Pre-emptive rights

Company Law Solutions provides services for the allotment and transfer of shares, including drafting pre-emption and other transfer provisions for company articles.

Pre-emptive rights (or "rights of pre-emption") are any rights shareholders may have to be offered shares in a company before they are made available to anyone else. They can arise on the allotment, transfer or transmission of shares. Such rights may be important to ensure that a shareholder's proportion of the voting and other rights in the company (such as dividend rights) are not diluted.

Pre-emptive rights on allotment of shares

Pre-emptive rights on the allotment of shares can arise under the Companies Act 2006, under the company's articles or under the terms of a shareholders' agreement.

Pre-emptive rights on share allotments under the Companies Act 2006

Pre-emptive rights on the issue of shares in a company may arise under CA 2006 Part 17, Chapter 3 sec561 to sec577. In outline, shares proposed to be issued must be offered to existing members in proportion to their present share holdings before being issued to anyone else. The offer must be in writing and the company must allow at least 21 days for the shareholder to take up the offer.

These pre-emptive rights on the issue of shares do not apply if:

1. the memorandum or articles of a private company exclude them or provide alternative provisions, e.g. to make more detailed provisions in respect of different classes of shares; or
2. the company passes a special resolution to exclude them; or
3. the shares are issued for non-cash consideration;
4. shares within an employees' share scheme.

The shares could also be offered to the members who then waive their rights to them.

Pre-emptive rights on share issues under the company's articles

Many companies' articles contain provisions on the allotment of shares which either exclude the statutory rights mentioned above or impose different provisions on share allotment. No issue of shares should be made without being sure what pre-emptive rights apply under the articles, and how the provisions in the articles relate to the current statutory provisions. Company Law Solutions can advise on these matters.

If there is a shareholders' agreement in effect this will often contain pre-emption provisions. The agreement will be a contract between those members of the company who are parties to it and often the company itself is a party and so bound by the provisions.

Pre-emption provisions in company articles on transfer or transmission of shares

There are no statutory provisions imposing pre-emptive rights when shares are transferred or transmitted, but they are often included in the articles of private companies as amendments to the Model Articles or Table A (in the case of older companies). Such provisions usually apply to both the transfer and transmission of shares (i.e. when a shareholder dies or is made bankrupt). There is a wide range of possible provisions, and it is very important that the articles are properly drafted to reflect the needs of the company and its shareholders. Company Law Solutions provides a service for this.

Pre-emption provisions in a shareholders' agreement

Many shareholders' agreements include provisions restricting further issues of shares and controlling the transfer of shares and their transmission. Such provisions can be in either the articles or a shareholders' agreement. A shareholders' agreement will also cover many other matters. If one is being put in place for other reasons then the share transfer provisions are usually included in it. What must be avoided is having share transfer provisions in both the articles and a shareholders' agreement if these are not identical, which can lead to real practical problems.

Company Law Solutions provides shareholders' agreements and company articles.