Pre-emption rights for shares are the rights for an existing shareholder of a company to be offered new shares in that company before those new shares are then offered to non-shareholders publicly. These rights state that new share issues have to be offered to existing shareholders at the same price (or a more favourable price) as they would have been offered to a non-shareholder. The main reasoning behind this is to allow existing shareholders the right to prevent the dilution of their stake in a company by being able to purchase the new shares; if they decide not to proceed with the sale then they are agreeing to this potentially happening.
Company law (in the form of the Companies Act 2006) and listing rules state that pre-emption rights are required for publicly traded companies. It is possible for private companies to exclude the requirement of pre-emption rights, providing the correct procedures have been followed. Pre-emption rights arise on the transmission, transfer and allotment of shares. Listing rules requirements do not apply to companies which are listed and incorporated abroad. This is mainly due to the fact that the pre-emption rights principle is not internationally and universally recognised.
What Shares do Pre-emption Rights Apply to in a Company?
All shares in a company have pre-emption rights apply to them, apart from 2 exceptions. The first exception involves the shares which are allotted to employees under the company’s employee’s share schemes. The second exception is where the shares involved are shares which carry a right to participate only up to a specified amount in a distribution of capital/dividend.
Pre-emption Rights Under the Companies Act 2006
Under this Act, new shares must be offered in existing shareholders in proportion to their present holdings, before they are offered to any other person. This offer must be in writing. Additionally, the company must allow the shareholder up to 21 days to contemplate the offer and then either accept or reject it.
Pre-emption rights under the Act will not apply to a company where a private company’s articles exclude them, or provide another alternative arrangement. They will also not apply where the company involved passes a special resolution stating their exclusion, or where shares are issued for non-cash consideration. It is common for a company to exclude the pre-emption rights granted by statute, and instead make their own provisions.
It is important to check whether there is a shareholders agreement in operation, as this will contain its own provisions for pre-emption rights, and therefore should be consulted first. It is often the case that the company itself is also bound by this agreement.
Pre-emption Rights Concerning the Transfer/Transmission of Shares
The pre-emption rights that are relevant here are not governed by statute. They are however, normally detailed in private company’s articles.
Pre-emption Rights Concerning Allotment
These can arise either in a shareholder’s agreement, in a company’s articles, or through the use of the Companies Act 2006.
A Waiver of Pre-emption Rights
In order to be effective, a waiver of pre-emption rights needs to be signed by all the shareholders of a company. This will have the effect of wavering any rights they might hold in relation to the company issuing new shares to somebody else (i.e. a third party).
It is therefore important to understand the consequences of signing a waiver of pre-emption rights relating to the company you work for/are dealing with, so that you know what you are doing before you give up those potential rights.