Do all shareholders automatically have pre-emption rights?<\/h3>\n
If the Model articles of association are adopted, existing shareholders are automatically afforded statutory pre-emption rights on the allotment of ordinary shares. Shareholders, however, do not automatically have pre-emption rights under any other circumstances, so these rights should never be assumed without confirmation.<\/p>\n
Statutory pre-emption rights are contained within section 561 of the Companies Act 2006<\/a>. As previously mentioned, this provision applies only on the allotment (issue) of ordinary shares – there are no statutory pre-emption rights on the transfer of existing shares, the transmission of existing shares (i.e., when a shareholder dies or becomes bankrupt), or on the allotment, transfer, or transmission of any share class other than ordinary.<\/p>\n How to transfer company shares<\/span><\/a>\n \n Whilst these statutory rights are sufficient for many small business owners, companies with multiple owners and\/or multiple share classes<\/a> usually require additional pre-emption rights to reflect the company\u2019s needs, protect shareholders, and avoid unnecessary disputes.<\/p>\n Should a company wish to disapply the statutory provision or expand the scope of these rights to include different share classes and\/or provide rights on the transfer or transmission of shares, the articles of association and\/or shareholders\u2019 agreement must be amended accordingly. Where amendments are made, the procedure for applying or disapplying pre-emption rights should also be outlined in the articles.<\/p>\n The procedure for applying or disapplying pre-emption rights will vary from company to company, depending on whether statutory or amended provisions apply. Directors must refer to the articles and any shareholders\u2019 agreement that exists before issuing or transferring shares, thus ensuring that the correct procedure is followed.<\/p>\n If the statutory provisions defined in the Companies Act apply, the directors will be required to contact existing shareholders (members) in writing to offer available shares in proportion to their current shareholdings, i.e., if the member currently holds 10% of the company\u2019s issued shares, he or she must be offered 10% of any newly allotted shares. This should be done in the first instance, prior to making new shares available to anyone else. Existing shareholders must be given at least 21 days to respond to the offer.<\/p>\n When presented with the option to take newly issued shares, existing members with statutory pre-emption rights may choose to:<\/p>\n Should the members choose to waive or disapply these rights, the company may then offer the available shares to third parties, but the terms of the share allotment must not be more favourable than the terms offered to existing members.<\/p>\n Why do companies use multiple share classes?<\/span><\/a>\n \n Where statutory pre-emption rights on the allotment of shares have been disapplied, or amended provisions are defined in the articles or shareholders\u2019 agreement, the procedure for pre-emption rights may be different.<\/p>\n In such cases, the company must ensure that its articles are properly drafted to include explicit provisions for the allotment, transfer, and transmission of shares and the procedures that directors and shareholders must follow.<\/p>\n The main purpose and benefit of pre-emption rights are to provide existing shareholders with a control mechanism; a way to protect their interests in a company by preventing involuntary dilution of their shareholdings. Essentially, it allows them to keep the same percentage of ownership in the company, regardless of how many new shares are issued.<\/p>\n Further benefits of pre-emption rights include:<\/p>\n Whilst pre-emption rights may be of no great concern to private companies that are owned and managed by just one person, they do provide a crucial form of protection to shareholders in companies with multiple shareholders. These rights are of particular benefit and importance to early-stage investors who, understandably, want to minimise the risk they are taking in investing in a new business.<\/p>\n Without the protection of such rights, shares could be issued, transferred, and transmitted to third parties to the detriment of existing members, most notably minority shareholders, thus impacting their voting rights and profit entitlement.<\/p>\n Despite their many benefits, there are a few potential disadvantages to pre-emption rights. In certain situations, these rights can impact the commerciality of a business, deter prospective investors, and cause disputes within a company.<\/p>\n Potential disadvantages include:<\/p>\n To minimise these risks whilst reaping the benefits of pre-emption rights, a degree of flexibility is key, coupled with open and effective communication between the company and its shareholders.<\/p>\n Pre-emption rights may be located in three separate sources of company governance: the Companies Act 2006; the articles of association; and a shareholders\u2019 agreement. It is vital that all of these documents are checked before issuing, transferring, or transmitting company shares.<\/p>\n Statutory pre-emption rights are located in the Companies Act 2006<\/a> (Part 17, Chapter 3, sections 561-577). This legislation provides rights only on the allotment of ordinary shares. There are no statutory pre-emption rights on the transfer or transmission of shares or on the allotment of any share class other than ordinary. Companies can, however, choose to amend their articles to alter their shareholders\u2019 pre-emption rights.<\/p>\n Whilst there are no statutory provisions on the allotment of shares other than ordinary or on the transfer of transmission of shares, it is quite common for companies (and recommended for companies with more than one shareholder) to include these additional pre-emption rights as amendments to the Model articles (or Table A, for older companies incorporated before 1 October 2009).<\/p>\n A shareholders\u2019 agreement, which is a private contract between members of a company, is advisable when it has more than one shareholder, and pre-emption rights are often included in such agreements.<\/p>\n If a company chooses to amend its articles to include its own pre-emption provisions, it is recommended these provisions should also be included in any shareholders\u2019 agreement.<\/p>\n Most new companies adopt Model articles in their entirety during the company formation process, which means that shareholders have only statutory pre-emption rights on the allotment of ordinary shares; however, in accordance with sections 569-573 of the Companies Act 2006, it is possible to amend the articles at any point after incorporation – to remove or alter the statutory provision and\/or include additional rights.<\/p>\n How to issue dividends in a company limited by shares<\/span><\/a>\n \n To amend the articles after incorporation, the existing shareholders must pass a special resolution at a general meeting or by way of a written resolution. At least 75% of the votes must be cast in favour of the resolution, otherwise the company cannot amend the articles to introduce additional rights. If the company also has a shareholders\u2019 agreement, this must be updated to include the changes reflected in the amended articles.<\/p>\n It is possible to permanently remove statutory pre-emption rights from the Model articles. Additional rights included in amended articles can also be permanently removed. To authorise such changes, the existing shareholders of the company must pass a special resolution at a general meeting, or by way of written resolution – both of which must be passed by a majority of no less than 75% of the votes.<\/p>\n Alternatively, rather than permanently removing pre-emption rights from Model or amended articles, shareholders can pass a special resolution or a written resolution to disapply rights to specified allotments or transfers on a case-by-case basis.<\/p>\n There are a few circumstances where the rules on pre-emption rights do not apply:<\/p>\n![\"The](\"https:\/\/s3-eu-west-1.amazonaws.com\/bso.media.cdn\/generic\/affiliates\/payoneer_mobile.png\"\n)
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\n <\/a>\n <\/div>\n \nWhat is the procedure regarding statutory pre-emption rights?<\/h3>\n
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What are the benefits of pre-emption rights to shareholders?<\/h3>\n
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What are the disadvantages of pre-emption rights?<\/h3>\n
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Where are pre-emption rights located?<\/h3>\n
Pre-emption rights in the Companies Act 2006<\/h4>\n
Pre-emption rights in the articles of association<\/h4>\n
Pre-emption rights in a shareholders\u2019 agreement<\/h4>\n
I don\u2019t have pre-emption rights in my articles, can I introduce them after incorporation?<\/h3>\n
I have pre-emption rights in my articles, can I remove them permanently?<\/h3>\n
When do pre-emption rights not apply?<\/h3>\n