect the proceeds of the deceased`s estate insurance. No no. In the event of the death of a person holding shares in an unlisted trading company, 100% relief may be available for commercial real estate for IHT purposes, provided that these shares have been held for at least two years. Shares traded on the Alternative Investment Market (AIM) are considered unlisted. Hmrc believes that at the time of death, a binding contract is able to sell the shares through the estate and enter cash. The shareholder has therefore not left a stake in a limited company for its beneficiaries, but a capital package – and the cash is entirely subject to the IHT.

As mentioned above, surviving owners may acquire shares when the owner of a business or another shareholder has entered into a shareholder contract within the company. This process will proceed smoothly, as the purchase price of the shares will be financed by the life insurance underwritten. It may also be held by a trust whose shareholders are beneficiaries. A forced sale of shares could lead to a capital gains tax and possibly future IHT liability for the outgoing shareholder, as they have cash when they die. Otherwise, these actions could have qualified for the relief of commercial real estate IHT. Structuring a cross-option in this way is not, in HMRC`s view, considered a binding sales contract and preserves « Business Relief ». It is considered a « right » to sell/buy and not an « obligation, » which is an important difference. If shareholders cannot afford to buy the shares, the immediate idea, when they do not have a shareholder contract, is to go to a bank for a loan. This is an unlikely means of payment, as they will not trust the stability of the business if an unforeseen circumstance such as death occurs. Before the shareholder contract is concluded, as has already been mentioned, each shareholder should take out life insurance or a critical illness policy.

It is written in a comprehensive trust document that is returned to shareholders in the event of unexpected death or illness. The value of life insurance or critical illness policy should reflect the value of each shareholder`s interest in the business. In addition, in the event of a takeover by the company itself, at the time of the takeover, there must be sufficient distributable reserves in the business (i.e. at the time of the exercise of the option and not at the time of the conclusion of the agreement). A shareholder protection pact solves these problems. If necessary, funds would be available for the death and/or critical illness of a shareholder. The sudden loss of a major shareholder may disrupt a business, but shareholder protection will minimize this disruption of activity. The shareholder or his family will quickly receive the real value of his shares to relieve these anxious periods. The death of a shareholder, who is also a director, can have a great influence on any company, especially if the company has not planned to organize such an event.

This is a particular concern for the owners/managers of small and medium-sized private enterprises, as the death of the shareholder can have many negative consequences for the company.