Preemption rights

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Hello and welcome to TransLegal's Lesson of the Week.

Today I'm going to be talking about preemption rights of shareholders in a company.

So what are preemption rights? Well, when a company wants to raise money it may decide to issue new shares which can be sold for cash. Existing shareholders of the company may want to buy these new shares firstly because they want to make further investment in the company, secondly to exercise control over who becomes a shareholder and thirdly, to avoid their existing shareholding being diluted, that is, their percentage of ownership would be reduced if new shares were issued to non-shareholders.

So in most jurisdictions shareholders are entitled by law to buy the new shares issued by the company before they are offered to third parties, i.e. non-shareholders. So the company must first offer the shares to the shareholders in proportion to their existing ownership. So a shareholder owning 10% of the shares would be entitled to buy 10% of the new shares in the issue. This shareholder may also have the right to buy more shares if other shareholders don't want them. This form of share issue is called a rights issue.

After the issue shareholders can maintain their proportional ownership of the company. If the company and therefore the shareholders want to issues the new shares to non-shareholders, i.e. to the general public, shareholders will need to disapply their statutory preemption rights in a meeting.

So preemption rights are an important safeguard and protection for shareholders.

Thank you for listening.