Put-Call Buy-Out Transaction

Contact Neufeld Legal PC for corporate transactional and legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

A put-call buyout is a common form of buy-sell arrangement contained in a unanimous shareholders agreement or partnership agreement, which relies upon an actual valuation of the business, and is capable of resolving deadlocks and facilitating the separation between business partners / shareholders. It enables the initiating party to force the procedure set out in the shareholders agreement, which will either enable them to purchase the other side's shares / partnership interest, or require the other side to purchase their shares / partnership interests, based on the pricing methodology set out in the unanimous shareholders agreement / partnership agreement.

Call Option

A call option gives the holder (typically the buyer or a new investor) the right to call for or require the seller (the current shareholder) to sell their shares at a predetermined price, known as the "strike price," within a specified time frame.

Purpose and Common Use Cases:

• Staged Acquisitions: A buyer might acquire a portion of a company now and use a call option to acquire the remaining shares at a later date, often based on the company meeting certain performance milestones. This allows the buyer to manage risk and ensures the seller remains motivated to help the business succeed.

• Controlling Future Ownership: A call option can be used to ensure a buyer can gain full control of a company in the future.

• Forced Departure: In a shareholders' agreement, a call option might be triggered if a shareholder-employee is terminated for certain transgressions (e.g., misconduct or breach of contract), which serves to protect the business that shareholder's bad actions. This allows the company or other shareholders to buy back their shares, often at a discounted price.

• Emergency Funding: A company might grant a call option to an investor to acquire shares on preferential terms if the company needs a quick injection of capital.

Put Option

A put option gives the holder (typically the seller or a minority shareholder) the right to put or force the buyer (or the company) to buy their shares at a predetermined strike price within a specified time frame.

Purpose and Common Use Cases:

• Guaranteed Exit Strategy: A put option is a crucial tool for a seller who wants to ensure they have a way to sell their remaining shares and exit the company at a future date. This is common when a business founder sells a portion of their company but stays on for a transition period.

• Minority Shareholder Protection: A put option can protect a minority shareholder by giving them an exit route if certain events occur, such as a change in business direction they didn't agree to, a dispute with other shareholders, or if the company doesn't meet specific performance targets.

• Necessitated Departure: A put option may exist where there is a necessitated departure (e.g., retirement or death) to ensure the departing shareholder or their family can sell their shares for a fair price.

• Investor Exit: Venture capital or private equity investors often negotiate a put option to ensure a liquidity event after a certain period of time, guaranteeing a return on their investment.

Key Elements of Put and Call Options

The provisions for put and call options are carefully drafted and typically include the following key details:

• The Target: The shares or partnership interest that is capable of being bought or sold by exercising the put or call option.

• Triggering Event: The specific conditions that must be met for the option to be exercised (e.g., a certain date, a performance metric, a change in control, or a shareholder's departure).

• Price Determination: The formula or mechanism for determining the price at which the shares will be bought or sold. This can be a fixed price, a formula based on the company's performance, or a value determined by an independent expert.

• Premium / Discount: Once the price of the shares / partnership interest has been determined, it may be increased by a premium to account for that party having to sell their interest, or a discount to account for the other parties (company) being forced to acquire that interest.

• Exercise Period: The defined window of time during which the option can be exercised.

• Exercise Procedure: A clear outline of the steps required to exercise the option, including notice periods and payment terms.

• Conditions Precedent: Any conditions that must be satisfied before the option can be exercised, such as regulatory approvals or due diligence completion.

When it comes to the legal component of corporate mergers & acquisitions, that is when the law firm of Neufeld Legal P.C. comes into play. Such that when your company is seeking knowledgeable and experienced legal representation in orchestrating and completing business mergers, acquisitions and divestitures, contact us at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.