Cross Options following merger

Trusts Discussion
1

I have a client with two companies with cross options written into the share holders agreement that specific life assurance proceeds are held on trust for the other shareholders to purchase the shares from his surviving family.

I’m comfortable that this is not a binding contract for BR purposes and the SA trust creation means the life insurance proceeds are outside of the estate.

However, the two companies have now merged and instead of putting a cross option in the holding company agreement, the shareholders agreement for the two companies (which are now subsidiaries) have been amended to say that the individuals are deemed to hold shares in the subs for the purposes of the cross option. This was set up so they didn’t need to take out new insurance policies.

The BR position is unchanged. But I am a bit nervous around the insurance proceeds. They are being held in trust for the other shareholders (presumably deemed as the only shareholder of the subs is the HoldCo) with an option to buy deemed shares (which don’t exist). In reality they will be pooling the two insurance proceeds to buy HoldCo shares. I haven’t seen this before so my nervousness is around:

  1. This assumes the value of holdco equates directly to the value of the two subs separately. It may well but anything in HoldCo separate to the two subs may affect this.

  2. Does this give any opening for HMRC to argue the trust is not valid as it refers to company shares and other shareholders which are deemed rather than the actual shareholders. If the trust is not valid the life insurance proceeds would be in his estate.

I could very well be overthinking this!

2

Hello,

Id suggest there isnt an issue, the trust and option agreement is not a concern for HMRC, the only rule is “no binding agreement”.

The machanics of the trusts and agreements are governed by trust law and this case - contract law.

It would be advantageous to write a new cross option agreement making clear how the life insurance etc would operate.

A final thought is to revew, carefully the trusts and wording and the set up.

  1. The life cover is taken out by the shareholding director in thier name and paid by them personally.
  2. The trustees and beneficiaries are the other shareholding directors.
  3. The trusts are typically “off the shelf” life insurance providers trust wording and discretionary.
  4. Cross option agreement.

Richard Bishop
PFEP