Put Options in Australia: A Comprehensive Guide for Business Owners

Put options can be a powerful way to manage risk, create exit certainty and align incentives between business owners and investors.

They’re common in shareholders deals, joint ventures and founder/investor arrangements - but they only work well if they’re set up properly and integrated with your company’s constitution and other contracts.

In this guide, we’ll break down what a put option is, when it’s useful, how it works in private companies in Australia, the key terms to negotiate, and the legal steps to get it in place confidently.

What Is A Put Option?

A put option is a contractual right that allows the holder (the “seller”) to require another party (the “buyer”) to purchase certain shares or assets at a future time or on certain events, usually at a pre-agreed price or price formula.

Think of it as a “right to sell” that you can choose to exercise if pre-defined conditions occur. In private company contexts, put options are typically documented in an option deed or embedded in a broader deal (for example, a shareholders agreement or investment agreement).

By contrast, a call option gives the right to buy. In practice, many deals include both (a “put and call” arrangement) so each side has clarity on exit scenarios.

Common Features

• Underlying subject: usually shares in a private company, but it can also be used for assets or business units.
• Exercise mechanics: how and when the option can be exercised (time windows, triggers and notice requirements).
• Price: either a fixed “strike” price or a valuation formula (e.g. EBITDA multiple or independent valuation).
• Conditions: what must be satisfied before completion (e.g. board approvals, waivers of pre-emptive rights, regulatory steps).

When Is A Put Option Useful?

• Founder/investor deals: the investor may offer a buyback or put option if certain milestones aren’t met.
• Buy-sell arrangements: co-founders agree that on death, disability or departure, the remaining party must buy and the departing party can “put”.
• Joint ventures: if a deadlock occurs, one party can require the other to buy out their interest under agreed terms.
• Earn-outs: the seller keeps a stake post-sale with a right to exit later at an agreed formula.

How Put Options Work In Private Companies

In a private company, the put option is usually granted by an existing shareholder or by the company itself (subject to Corporations Act restrictions). The option sits alongside your governance documents and becomes “live” when its conditions are met.

Where Is The Put Option Documented?

Most commonly in a standalone Option Deed (signed as a deed for certainty of consideration and enforceability) or as a clause set inside a Shareholders Agreement. If you’re using a deed, ensure execution complies with deed formalities - it helps to understand what a deed is and how it’s properly executed in Australia.

Interaction With Your Constitution And Pre‑Emptive Rights

Most companies have pre-emptive rights (rights of first refusal) in their Company Constitution or shareholder arrangements. Your put option needs to expressly deal with these - for example, by requiring waivers at completion or stating that pre-emptive rights don’t apply to option transfers.

Completion Steps After Exercise

Once the option is exercised, the parties typically complete an off-market share transfer. You’ll usually prepare transfer forms, update the register and issue new certificates. If you’re new to this process, it’s worth reading about off‑market share transfers and the practical requirements for ASIC transfer of shares in private companies.

Who Funds The Purchase?

That depends on the deal. Sometimes the counterparty shareholder buys the shares, sometimes the company buys them back (which raises specific Corporations Act issues, more on that below). If the company is the buyer, you must follow buy-back rules; if a shareholder is the buyer, consider their funding capacity and whether any security or escrow should be used.

Key Terms To Negotiate

The commercial power of a put option sits in its detail. Here are the core terms to focus on.

1) Triggers And Timing

• Exercise period: a window (e.g. within 30 days of a trigger) or a long-stop date.
• Triggers: deadlock, breach, non-achievement of KPIs, change in control, insolvency, or time-based (e.g. after 3 years).
• Notice mechanics: who you notify, how (email/hard copy), and the information that must accompany the notice.

2) Price And Valuation

• Fixed price: simple and certain, but may become “wrong” if performance changes.
• Formula: e.g. X times EBITDA, net asset value, or a waterfall that changes based on performance tiers.
• Independent valuation: appoint an expert, define methodology, inputs (normalisations, working capital), and who pays fees.

If you plan to use a formula or an expert process, be clear and practical. Disputes often arise from vague pricing clauses. It can help to review common methods for valuing shares to decide what best fits your business.

3) Scope Of Shares And Classes

Specify exactly which shares are covered (number and class). If your company has different classes on issue (ordinary, preference, non-voting), your put option should account for rights attached to each class, dividend arrears and conversion mechanics. If you’re designing a new capital structure, it’s worth understanding different classes of shares before you finalise the option terms.

4) Conditions Precedent And Consents

• Waiver of pre-emptive rights and any deed polls required from other shareholders.
• Board or investor consents where needed under your constitution or investor rights.
• Regulatory approvals (if any) and third party consents (e.g. key supplier contracts with change of control clauses).

5) Warranties, Covenants And Adjustments

• Warranties: limited share/title warranties on completion or a fuller suite if the put is part of a quasi-exit.
• Covenants: restrictions on taking value out of the company or issuing shares that dilute the option coverage.
• Adjustments: debt, cash and working capital adjustments to avoid price distortions.

6) Funding, Security And Default

• Funding plan: evidence of funds, escrow or staged payments.
• Security: charge over shares until price is fully paid; retention amounts against warranty claims.
• Default consequences: interest on late payments, specific performance, buy-back fallbacks.

7) Relationship To Other Rights

Make sure the put option is consistent with tag/drag rights, pre-emptive rights and any performance-based earn-out. Conflicts cause uncertainty - your agreement should set clear priorities if rights collide.

Legal And Compliance Issues In Australia

Put options are flexible, but they must fit within Australian company and contract law. Here are the headline issues to watch.

