When UK companies issue new shares or transfer existing ones, pre-emption rights come into play to protect existing shareholders. These rights ensure that current shareholders have the first opportunity to acquire additional shares before they’re offered to new investors. This practice is crucial in maintaining equity and ensuring fairness among stakeholders.

In the UK, unless pre-emption rights are specifically disapplied, issuing new equity securities (typically for cash) must follow a pre-emptive approach, offering shares to existing shareholders in proportion to their current ownership. This process ensures that existing shareholders can maintain their relative stakes and prevents unexpected dilution of their ownership.

Pre-emption rights offer a critical level of protection to existing shareholders when a company issues new shares. Here’s why they are crucial, along with an explanation of how certain shareholders might have priority over others:

Pre-emption rights give existing shareholders the first right of refusal. This means that when a company plans to issue new shares, the existing shareholders get the opportunity to purchase them first, maintaining their ownership percentage. Priority rights can apply to specific groups of shareholders, typically preference shareholders, who might have enhanced rights due to their investment in the company during earlier funding rounds.

In many UK companies, particularly those at the Series A stage and beyond, preference shareholders often hold priority rights to receive pre-emption offers first. This setup is common among venture-backed companies, where preference shareholders have invested at key stages of growth, earning additional rights and privileges. These shareholders often get the first opportunity to acquire new shares, followed by other classes of shareholders based on their respective agreements with the company.

The pre-emption process aims to maintain equitable ownership among shareholders. By allowing preference shareholders the first opportunity to acquire new shares, companies acknowledge their priority status and ensure they’re compensated for the risk taken during earlier funding rounds. This approach helps maintain a sense of fairness and stability within the company’s shareholder structure.

Pre-emption rights, including priority for preference shareholders, contribute to a transparent and fair governance process. By following this procedure, companies demonstrate their commitment to equity and build trust among stakeholders. This transparency is essential for maintaining investor confidence and fostering a cooperative environment.

Pre-emption rights, particularly those offering priority to preference shareholders, also support company growth. By allowing key investors to maintain their stakes, companies can attract additional funding while preserving loyalty among existing shareholders. This balanced approach to fundraising and shareholder protection creates a solid foundation for business expansion.

Pre-emption rights, along with priority rights for preference shareholders, are vital for UK companies to protect existing shareholder interests and ensure equitable ownership. Companies should consider these rights carefully to maintain a harmonious and fair shareholder structure.

If you’re seeking advice on pre-emption and priority rights, our team at Avery Law has extensive experience in this field. We regularly advise companies on matters relating to share capital and share issues. If you need guidance, don’t hesitate to contact us.

Author: Lisa Brunt