Pre-emption right

Company shares

In practice, the most common form of pre-emption right is the right of existing shareholders to acquire new shares issued by a company in a rights issue, usually a public offering. In this context, the pre-emptive right is also called subscription right or subscription privilege. It is the right but not the obligation of existing shareholders to buy the new shares before they are offered to the public. In that way, existing shareholders can maintain their proportional ownership of the company and thus prevent stock dilution. In many jurisdictions, subscription rights are automatically provided for by statute, such as in the United Kingdom, but in other jurisdictions, there arise only if provided for under the constitutional documents of the relevant company. In the United States, for example, it is rare for publicly listed companies to grant pre-emptive rights to shareholders, but it is common for unlisted companies to grant pre-emptive rights to venture capital and private equity investors. The European Union has brought an infringement action against Spain based on the claim that the lack of statutory pre-emptive rights under Spanish law violates the Second Company Law Directive.

Other situations in which pre-emption rights are seen to arise are in property developments. Parties close to the investors are often given a right of pre-emption in relation to new flats or condominiums within a development.

Overall, pre-emption right is similar to the concept of a call option.

British companies

The Companies Act 2006 is the source of shareholder pre-emption rights in British companies. Under Section 561(1) of the Companies Act 2006 a company must not issue shares to any person unless it has made an offer (on the same or on more favourable terms) to each person who already holds shares in the company in the proportion held by them, and the time limit given to the shareholder to accept the offer has expired.

By virtue of Section 562(5), the period given to the shareholders to accept such an offer must not be less than 14 days.

Those provisions' effect is that a company cannot allot shares to new shareholders until it has offered them to its existing shareholders. The company must give the shareholders at least 14 days to decide whether or not they wish to purchase the shares. Private companies and sometimes public companies can choose to disapply or modify the statutory pre-emption rights either generally or in respect of a specific allotment (Sections 569 to 573 of the Companies Act 2006).