What is a put and call option agreement over shares?
Is a put and call option agreement over shares enforceable in South Africa?
“the rule that the determination of rent — or, for that matter, any prestation — may not be left to one of the parties should be confined to the situation where the determination depends entirely upon the unfettered will of that party.”
“There must be levied and paid for the benefit of the National Revenue Fund a tax, to be known as the securities transfer tax, in respect of— (a) every transfer of any security … at the rate of 0,25 per cent of the taxable amount of that security determined in terms of this Act. “transfer” includes the transfer, sale, assignment or cession, or disposal in any other manner, of a security or the cancellation or redemption of that security, but does not include— (a) any event that does not result in a change in beneficial ownership; (b) any issue of a security; or (c) a cancellation or redemption of a security if the company which issued the security is being wound up, liquidated or deregistered or its corporate existence is being finally terminated.”
“A share issued by a company is movable property, transferable in any manner provided for or recognised by this Act or other legislation (s 35(1)). … a company must enter in its securities register every transfer of any certificated securities, including in the entry— (a) the name and address of the transferee; (b) the description of the securities, or interest transferred; (c) the date of the transfer (s 51(5)).”
When you need a Put & Call Option
- A shareholders agreement, private-equity investment or BEE deal needs a guaranteed exit: a put option lets an investor or minority shareholder require the others (or the company) to buy their shares at a pre-agreed valuation if certain triggers or a target date are reached.
- A founder, majority shareholder or co-shareholder wants a call option to pull shares back in on a "bad leaver", default, deadlock, breach of the shareholders agreement, or the death or disability of a shareholder — at a price set by a formula now.
- A sale of a business or earn-out is being structured so that the balance of the shares (or a top-up tranche) crosses over later if performance targets are met — using paired put and call options to lock in price and certainty for both sides.
- An employee or management share scheme needs the company or founders to be able to repurchase (call) vested or unvested shares when an employee leaves, and to give the employee a put right to realise value at an agreed measure.
- Joint-venture partners want a clean break mechanism — a put/call (sometimes a "Russian roulette" or "Texas shoot-out" buy-sell) to resolve deadlock by forcing one party to buy the other out at a determinable price.
What a Put & Call Option should contain
Grant of the put and the call (and which is which)
States separately and unambiguously who holds the call (the right to buy) and who holds the put (the right to sell), over exactly which shares, and that each grantor's undertaking is an irrevocable offer kept open for the option period. Conflating the two, or leaving it vague who can compel whom, is a classic and expensive drafting failure.
The shares and the option period
Identifies the precise shares (class, number, the company) the option covers and fixes the period during which each option stays open and irrevocable. The shares must be identifiable for the resulting sale to be valid, and a clear opening and expiry date prevents arguments about whether an option was still live when it was exercised.
Exercise price or a determinable price mechanism
Sets the strike price or — more commonly — a clear, objective mechanism for determining it: an agreed formula (e.g. a multiple of EBITDA or net asset value), a valuation by an independent expert/auditor whose determination is final and binding, or a price tied to a third-party offer. Because exercising the option creates a sale, the price must be fixed or determinable; a price left to one party's unfettered will is void for uncertainty (Benlou Properties v Vector Graphics).
Trigger events and the exercise window
Defines what entitles a holder to exercise — a target date, an exit event, a default or breach, a deadlock, a leaver event, death or disability — and the window within which they must act. Tight, objective triggers stop a counterparty engineering or dodging the exercise of the option.
Exercise mechanics and notice
Specifies exactly how the option is exercised: the form of the exercise notice, where and how it is delivered, the deadline, and what is then triggered (signature of a share sale agreement, delivery of share certificates and a signed securities transfer form, payment terms). Precise notice mechanics avoid disputes about whether and when an option was validly taken up.
Completion, payment and securities transfer (STT)
Deals with completion once the option is exercised: payment of the price, delivery of the transfer documents, updating the company's securities register, and who bears and accounts for securities transfer tax (payable on the transfer that follows exercise, not on grant). Allocating STT, costs and the timing of beneficial-ownership transfer up front prevents nasty surprises at completion.
Company-law and MOI compliance
Builds in the Companies Act and Memorandum of Incorporation steps the underlying share transfer must clear — pre-emption rights of other shareholders, transfer restrictions, board or shareholder approvals, and (where the company itself is buying back shares) the share-repurchase solvency-and-liquidity requirements. An option that ignores the MOI can be unenforceable in practice even if the contract itself is sound.
Warranties, conditions, cession and default
Covers warranties about the shares being transferred (title, free of encumbrances), any conditions precedent (regulatory or competition approvals), whether the option may be ceded or assigned, and what happens on default — including specific performance to compel the transfer, since damages are often an inadequate remedy for shares in a private company.
Put option vs call option over shares in South Africa
| Feature | Call option | Put option |
|---|---|---|
| Who holds it | The would-be buyer of the shares | The would-be seller of the shares |
| What it gives the holder | The right to buy the shares at the strike price | The right to sell the shares at the strike price |
| Effect of exercising it | Forces the grantor to sell those shares to the holder | Forces the grantor to buy those shares from the holder |
| Typical use | Founder/investor pulling shares in on a default, leaver or earn-out | Investor/minority securing a guaranteed exit at an agreed value |
| Irrevocable offer? | Yes — the grantor’s offer to sell is kept open for the option period | Yes — the grantor’s offer to buy is kept open for the option period |
| Price requirement | Must be fixed or objectively determinable | Must be fixed or objectively determinable |
| STT timing | On exercise, when the shares transfer (not on grant) | On exercise, when the shares transfer (not on grant) |
Common South African pitfalls
- Leaving the price to one party’s unfettered discretion. Because exercising the option creates a sale of shares, the price must be fixed or objectively determinable. A price set by "such amount as the seller decides" is void for uncertainty — Benlou Properties v Vector Graphics [1992] ZASCA 158 confines the prohibition to a determination resting entirely on one party’s unfettered will, so use a formula, an independent-expert valuation, or a third-party-offer benchmark.
