UK Limited companies have shares that are issued to shareholders. When shares are sold or transferred to another party the existing company shareholders may have rights over these shares.
The term pre-emptive rights, otherwise called rights of pre-emption, relates to shareholders in a UK company that may have to be offered shares in a company before they are made available to third parties. The right of pre-emption can arise when there is a transfer, allotment or transmission of shares. These rights could prove important when trying to ensure that a shareholder's proportion of the voting and other rights in the company are not watered down.
Pre-emption rights are normally set out in the company’s articles of association. Limited company members may choose to add pre-emption rights to the articles during the company formation process. Alternatively they can add these afterwards through a special resolution at a general meeting. Pre-emption rights can be also removed from the articles at any time after company registration. This is done by holding a meeting and recording the change with a special resolution. You should then update any shareholders’ agreements to reflect this change.
Most new companies in the UK are formed with one director and one shareholder for simplicity but also because many companies are typically run by one person. However, this isn’t always the case and the company may be registered with several shareholders and issue a large amount of shares or different share classes.
It is important to remember that you can always issue more shares in the future and, as already mentioned, rights can be applied where necessary through a special resolution.
If pre-emption rights are in place and you do decide to issue more shares, or transfer existing shares to new holders, you will need to make sure that any existing holders are offered them first. That is the purpose of the pre-emption rights.
It is important to note that a shareholder has a right to waive his or her pre-emption rights for any reason either in one instance or for all future times. If this is the case this should be documented accordingly. We would suggest this decision is not taken lightly and legal advice is taken. Pre-emption rights protect existing shareholders and may prevent the company from being taken over by outside investors.
If you want to form a limited company with pre-emption rights you can upload your own bespoke articles of association when registering a new company on our site.