It’s good to know your options. You don’t want chips with your sandwich? You’ll be happy to know you have the option to substitute fries (or fruit, for those more health conscious). You want a heated steering wheel, touchscreen navigation, and the DVD system in your SUV? You’re in luck. Those options can all be yours (but they’ll cost you!). Options also show up in the legal world. Michigan law defines an option contract as “an enforceable promise not to revoke an offer.” In other words, the party granting the option (also called the “optionor”) is promising not to revoke an offer, such that the party holding the option (the “optionee”) has the power or right to choose to exercise the option or not.
Option contracts appear in a number of contexts. Perhaps most well-known are real estate options, but options also exist in the corporate world, including as part of stock purchase or shareholder agreements. These types of option contracts often give the option holder (typically the company or another shareholder) the right to purchase another shareholder’s shares, or sell their own shares, under specified circumstances and at a specified price.
Whether the option pertains to real estate or shares in a company, there are a number of important considerations if you are a party to an option contract:
- Timing: When it comes to option contracts, the specified time for performance is “of the essence.” The option holder must comply with any time limitations or risk losing their rights.
- Acceptance: Many option contracts state a specific way to exercise the option and accept the option terms. Michigan law is clear that acceptance of the option must be in agreement with the proposed terms and the exact thing offered.
- Creating the Contract: An option is considered a “mere offer.” All the optionee has to do to create acceptance of that offer is comply with the terms of the option contract by, for example, timely exercising the option and doing so per the express terms. If the optionee does so, a binding contract is created.
- Enforcement: What if the optionor refuses to sell? The optionee is left to file a complaint, asking a court to order the optionor to specifically perform the option contract. But the optionee will have to show strict compliance with the terms of the option contract in order to obtain an order requiring the optionor to sell (or buy, whatever the case may be).
We have litigated numerous cases involving options, both in circuit court and the Michigan Business Court. In some of those cases, our clients were able to avoid having to sell their shares or property because the company failed to strictly comply with the option terms. In other cases, because our clients knew the specific steps they had to take in order to complete the option, they were able to force the optionor to sell. But in any case, given the technicalities involved with option contracts and Michigan law’s requirement of strict compliance, it is important to fully know and understand the terms of your option contract. Because if you don’t, you may end up with no options at all.More Publications