Cross Option

A cross-option agreement is an agreement between the shareholders of a company, that gives the surviving shareholder(s) an option to buy back the shares of a terminally ill or deceased shareholder, and the personal representatives of the deceased the option to sell the shares.

The shares in question are paid for by an insurance policy that pays out upon the death or terminal illness (depending upon the terms of the policy) of a shareholder. 

A Cross- Option Agreement allows the surviving shareholders to retain control of the company, and the personal representatives of the deceased to sell the shares at full value. 

A Cross- Option Agreement is similar to a Shareholders Agreement in that it sets option to sell and purchase shares, as most Shareholders Agreements do, however with a Cross Option Agreement the parties have the security of knowing that the remaining shareholders have the funds to purchase the shares. 

Typically, a life insurance policy is taken out on the life of each shareholder, with the other shareholders named as beneficiaries. The insurance payout is used by the surviving shareholders to buy the deceased’s/terminally ill shareholders shares. The Cross – Option agreement specifies the mechanics of this process, including how the shares are valued. Once one party exercises their option, the other party is legally obligated to comply.