Corporations Act Limits On Buy‑Backs And Financial Assistance

If a company is the buyer under a put option, the purchase may be a share buy-back, which triggers specific rules (including the need for shareholder approvals, solvency statements and filings in some cases). Likewise, if the company helps a buyer finance a share purchase, financial assistance rules can apply. These issues are technical - get tailored advice before you commit to any structure that relies on company funding.

Enforceability: Deeds, Execution And Authority

Put options are often executed as deeds for certainty of consideration and longer limitation periods. Ensure the deed is properly executed under section 127 or with clear authority - and avoid informal sign-offs that could undermine enforceability. If separate parties will sign at different times, consider allowing execution in counterparts and clarify the effective date.

Pre‑Emptive Rights And Shareholder Approval

Even with a put option, you may still need to manage pre-emptive rights or obtain waivers. Build these steps into your completion checklist so they don’t delay settlement. If the option overrides pre-emptive rights, that intent must be explicit and supported by your constitution and shareholder documents.

Tax Considerations

Exercise of a put option typically results in a disposal event for the seller. The price mechanism (including any premium paid for the option) and timing can have tax outcomes. While we don’t provide tax advice here, it’s wise to coordinate your legal terms with tax advisers so the structure achieves the intended after-tax result.

Valuation Disputes And Expert Determination

If you rely on an expert valuation, set a clear process (appointment, inputs, timetable, ability to make submissions, and whether the expert’s decision is final). Consider guardrails to avoid unfair outcomes (for example, excluding one-off items or defining “maintainable earnings”).

Minority Protections And Unfair Prejudice

Where a put option can be triggered by subjective events (e.g. “material breach”), define these carefully to avoid disputes. If the option could force a minority shareholder into an unfair outcome, expect scrutiny. Clear drafting and balanced triggers reduce the risk of an oppression claim.

Step‑By‑Step: Putting A Put Option In Place

If you’re ready to use a put option in your deal, here’s a practical roadmap.

1) Map The Commercial Scenario

Start by writing down the events that should trigger the option, who can exercise it, the timing, and how price should be set. Keep it simple and aligned with your commercial goals - the legal drafting will mirror these decisions.

2) Check Your Existing Documents

Review your Company Constitution, any Shareholders Agreement, investor rights deeds, loan agreements and key supplier/customer contracts. Flag clauses that affect transfers, change of control, pre-emptive rights and approvals, so your option fits cleanly.

3) Choose The Price Mechanism

Decide on fixed price, formula or expert valuation - and specify adjustments (debt, cash, working capital). If using a formula, test it on real numbers to ensure it behaves as expected across performance scenarios.

4) Draft The Option Instrument

Use a dedicated Option Deed or integrate a robust put option clause into your shareholders or investment documents. Ensure clear triggers, exercise procedure, price mechanics, conditions precedent, completion steps, warranties (if any) and default remedies. For execution, remember you’re dealing with a deed - follow proper formalities from the outset.

5) Align The Capital Structure

Confirm the classes and number of shares covered by the option and that future issuances won’t unintentionally dilute the option coverage. If you plan new classes or a reclassification, address this upfront and document the rights carefully, drawing on guidance about different classes of shares.

6) Prepare Completion Mechanics

Set out a practical checklist for closing after exercise: share transfer forms, pre-emptive rights waivers, board and shareholder resolutions, payment flows and timing. For the transfer workflow, it helps to understand the nuts and bolts of off‑market share transfers and the ASIC process for recording an ASIC transfer of shares.

7) Think Through Dispute Processes

If you rely on expert valuation or KPI-based triggers, include a concise dispute resolution pathway with short timeframes. The goal is to keep momentum and avoid protracted deadlocks.

8) Sign, Store And Monitor

Execute the deed correctly, store signed counterparts securely, and diarise key dates (exercise windows, milestone checks). If the put option is tied to performance measures, set up a reporting rhythm so both sides have the same data early.

What Documents Will I Need?

• Option Deed: the core instrument granting the put option, setting triggers, price and mechanics.
• Shareholders Agreement: aligns transfer rules, pre-emptive rights, drag/tag and decision-making with the put option.
• Company Constitution: ensure it doesn’t conflict with the option and allows your intended transfer process.
• Share Sale Agreement: for more complex completions (warranties, restraints, adjustments) once the option is exercised.
• Board/Shareholder Resolutions: approving the option, waiving pre-emptive rights and authorising transfers or buy-backs where relevant.
• Valuation/Expert Engagement Letter: if using an independent valuer, with the agreed methodology and scope.

In some deals, a short-form completion document is enough; in others, a fuller Share Sale Agreement is appropriate to capture warranties, restraints and post-completion obligations.

Key Takeaways

• A put option gives the holder a contractual right to sell shares or assets on agreed terms - it’s a useful tool for exits, deadlock and risk management in private companies.
• Clarity on triggers, timing, price and completion mechanics is essential; vague clauses lead to disputes and delays.
• Align your put option with your Company Constitution and any Shareholders Agreement so pre‑emptive rights and transfer rules don’t derail completion.
• Consider the Corporations Act rules on buy-backs and financial assistance before making the company the buyer under the option.
• Choose a practical pricing approach - fixed price, formula or expert valuation - and define inputs to reduce disagreement, using resources on valuing shares if needed.
• Plan the end-to-end workflow early, including off‑market share transfers and the ASIC transfer of shares process, so settlement runs smoothly.
• Document your put option in a robust Option Deed (or within your shareholder documents) and ensure it’s executed correctly as a deed.

If you’d like a consultation on structuring and documenting a put option for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.