What are pre-emption rights?

The Companies Act 2006 (the 'CA 06') provides that a company proposing to allot equity security may not allot them for cash to any person unless it has previously offered them on the same or more favourable terms to its existing shareholder. These are known as pre-emption rights and are intended to protect shareholders from having their shareholdings diluted by the issue of more shares. These rights can be disapplied by the company provided it follows the correct procedure. There is a distinction between private companies and public companies in relation to pre-emption in that private companies can exclude pre-emption rights. See below for more information.

The pre-emption right is only triggered by a proposed allotment of relevant shares (excluding subscriber shares and bonus shares) and rights to subscribe for or to convert securities into relevant shares.

Relevant shares mean all the shares in the company except:

• Shares which carry a right to participate only up to a specified amount in a distribution of a dividend or capital, i.e. shares such as non-participating preference shares where the right to income and capital is fixed
• Shares allotted (or to be allotted) under an employees' share scheme

A company can disapply the pre-emption rights of existing shareholders in relation to either of a specified allotment or to allotments generally.

Pre-emption rights in relation to a specific allotment can only be disapplied by passing a special resolution of the shareholders of the company at a general meeting. The resolution must be proposed to the shareholders, in advance with sufficient notice, by the directors who have to set out their reasons for making the recommendation, the amount of payment for the shares being allotted and the directors' justification of that amount.

As a result of these cumbersome requirements, it is unusual for a company to disapply the pre-emption rights in relation to specific allotments. Normally, the directors are given general authority to allot shares and at the same time the company can disapply the provisions of the CA 06 in relation to allotments made under that general authority. This general disapplication must:

• be contained in the articles of association of the company;

• be effected by way of a special resolution passed by its shareholders.

A listed company that intends to issue shares must comply with the requirements relating to pre-emption rights. A listed company, which is proposing to issue equity securities for cash, must offer them to existing equity shareholders and to holders of other equity securities who are entitled to be offered them in proportion to their existing holdings. This stock exchange requirement does not apply if the company has a general or specific disapplication of pre-emption rights. This listing rules requirement doesn't apply to listed companies that are incorporated overseas. This is because the principle of pre-emption rights isn't recognised universally.