A call option gives the option holder the right to acquire shares. The option holder is not obliged to purchase the shares – they merely have the right or option to do so. There are two different types of call options that one might consider when entering into a call option agreement as set out in the table below.
| Type of Share | Grantor | Rights Conferred |
|---|---|---|
| Option to subscribe for shares | Company | Right to subscribe for new shares |
| Option to purchase shares | Existing shareholder | Right to subscribe for existing shares |
The documents for each type of call option differs slightly. We discuss these general differences below.
What are the Key Differences in the Option Agreements?
One key difference between the option agreements is the parties to the agreement. For a call option to subscribe for shares, the company must be the grantor of the option because only the company can issue shares. For a call option to purchase shares, the grantor of the option is an existing shareholder. Sometimes, the company is also required as a party to the agreement. This can provide the option holder additional comfort knowing that the business is aware of the arrangement and will ensure a smooth transfer of shares when the option holder exercises their option as well as at the completion of the transfer.
Another key difference between the two types of call option arrangements are the documents that may be required to be delivered at completion following the exercise of the call option.
| Type of Share | On the Date of Completion | Documents Company Issues |
|---|---|---|
| Option to subscribe for shares | Option holder issued with new shares in the company | Company issues new share certificates to the option holder and updates shareholders’ register |
| Option to purchase shares | Existing shareholder delivers option holder duly executed transfers in registrable form for the options | Company updates shareholders’ register, cancels grantor’s old share certificates and issues new share certificates |
Does ASIC Need to be Notified?
Proprietary companies do not need to notify ASIC when parties enter into a call option agreement. However, parties will need to notify ASIC after the call option is exercised and the completion of the share issuance or share transfer has occurred.
What Type of Ancillary Documentation is Required?
For a call option to subscribe for shares, the company is required to register the call option in an option holder register. The company is required to set up and maintain the register under section 170 of the Corporations Act 2001 (Cth).
For both types of call options, the option holder should review the company’s documents (including company constitution and the shareholders agreement) to determine what type of approvals or waiver of pre-emptive rights are required for the performance of the call option agreement.
The shareholders agreement (if one exists) will most likely require that the option holder delivers a duly executed copy of the deed of accession upon completion of the issuance or transfer of shares.
Continue reading this article below the formKey Takeaways
The process to transfer option shares differs depending on whether you are subscribing to or purchasing the shares – so it’s important to get this right. If you are unsure of your rights, you should first consult the call option agreement as well as the shareholders agreement and company constitution.
Questions? Get in touch with our commercial lawyers on 1300 544 755.
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