The problem it addresses
When a shareholder dies, their shares generally pass under their will. The surviving owners may then find themselves in business with a beneficiary who has no interest in running the company — and no funds to buy them out.
The beneficiary, meanwhile, may hold a valuable but unsellable asset.
How the arrangement usually works
Each shareholder is insured for the value of their holding, and a cross-option agreement gives both sides an option to require a sale and purchase on agreed terms.
Without that agreement, the money may arrive with no obligation on either side, which is not the outcome anybody planned for.
- Agree a valuation method in advance
- Check the company articles do not conflict
- Review whenever ownership, value or borrowing changes
Where to start
An enquiry usually begins with a simple question: if one of you were not here next month, what would happen to the shares? The answer normally makes the next steps obvious.
Sources and further reading