Pre-emption rights on an allotment may arise by statute or under the company’s Constitution.

Section 69(6) of Companies Act 2014 gives existing members of a private company a statutory pre-emption right in proportion to their existing holding on an allotment of new shares of that class. This protects an existing shareholder by ensuring they're made aware of any potential movement in shares. These pre-emption rights may however be ousted by the Constitution, varying share rights or a shareholder’s agreement.

The Legislation

Section 69(6) Subject to subsections (8) and (12) and section 70 , a company proposing to allot any shares—

(a) shall not allot any of those shares, on any terms—

(i) to any non-member, unless it has made an offer to each person who holds relevant shares, of the class concerned, in the company to allot to him or her, on the same or more favourable terms, a proportion of those relevant shares which is, as nearly as practicable, equal to the proportion in nominal value held by him or her of the aggregate of the shares of that class; or

(ii) to any person who holds shares in the company, unless it has made an offer to each person who holds relevant shares, of the class concerned, in the company to allot to him or her, on the same terms, a proportion of those shares which is, as nearly as practicable, equal to the proportion in nominal value held by him or her of the aggregate of the relevant shares of that class;

and

(b) shall not allot any of those shares to any person unless the period during which any such offer may be accepted (not being less than 14 days) has expired or the company has received notice of the acceptance or refusal of every offer so made.

A pre-emption right is simply a right of first refusal, where the shares are typically “offered around” to the existing shareholders proportionately. The company must offer the shares to their existing shareholders 14 days before any shares are allotted to any other party. If the existing shareholders refuse, the provision may allow for a sale of the shares to a third-party outsider. Alternatively, the existing members of that class of share can request that the shares be issued to another party on that member’s behalf. 

When does this apply or not apply?

Often the constitution of a private company will exclude the statutory pre-emption right or by the rights attached to previously issued shares.

Where the statutory pre-emption right is not excluded in the constitution, a special resolution may exclude the section in respect of a particular allotment.

Pre-emption rights are not given:-

• to allotments for non-cash consideration (e.g. bonus shares)
• If the Constitution, special resolution or the terms of issue exclude the operation of Section 69(6)
• allotment is in respect of employee share scheme
• shares on incorporation

Allotments of shares are submitted on form B5 and should be submitted within 30 days of the allotment. Failure to file on time constitutes a category 4 offence.

Waiving Pre-Emption Rights

It is important to note a waiver of pre-emption rights may be in place, this should be reviewed prior to completing any documentation.

As discussed above, the pre-emption right on an issue of shares can be waived by the company’s Constitution. If a pre-emption right on an issue of shares arises under the Constitution, they can be waived using a special resolution which will need to be signed by the holders of no less than 75% of the company’s issued shares. If this threshold is met, the pre-emption right is waived for that issue. It should be noted that such waiver only applies to the shares specified in the resolution. If a blanket waiver is desired, the Constitution will need to be amended.

The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article. The information at the time of publishing was accurate and could be subject to final changes.