Suppose there are two shareholders in a registered joint venture company – A and B. Shareholders A is concerned that B will not refuse the shareholder contract and will not be able to remedy this deficiency. In order to reduce the risk of loss for A, a shareholders` pact may provide a put option mechanism that allows A to sell the shares in B and leave the company in the event of a default. In this case, A has the right to require B to repurchase A`s shares at a specified price in the event of default, and B may be retained in the business. A put option becomes more valuable when the underlying share price falls. Conversely, a put option loses its value if the underlying stock increases. When exercised, put options offer a short position in the underlying. For this reason, you are usually used for hedging purposes or to speculate on the stock`s downside price. A sale option in a shareholders` pact is an important mechanism to reduce the risk of capital loss to shareholders and provides a convenient way to withdraw investments in a company. To be effective, a put option should be specified whether the shareholder has the right to sell shares, indicate the amount or percentage of shares subject to the put option, and comply with applicable government and federal laws. After its creation, the company becomes a legal entity independent of its owners and issues shares or share certificates to individuals or corporations in exchange for capital invested in the company. In other words, the company collects money by selling shares to individuals and businesses. As soon as individuals or other companies acquire shares in the company, they become shareholders and obtain all rights and benefits arising from holding shares under national and federal law.
Of course, we are only discussing a non-public body here, but the company can also be a registered joint venture. Suppose an investor is bullish on SPY, which is currently trading at $277, and doesn`t think it will fall below $260 in the next two months. The investor could receive a premium of $0.72 (x 100 shares) by writing a put option on SPY with a strike price of $260. Shareholder 1 wishes to remain a shareholder in the company only if the company achieves a fixed turnover after five years; If this is not the case, Shareholder 1 wants to withdraw. An option-to-sell clause in the shareholder contract gives that shareholder the right to request, at his choice, that the entity repurchase the shares at a predetermined price or according to a predetermined formula. The second most useful tool for dealing with irreconcilable differences is a sell-out option. A put option entitles a shareholder who wishes to send a written notification to other shareholders requiring him to acquire all shares of the transaction that have the advantage of such a shareholder. The shareholder contract would establish the formula for determining the purchase price of the shares and the period during which the put option could be exercised.
In order to allow sufficient time for the company to adapt, for example, to the initial growing pain, the shareholders` pact could indicate that the put option can only be exercised after the expiry of a two-year period. Unlike the pellet gun clause, a minority shareholder with limited means could use a put option.