Pre-emptive rights of purchase shares

3 key takeaways

• Pre-emptive rights protect existing shareholders from dilution by allowing them to maintain their percentage ownership.
• These rights are typically outlined in a company’s articles of association or in shareholder agreements.
• Exercising pre-emptive rights can provide shareholders with the opportunity to increase their investment in the company at potentially advantageous terms.

What are pre-emptive rights of purchase?

Pre-emptive rights of purchase, also known as subscription rights or anti-dilution rights, are a shareholder’s privilege to buy additional shares in a company before the company offers them to the public. This right helps existing shareholders maintain their proportional ownership in the company when new shares are issued. By exercising pre-emptive rights, shareholders can prevent their ownership percentage from being diluted by new investors.

These rights are especially important during new share issuances, such as rights issues, where companies raise additional capital by issuing more shares. Pre-emptive rights ensure that current shareholders have the first chance to purchase these new shares, usually at a discount to the market price.

How pre-emptive rights work

The process of exercising pre-emptive rights typically involves the following steps:

• Notification: The company notifies existing shareholders about the new share issuance and their pre-emptive rights.
• Offer period: Shareholders are given a specified period to decide whether to exercise their rights and purchase the new shares.
• Subscription: Shareholders who wish to exercise their rights can subscribe to the new shares, often at a discounted price.
• Allocation: The new shares are allocated to shareholders who exercised their pre-emptive rights, ensuring their ownership percentage remains unchanged.

This structured approach ensures that existing shareholders are prioritized and given a fair opportunity to maintain their stake in the company.

Benefits of pre-emptive rights

Pre-emptive rights offer several advantages to existing shareholders:

• Protection against dilution: By purchasing additional shares, shareholders can maintain their proportional ownership and influence within the company.
• Opportunity for increased investment: Shareholders can increase their investment in the company, potentially at a discounted price, which could lead to greater returns if the company performs well.
• Fairness and transparency: Pre-emptive rights promote fairness by giving existing shareholders priority over new investors, fostering trust and loyalty among shareholders.

These benefits help safeguard shareholders’ interests and provide them with additional investment opportunities.

Implementation and legal framework

Pre-emptive rights are typically governed by the company’s articles of association and relevant shareholder agreements. In many jurisdictions, these rights are also supported by corporate law, ensuring that companies comply with pre-emptive rights provisions when issuing new shares.

• Articles of association: This document outlines the rules and regulations for the company, including the pre-emptive rights of shareholders.
• Shareholder agreements: Agreements between shareholders may also specify the terms and conditions for exercising pre-emptive rights.
• Legal compliance: Companies must adhere to local laws and regulations that protect shareholders’ pre-emptive rights, ensuring fair treatment during new share issuances.

By understanding the legal framework and company-specific provisions, shareholders can better exercise their pre-emptive rights effectively.

Risks and considerations

While pre-emptive rights offer significant benefits, there are also risks and considerations:

• Financial commitment: Exercising pre-emptive rights requires shareholders to invest additional capital, which may not always be feasible.
• Opportunity cost: Shareholders must weigh the potential benefits of maintaining their ownership percentage against other investment opportunities.
• Market conditions: The value of the new shares may fluctuate, and shareholders should consider market conditions before exercising their rights.

Understanding these risks helps shareholders make informed decisions about whether to exercise their pre-emptive rights.

Pre-emptive rights of purchase are a vital tool for protecting shareholders from dilution and providing opportunities for increased investment. By understanding their features, benefits, and potential downsides, shareholders can better navigate new share issuances and make informed investment decisions.