Shareholders Agreement Put Option Clause

The mechanism of Russian roulette works as follows; If a participant in the impasse offers to sell its shares at a price it sets, the target recipient has the choice to accept that offer or sell its shares at that price. This mechanism leads to offering a fair price because the seller does not know if he will be the seller or the buyer. Again, the valuation of the shares, the terms of payment, etc. would be set out in the terms of the agreement. The article discusses what a put option is in a shareholders` agreement and how to draft this important part of the shareholders` agreement. Some caveats: When drafting the option clause, there are some important things to consider. B for example the specific amount or percentage of shares subject to put or call options. Questions such as – Whether the right can also be exercised for the benefit of third parties or not? How are these options exercised? –should receive a clear answer. Above all, the current legal situation in this area should be borne in mind.

When deciding which impasse mechanisms are required in a particular shareholders` agreement, it is important to consider the structure of the company and the dynamics of the shareholding. Almost all deadlock clauses can be manipulated by a shareholder with much greater financial resources than the remaining shareholders. It is therefore important to take into account the relative power dynamic between shareholders when drafting an impasse clause. If a shareholder feels that they can no longer be part of the company, what are the opportunities? How can the shareholder liquidate his position in the company while preserving the underlying family relationship? Although the sale of shares to a third party is theoretically an option, in reality there is no market for shares in private family businesses, and even if such a market existed, restrictions on the transfer of shares would likely prevent a sale to third parties. While some put options may be offered to shareholders at any time, this right to offer may be limited to the period following the end of a shareholder`s employment relationship through retirement, resignation or disability, so it will not be available until a shareholder withdraws from an active role in the company. A call option allows one shareholder to force another to sell their shares in certain circumstances. This is useful for large shareholders who want to acquire the shares of a minority shareholder who is causing a stalemate. Most disputes are eventually settled amicably.

However, there will be times when a dispute over an important issue cannot be resolved informally and the survival of the family business may be threatened. It can be difficult for family members to discuss planning issues related to the collapse of the business, but it must be remembered that it is precisely this reluctance to deal with problems that poses the greatest risk. Family members should plan a clear strategy for conflict resolution. The most useful tool is a well-prepared shareholders` agreement. By forcing family members to resolve issues before going into business, the actual process of preparing a shareholders` agreement can help avoid future conflicts. To foster effective communication and collaboration, family members may even seek the help of a mediator at this stage. A put option clause is a right, but not an obligation, to sell the shares at a specific price upon the occurrence of the specified event. For example, if A has placed an option on say 28% of his shares in the company that he can exercise if the company becomes insolvent.

In this case, he can sell his shares to „B“, now B cannot refuse to buy shares of A. Another example would be to say that „A“ and „B“ are two shareholders of a joint venture. B has set an essential default value. Now, A has two options: – If you are faced with a dead end, the simplest solution may be to liquidate the company. This clause can encourage shareholders to break the deadlock, as a fire sale may not result in the sale of the business for what it is worth. As a result, shareholders may be incentivized to break the deadlock or sell their shares, as this would put them in a better financial position. .