(a) Pre-emption rights refer to the rights of existing shareholders to be offered any new issue of shares before those shares can be offered to non-shareholders.
The purpose of pre-emption rights is to ensure that existing shareholders have an opportunity to maintain their interest in their company by preventing their percentage holding being watered down by the issue of shares to new members. There is, of course, no compulsion on the part of the shareholder to take the shares if they do not wish to.
In the UK there was no statutory requirement as to pre-emption rights before the European Community second company law directive (77/91) made it necessary for the law of the UK to be changed to introduce such rights.
Currently, by virtue of s.561 Companies Act (CA) 2006, a company cannot offer new shares for cash unless the existing shareholders have been offered the chance to buy the shares in proportion to their existing holding. Section 565 specifically exempts pre-emption rights where non-cash consideration is involved. As it is not always cost effective to offer new shares to all existing members, pre-emption rights can be waived by provision in the articles of association or by a special resolution of shareholders. Pre-emption rights may also be included in a company’s articles of association and it is not unusual in the case of private companies to offer a form of pre-emption right to existing members when others wish to sell their shares. |
