Pre-Emption Rights

PRE-EMPTION RIGHTS

Pre-emption rights are often defined as those rights that shareholders may have to be offered shares in a company before they are made available to anyone else. Pre-emption rights can arise on allotment of shares, transfer of shares and/or transmission of shares. Pre-emption rights is one way to ensure that existing shareholder’s proportion of voting and other rights in a company are not diluted.

Pre-emption rights on allotment

The Companies Act 2006 provides that a company proposing to allot shares may only do so provided that it has previously offered these shares on the same or more favourable terms to its existing shareholders.

It is common practice to find pre-emption rights on allotment in a company’s articles of association or in a shareholders’ agreement.

Provided that a company follows the correct procedure, these pre-emption rights can be disapplied

Pre-emption rights under the Companies Act 2006

These arise under the Companies Act 2006 which state that shares must be offered to existing shareholder in such proportion to their current share holdings, in writing, before they are offered or issued a new shareholder. The company must allow the shareholder at least 21 days to take up the offer.

These pre-emptive rights do not apply if:

(a) the memorandum or articles of a private company exclude them; or

(b) the company passes a special resolution to exclude them; or

(c) the shares are issued for non-cash consideration;

Many articles of association contain provisions on the allotment of shares which either exclude the statutory rights or impose different provisions on share allotment. No issue of shares should be made without being sure what pre-emptive rights apply under the articles, and how the provisions in the articles relate to the current statutory provisions.

Pre-emption provisions on transfer or transmission

There are no statutory provisions relating to share transfers or transmissions, but they are quite commonly included in the articles of private companies as amendments to the Model Articles or Table A (in the case of older companies). Such provisions will also usually apply also to the transmission of shares (i.e. when a shareholder dies or is made bankrupt).