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September 6th 2013 / BY: Wisteria

What are pre-emption rights and when do they apply?

Pre-emption rights refer to the right of existing shareholders of a company to be offered new shares in the company before the offer is made to external investors. The offer will be for a proportion of the new shares which reflects their current shareholding. Under the Companies Act 2006 pre-emption rules, all current ordinary shareholders must be offered the new shares and the shares cannot be sold to anyone else until the offer expires or the shareholder has rejected it. Shareholders can choose to waive their rights if they wish to.

The purpose of pre-emption rights is to give current shareholders the opportunity to protect their stake in the company from becoming diluted if more shares are issued. As shareholders are offered an equivalent percentage of the new shares according to their existing shareholding, if they chose to purchase the new shares they would still have a similar stake in the company. This means that shareholders can protect their rights within the company, for example by allowing them to maintain the same proportion of the voting.

The statutory rules regarding pre-emption rights laid out within the Companies Act 2006 apply even if they are not included within the company’s constitution. However it is legally possible for companies to exclude pre-emption rights within their Articles of Association, in which case they would no longer apply. The pre-emption rights can also be excluded by special resolution of the members if they have not been excluded within the Articles. If a company chooses to include its own provision regarding pre-emption rights, this overrules the statutory provisions laid out in the Companies Act 2006.

If you are issuing new shares and are unsure about how pre-emption rights apply to your company or require further assistance or information regarding pre-emption rights please contact our specialist company secretarial team.