Limited companies – what are pre-emptive rights?

shareholders pre emptive

Pre-emptive rights, also known as rights of pre-emption, means that the current shareholders in a company should always have first refusal on any new shares being issued, whether this arises through the transfer, allotment, or transmission of shares.

In other words, no new shares in the company can be offered to outside investors before they are offered to existing shareholders first. When a company is considering issuing new shares, they need to be aware what, if any, pre-emptive rights exists and proceed accordingly.

Typically, any rights will be proportionate to the shareholding, so if an individual with pre-emptive rights owns 25% of shares already in issue, they should have first refusal on the same percentage of any new share issue. If they decide to take up the offer and pay for each new share issue, they’ll be able to maintain their percentage shareholding in the company as well as preserve their proportion of voting and other rights, such as dividend rights.

How do pre-emptive rights arise?

Pre-emption rights on the allotment of shares can arise from any of the following three sources:

Pre-emptive rights on allotment of shares under the Companies Act 2006

Statutory pre-emptive rights, as detailed in section 561-576 of the Companies Act, means that new shares must be offered to current members first, and in proportion to their shareholding. The offer to take up shares must be made in writing and the company should allow no less than 21 days for the shareholder to respond. Statutory pre-emptive rights don’t apply to any of the following:

  • If the memorandum or articles exclude them or alternative provisions are made
  • If shares are issued wholly or partly for non-cash consideration
  • If a special resolution to exclude such rights is passed by the company
  • If shares are held under an employees’ share scheme

Pre-emptive rights under the company’s articles of association

Statutory rights are often excluded or alternative provisions made on share allotments in the company’s articles of association. However, companies should not propose an issue of shares without first being certain what pre-emptive rights are included within the articles and/or understand how provisions in the articles relate to statutory provisions. Where a shareholders’ agreement exists, this is likely to contain provisions on pre-emptive rights. If in any doubt about pre-emptive rights, it is always best to seek professional advice.

Pre-emptive provisions on transmission or transfer of shares

When shares are transmitted or transferred they are not subject to any statutory provisions that impose rights of pre-emption, but provisions are likely to be included as amendments in the company’s articles of association. As such, the provisions will apply to both the transmission and transfer of shares, for example when a current shareholder passes away or should happen to be declared bankrupt. But regardless of the provisions made, it is important the articles are drafted to accurately reflect the needs of both the company and the shareholders in every instance.

Pre-emption rights in shareholders’ agreement

Shareholders’ agreement will often include provisions that control the transfer of shares and restrict the further issues of shares. These can also be included in the articles of association but where the provisions appear in both the articles and the shareholders’ agreement, it’s important the share transfer provisions are identical to avoid any problems or misunderstanding in future.

Can a company remove pre-emptive rights?

There are legitimate reasons why directors may choose to remove pre-emptive rights. If there are a number of shareholders, for instance, the pre-emption procedure can be both expensive and time-consuming. Amending the articles of association to exclude an explicit provision or state that statutory pre-emptive rights should not apply to the company’s shares, may allow for more flexibility on share issues Removing or dis-applying pre-emption rights can be done permanently or for a specific allotment of shares, provided certain procedures are followed, such as shareholders passing a special resolution and the directors stating in writing their reasons for recommending the change.

Please share this article