Put Option Vs Call Option Shareholders Agreement

Section 194 of the Companies Act 2013 is an evolution designed to help institutional investors such as private equity firms get out of the business. However, this section does not prohibit the director from being the author of the call or sell option. As a result, this manager may purchase a number of shares at a later date. Since the options for sale and appeal impose obligations on the parties without their consent, the triggers for these clauses must be developed with great care. A price mechanism must also be included in the shareholders` pact with an agreed minimum price for this clause. The put option may be subject to additional conditions as negotiated and agreed between the parties. Some sale-to-purchase agreements include a “sell-off option” that is used to create a market for shareholders by allowing a shareholder to submit his shares to the company at any time. This option is to create a shareholder market and available liquidity that would otherwise not be available in many nearby companies. A put option is most often requested by a financial investor as a way to withdraw from the investment in the event of a specific trigger event.

Investors may also require that this provision be protected from reputational risks when the company`s activities are controversial, or to avoid commitments under money laundering legislation, etc. The method used to determine the purchase price for the exercise of the put option will be the subject of important negotiations. It is important to consider the judgment in the case of Shakthi Nath – Others vs Alpha Tiger Cyprus Investment Ltd – Others [8], in which certain investment companies granted a put option in the exercise of the shareholder contract if the following conditions were not met by the “long-standing reference”. The exit price was set at the amount invested, plus an after-tax IRR up to 19% of the amount invested. The H.C found that, in the duty, the respondents did not want to impose the put option, but were seeking damages for breach. The petitioners were therefore bound by the contractual terms they entered into and the arbitrator`s award was upheld. A put option has become a popular exit option in business practice and has resulted in the put option clause in the shareholders` pact and the share subscription agreement. This right of sale is not conferred by law on the shareholder, but by the creation of a contractual agreement between the parties.

Therefore, if no option to sell is provided, the investor or shareholder cannot exercise this right of sale. Put Options on shares of a private company is legal when granted to an Indian investor. If the investor is a foreigner or an NRI, then the minimum warranty of the exit price is at odds with the RBI guidelines. The legality of the clause can only be questioned by the fact that a contract allowing the investor to sell the shares to the developer at a later fixed counterparty is equivalent to a futures contract prohibited by the Securities Regulation Act of 1956. The call option therefore gives the buyer a level of security, since he has the right to acquire the seller`s shares at a pre-agreed price during the agreed limited period. “Sell options” such as “call options” are often used in U.S. shareholder contracts. As you know from reading our other articles, a shareholder pact defines the rights and obligations of shareholders and defines how the corporation is governed.