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Simple English definitions for legal terms
option agreement
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A quick definition of option agreement:
An option agreement is a type of contract that restricts a shareholder from selling their shares until a specific event occurs. This contract obligates the shareholder to sell their shares at a predetermined price, but it does not require the corporation or other shareholders to buy those shares. It is similar to a buy-sell agreement, but with the added option for the shareholder to sell their shares at a fixed price.
A more thorough explanation:
An option agreement is a legal contract that restricts a shareholder from selling their shares to anyone else except for a specific buyer at a predetermined price. This agreement is usually made between the shareholder and the corporation or other shareholders.
For example, let's say John owns 50% of a company and wants to sell his shares. The other shareholders, however, want to maintain control of the company and do not want John to sell his shares to an outsider. They can enter into an option agreement that gives them the right to buy John's shares at a fixed price if he decides to sell.
Another example is when a company wants to acquire another company. They can enter into an option agreement with the shareholders of the target company, giving them the right to buy their shares at a fixed price if the acquisition goes through.
Option agreements are commonly used in business to protect the interests of shareholders and ensure the stability of the company's ownership structure.