Enforceability of options clarified

Put and call options are customarily found in investment transactions, joint ventures and acquisitions. A “put option” is the right of a shareholder of a company to sell its shares to another person at a pre-agreed price. Conversely, a “call option” is the right of a person to purchase shares from an existing shareholder at a pre-agreed price.

In investment transactions, put options are accorded to investors as a fall-back exit mechanism, typically as a means of liquidating a portfolio investment where an IPO or strategic sale is not feasible.

Call options are often found in joint ventures and strategic acquisitions, and entitle the option-holder to acquire shares from the joint venture/strategic partner on the occurrence of identified events. Call options are also used as a means to resolve disputes or situations of deadlock where parties are no longer able to conduct business harmoniously.

Ganesh Prasad is a partner and Sharad Moudgal is a principal associate at Khaitan & Co. The views of the authors are personal, and should not be considered as those of the firm.