Definition of Pre-Emption Rights
Pre-emption rights, established under UK company law, ensure that existing shareholders are given the first opportunity to purchase new shares before they are offered to any external parties. This principle is intended to protect shareholders from dilution of their ownership stake. These rights require that new shares be offered on terms no less favorable than those offered to potential new investors.
Examples of Pre-Emption Rights
Example 1: Rights Issue
A corporation decides to raise capital by issuing new shares. It must first offer these shares to existing shareholders in proportion to their current ownership. If a shareholder owns 10% of the company and the company issues 1,000 new shares, that shareholder has the right to purchase 100 shares at the offered price before the shares are made available to the public.
Example 2: Vendor Placings
Unlike a rights issue, a vendor placing involves selling shares directly to new investors. While easier and less expensive, this method bypasses existing shareholders, which could lead to dilution. To proceed with vendor placings, shareholder approval through a ‘special resolution’ is required under UK law.
Example 3: Special Resolution
To circumvent pre-emption rights, a company might propose a special resolution that requires approval by at least 75% of shareholders participating in the vote. If successful, the company can issue shares without first offering them to existing shareholders.
Frequently Asked Questions
Q: What is the primary purpose of pre-emption rights? A: Pre-emption rights protect current shareholders from dilution of their ownership stakes by allowing them first option to buy new shares.
Q: How are pre-emption rights typically executed in the UK? A: Companies must inform all shareholders of their right to buy new securities, usually via a rights issue.
Q: Can pre-emption rights be waived or bypassed? A: Yes, but only if shareholders agree to a waiver through a special resolution.
Q: Are pre-emption rights common practice in the USA? A: Pre-emption rights have largely been abandoned in the USA, though their principle continues to be debated in the UK.
Q: What are vendor placings and bought deals? A: They are modern methods of issuing new shares directly to new investors, which are easier and less expensive but require the waiver of pre-emption rights through a special resolution.
Related Terms
Rights Issue: An offering of new shares to existing shareholders in proportion to their current holdings.
Special Resolution: A resolution that requires the approval of at least 75% of the votes cast by shareholders.
Vendor Placings: A method of issuing new shares directly to pre-selected new investors, usually bypassing the pre-emption rights of existing shareholders.
Bought Deals: An arrangement where underwriters buy the entire share issue from the company and sell it to investors, commonly seen in the USA.
Online Resources
Companies Act 2006 - Pre-emption Rights: UK Government Legislation
Financial Conduct Authority: FCA Handbook
Pre-emption Group: Principles of Disapplying Pre-emption Rights
Suggested Books for Further Studies
- Gore-Browne on Companies by Alastair Hudson
- Company Law (Core Text Series) by Alan Dignam and John Lowry
- The Law of Company Finance by Eilís Ferran
Accounting Basics: “Pre-Emption Rights” Fundamentals Quiz
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