Pre-emptive rights are clauses in a shareholders agreement that require any shareholder who wishes to sell their shares to first offer those shares to the other existing shareholders before they can sell to a third party.
The price of the shares is either the price nominated by the selling shareholder or as determined by an independent valuer.
Usually, with a number of continuing shareholders, each of them can nominate how many shares they wish to purchase. If the offer is oversubscribed then the shares are allocated on a proportionate basis to the continuing shareholders in accordance with their existing proportionate shareholding, or as may otherwise be agreed between them.
If the acceptances from the continuing shareholders do not cover all of the shares put up by the outgoing shareholder then their offer is deemed to be rejected and they are free to sell to a third party for not less than the same price, and on the condition that:
- the new incoming shareholder is approved by the continuing shareholders (their consent not to be unreasonably withheld); and
- the new incoming shareholder agrees to become bound to the shareholders agreement.
Without pre-emptive rights, shareholders remaining in the business are at risk of being caught out by an outgoing shareholder selling to a third party who they don’t know or haven’t approved. You mightn’t think this is a real risk but if the shareholders are not getting on with each other, people will look for alternatives and if the outgoing shareholder has a controlling interest then a third party might just be interested in buying.