How do Call Option Deeds Work?
A Call Option Deed – also referred to as a “Call Option Agreement” – is a legally binding agreement conferring the right of the grantee (also referred to as the ‘option holder’) to buy shares in a company. The option will usually dictate that a certain amount of shares can be purchased at a predetermined amount. The grantee has the right to exercise the option within a specified period, however has no obligation to do so and may let the option lapse. A call option may be granted by a company for the issue of new shares or for the transfer of shares from an existing shareholder.
What’s included in an Option Deed?
- The Parties to the Agreement – A grantee (Option Holder) and Grantor (the company or existing shareholder). The grantee may be a corporate entity or an individual.
- Option Fee – An amount paid for the call option itself. This is often nominal and whether such a fee is included depends on the nature of the commercial agreement.
- Price and Amount of Shares – Setting the price payable if the option is exercised and the exact number of shares purchasable. The agreement might also specify that the grantee purchase all the available shares or allow the option to purchase a portion of the shares available.
- Conditions to Exercise – The option might contain conditions that must be fulfilled before an option is exercised. These are usually set by the grantor and may prevent the option from being exercised for a set amount of time or requiring the grantee to satisfy a specific condition.
- Expiry Date – The date which the option must be exercised by.
Benefits of an Option Deed?
Call Option deeds are a great way to incentivise the purchase of a company’s shares, to attract new investors or to reward employees or loyal investors. Options are usually set at below market price, meaning that purchasing an option often has the potential to earn a profit even with the option fee. Employee stock options are usually provided without a fee, but might have waiting periods to encourage employees to remain with the company.
To Sum Up
Call Option Deeds have a wide variety of benefits and uses. It is important to speak to a lawyer before drafting an option agreement as a number of legal issues need to be considered.
If you have any further questions about option deeds or need assistance drafting an option deed, get in touch with our commercial lawyers. You can call us on 1300 337 997, or fill in the contact form on this page.