Pre-emption is the name given to a right of first refusal in favour of existing shareholders for the allotment of new shares in a company. We consider the role of the Pre-Emption Group in relation to recommended practice by listed companies.
A pre-emption right is an anti-dilution mechanism that allows shareholders to preserve their percentage shareholding in a company provided they have sufficient funds available to exercise their rights.
Statutory pre-emption rights on the allotment and issue of ordinary shares or the rights to subscribe for or to convert securities into ordinary shares are imposed under the Companies Act 2006. In the context of a private company, contractual pre-emption rights are also commonly found in the company's articles of association, shareholders' agreement or a trust deed.
Pre-emption rights can be valuable to shareholders, but the Act does allow the directors of a company to disapply or modify the operation of statutory pre-emption rights in certain circumstances.
The role of the Pre-Emption Group
The Pre-Emption Group initially published its pre-emption guidelines in 1987 in relation to considerations to be taken into account when assessing a company's case for disapplying pre-emption rights in the UK equity capital markets.
The Group aims to provide clarity on the circumstances in which flexibility might be appropriate and the factors to be taken into account when shareholders are considering the case for disapplying pre-emption rights or making use of an agreed authority for a non-pre-emptive share issue.
Its most recent Statement of Principles applies to both UK and non-UK incorporated companies whose shares are admitted to the premium segment of the Official List of the UK Listing Authority.
Companies whose shares are admitted to the standard segment of the Official List, to trading on AIM, or to the High Growth Segment of the London Stock Exchange's Main Market are encouraged to adopt the Statement.
It's not a set of rules but intended to provide a basis for discussion of the business case between companies and their investors. The Statement is updated periodically, most recently in March 2015.
Some of the key elements of the 2015 Statement of Principles are:
- clarification that it applies to all issues of equity securities undertaken to raise cash for the issuer or its subsidiaries - irrespective of the legal form of the transaction, including for example 'cashbox' transactions
- flexibility to undertake non-pre-emptive issuance of equity securities in connection with acquisitions and specified capital investments, consistent with existing market practice
- greater transparency on the discount at which equity securities are issued non-pre-emptively.
In May 2016 the Pre-Emption Group published a template resolution outlining good practice in requests for disapplication. This template provides for companies to propose separate resolutions to authorise a company to disapply pre-emption rights:
- on up to 5% of its issued share capital; and
- for an additional 5% for transactions which the board determines to be an acquisition or other capital investment as defined by the Statement.
If you are a shareholder of a company and would like to understand your pre-emption rights and/or the protections you have against further shares being issued, then please do not hesitate to contact the author to discuss your pre-emption rights.