What Are Pre-Emption Rights In Relation To The Allotment And Issue Of Company Shares?

In the context of an allotment and issue of shares, a pre-emption right is a right of first refusal in favour of existing shareholders in relation to the new shares.

In essence, a pre-emption right is an anti-dilution mechanism that allows shareholders to preserve their percentage shareholding in a company, provided they have sufficient funds available to be able to take up their rights.

Pre-emption rights on the allotment and issue of shares are imposed by Part 17 of Chapter 3 of the Companies Act 2006 (CA 2006).

In addition, in the context of a private company, contractual pre-emption rights are commonly found in the company’s articles of association and/or a shareholders’ agreement between the company’s shareholders.

The basic pre-emption principle is that a shareholder should be able to protect their shareholding from dilution by being given the opportunity to subscribe for a proportionate part of any new shares that are issued. This principle is preserved in the CA 2006, which requires that a company proposing to allot ordinary shares must first offer them on the same or more favourable terms to each holder of ordinary shares pro rata to their existing holding of ordinary shares.

Exceptions to the statutory pre-emption right

There are certain exceptions to the statutory pre-emption right, including in respect of shares issued under an employees’ share scheme for example. However, the applicable rules and procedures are complex, and it is always prudent to seek professional advice before relying on any assumed exception.

The statutory pre-emption right will also not apply if all the shareholders have agreed to waive their pre-emption rights in relation to the proposed allotment of shares.

Can the statutory pre-emption right be disapplied?

There are various ways in a which a company can either exclude or disapply the statutory pre-emption regime.

Private companies can exclude the application of the statutory pre-emption right (either generally or in relation to a particular allotment) by an express provision to that effect in their articles of association.

Section 568 of the CA 2006 also provides for the exclusion of the statutory pre-emption right where a company’s articles of association include a corresponding pre-emption provision.

Breach of the statutory pre-emption right

The CA 2006 sets out the sanctions that apply if the statutory pre-emption rules are contravened. Liability arises under the CA 2006 if a company either breaches the requirement to make a pre-emptive offer under the CA 2006 or fails to follow the procedure for communicating the pre-emptive offer in accordance with the CA 2006.

Where there is a breach of either of these provisions, the company and each of its officers who knowingly authorised or permitted the contravention are jointly and severally liable to compensate any person to whom a pre-emptive offer should have been made.

Summary

In summary:

1. The statutory pre-emption right in relation to an issue and allotment of shares provide an anti-dilution mechanism that allows shareholders to preserve their percentage shareholdings in a company.
2. There are certain exceptions to the statutory pre-emption right contained within the CA 2006, but it is prudent to seek professional advice before relying on any assumed exception.
3. Mechanisms exist that allow the disapplication of the statutory pre-emption right in certain circumstances, but again it is prudent to seek professional advice to ensure that the applicable mechanism is correctly followed.
4. Any failure to correctly apply the requirements of the statutory pre-emption right can result in the company and each of its officers who knowingly authorised or permitted the contravention being held jointly and severally liable to compensate any person whose position has been prejudiced by the failure.

How can we help?

The Corporate and Commercial team at Wilson Browne Solicitors is ideally placed to advise on all legal aspects of the statutory procedures and formalities which are required to be followed in relation to the application of the statutory pre-emption right. For a confidential and no obligation initial discussion about how we may be able to help, please contact the Corporate and Commercial team: 0800 088 6004