What is a share option?
A share option can mean a number of different things:
- an option to buy or sell shares between a buyer and a seller
- an option granted by a company, often in favour of an employee, to acquire shares in the company to incentivise and reward performance (an “employee share option”)
An option is a legal right for one party (or possibly both parties) to exercise in the future, depending on the satisfaction of any specified conditions. If the option holder elects to exercise the option, the transaction which is the subject-matter of the option will then be completed. In the case of an option to buy shares, should the buyer choose to exercise the option, the sale and purchase of the shares will then take place.
This sub-section of documents contains template documents for the purchase or sale of shares. where the parties have agreed to structure their transaction as an option which, if exercised, would lead to the sale and purchase of the shares in the future.
What is a put option and what is a call option?
A put option is a right of a seller – the holder of shares has the option to require (if the holder exercises the put option) that a third party purchases those shares. The seller is the optionholder in this case.
A call option is a right of a buyer – the buyer has the option to require (if the buyer exercises the call option) that a holder of shares sells those shares to the buyer. The buyer is the optionholder in this case.
Option transactions can be structured either as a put option, a call option or both a put and a call option. This will depend on the commercial terms which the parties negotiate. If the transaction is a put and a call option, both the seller and the buyer can exercise the option at the times (and subject to any conditions) specified in the agreement.
What are the main feature of a put or a call option?
The main features of a put or a call option are:
- option shares: identifying the shares which are the subject of the option
- option period: the period (the option window) during which the option may be exercised
- option conditions: including any pre-conditions which must be satisfied before ethe option can be exercised
- option price: specifying the price to be paid by the buyer of the shares. The price could be a fixed amount or an amount to be calculated in accordance with a formula, for example based on the multiple of the profits of the relevant company
- option exercise and completion: the process for the exercise of the option and the subsequent sale and purchase of the option shares
- warranties and undertakings from the seller with regard to the option shares