An option contract: what is it?

A written agreement between two individuals or businesses is called an option contract to purchase shares in a Dutch BV (Besloten Vennootschap, often known as a private limited liability corporation). The buyer is granted the right, but not the responsibility, to purchase shares in the business by the seller. The fee is always agreed upon in advance, and this right is typically only valid for a specific amount of time. Simply put, the buyer is expressing that “I’m not entirely sure yet, but I might want to buy shares in your company later.” And that’s the purpose of an option contract.

After that, the seller consents to maintain that door open under the predetermined terms. Even if the market price increases later, the buyer can still purchase the shares at the price specified in the contract if they choose to proceed. The option expires, and no shares are purchased if the buyer changes their mind or nothing occurs before the deadline. When people want to collaborate but aren’t quite prepared for a full commitment, these contracts can be helpful. A formal agreement in place allows the buyer time to reflect, seek funds, or monitor the company’s progress.

Why use an option contract to purchase shares in a Dutch BV?

A person may choose to purchase shares in a Dutch BV through an option contract rather than immediately, for several valid reasons. The freedom this choice provides is truly the primary factor. With an option contract, the buyer is not required to commit right away. They are given time to reflect, conduct research, or secure finance, but they retain the option to purchase the shares at a predetermined fixed price at a later date. When a buyer is interested in a business but wants to observe how things progress first, this is beneficial. For instance, the company may be expanding, but it’s not yet certain if this expansion will continue. The buyer may also wish to become a co-owner, but only if specific conditions are fulfilled or if they receive backing from investors.

Locking in a price is another justification for purchasing shares in this manner. Even if the market value of the company increases over time, the buyer can still buy the shares at the original contract price. This presents intriguing chances to earn money without taking significant risks. Option contracts are especially helpful in startup agreements, business-partner agreements, and situations where employees are allowed to own a portion of the company eventually. To put it briefly, it’s a clever strategy to maintain options without immediately taking on all the risk.

A list of crucial elements to consider while creating an option contract

A contract for an option must always have some essential elements. This is required by legislation in the Netherlands. For you to know what you need to include to build a legitimate option contract, we will list and describe these below. In essence, an option contract is void without these components.

The holder of the option

The individual (or business) that is granted the right to purchase shares is known as the option holder. As we previously stated, customers are under no obligation to purchase them, but they are free to do so if they so desire within the predetermined window of time. The option holder is frequently an employee, business partner, or investor who may eventually wish to become a co-owner. They have a reservation on the shares as the option holder, and they are not required to pay for them immediately. This enables them to consider their options, wait for a better opportunity, or assess the company’s overall performance before acting. Because they can still purchase at the previously negotiated price, the option holder gains the most if the company’s worth rises after the contract is signed.

The writer of options

The business that gives the option is known as the option writer. Stated differently, they are the present owner or shareholder who consents to potentially sell their shares in the future in accordance with the conditions of the agreement. During the option term, the writer then pledges not to sell those shares to anybody else. They may be compensated with a small sum or other advantages for maintaining that option. The terms and limitations of the agreement, including its duration and the circumstances under which the option holder may exercise it, must be precisely specified by the option writer. In this manner, the writer maintains control over the situation until the choice is made, and both parties are aware of what to expect.

Price of an option

The price of the choice is especially crucial. It is the sum that the option holder has committed to pay if they choose to purchase the shares. Even if the company’s true value changes later, this price is often set in the contract when it is signed. The buyer may benefit from this since, as we have already stated, they are still able to purchase at the original, lower price, even if the business expands and gains value. A reasonable assessment of the company’s worth at the time of the transaction should always be reflected in the option price. The price per share may be fixed or determined by a specific formula. Setting the price correctly is crucial since it safeguards both parties: if the option is chosen, the seller won’t be underpaid, and the buyer won’t overpay.

The time spent exercising

The time range within which the option holder can actually decide to purchase the shares is known as the exercise period. The buyer loses the right to buy when this time frame passes and the option expires. Depending on what both parties agree upon, the exercise time could be a few months or several years. An employee may have four years to exercise their option, whereas a company may allow an investor one year to make a decision. All of this is optional. In addition to giving the seller a clear endpoint, the time frame should allow the option holder the opportunity to make a decision. To prevent misunderstandings later, it is a good idea to provide precise dates in the contract.

Conditions for exercise

The particular circumstances that must occur before the option can be used are known as exercise conditions. These terms guarantee that the option is only activated when it makes sense and safeguards both parties. For instance, if the business hits a specific revenue threshold, the option holder might not be permitted to purchase the shares. Alternatively, if an employee wishes to buy shares, they can only do so if they are still working. Another requirement could be that a specific date has passed. These terms can vary greatly and are frequently determined by the state of the company. The clearer they are in the contract, the fewer surprises there will be later. If no conditions are added, the buyer can usually exercise the option at any time during the agreed period.

The shares that are subject to the option

The precise shares that are covered by the option are described in this section of the contract. It specifies the type of shares and the maximum number that the buyer may purchase. These could be preferred shares or common shares, for instance. The percentage of the business that the buyer could ultimately own if they choose to proceed with the purchase is made apparent in this section. To ensure that everyone is aware of what they are dealing with, it is crucial to include information such as voting or dividend rights. In this manner, ownership and influence inside the organization are not misunderstood later.

Terms of payment

If the buyer chooses to exercise the option, the payment terms specify how and when they will pay for the shares. Either a one-time payment or a series of installments could be made. Additionally, the contract may specify whether payment will be made in cash, by bank transfer, or by other means. A minor advance charge, always distinct from the whole share price, may occasionally be included in the agreement to reserve the option. The terms of payment must be understandable and feasible for both parties. The seller may be able to terminate the contract if the buyer is unable to make the payment on time or in whole.

