1. Main features and interests
The purpose of a put option is to grant its beneficiary with a right to sell securities (generally, shares of a company) in accordance with predetermined conditions. The other party to such an agreement, i.e. the buyer takes the engagement by advance to purchase the securities upon exercise of the option by the beneficiary. The interest of put options is to facilitate the sale of their participation in a company at a secured price. A put option provides a safety net for a potential seller by guaranteeing a determined or determinable exercise price on a certain period.
On the other hand, a call option agreement grants its beneficiary with the right to purchase securities at predetermined conditions. The other party i.e. the seller takes the engagement in advance to sell the securities upon exercise of the option by the beneficiary. Call options can be used as a guarantee. It may also be an interesting tool in the context of the issuance of shares to employees as an incentive measure, as it allows to “call” back such shares in the case where the employees resign. It can also be used in joint ventures as a method to resolve deadlock situations: the beneficiary of an enforceable call right against another dissenting shareholder may exercise it to acquire its shares in order to get a sufficient majority to unlock a situation.
2. Key issues in practice
Even if call and put options are practical tools, their implementation may raise some issues. Below is an overview of key questions in practice and some tips to avoid the main pitfalls.
Transferability of the shares subject to the option
The exercise of a put or call option always involves a transfer of shares. Therefore, it is advised, before to conclude an option agreement, to address the conditions applicable in order to validly transfer such shares e.g. existence of transfer restrictions (pre-emption rights, …) or particular applicable formalism (prior approval process, …).
Representations & warranties
A particular attention should be paid to the wording of the representations & warranties which should include (among others) the authority and capacity to sell the option shares, the absence of any encumbrance and the warranty that they are fully paid-up.
Conditions of the exercise of the option
It is possible to provide that options are exercisable subject to the occurrence of a specific event or condition. In such a case, it should be specified accurately the scope and the deadline to fulfil each condition, the party responsible and the consequences in case of failure.
To minimize the risk of dispute, the possibility to exercise partially or not the rights (e.g. on a portion of the option shares only) or the possibility of an early exercise should also be addressed.
In case of crossed option rights, it is common practice to provide that the put option right may be first exercisable by the minority shareholder; if it is not, then the majority shareholder will have the right in turn to exercise its call option.
Price of the exercise of the option
The price of exercise of the option may either be fixed or determinable in advance in accordance with a pre-agreed formula. In the latter situation, disputes between parties may arise in case of disagreement on the final calculation of the price.
To avoid it, the method of calculation of the final option price should be provided as precisely as possible. If the parties cannot find common ground, the appointment of an expert may be necessary in order to settle the matter. It could thus be helpful to provide for a specific clause in order to outline the appointment process of the expert in case of disagreement (e.g. the expert must be an independent third party with certain qualifications; and/or the candidate has to be proposed by one of the parties and approved by the other one). An independent expert may also be directly named.
The Luxembourg case law, based on the prevailing French case law, considers that the remedy to a breach of an undertaking to do is damages only i.e. it cannot in principle be subject to specific performance.
This being said, the French Supreme Court has also expressly validated the principle of specific performance clauses in option agreements.
Thus, if expressly mentioned in the option agreement, it is likely that a Luxembourg court would grant the specific performance in case of breach of its undertakings by the debtor.
It could also be considered whether a forfeiture clause could be useful, in order to grant the potentially aggrieved party with the payment of a fixed amount. As opposed to a penalty clause, a forfeiture clause cannot (in principle) be reduced by a Court. The difference between these clauses is that for the first one, the debtor committed a breach of its obligation; for the second one, the debtor is buying its liberty to get out of its contractual obligations.
As a final general remark, the replication of the put / call options provisions (if not confidential) in the articles of association (publicly available) may enhance their enforceability toward third parties. For the same purpose, we also recommend mentioning the existence of the put or call option directly in the company’s share register.