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Pre-emption rights explained

Pre-emption rights are rights which protect an existing shareholder by ensuring they’re made aware of any potential movement in shares.

Q: In relation to shares, what are pre-emption rights?

A: They are rights which protect an existing shareholder by ensuring they’re made aware of any potential movement in shares. This could include, for example, another shareholder wishing to transfer their shares or the company issuing new shares.

Q: I hold ordinary shares in a private company. Do my shares automatically give me pre-emption rights?

A: YES, for new issues of shares: Section 561 of the Companies Act 2006 affords a shareholder holding ordinary shares with an automatic right of pre-emption on allotment. As an existing shareholder, this means that when new shares are allotted the company must first make you an offer equal to the proportion (in nominal value) held by you on the same (or more favourable) terms. Shares may only be issued if you waive your rights to pre-emption.

A:  NO, for transfers of shares: The Companies Act 2006 does not provide automatic pre-emption protection to shareholders for transfers of shares. As a result, if you require protection on transfers you need to ensure this protection is included in the company’s articles of association.

Q: Why do I need to make sure there are pre-emption rights, both on new share issues and on transfer?

A: It allows you to understand who your fellow shareholders are and makes sure your shareholding is not diluted without you having a say.
If you hold shares in a company and there are no pre-emption rights on transfer you may find yourself owning a company alongside strangers with whom you did not necessarily set out to do business with.

Q: If I form a company with Vistra, can you help me with pre-emption rights on transfer?

A: Yes. We have specialist articles for this. Just tick the box marked “pre-emption on transfer” and we shall include it in your articles; which can be adopted on formation.
 

 

Corporate Law

 

 


Author: Debbie Farman

 

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