The pre-emption right under the Companies Act 2006 is the right of existing shareholders to be offered new shares in a company before they are offered to other investors. This right is intended to protect the interests of existing shareholders by giving them the opportunity to maintain their proportionate ownership of the company and to avoid dilution of their shares.
Under section 561, a company cannot allot “equity securities” unless it has made an offer to each shareholder who holds ordinary shares to allot to him on the same or more favourable terms. Therefore, section 561 only applies to “equity securities”.
Equity securities are the class of shares that do not participate in a specific amount (capped/fixed rate). E.g., preference shares with 10% entitled dividends are capped shares and are not subject to the pre-emptive rights.
Section 561(1)(a) stated that the offered shares should be proportionate to the current shares in possession. I.e., if the current shareholder owns 51% of shares, he must be offered 51% of the shares that are being offered on the same or more favourable terms.
If existing shareholders choose not to exercise their pre-emption rights, the new shares may be offered to other investors. However, the company must first give notice to its existing shareholders of their right to buy the new shares and the terms on which they are being offered. This notice must be given within a specified time period and must include details of the number of shares being offered, the price and any other relevant terms.
Disapplication of the Pre-emption Right
“Section 567 allows for a permanent exclusion of the pre-emption right by adding a provision of exclusion to the Articles of Association. In the case of private companies with only one class of shares, Section 569 permits a one-time exclusion by a special resolution, which is the preferred option for most companies. Section 570 addresses the exclusion of the pre-emption right for companies with more than one class of shares.”
As an alternative option for waiving the pre-emption right, a company can disapply this right under common law by issuing a letter signed by each shareholder waiving his pre-emption right under section 561 of the Companies Act 2006.
In conclusion, the pre-emption right under the Companies Act 2006 is an important protection for existing shareholders, giving them the right to maintain their proportionate ownership of a company and avoid dilution of their shares. Companies must comply with the pre-emption rules when issuing new shares unless an exclusion or exception applies.