Call/put option contracts

Within the context of selling and buying equity units or shares in a company, the parties may agree that only part of the capital, not all of it, will be transferred in the first phase. There may be different reasons for this: the parties may agree that (i) the sellers or assignors will remain in the capital for a certain period of time, contributing their know-how in the first transitional years; (ii) the buyers or assignees will not have sufficient financing to buy all the capital; or (iii) the sale or purchase of all the capital will be delayed to a later date for whatever reason they deem appropriate, whereby the parties agree to buy or transfer the remaining capital in the future. In that context, the parties may arrange, in a single act, a call/put option agreement, whose main features are described in this article.

Purpose

The purpose of the agreement is for the assignors to grant a call option right in favour of the assignees so that they can buy the capital, and/or the assignees grant a put option right in favour of the assignors so that they can transfer that capital. It is also common for options to be automatically extended to any new equity units or shares that the assignors may buy (either through a purchase agreement or a capital increase).

Rights associated with options

As a standard policy, the economic and political rights attached to the options will remain with the assignors until the assignees buy the remaining capital.

Conditions for exercising the options

The parties must determine the conditions for exercising the options; the main ones are set out below:

• The term for which the options are in force.
• The period in which the options may be exercised, starting from the occurrence of the exercise condition.
• The trigger event for the option right (e.g. the company must have positive EBITDA for certain consecutive financial years).
• The price for buying the capital, or the way in which it is set.
• The procedure for exercising the call/put option (i.e. from the notification of its exercise by either party until the complete execution of the sale/purchase).

The assignor’s representations and warranties

The assignors usually make the following representations and warranties in favour of the assignees:

• That they own the capital to be transferred.
• That it is free of encumbrances.
• That there are no limits to the transferability, other than those envisaged in the law or in the company’s articles of association, and that, in any case, they have the necessary authorisations for formalising the call/put option and executing the potential contract for the sale/purchase of the capital.

Advantages of formalising the call/put option

The following are some advantages for both parties resulting from formalising this type of agreement:

For the assignees:

• They will control the company and its business, although they will not be 100% exposed to any losses suffered by the company.
• They will maintain the assignors motivated to drive the company’s growth during the first years of the project’s consolidation.
• They will set out a number of conditions, usually subject to the company’s performance, for acquiring all the capital.

For the assignors:

• They will not distance themselves initially from the company, so they will continue adding value to the project.
• As a result, they will be able to maximise the value of the company’s equity units/shares, which will benefit them when exiting the company.

Conclusions

Such agreements can be very beneficial to the parties’ interests. As stated at the start of this article, the parties may be unwilling or unable, at an early stage (but may be able to do so at a later stage), to transfer and/or buy (as the case may be) all the capital of a company.

In this respect, by exercising the call/put option, each party has the legal certainty that, once the exercise condition has been met, it may exercise the options at its discretion, with the other party being required to transfer or buy (as the case may be) the capital.

In such cases, it is essential to seek the advice of a lawyer specialised in M&A who is familiar with these types of agreements since they require specific technical knowledge. If you need to speak to a specialist, please contact us.