Pre-emption rights - uses and variables

What Are Pre-emption Rights?

Pre-emption rights (sometimes called rights of first refusal) are most commonly rights that grant existing shareholders the opportunity to maintain their proportional ownership by giving them priority to purchase new shares before they can be offered to third parties, preventing dilution of their ownership stake and control.

Pre-emption rights can be found in:

• A company's Articles of Association

• Shareholders' agreements

• Investment agreements

• Joint venture agreements

What's the context or scenario in which pre-emption rights become important?

In private UK companies, pre-emption rights are key in both new share issues and share transfers. For transfers—such as when a shareholder exits, dies, or wants to sell to a third party—pre-emption rights give existing shareholders first refusal. This helps maintain control, prevent unwanted shareholders, and protect the agreed ownership balance.

Statutory Pre-emption Rights

Under Section 561 of the Companies Act 2006, UK companies have statutory pre-emption rights that require new shares issued to be offered first to existing shareholders in proportion to their current holdings. However, private companies often modify or disapply these statutory rights in their articles of association to disapply pre-emption or modify how and when pre-emption rights may apply.

Other situations where pre-emption rights are important

Pre-emption rights are most commonly associated with new share issues or share transfers of ordinary shares, but they have several other important applications :-

• Preference shares - pre-emption rights don’t automatically apply to preference shares under UK law and must be contractually agreed. They’re particularly relevant where preference shares are convertible or part of negotiated investor protections, helping prevent dilution of economic rights or conversion value. While the principle is similar to ordinary shares, the emphasis is often on preserving financial terms rather than voting control.

• Asset Sales - for example, when a company considers selling a property or intellectual property, shareholders may negotiate pre-emption rights over these assets to ensure they have the first opportunity to acquire them if sold.

• Joint Ventures - pre-emption rights can apply to the transfer of 1 of the venturers interest, ensuring the remaining party or parties maintain control over who joins the venture.

• Commercial Contracts - such as distribution agreements, where a supplier may want the right to re-acquire distribution rights before they can be transferred to a third party.

Key considerations with pre-emption rights

Pre-emption rights are typically subject to extensive negotiation including :-

• Valuation Mechanisms - options include fair market value as determined by independent valuers, formula-based pricing (e.g., multiple of EBITDA), matching third-party offers or pre-determined fixed prices or discounts

• When pre-emption will not apply - common situations include transfers to family members for estate planning or employee share schemes

• Time Limitations - including notice periods for expressing interest (typically 14-30 days) and periods for completing transactions (often 30-60 days).

• Partial Exercise - what happens when pre-emption rights are only partially exercised.

• Drag along and tag along - pre-emption rights frequently interact with drag-along rights (allowing majority shareholders to force minorities to join in a sale) and tag-along rights (allowing minorities to join in a sale on the same terms as the majority):

We can help

Pre-emption rights should balance the interests of existing shareholders against the company's need for flexibility and growth. Contact our experienced and specialist team for legal advice, drafting, review or negotiation of pre-emption rights and other shareholder rights, rules or corporate legal matters.