Clarification of the Term ‘CALL OPTION’

A call option, or option to buy, is a contractual right of a particular person to require the other contracting party, under conditions set in advance, to sell a specific share in a limited liability company or shares in a joint stock company. The holder of the call option is not obliged to exercise this right, whereas the other contracting party, which has undertaken the obligation to sell, must act in accordance with the contract once the conditions for exercising the option are met.

Call options are also used on financial markets as derivative financial instruments, but contractual rights to buy shares in companies need not be regarded as financial derivatives. An option that gives the right to buy is called a call option, while its counterpart is the Put Option, which gives a contractual right to sell.

In company law, a call option may be agreed in a separate contract or by an appropriate clause in a members’ agreement (shareholders’ agreement) or another contractual arrangement. The price at which the shares may be bought may be fixed in advance or determinable according to agreed criteria, and exercise of the option may be tied to a specific period or the occurrence of agreed circumstances.

This legal mechanism gives investors the opportunity to agree on a future purchase of shares without being obliged to acquire them immediately. Depending on how the business develops and how the value of the company changes, exercising the option may be economically advantageous for its holder. In company law, call options are therefore most often used where investors want to retain the possibility of acquiring a larger ownership interest in the company but do not want to take ownership immediately. This strategy provides flexibility in investments, particularly at stages when the valuation of the company is still uncertain. It is important to stress that a call option is a right, not an obligation. This means that the option holder may, but is not obliged to, exercise its right to buy the shares. This flexibility is crucial for investors who want to keep the option of increasing their ownership interest without taking on the risk of a mandatory purchase in the future, which is particularly important where market conditions change or the company does not achieve the expected performance.

A key feature of this instrument is that it allows one party (usually an existing member) to increase its ownership interest in the company later, under certain conditions. This can be particularly significant where the party holding the option has a long-term vision reflected in the need to retain or increase control over the company.

The call option is also often used as a protective instrument in corporate agreements.

Contracting the Call Option and Setting the Purchase Price

A call option may be agreed between the future buyer, as the option holder, and the person undertaking the obligation to sell the shares. It may be the subject of a separate contract or form part of a members’ agreement or a joint venture agreement.

For the legal certainty of the contracting parties, it is particularly important to specify precisely the shares that are the subject of the option, the purchase price or the method of determining it, the conditions and deadlines for exercising the right, and the manner in which the transfer is to be carried out.

The future price of a share in the company may be agreed in several ways, depending on the specific needs and objectives of the contracting parties. Some common approaches are:

  • Fixed Price: the future price of the share is set in advance as a fixed price that will not change regardless of future changes in the value of the company. This approach is simple, but it carries the risk that the price will not reflect the actual value at the time the transaction is carried out.
  • Valuation-Based Price: the price of the shares is determined on the basis of the estimated value of the company’s equity, taking into account the stake being purchased. The value may be determined by an independent appraiser or by applying a formula agreed in advance.
  • EBITDA-Based Price: the future price of the share may be linked to a specific multiple of the company’s EBITDA (earnings before interest, taxes, depreciation and amortization). In determining the value of the share, financial liabilities, cash and other elements relevant to the value of the company’s equity may also be taken into account.
  • Revenue-Based Price: the price may be based on a multiple of the company’s annual revenue. This method is often used in sectors where revenue is the key indicator of value.
  • Growth-Based Price: the price may be determined on the basis of the company’s projected growth, with the future price of the share linked to the achievement of certain growth targets, such as revenue growth or market share.
  • Price Escalation Clause: an initial price is agreed together with an escalation clause allowing the price to be adjusted in the future on the basis of predefined factors, such as inflation, market conditions or the company’s performance.
  • Future Financing Round-Based Price: the future price of the share may be linked to the valuation of the company in its next financing round. For example, the price may be agreed as equal to, or at a discount to, the price at which the next investors enter the company.
  • Market Price-Based: the price may be defined as the average market price of the shares over a specified period before the transaction is carried out. This approach is usually used for listed companies whose shares are liquid.
  • Discounted/Premium Price: the future price may be agreed at a certain discount or premium to the market price or the estimated value, depending on the specific terms of the contract or the risks assumed by the parties.

These approaches to determining the future purchase price may be combined in more complex contracts, taking into account various risk factors, business uncertainty and the economic interests of the contracting parties.

Options and the Call Option in Regulation

As a contractual right to buy shares, the call option is not specifically regulated by the Serbian Companies Act. It may be agreed on the basis of the general rules of the law of obligations and the provisions of the Companies Act on the freedom of members to regulate their mutual relations, in particular Articles 15 and 140.

When agreeing and exercising a call option, account should be taken of the statutory rules on the transfer of shares, the right of pre-emption, any restrictions laid down in the founding act and the prescribed form of the share transfer agreement.

The Companies Act also regulates specific instruments that give their holder the right to acquire shares: warrants in joint stock companies (Article 262) and the financial instrument called the “right to acquire a share” in limited liability companies (Article 159v). These should not be equated with a contractual call option to buy an existing share or existing shares.

Exercising a call option to buy existing shares does not in itself lead to an increase in the company’s share capital. Where the option mechanism concerns the acquisition of new shares, the specific statutory rules on capital increases and on the issue or acquisition of such shares must be observed.

Where a particular option qualifies as a financial instrument within the meaning of the Capital Market Law, the relevant provisions of that law also apply, including the rules on supervision by the Securities Commission of the Republic of Serbia.

In the European Union, the market in financial instruments is regulated, among other things, by the MiFID II Directive (Markets in Financial Instruments Directive II) and the EMIR Regulation (European Market Infrastructure Regulation). These rules govern certain financial instruments and derivatives transactions, but they do not automatically apply to every contractual right to buy a share in a company.

The call option is a powerful legal instrument in company law that provides flexibility in managing a company’s ownership structure. Proper drafting and an understanding of the legal aspects of the call option are key to protecting the rights of the option holder and achieving corporate objectives. In practice, call options are often used in transactions where control over the company needs to be retained or acquired. For example, when a joint venture is set up, one party may retain the right to buy out the other party’s share or shares within a specified period, making it possible to take full control of the project.

If you need to agree a call option or align it with the company’s founding act, see our contract drafting service.

For the origins of the option as a legal institute and financial instrument, and its regulation in comparative law, you may refer to the text discussing the Put Option.

See also: Put option, Tag-along rights, Drag-along rights

This text does not constitute legal advice and is for information purposes only, in accordance with the terms of use of this website.