- A vague or unworkable valuation formula. "Fair market value" with no method, an EBITDA multiple with no defined accounting basis, or an expert clause that does not say the determination is final and binding all invite a fight at the worst moment. Spell out the formula, the inputs, the valuation date, and an expert deadlock-breaker with a binding determination.
- Forgetting securities transfer tax and getting the timing wrong. STT (0.25%) is payable on the transfer of the shares that follows exercise — a change in beneficial ownership — not on the grant of the option. Failing to allocate who pays STT, or assuming it falls due on grant, leads to mispriced deals and late-payment exposure under the Securities Transfer Tax Act 25 of 2007.
- Ignoring the Companies Act and the MOI. The underlying transfer may trigger other shareholders’ pre-emption rights, MOI transfer restrictions, board/shareholder approvals, or — where the company itself buys back the shares — the share-repurchase solvency-and-liquidity requirements. An option that cannot actually be completed because the MOI steps were missed is worthless when you need it.
- No specific-performance / completion machinery. If a grantor refuses to honour an exercised option, a damages claim is a poor substitute for shares in a private company. Provide expressly for specific performance, a power of attorney or escrow of signed transfer documents, and a clear completion timetable so the transfer can be forced through.
- Mixing up an option with a right of first refusal. An option lets the holder force the sale by exercising it; a right of first refusal (pre-emption) only obliges the grantor to offer the shares first if they decide to sell. Drafting "first option" without saying which is meant, or pairing them carelessly, produces exactly the ambiguity that ends up in court.
Frequently asked questions
What is the difference between a put option and a call option over shares?
A call option gives its holder the right to buy the shares at the agreed price, so exercising it forces the grantor to sell. A put option gives its holder the right to sell the shares at the agreed price, so exercising it forces the grantor to buy. They are often paired in a shareholders agreement so the same shares can be moved in either direction on a trigger — for example a minority’s guaranteed exit (put) and a founder’s right to pull shares back (call).
Is a put or call option over shares legally binding in South Africa?
Yes. An option is an irrevocable offer and is one of the pacta de contrahendo that South African law treats as binding (not an unenforceable agreement to agree). Once granted, the grantor cannot withdraw during the option period, and the holder creates a binding sale of shares by exercising the option — provided the shares are identifiable and the price is fixed or objectively determinable.
Does an option to buy shares have to be in writing?
No statute requires an option over shares to be in writing to be valid — unlike an option to buy land, which must comply with the Alienation of Land Act. But writing is strongly advisable in every case to fix the parties, the shares, the price mechanism, the trigger events and the exercise mechanics, and to satisfy any writing requirement in the company’s shareholders agreement or Memorandum of Incorporation.
How is the price set in a put and call option agreement?
The price (the strike price) can be a fixed amount or, more usually, a determinable one set by an objective mechanism — an agreed formula such as a multiple of EBITDA or net asset value, an independent expert or auditor valuation whose determination is final and binding, or a price benchmarked to a third-party offer. South African law requires the price to be fixed or objectively determinable; a price left to one party’s unfettered will is void for uncertainty (Benlou Properties v Vector Graphics).
Is securities transfer tax (STT) payable when an option is granted or when it is exercised?
STT is payable on exercise, not on grant. Under the Securities Transfer Tax Act 25 of 2007, STT (0.25%) is levied on the transfer of a security — a change in beneficial ownership of the shares. Granting the option does not transfer beneficial ownership, so no STT arises then; STT becomes payable when the option is exercised and the shares actually transfer. The agreement should record who bears the STT.
Can a put or call option be specifically enforced if the other party refuses?
Generally yes. South African courts will, in their discretion, order specific performance, and for shares in a private company a damages award is often an inadequate substitute. A well-drafted option therefore provides for specific performance and practical completion machinery — such as a power of attorney or pre-signed, escrowed transfer documents — so the share transfer can be compelled if the grantor refuses to honour an exercised option.
What is the difference between a put/call option and a right of first refusal over shares?
A put or call option lets the holder force a sale by exercising it within the option period — the grantor cannot withdraw. A right of first refusal (pre-emption) is weaker: it only obliges the holder of the shares to offer them to the other party first if they decide to sell, and they remain free never to sell at all. Many shareholders agreements use both, so they must be drafted to work together, not in conflict.
Do I need a lawyer to draft a put and call option agreement?
It is strongly advisable. The line between an option and a pre-emption, the certainty-of-price rule, the valuation and expert mechanics, the trigger and exercise machinery, the securities transfer tax timing, and the Companies Act and MOI steps for the underlying transfer all have to be exactly right, or the option fails when you most need it. MJ Kotze Inc drafts and reviews put and call option agreements over shares on a fixed-fee basis.
Sources & authority
- Benlou Properties (Pty) Ltd v Vector Graphics (Pty) Ltd (185/1991) [1992] ZASCA 158; 1993 (1) SA 179 (A) (18 September 1992)
- Securities Transfer Tax Act 25 of 2007 (lawlibrary.org.za canonical work) — s 2 (charge / 0.25%) and the definition of "transfer"
- Securities Transfer Tax Act 25 of 2007, s 2 (imposition of tax) and s 1 (definition of “transfer”)
- Companies Act 71 of 2008, ss 35, 40–41 and 51 (shares as transferable movable property; issue vs transfer; the securities register)
This guide is general information, not legal advice. It reflects the law as at June 2026.