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Pre-emption rights: what are they, when do they apply and where do they come from?

A pre-emption right is a right that a shareholder may benefit from on an issue of new shares or a transfer of shares in a company. Generally speaking, it gives the shareholder the right to purchase the shares being issued or transferred in proportion to their existing shareholding before a third party can receive them. The right can arise under the company’s articles of association, other documents such as a shareholders’ agreement, or under law as a consequence of the Companies Act 2006 (the “CA 2006”). A pre-emption right gives shareholders the right, but not the obligation, to purchase the shares.

Pre-emption on an issue of shares

The CA 2006 gives a statutory pre-emption right on an issue of new shares. If a company is planning to issue new shares, it must first offer the shares to its existing shareholders who have the right to purchase the shares at the same price as the third party purchaser in a proportion that is pro-rata to their existing shareholding. This statutory right can be disapplied in the companies articles of association.

The Vestd standard articles of association disapply the right under the CA 2006 and instead provide a pre-emption right upon an issue of shares under the articles of association. This sets out the process the company must follow for offering the shares to its shareholders and how shareholders can purchase the shares offered.

Pre-emption on a transfer of shares

Neither the CA 2006 nor the model articles confer a pre-emption right to shareholders upon the transfer of shares from a shareholder to a third party (be them an existing shareholder or not). If such a right exists, it will be found in a company’s articles of association or other documents such as a shareholders’ agreement.

Under the Vestd standard articles of association a shareholder is free to transfer their shares to a Permitted Transferee (as defined therein) with the consent of a majority of the company’s directors without first offering the shares to other shareholders. If a transfer is to any person other than a Permitted Transferee, the procedure set out in the articles of association as to offering the shares to the other shareholders pro-rata to their existing shareholding must be followed. Alternatively, the pre-emption rights can be waived using a special resolution (please see below). 

Waiving pre-emption rights

As discussed above, the pre-emption right on an issue of shares arising under the CA 2006 can be waived by the company’s articles of association. If a pre-emption right on an issue of shares or on a transfer of shares arises under the articles of association, they can be waived using a special resolution which will need to be signed by the holders of no less than 75% of the company’s issued shares. If this threshold is met, the pre-emption right is waived for that issue or transfer. It should be noted that such waiver only applies to the shares specified in the resolution. If a blanket waiver is desired, the articles of association will need to be amended.