Termination or lapse conditions

The expiration or invalidity of the option contract is explained in this section. It may naturally expire at the conclusion of the exercise period, or it may terminate earlier if a specific event occurs, such as the sale of the business, the resignation of the option holder, or a breach of contract by one of the parties. These requirements are necessary to prevent future misunderstandings or legal issues. Everyone ought to be aware of what occurs if plans don’t work out. Including what happens if the seller changes their mind or the buyer wishes to leave early is also beneficial. Both sides are protected when these things are put in writing.

Non-compete and exclusivity agreements

The purpose of these provisions is to safeguard the seller’s rights throughout the option period. With an exclusivity clause, the seller commits to avoid selling the identical shares to another party for as long as the option contract is in effect. In this manner, the buyer is aware that the transaction is private. A non-compete agreement can provide that, during the option term, the buyer is not permitted to collaborate with a direct rival or use insider knowledge to launch a competing business. These provisions aid in fostering trust and averting disputes. If the buyer is already employed in the same field or has some connection to the company, they are quite helpful.

The Dutch BV option contract’s legal foundation

Option contracts for purchasing stock in a Dutch BV are subject to specific legal requirements in the Netherlands. The Dutch Civil Code, also referred to as the “Burgerlijk Wetboek,” or BW for short, contains these regulations. The board of the company must often provide its approval before someone can purchase or transfer shares in a BV. Permission from other shareholders may occasionally be required as well, particularly if the BV’s articles of association specify otherwise. When a company is incorporated at a notary, the articles of association—the official rules of the business—are always created. They might include limitations on the circumstances and individuals who are permitted to purchase or sell shares. For instance, they may assert that current shareholders are entitled to buy the shares before they are made available to new investors. We refer to this as a right of first refusal.

As a result, it is crucial to thoroughly review and adhere to the company’s internal policies when creating the option contract. If there are any current shareholder agreements, they must also be reflected in the contract. These contracts frequently contain additional guidelines about the timing and manner of share sales. Therefore, an option contract needs to adhere to both Dutch law and the particular regulations of the Dutch BV. By putting it up correctly, you may prevent legal issues and ensure that everyone is aware of their rights and obligations.

A few useful things to keep in mind when creating an option contract

There are a few more factors you should consider in addition to the required list of elements that must be present in any options contract to purchase shares of a Dutch BV. For your convenience, we have included a list of these below, including whether buying shares in this manner is even feasible and whether there are any tax ramifications. To ensure that what you are doing is both legal and correct, you must research these subjects.

Approval of shareholders

It’s crucial to review the company’s articles of organization (its formal rulebook) before purchasing shares in a BV through an option arrangement. Many Dutch BVs have restrictions on who is allowed to buy or sell shares. These regulations frequently grant current shareholders the right of first refusal, which entitles them to purchase the shares before they are offered to another party. In certain situations, any transfer requires consent from the board or other shareholders. The contract could not be enforceable if you disregard these guidelines. Therefore, before signing anything, thoroughly read the articles of association. Adhering to these guidelines ensures that the option contract can be utilized when the time comes and helps prevent disputes.

Implications for taxes

Option contracts may have tax ramifications. For instance, the Dutch tax authorities may consider a financial advantage created by the time of the transaction or a purchase of shares at a significantly lower price than their actual value to be a taxable gain. This implies that tax on the difference may be due by the buyer or even the seller. Before signing the contract, it’s a good idea to consult a tax professional to avoid any surprises. They may help arrange the deal in a way that complies with the regulations and is equitable for both parties, as well as explain how it might be taxed. Our knowledgeable staff is always available to help you in this manner.

Price adjustment and valuation

It’s wise to determine the share price in advance if the option contract permits the shares to be purchased at a later time. We refer to this as a valuation approach. Having a clear process for valuing the shares might help avoid disputes later on because a company’s worth can fluctuate over time, particularly in rapidly expanding enterprises. At the time of exercise, you may decide to employ a fair market value, an independent assessor, or a predetermined calculation. Establishing this early on guarantees that, when the buyer is prepared to exercise the option, the final price will accurately represent the company’s value.

Exit plan for the holder of the option

The option holder should consider their exit strategy before signing an option contract. Will they purchase and hold onto the shares over time? Or do they intend to sell them shortly once the option is exercised? Understanding the response can aid in drafting the contract, particularly about terms like cost, schedule, and performance. For instance, the option holder may need flexibility in the manner and timing of their sale if the objective is to sell the shares as soon as possible. A well-defined exit strategy can facilitate a more focused and seamless process by assisting both parties in understanding the goals of the option holder.

Overall, both the option holder and the company’s shareholders benefit from flexibility and security when purchasing shares in a Dutch BV through an option contract. To guarantee that the agreement conforms with Dutch legislation, the Dutch BV’s articles of organization, and any existing shareholder agreements, it is necessary to carefully analyze the legal, financial, and operational aspects while structuring such a contract. To handle the intricacies of such agreements and make sure that all parties are sufficiently protected, professional legal guidance is frequently required. To guarantee compliance and steer clear of hazards throughout the drafting process, it is recommended that you seek further advice from a legal specialist in Dutch corporation law.

To guarantee compliance and steer clear of hazards throughout the drafting process, it is recommended that you seek further advice from a Dutch corporate law specialist. If you have any questions, please do not hesitate to contact us.