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Pre-emption rights represent a right of first refusal for existing shreholders. The starting principle (subject to ways the company can disapply pre-emption) with private companies is that pre-emption rights allow existing shareholders to buy new shares before they are offered to outsiders, helping protect their proportionate ownership and influence.
There are many potential pitfalls and considerations with shareholder pre-emption rights, including :-
If you are a majority shareholder, pre-emption rights can limit your flexibility to raise capital or issue different classes of shares;
If you are a minority shareholder, you need to protect yourself from dilution or being sidelined;
Statutory pre-emption rights are limited - they cover only certain types of shares, apply only to cash issues, and can be overridden by a 75% majority (in other words, disapplied).
Contractual rights in the articles or shareholders’ agreement are critical to extend protection.
Private companies can also issue new classes of shares, like preference shares, outside the statutory rules.
Understanding how pre-emption rights can be used, structured, reinforced or restricted is essential.
We advise a wide range of stakeholders in private companies on pre-emption related issues and underlying transactions, including the company itself, majority or minority shareholders, investors, and joint venture partners. Experience includes :
For companies - drafting or updating articles of association and shareholders’ agreements, advising on the disapplication of statutory or contractual pre-emption rights
For minority shareholders - Reviewing and negotiating pre-emption protections, protecting against potential dilution risks and overall negotiations on protecting minority shareholdings.
For investors and JV partners - Conducting due diligence on pre-emption rights and share structures before investment, structuring investments to ensure clear pre-emption, exit, and protective rights, advising on alignment of articles, shareholder agreements, and statutory provisions to avoid disputes.
Transaction related advice – pre-emption implications with employee share schemes or option plans, capital raises, share buybacks and exits, or acquisitions, ensuring pre-emption rights do not block or delay transactions.
Shareholder exit scenarios - pre-emption rights may block or delay management buyouts or acquisitions; “bad leaver” situations may be complicated by shareholder claims.
Investor requirements - investors may demand rights disapplied entirely, creating tension with existing shareholders.
Employee incentives - standard rights can make issuing employee shares difficult. Formal disapplication is often needed.
Where shareholders are also directors - conflicts between capital needs and personal holdings can cause board deadlock.
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):
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.
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