Call Option Agreement
This month the call option agreement has been updated to refresh and modernise it and to align it with the drafting of the put option agreement newly introduced to the share option agreements portfolio last month.
These two agreements form both sides of the option process where a shareholder in a company can require another shareholder to either purchase their shares (put) or sell their shares to them (call).
A call option is where an existing shareholder (the grantee) in a private limited company is granted the option to purchase (or “call”) for the shares of another shareholder (the grantor) for a specific price and within a specific time period. If the option is exercised, the grantee purchases the shares in accordance with the terms of the agreement.
Parties may wish to enter into a call option if for example the parties agree that one party should be able to participate more fully in a possible sale of the company or other reorganisation and so will have the option to “call” for additional shares, with a requirement that if the option is exercised, the grantor is obliged to sell the shares. A call option can also be useful following a company’s incorporation if shareholdings are unequal, to allow one party the option to “call” for additional shares later. The parties may wish to add conditionality to the exercise of the option, this can be included within the template if this is required.
The template also includes a notice of exercise attached as a schedule to the agreement. This notice is the option exercise mechanism.
This template assumes that both parties are individuals; however, this may be changed if one or both parties are corporate entities. The template also assumes that the consideration for the purchase of the shares will be made in cash and that the granting of the option itself will be made for nominal consideration.
The template does not consider the tax and stamp duty implications of the option. HMRC’s website has relevant information and should be considered. Exercising a call option will not of itself attract stamp duty. Stamp duty is payable on stock transfer forms at 0.5% of the value of the consideration for the transfer of the shares. The stock transfer form, as the document that transfers the shares, is the document liable for stamp duty.
The contents of this Newsletter are for reference purposes only and do not constitute legal advice. Independent legal advice should be sought in relation to any specific legal matter.