There are a wide variety of reasons for the issue of options and other securities in the company. It is difficult to generalise, but the availability of options and other securities enable the sponsors to structure the project companies in ways that would achieve the objectives of the various parties. For example, a project company may offer options to its employees that are convertible if certain performance criteria are met in order to incentivise the employees.
Key Issues
An options agreement is an agreement between the project company and the options holder that provides:
• the grant of the option from the project company to the option holder, this needs to specify the number of options provided;
• consideration (if any) payable for the option;
• the exercise price of the option, this may be fixed in the agreement or dependent on the performance of the company, a common one is the net asset value as shown in the audited financial statements at a given date;
• the exercise period of the option, this may be a predetermined date, or contingent on certain events occurring, as examples, a period of one month after the date of audited financial statements showing that a certain performance hurdle (revenues, profits) has been achieved, immediately the company is in default of the concession agreement;
• lapse of options, this is usually at the end of the exercise period if the options are not exercised;
• mechanics of how the option should be exercised, the form of notice (which ideally should be attached to the agreement), to whom the notice should be addressed, when the notice is deemed to have been received;
• mechanics of closing, if the options is exercised, the options agreement needs to provide for the "closing" of the options exercise, that is, the payment of the exercise price and the issue of shares in accordance with the options;
• provisions to prevent any dilution of the options (for example the issue of shares before the options can be exercised);
• adjustment in the exercise price or number of options for any dilution events;
• covenants prior to the exercise of the option, perhaps covenants to prevent the payment of dividends, the distribution of capital or the issue of shares that would dilute or affect the value of the options;
• assignment of the option, options of this nature are not assignable, however, the option holder may negotiate the flexibility of being able to assign to a wholly owned subsidiary for the purpose of flexibility in its restructuring process; and
• termination, right to terminate from either party should be limited, perhaps limited to insolvency events of either party.