EXIT STRATEGIES FOR SHAREHOLDERS PT 4 - PUTS AND CALLS

What's a Put and who do I Call?

By Delzad Kutky

Put and call options are different types of transactions where a shareholder can force the sale of the shares they hold in a corporation or where the shareholder may be forced to sell their shares.

At a high level, put options are a contractual device that gives a shareholder the right to sell (or put) the shares they hold in a corporation to that corporation on certain terms and conditions. On the other hand, call options are a contractual device that gives a corporation the right to buy (or call) its own shares back from a shareholder on certain terms and conditions.

Put another way (pun intended) put options are generally for the benefit of the shareholder, giving them the right to sell their shares back to a corporation and end their involvement with a corporation. Conversely, call options are generally for the benefit of the corporation, giving it the right to buy back shares from a shareholder.

What to watch for in option agreements

First and foremost, we need to know if there are any rights or restrictions tied to the shares that address retraction or redemption rights separately from any agreement you prepare. Overlooking a review of the articles of incorporation of the corporation can make all of the work done to get an option agreement prepared fruitless.

Beyond that, well-drafted put option agreements and call option agreements should cover how the purchase price for the shares will be determined, whether there are any deadlines or timelines for exercising the put or call option, and a detailed procedure for how the option will be exercised and how the transaction will proceed.

Shareholders receiving put options from a corporation or granting call options to a corporation as an exit strategy should have a strong understanding of how the purchase price for their shares will be determined. It may be a fixed price, or it may be “fair market value”, which sounds fair (the word is in the phrase, after all), but a method for determining fair market value should also be present in the agreement to make sure everyone is on the same page. Disagreements on how to determine fair market value can waste valuable time and money to resolve.

Similarly, option agreements often have specific time restrictions on the exercise of those rights or restrictions on how many shares can or must be part of the transaction. Shareholders may not want to give a corporation the option to force a redemption of shares immediately after they’ve been acquired, and corporations may not want to give shareholders the option to force a retraction of shares for a few years to keep the use of the shareholders’ capital available.

Like other exit strategies we’ve looked at in this series, having a detailed procedure in your agreement (whether it’s a put option agreement, a share option agreement, or a shareholders’ agreement) for how the transaction will commence and conclude is very important. If there’s a disagreement as to whether a party exercised their right properly, how the purchase price will be paid, or what documents will be exchanged, a dispute may arise. Unfortunately, the time and money required to address disputes can negate a lot of the benefit of exercising an option altogether, so it’s always best to have a carefully drafted agreement in place ahead of time.

Where to call to put this in plainer terms

Put and call options can be a useful tool for ending a shareholder’s involvement with a corporation or pre-determined terms. However, it can be complicated to understand exactly what rights or obligations you may have with these options, and even more complicated to carry out the transaction.

The experienced corporate lawyers at SorbaraLAW are ready to assist with deciding what exit strategy works best for you, as well as the negotiation, drafting, and carrying out of exit strategy plans.