Staged Acquisitions: Using Options and Call Rights to Manage Timing and Risk

However, a staged acquisition structure provides for an alternative resolution by separating the right to acquire an asset from the obligation to complete the purchase, which would allow parties to allocate risk more effectively while preserving commercial certainty. Whether structured through a call option, a put and call option deed, an option structure or contractual call rights, these arrangements have become an established feature of property and corporate transactions.

Call Option: Flexibility Without Immediate Commitment

A call option gives a purchaser the right but not the obligation to acquire an asset within an agreed period. In return, the purchaser typically pays an option fee for the exclusive opportunity to purchase on pre-agreed terms.

The commercial value of this arrangement lies in timing. Rather than committing immediately, the purchaser can investigate the opportunity, satisfy key conditions and determine whether the acquisition remains commercially viable before deciding whether to proceed. However, the timing of exercising the option is critical.

The case of Payne v Trinity [2021] NSWSC 986, reiterates the importance of complying with the terms of the call option agreement. In this case the plaintiff was required to provide a duly executed notice of exercise of the call option, pay a sum of $280,000 by cheque and provide a dated and executed Contract of Sale by 5.00pm on 24 April 2021, with time being of the essence. The plaintiff made the payment of the $280,000 on Saturday 24 April 2021 by way of EFT which was unsuccessful and ultimately sent to the Defendant on Monday, 26 April 2021. Ultimately, Justice Darke held that a reasonable business person would understand the Call Option to expire strictly at 5:00 pm on 24 April 2021. He further noted that, even if 26 April 2021 were accepted as the expiry date, the Option would still not have been validly exercised because the payment was required to be made by cheque delivered to the Defendant’s solicitor, rather than by EFT.

For developers, this may mean obtaining development approval. Investors may instead use the option period to obtain unconditional finance approval, secure capital or assess market conditions. Whatever the objective, the option creates breathing room without requiring the purchaser to relinquish the opportunity altogether.

A well-structured staged acquisition enables the transaction to progress when it best suits the commercial objectives of both parties, rather than forcing completion to occur according to an inflexible timetable. This may be achieved by establishing clear milestones, defining the conditions for each stage, and allowing extensions where necessary, subject to agreed time limits.

Put and Call Option Deed: Balancing Competing Commercial Interests

Where greater certainty is required, parties often adopt a put and call option deed. Unlike a standalone call option, this structure grants rights to both parties. The purchaser may elect to exercise its call option during the agreed period, while the vendor retains a subsequent put option that can require the purchaser to complete the acquisition if the call option is not exercised.

This balance of rights often makes negotiations easier. Purchasers retain the flexibility needed to satisfy commercial objectives, while vendors gain confidence that the transaction will complete rather than remaining indefinitely uncertain.

In the Queensland case of Hilas v GGPG Developments (No 133) Pty Ltd [2020] QSC 313, the Queensland Supreme Court considered whether a put and call option deed was void for uncertainty because the purchase price was not expressly addressed in subsequent variations extending the call option period. The Court held that the purchase price remained sufficiently certain, as the deed, properly construed, provided an objective basis for determining the price, subject to a maximum of $22.5 million. The decision highlights the importance of construing commercial agreements as a whole and giving effect to the parties’ bargain where their obligations can be determined with sufficient certainty.

Option Structure: Managing Commercial Risk

Significant acquisitions are rarely free from risk. Planning approvals may be outstanding, environmental investigations incomplete, finance may still be conditional, or other business or personal conditions may change during negotiations. Entering an unconditional contract before those matters are resolved can expose a purchaser to considerable financial and legal risk. This is clearly illustrated in Payne v Timilty [2021] NSWSC 986, where the purchasers failed to validly exercise a call option because they did not comply with the deed’s payment requirements by the stipulated deadline.

An option structure allows those issues to be addressed before the purchaser becomes obliged to complete the acquisition. While the option fee represents an upfront cost, it is often modest when compared with the potential exposure associated with proceeding prematurely.

The main advantage of a staged acquisition is its ability to manage uncertainty.  For example, the deed should specify the option fee, the method and deadline for payment, the exercise period and the procedure for serving an exercise notice. Conditions precedent, such as obtaining development approval or third-party consent, should be clearly defined, together with the party responsible for satisfying them and the consequences if they are not met. The parties should also consider including extension clauses to deal with delays, long-stop dates to provide a final deadline, and default provisions setting out the consequences of non-compliance.

Contractual Call Rights: Beyond Property Transactions

Although commonly associated with real estate, call rights are equally valuable in broader commercial transactions.

Shareholder agreements, joint venture arrangements and investment structures frequently include call rights that permit one party to acquire another’s interest upon the occurrence of specified events. Those events may include the completion of a project, the achievement of financial goals, the expiry of an agreed investment period or the occurrence of a contractual default.

By documenting those mechanisms at the outset, parties reduce the likelihood of future disputes and avoid the need to renegotiate fundamental commercial terms at a later stage. This is illustrated in Hilas v GGPG Developments (No 133) Pty Ltd [2020] QSC 313, where the Court upheld the purchase price under an option deed despite subsequent variations extending the option period.

Drafting considerations

The effectiveness of any option arrangement ultimately depends on the quality of its drafting.

Parties should give careful consideration to the option fee, exercise procedures, option period, conditions precedent, due diligence rights, default provisions and the consequences of non-exercise. Any extension rights and conditions precedent should be expressly stated, with clear provisions setting out how and when they must be satisfied or waived. The deed should also address the buyer’s due diligence rights, including access to relevant information and any applicable time limits. Default provisions should specify the consequences of non-compliance, including any rights to remedy a breach and the remedies available to either party. Finally, the deed should clarify what happens if the option is not exercised, including whether the option fee is refundable and whether either party remains subject to any ongoing obligations.

Depending on the nature of the transaction (i.e. commercial property acquisitions), issues such as registration requirements and taxation consequences including transfer duty and GST should also be taken into consideration.

Poorly drafted option documentations can create uncertainty precisely where the parties intended to achieve flexibility. Clear drafting ensures the commercial bargain is accurately reflected and reduces the scope for disputes as the transaction progresses. When preparing or reviewing the document, solicitors should ensure that key terms, including the option fee, purchase price, exercise period, payment method and notice requirements, are clearly defined to ensure that the document accurately reflects the parties’ commercial intentions and reduce the risk of disputes.

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Disclaimer

This article is provided for general information purposes only and does not constitute legal advice. It is also not an exhaustive statement of the law, nor is it specific to your circumstances.

If you are considering implementing a staged acquisition structure, whether it is a call option, a put and call option deed, an option structure or a contractual call rights, or would like to explore your options within your particular circumstances, you should seek proper and tailored independent legal advice, which our commercial team at Watson Webb can assist you with.