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Understanding pre-emption rights as a shareholder

pre-emption rights

What are pre-emption rights and where are they found?

Pre-emption rights provide the existing shareholders of a company:

  • first offer on an issue of new shares; or
  • first refusal over the sale of existing shares.

Pre-emption provisions, and other provisions relating to the issue or transfer of shares in a company can be found:

  • generally, for an issue of new shares, in the Companies Act 2006 (or sometimes in a company’s articles of association or shareholders’ agreement);
  • for a transfer of shares:
    • in the company’s articles of association (which is publicly available on Companies House); or
    • in a shareholders’ agreement (which is a confidential document not publicly available).

Pre-emption rights on the issue of new shares

In the context of a company creating new shares and issuing these shares to new shareholders, a pre-emption right is a right of first offer in favour of the existing shareholders.

Shares are first offered to existing shareholders in proportion to their holdings before they can be offered to any new buyers. This allows shareholders to preserve the percentage of their shareholding in a company, provided they have sufficient funds to purchase the new shares being issued.

Pre-emption rights on the issue of new shares are set out in the Companies Act 2006  and normally apply to an issue of new shares unless the pre-emption provisions conferred by the Act are disapplied in the company’s articles of association or shareholders’ agreement. In complex multi-party investments, there are sometimes contractual pre-emption rights on an issue of shares in a shareholders’ agreement.

Pre-emption rights on the transfer of shares

In the context of an existing shareholder of a company selling his/her shares in the company, a pre-emption right is a right of first refusal in favour of the remaining shareholders. The purpose of such rights is to preserve the original shareholder base and limit the ability of a third party acquiring shares in a company.

Normally, the selling shareholder must offer his/her shares to the remaining shareholders on the same terms agreed with the proposed buyer before he/she is able to sell the shares to the proposed buyer.

A selling shareholder will be in breach of the shareholders’ agreement and/or articles of association if they do not follow the pre-emption on transfer provisions. The directors of a company may also be liable under the Companies Act 2006 and articles of association/shareholders’ agreement if they ignore such provisions and register such a transfer that has not satisfied the pre-emption on transfer provisions.

Pre-emption provisions are there to protect shareholders by ensuring their shareholdings cannot be diluted on an issue of more shares and by protecting their shareholder base from unwanted third parties. As a shareholder, it is important to understand the significance of pre-emption rights from the outset as this may help to avoid any unnecessary and potentially costly disputes.

Loosemores is a boutique law firm with in-depth knowledge and expertise. Our Corporate and Commercial department regularly advises on a range of corporate transactions such as sales and acquisitions, management buyouts, debt and equity investments, and joint ventures.

If you need advice from our team of legal experts, please email or call us on 02920 224433. Please contact Senior Partner, Mark Loosemore, or fellow Corporate Partner, Siôn Tudur to find out more.

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