What are pre-emption rights?

Pre-emption rights may be found in a company’s articles of association or in a shareholders agreement, or may be applied by law. They give existing shareholders a right of first refusal where it is proposed to issue new shares or transfer existing shares.  This allows the existing shareholders (assuming they have the resources to pay for the shares which are offered to them) to avoid their percentage shareholding being diluted by the issue of new shares or prevent an outsider gaining a stake in the company through the transfer of existing shares. Pre-emption provisions may kick in automatically on the occurrence of certain events such as death or bankruptcy to force a shareholder to offer his shares to the other shareholders. It is vital to ensure that pre-emption rights are carefully drafted.

Advertisement