Cross Option Agreement: Explained for PLCs

When it comes to business, it`s important to put in place agreements to protect the interests of all parties involved. A cross option agreement (COA) is one such agreement that can be used by private limited companies (PLCs) to secure the future of the business in the event that one of the shareholders passes away or becomes incapacitated.

What is a cross option agreement?

A cross option agreement is a legal document that is entered into by the shareholders of a company. It allows the remaining shareholders to purchase the shares of the deceased shareholder or the shareholder who becomes incapacitated. The agreement is triggered by a specific event, which is outlined in the agreement. This event can be the death, critical illness, or incapacity of the shareholder.

How does a cross option agreement work?

When a shareholder passes away or becomes incapacitated, their shares in the company will pass on to their beneficiaries or heirs. However, if a COA is in place, the remaining shareholders will have the option to buy those shares at an agreed price. This means that the deceased shareholder`s shares will remain within the company and will not be sold to an unknown third party.

The agreement will typically contain provisions setting out the mechanics of the option, including the notice period, the valuation mechanism, and payment terms. It is important for all parties to understand the agreement and the specific terms and conditions before signing.

Why is a cross option agreement important for PLCs?

A COA is particularly important for PLCs as it allows the remaining shareholders to retain control of the company in the event of the death or incapacity of a shareholder. It also provides a pre-agreed valuation mechanism, which can help prevent disputes between shareholders and ensure that the remaining shareholders are not overpaying for the shares.

It is important to note that a cross option agreement is not the same as a shareholders` agreement. A shareholders` agreement sets out the rights and obligations of the shareholders in relation to the company, whereas a COA is focused on the sale of shares in a specific event.

In conclusion, a cross option agreement is an essential tool for PLCs to protect their interests and ensure the smooth running of the business in the event of a shareholder`s death or incapacity. It`s important for all parties involved to consider the benefits of such agreements and seek legal advice when drafting and entering into them.