What is a Shareholder’s Pre-emptive Right?
Pre-emption rights give existing shareholders first refusal if a company issues new shares. If shareholders have pre-emptive rights, the company cannot look for external investors without first offering the share issue to current members.
Pre-emptive rights are usually proportional to a member’s existing shareholding. The company will offer each shareholder a batch of new shares to reflect their current percentage shareholding.
Pre-emption rights can arise from three possible sources:
- Statutory pre-emption rights under Sections 561 to 576 of the Companies Act 2006
- Pre-emption rights contained in the company’s Articles of Association, which take precedence over statutory pre-emption rights
- Pre-emption rights in a shareholder’s agreement
If pre-emption rights exist, the company must always follow procedure even if they know the shareholders don’t want to buy any more shares. The company has to allow current shareholders to purchase before they present the share issue to outside investors.
The company’s Articles of Association will specify the protocol, and the usual process is to send out a letter of rights to the existing shareholders. Shareholders who want to buy the shares indicate their acceptance by a letter of application. Statutory pre-emptive rights state that the shareholder has at least 21 days to accept the company’s offer. However, pre-emptive rights in the company’s Articles of Association can specify a different time frame.