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E-library Corporate Law Call option agreement (French business law)

Call option agreement (French business law)

12 Feb 2012

A call option agreement, or simply labelled a call, is a contract entered into by a potential purchaser of company shares or securities (the “Purchaser”) with the holder of such securities (the “Seller”), whereby the Seller undertakes to sell to the Purchaser all or part of its securities if the Purchaser so requires. Whereas the Purchaser does not have an obligation to purchase, the Seller has an obligation to sell if the Purchaser exercises the call.

Call options are frequently used to secure the purchase of:

  • stock options or equity incentives from executives or employees who decide to leave the company,
  • equity participations of minority shareholders upon the occurrence of certain events.

To be valid under French law, a call option must specify:

  • the number and type of securities which the Seller must sell upon exercise of the call by the Purchaser, and
  • the price payable for the purchase of such securities (or a mechanism allowing for its determination).

It should be noted that specific performance of a call option under French law is subject to controversy. Indeed, according to French civil law, breach of a contractual obligation to sell may only be sanctioned by damages, and not by its forcible enforcement.

Consequently, great caution should be taken while drafting call option agreements to:

  • ensure that all conditions for their validity are met, and
  • provide for specific performance mechanisms and dissuasive sanctions in the event that the Seller decides not to comply with its obligation to sell.

In certain cases, a call option may be accompanied by a put option.

Put option agreement (French business law)
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