UK Accounting Glossary
Pre-emption rights for shares offer protection to existing shareholders by giving them a priority option to acquire newly issued shares. By having the option to acquire shares before they are offered to any third parties, the existing shareholders protect their shareholdings from being diluted. In the context of allotment of shares, pre-emption rights are also known as subscription rights. Dependent on the company’s articles of association, pre-emption rights may also arise in the case of share transfers. The Model Articles contain such restriction and practically most private companies will have restriction on transfers to ensure that the shares are not transferred to third-party without prior consultation with other members.
Both Table A (for companies registered before 1 October 2009) and the Model Articles (for companies incorporated after 1 October 2009) include pre-emptive provisions. These require any new shares issued for cash to be offered to existing shareholders first. Please note however that pre-emption rights do not apply to new issues of shares that are allotted as wholly or partly paid-up or issued for a non-cash consideration. The above-mentioned statutory pre-emption rights regime can be disapplied and replaced by a completely bespoke procedure for allotment, if necessary.
Sections 561 to 577 of the Companies Act 2006 contain pre-emptive provisions stating that newly issued shares must be first offered to existing members in proportion to their present shareholdings before being offered to anyone else. Such an offer must be open for at least 21 days. The statutory pre-emption regime does not apply to certain shares including:
Shares as any other property can be sold or gifted. Whether you decide to sell or give away your shares to somebody you will need to make a transfer of shares. This will require a valid stock transfer form with a stamp confirming payment of any stamp duty applicable, if the transfer is for consideration is more than £5 (no stamp duty is payable on gifts).
The Model Articles include provision placing a restriction on share transfers. The restriction provides directors with a discretionary right to refuse to register any proposed transfer of shares. Unlike the Model Articles, Table A does not contain such restriction. The most common tailored form of restriction is a pre-emption right contained in the shareholders’ agreement. Typically, potential transferors are required to first make a written offer to all of the other existing shareholders, who have a right but not obligation to acquire the number of shares offered. The existing shareholders must be offered the same terms and price as any third party to whom such shares have been offered.
The statutory pre-emption rights for shares can be disapplied in a number of ways. These include:
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Definitions for Pre-emption Rights For Shares are sourced/syndicated and enhanced from:
This glossary post was last updated: 25th February 2020.