Eternity Law International News Features of options

Features of options

February 19, 2019

In this article we will tell you about the peculiarities of the work of contractual structures, namely, options. Among entrepreneurs and investors, the term “option” is very well known.

It is considered a separate treaty structure in many countries. It does not cover the securities markets in which options are financial instruments.

In this article, they will be presented as a legal toolkit. Thanks to him, there is a settlement of relations between entrepreneurs in their business environment.

An option is an agreement through which, without litigation, but with the participation of a lawyer, a redistribution of shares in a business is made. In fact, this is a mechanism for resolving disputes between the founders of one company or with investors.

Also, thanks to the option programs, employees are motivated to stay in positions to avoid the outflow of valuable personnel from the company. Large companies make their employees option holders.

Not all business partners have switched to using options to structure relationships among themselves.

To enter the option among entrepreneurs, one can consider:

  1. poor awareness of business participants about the possibilities of using options;
  2. no need for business partners to use them;
  3. the conservatism of the participants, which entails a reluctance to use a little-known legal instrument.

Here we will get acquainted with the structure of the option. We will talk about the possible difficulties that may arise when using it. Let’s try to explain everything in words that are understandable to an ordinary entrepreneur. So that after reading the article, there is no feeling of publishing a scientific document.

In the process of working with options, we made several conclusions that will be presented here.

Conclusion 1

When a company wants to offer a leading specialist of a team working on a separate project a share if he or the entire project reaches a certain KPI value, then a problem arises with drawing up an option agreement.

According to its structure, the specialist will not be able to confirm the fulfillment of the requirements of any of the parties to the agreement without confirming the option agreement itself.

This is not consistent with the procedure prescribed by law for limited liability companies (LLC).

In this case, the notary, within the limits of the law for a certain period of time prescribed in the contract, from the moment of confirmation of the agreement on the alienation of the project share or acceptance of the irrevocable offer, must personally submit a petition for the changes to be made to the Unified State Register of Legal Entities, which are connected in the transfer of a part to limited liability company.

And in this optional plot there are no answers to the questions:

How can a notary be sure that the person who acquired a stake in an LLC has reached the KPI?

What agreement will be the basis for the application? Because under the terms of the option, the buyer will become the owner of the LLC share only upon receiving the agreed KPI.

Suppose the notary managed in some way to verify the KPI indicator received by the buyer of a part of the company. As a result, the option earned itself as an administrative agreement.

Now the specialist must comply with the law on LLC and in time contact the relevant authorities to write an appeal to make the appropriate change.

What document should he certify in this case, and what data should he submit?

The answer should be that the option agreement is certified if longer terms for filing an application are spelled out here. Also, on the basis of the law on companies, he must submit such an application without taking into account other circumstances. It shows that there is no need to clarify the achieved KPIs by the buyer of a part.

From this we get that in any case, the specialist must file an appeal for the alienation of a part, which denies the nature of the option structure.

Conclusion 2

In order to achieve the goals, which are the transfer of a part in a specific project to the leading employee of the team, when he is obliged to obtain certain results, the following structure of an agreement on the granting of an option to enter into a contract is perfectly suitable.

In practice, this design is implemented in this way.

  1. Both parties draw up a preliminary draft of the contract, which specifies the terms of the option, in what ways it will be possible to confirm the fulfillment of these conditions, what responsibility the parties bear and other points.
  2. The notary is obliged to check the draft agreement, explain to each of the parties their rights and obligations under this agreement, discuss all the points with them and make final changes.
  3. Further, the parties sign the drawn up agreement, having understood all the points and obligations.
  4. The notary certifies this agreement on his part.
  5. Both parties receive their own copy of the contract.
  6. The notary also receives a sample of the agreement, which he certified.

When the conditions specified in the option occur, the acquirer calls up the notary to clarify the list of documents required to confirm the occurrence of these conditions, collects the documents listed by him and applies to any notary to obtain an acceptance (here we mean the document that the acquirer of the option agrees to receive the share specified in the contract);

Such an acceptance of the person who purchased the option is certified by a specialist, and within two working days he is obliged to personally notify the other party to the agreement about this. In addition, on the indicated days, he submits an application to the inspectorate that the share in the authorized capital (or in a specific project) of the LLC is transferred to the acquirer of the option.

There is no need to prepare and submit other documents and papers to carry out such a procedure.

Within the period specified by law from the moment the notary submits an application for a change in the ownership of the company’s shares, the tax service must make all the changes specified in it; from that moment on, the leading member of the project group becomes its full-fledged owner.

Conclusion 3
An option must clearly state the methods by which it will be allowed to obtain confirmation of the occurrence of contractual conditions. As a result of that the recipient of the option will have the right to become the owner of the share.

This must be done so that the notary is not fooled or gets into an unpleasant situation due to the fact that he cannot confirm the achieved results necessary to fulfill the terms of the contract. Confirmation methods should be as accessible as possible to obtain and implement the necessary information.

Conclusion 4
In order to interest a specialist in purchasing an option, the contract must provide opportunities to implement the fulfillment of its conditions. Providing guarantees that the acquirer of the option will be able to fulfill the conditions specified in it and will reflect his interests.

There are cases in which a company’s corporate agreement contains conditions that deny the terms of an option. For example, when there is a ban on the alienation of a part of the project by one of the owners without the permission of its other co-owners.

Or the part offered for receipt under the option agreement is pledged and in the future may be sold to a third party (the holder of the pledge) in the priority right queue.

When a participant is given the opportunity to acquire a part in possession through the sale and purchase, which was intended to exercise the option. Then there is a risk of violation of the right of advantage to purchase this part by other participants in the shares in this company.

Conclusion 5
To take into account the interests of both parties to the transaction, the option agreement must contain conditions that indicate legal liability in addition to the existing ones. They are prescribed for each side when certain cases occur.

Such situations may be falsification of evidence or counter-evidence of the occurrence of the conditions prescribed in the option by one of the parties to the agreement, or violation of other contractual conditions.

As a result, after completing the execution of the option in practice, the partner got into his team the most motivated, loyal and motivated leading team member, while saving significant funds, because its cost in the labor market is almost twice as high.

The applicant for the minimum market salary for work in the project was given the opportunity to become the owner of a share in a developing company. Both were pleased.

Thus, a novice businessman gets a lot of benefits from the option. Here he will be an effective tool for building and organizing relationships with the leading members of the team involved in the project, and will also significantly save money.

It is used to eliminate legal risks for both a businessman and his investor when making an investment.

Lawyers also consider options to be a complex and incomprehensible phenomenon. But you should not be afraid of the new opportunities that have opened up with options. To avoid problems and mistakes, contact only experienced lawyers with high qualifications in the field of contracts and corporate law.

If you need help preparing an option, please contact our specialist and get a full consultation.

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