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What are Pre-Emption Rights?

What are Pre-Emption Rights?

The Companies Act 2006 contains pre-emption rights for shareholders on the issue of new shares for cash (but not for other consideration, such as shares). If a company proposes to allot new shares for cash (except those allotted under an employee share scheme), it is required to offer those shares first to the existing shareholders in proportion to the shares held by them. This is an anti-dilution mechanism.

Pre-emption rights can be disapplied by a special resolution of the shareholders of the company or can be excluded by a provision of the company’s articles of association.

It is possible that as part of a company’s financing arrangements, it will have agreed with investors or lenders not to issue further shares without their consent. Accordingly agreements with lenders and capital investors will have to be reviewed and any necessary consent obtained prior to any new share issue.

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