What are pre-emption rights?
Our specialist commercial litigation team handles many disputes in the corporate and commercial environment. This includes shareholder and investor disputes, such as those between shareholders and a company board or between shareholders. This usually requires consideration of the Companies Act 2006, Articles of Association, and Shareholders’ Agreements. In this context, we consider pre-emption rights to be important. We are involved in many unfair prejudice, quasi-partnership and litigation disputes across the country. Importantly we do not draft non contentious documents and our team only gets involved where there is an underlying dispute.
Pre-emption rights allow are a mechanism allowing shareholders to maintain control over a company by giving them the . Existing investors are given the first chance to buy additional shares before external investors. It is crucial for a business’s long-term stability, encouraging loyalty and allows for strategic planning from existing investors.
This entitlement protects shareholders’ proportional ownership and voting powers, providing security and continuity. It is important for the long-term stability of a business, as it encourages loyal customers and strategic planning by existing investors. In this article, we explain what pre-emption rights are, why they’re important, the laws and exceptions that apply, and how they affect Articles of Association or shareholder agreements. The Primary Purpose for Pre-emption Right
The primary purpose of pre-emption right is to give shareholders the “right of first refusal” to purchase new shares. It also protects their original investment if and when they join new shareholders.
Why Are Pre-emption Rights Important?
Pre-emption rights are an The need for companies to offer shares to existing members first is an essential aspect of business operations, boosting financial stability and promoting longevity. They offer several benefits. It offers various benefits that are vital to maintaining investor trust and confidence, including:. Below are some of the core elements that highlight their importance:
Control
: Shareholders maintain control as their proportional ownership of shares won’t be reduced. This is especially important for smaller businesses where the success of the company depends on fewer people being in control.
Protection
: Existing shares aren’t diluted, meaning shareholders keep the same percentage of equity in the company. The value of existing holdings remains the same.
- Investor Confidence By giving shareholders first rights to purchase new shares companies promote investor trust and reassure members they will protect their interests. It increases the likelihood that future investments will be made.
- Fairness: Granting shareholders priority enhances fairness within the business by acknowledging the existing effort and monetary contributions they have invested.
- Strategic Stability : The mechanism helps to maintain a clear and concise business plan.
- What Are Statutory Pre-emption Rights?Statutory pre-emption rights are dealt with under Section 561 of the Companies Act 2006 and provide a legal basis for rights of first refusal. They only apply to newly issued shares and don’t arise where members wish to transfer their holdings.
- Section 561 states that a company cannot allot shares to a person on any terms unless: It has already offered them to those who hold ordinary shares in the company on the same or more favourable terms and in the same proportion to their existing holding.
The period for existing shareholders to accept the offer has expired, or the relevant investors have notified their company of their acceptance or refusal to purchase.
The company must also comply with the requirements under Section 562 in terms of how it makes the offer:
It may be provided in hard copy or electronically.
- It may be published in the Gazette if the holder does not have a UK-registered address or holds a share warrant (a type of holding allowing them to buy or sell shares at any time at a predetermined price and within a set time). It must state the time limit for the individual to accept the offer. The company cannot withdraw the offer before the deadline expires. This
- The period must be at minimum 14 days starting from the date that the offer was sent or published in a Gazette.
The Exceptions to Statutory Pre-emption Rights
- Section 562 of the Companies Act lists certain exceptions to shareholders’ first-refusal entitlement. Companies are, therefore, not obligated to offer new holdings to existing investors in the following situations:
- If the offering is for bonus shares, i.e., those given to existing shareholders for free.
- If shares are not paid for in full or in part by cash. If they are being allocated under an employee’s scheme, unless the employee has renounced or assigned their allocation. If the sale of shares is a result of a compromise, or an arrangement made to help a company in financial trouble. If all shareholders agree to waive pre-emption rights.
The role of pre-emption rights in articles of association and shareholder’s agreement
The Articles of Association regulate how shareholders members run their business. These documents are legally required and can be found on Companies House. A shareholders’ agreement is a private document that outlines the responsibilities of the members to each other and to the company.
Investors can disapply or modify the requirement and procedures for statutory preemption rights by amending the Articles of Association or a private contract, which will take priority over the statutory requirement. Businesses often customize these documents to meet their specific needs. For example, company members may wish to include a provision for pre-emption entitlement for a share transfer, as the Companies Act does not cover this.
- Sometimes, shareholders may agree to waive their rights of first refusal in specific situations, such as if a member wishes to transfer some of their shares to a close relative. The Articles of Association or an agreement may allow for a third party to buy an interest without having to follow the normal pre-emption rights procedure.
- Another method by which shareholders can disapply their rights is through a special resolution. To do this they must hold a general assembly where the relevant members vote. If the votes in favour exceed 75%, the resolution will pass, and the pre-emption procedure will not apply to that particular sale or transfer.
- Need Advice? Contact Helix Law
- If there is a dispute between shareholders, we will be happy to help. You may feel that you have been unfairly prejudiced and need advice. Please contact Helix Law if you need further assistance.
