Pre-Emption Rights

Section 561 of the Companies Act 2006, headed 'Existing shareholders' right of pre-emption', provides that 'A company must not allot equity securities to a person on any terms unless' it has first made an offer to each existing holder of ordinary shares to allot to them, on the same or more favourable terms, a proportion of those securities 'as nearly as practicable equal to the proportion in nominal value held by him of the ordinary share capital of the company', and the offer period has expired or all offers have been accepted or refused.

Pre-emption rights protect existing shareholders from having their proportionate stake in the company diluted without being given the first opportunity to maintain it. The Act allows a shareholder to accept an offer, let it lapse, or renounce their right to the allotment in favour of someone else. Pre-emption rights can be disapplied or excluded in certain circumstances, including under a company's articles or by shareholder resolution, which is why company law practice distinguishes 'statutory pre-emption rights' from any pre-emption provisions found in a company's articles or a shareholders' agreement.