Many years ago, I failed to take my own advice to protect my business and myself by having a cross option agreement sometimes called a double option agreement and my partner and I failed to take out policies on each other to cover death or incapacity. 
It’s relatively simple in the sense that if your co-shareholder or partner whether in a limited liability company, a limited liability partnership or partnership dies, then that person’s share passes under their estate to a spouse, friend or other person who benefits under their Will or intestacy. That means that as the continuing shareholder you will find yourself in business with someone you don’t know or if you do, knows little or nothing about the business.
To deal with this you need a cross option agreement and it’s in that format to save HMRC arguing that it’s a sale and purchase agreement and collecting tax.
Under the double option agreement, the continuing shareholder has the right to exercise a Call Option, that is for them to buy the shares. The estate of the deceased shareholder has the right to exercise a Put Option, that is to require the continuing shareholder to buy their shares.
Each of you take out and hold on trust for the other an insurance policy only to be used to buy shares if your co-shareholder/partner dies or loses capacity. Losing capacity, unless the parties agree, needs to be judged by an independent specialist experience in assessing capacity under the Mental Capacity Act 2005. Under this structure in the event of death or critical illness, the continuing shareholder becomes the buyer by exercising the Call Option or the estate can require the continuing share holder to buy the shares by exercising the Put Option.
The net result is that the deceased shareholder’s estate ends up with the money for the shares and the continuing shareholder continues to have control of the company by holding their share and the shares of the deceased shareholder.
Initially there should be a valuation of the shares at the date the cross option agreement is entered into and as time goes on the value of the shares may go up or down in which case the insurance policy gets adjusted. If the price of the shares cannot be agreed, then the valuation is carried out by the accountants who will have in the cross option agreement a defined basis for the valuation.
To avoid the difficulties that can occur, it’s worth going through the complexities of a double option agreement with insurance policies held in trust for each other to cover the contingency of death or loss of capacity.
We have the knowledge and ability to create the cross option agreement and we can introduce independent financial advisers to find a suitable policy at the best available premium.
Lynne Brooke
The Brooke Consultancy
Winter 2021