What are shareholder pre-emption rights?

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Shareholders in a company will often benefit from ‘pre-emption rights’. These give existing shareholders first refusal when a company is issuing new shares. If pre-emption rights exist, new shares in a company cannot be offered to other potential investors without first being offered to the current shareholders. Any company looking to issue new shares needs to consider whether pre-emptive rights exist and, if so, take account of them. In this article we look at how to do so.

The rights are usually in proportion to the current shareholdings – so if someone with pre-emption rights already owns 25% of the shares in issue, they’d be given first refusal over 25% of any new shares to be issued.

If an existing shareholder chooses to take up the rights, they’ll be able to preserve their percentage shareholding in the company – assuming that they have the money to pay for each new share issue!

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How can pre-emption rights arise?

Pre-emption rights can arise from any of three sources:

  1. Statutory pre-emption rights
  2. Pre-emption rights within the company’s articles of association
  3. Pre-emptive rights under a shareholders’ agreement

The statutory pre-emption rights – detailed in Section 561 to 576 of the Companies Act 2006 – apply by default to ‘equity securities’ where the dividend paid varies dependent on the company’s profits and which have no special rights to capital repayment if the company is wound up. However, they don’t apply to any of the following:

  • Shares held under an employee share scheme
  • Shares issued partly or wholly for non-cash consideration
  • Bonus share issues

Even where the statutory pre-emption rights would otherwise apply, they can be altered or disapplied by a company’s articles of association. It’s the provisions in the articles that take precedence.

If shareholder pre-emption rights exist, the company essentially has two choices:

  • Follow the specified procedure to take account of the rights ; or
  • Prevent the pre-emption rights from applying (either as a one-off or permanently)

We’ll look at each of these in turn.

What procedure needs to be followed to issue shares if pre-emption rights exist?

In many cases a company will choose to follow the pre-emption procedure when offering new shares for sale, allowing existing shareholders to take up the offer to purchase and only inviting new investors to apply for shares if the current shareholders decline them. Even if you know the existing shareholders don’t want the new shares, a procedure still needs to be followed where pre-emption rights apply.

Where the pre-emption rights are defined in the articles of association, the articles should also define the procedure to be followed. However, the most widely used procedure involves sending existing shareholders a letter of rights (our template – Invitation to apply for shares). The shareholders can choose to take up the offer via a letter of application (our template – Application for new shares).

Where the pre-emption rights are those defined in statute, existing shareholders must be given at least 21 days in which to accept the offer. If the pre-emption rights are instead defined in the articles of association, the articles may specify a different minimum time period that shareholders must be given to accept the offer.

How can the company remove pre-emption rights?

Often directors would prefer not to follow the prescribed pre-emption procedure, which (particularly for those companies with a number of existing shareholders) can be time-consuming, expensive and cumbersome. It is possible to ‘disapply’ pre-emption rights, allowing share issues to be undertaken more flexibly.

A private company may disapply pre-emption rights permanently by amending its Articles – either removing an explicit provision in the articles themselves or stating that the statutory pre-emption rights are not to apply to the company’s shares.

Private and public companies can instead disapply pre-emption rights for a specific allotment provided:

  • Shareholders pass a special resolution at a general meeting; and
  • The directors give a written statement which accompanies the notice of the meeting to propose the special resolution in which they give:
    • The reasons for making the recommendation
    • The amount to be paid to the company in respect of the allotment
    • The directors’ justification of that amount.

The wording of the resolution will depend on the exact circumstances. Our template – Shareholders’ resolution to waive pre-emption requirements – assumes that the aim is to waive the statutory pre-emption rights rather than those defined in the company’s articles. Generally, both a time limit and a limit on the amount (or value) of shares that can be issued unconditionally will be imposed by the resolution – this balances the need for the directors to have freedom to allot new shares with the members’ need to retain some control over the number of shares that are issued.


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