What happens upon the death of a shareholder? Cross-option agreements

Usually the spouse will inherit the deceased’s shares, making them a shareholder in the company. The spouse may never have had any involvement in the company prior to their partner’s death. This can create a problem for the company and the spouse alike, as responsibilities may be placed upon the spouse such as voting rights and access to company bank accounts.

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How it works

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One option that may be used to avoid this scenario is a cross-option agreement. A cross-option agreement can be entered into by the shareholders of a private limited company. Under this form of agreement each shareholder grants to other shareholders in the company, “put and call” options over their shares, which are exercisable upon death. The effect of the put and call options is as follows:

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Put options – family members and personal representatives of the deceased shareholder can require the Company to purchase all of the shares held by the deceased shareholder. This is only exercisable if the call option has not already been exercised in regards to the relevant shares.

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Call options – the Company is entitled to buy all the shares that the deceased shareholder held.

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Who enters into the agreement

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All shareholders in the company will enter into the agreement, under which each shareholder is also required to take out a life insurance policy, written in trust for the other shareholders of the Company. In the event that a shareholder should die, the cross-option agreement gives the remaining shareholders of the Company the right to purchase the deceased shareholders shares, with the purchase price being funded by the life insurance policy.

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A cross-option agreement will usually be entered into to help shareholders maintain continuity of ownership. However, one potential issue with cross-option agreements is that they rarely make provision for all shareholders dying simultaneously. In this event there would be nobody to exercise the call option or put option.