Put and call options - how they are used in corporate transactions

What are put and call options?

Put and call options are financial contracts that grant the buyer the right, but not the obligation, to buy (call) or sell (put) an underlying asset at a predetermined price (strike price) on or before a specific date (expiration date). In the context of corporate transactions, the underlying asset is often shares in a company.

Use in corporate transactions

Put and call options are versatile tools used in various corporate transactions :-

• Exit strategies - to facilitate a smooth exit for investors or founders by providing a mechanism for selling their shares at a predetermined price and time.

• Acquisitions and mergers - to structure deals where the acquisition is conditional upon certain events, such as regulatory approvals or financial performance milestones.

• Joint ventures and partnerships - to manage the potential for a future sale or transfer of ownership interests.

Why use put and call options?

• Flexibility - in structuring deals and allow parties to lock in a price and timing for future transactions.

• Risk management - they can be used to mitigate risks associated with market fluctuations or changes in a company's performance.

• Tax planning - they can be structured to optimize tax consequences for both the buyer and seller.

Key considerations for a put and call option agreement

• Underlying asset - precisely define the shares subject to the option.

• Strike price - determine the price at which the shares can be bought or sold.

• Expiration date - the date on which the option expires.

• Exercise procedure - outline the steps required to exercise the option, including notice periods and payment terms.

• Conditions precedent - include any conditions that must be met before the option can be exercised.

• Representations and warranties - include relevant representations and warranties about the company and its financial condition.

Pitfalls and complications

• Valuation - determining the fair market value of the underlying shares can be complex and contentious, especially for privately held companies.|T

• Tax implications - understanding the tax consequences of exercising the option is crucial.

• Contractual issues - drafting a comprehensive and enforceable agreement is essential.

Legal work involved

Put and call options may be included as part of a share sale agreement in an M & A transaction or a Joint Venture Agreement. In other situations, you may need a specific and separate put and call agreement. We draft, advise on and review put and call options and our experience means we know our way around wat's needed, which also saves clients time and money.