Usually, shareholders in a company will benefit from pre-emption rights.
These provide current subscribers with first refusal when a company issues new shares. Should there be pre-emption rights, new shares in a company cannot be given to other prospective investors without first being given to the existing shareholders. Any company that wants to allot new shares should take into consideration whether there is a pre-emptive right and, if there is, should consider them. We shall examine how to do so in this article.
Usually, the legal rights are proportional to the present shareholdings – therefore should an individual having pre-emption rights own 25% of the issued share, they would be given initial refusal above 25% of any fresh shares to be offered.
Should a current shareholder decide to take up the rights, they will be able to maintain their percentage shareholding in the company provided they have the money to pay for every new share issued.
How can pre-emption rights come up?
Pre-emption rights can occur from any of the following three sources:
- Pre-emption rights within the company’s articles of association
- Legal (statutory) pre-emption rights
- Pre-emptive rights under the agreement of a shareholders
The legal pre-emption rights explained in Section 561 to 576 of the Companies Act 2006 – apply by default to ‘equity securities’ wherein the dividend (bonus) paid differs depending on the profit of the company and which have no particular rights to capital reimbursement should the company be wound up. Nevertheless, they never apply to any of the following:
- Dividend (bonus) share issues
- Shares issued in total or partly for non-cash consideration
- Shares held under a worker’s share plan
Even where the pre-emption rights would otherwise apply, they can be altered by a company’s articles of association. It is the requirements in the articles that take priority.
Should shareholder pre-emption rights exist, the company basically has two alternatives:
- Adhere to the specific process to take account of the rights ; or
- Prevent the pre-emption rights from applying either permanently or as a one-off
How to remove pre-emption rights?
Directors would often choose not to follow the set pre-emption process, which (mainly for companies with a number of current subscribers) can be costly, time-consuming and burdensome. It is most common to ‘dis-apply’ pre-emption rights, therefore permitting share issues to be accepted more flexibly.
A private Limited company may dis-apply pre-emption rights for life by modifying its Articles – either stating that the pre-emption rights do not apply to the company’s shares or removing a precise provision in the articles themselves.
Public and private companies can, as an alternative, dis-apply pre-emption rights for a precise allotment given that:
- The directors give a printed statement which follows the notice of the meeting to recommend the particular resolution in which they give:
- Shareholders pass a special resolution at a general meeting; and the essence of the recommendation
- The amount to be paid to the company in regards to the allotment
- The directors’ validation of that amount.
The wording of the resolution will be based on the precise conditions.