Pre-emption rights are protective mechanisms that allow current shareholders to maintain their ownership percentage when a company issues new shares. Think of it as a "first dibs" system that prevents dilution of existing shareholders' stakes without their consent.
When your company wants to issue new shares, you must first offer them to existing shareholders in proportion to their current holdings.
For example, if someone owns 20% of your company, they have the right to buy 20% of any new shares before you can offer them to outsiders.
Pre-emption rights protect founders from unexpected dilution and ensure they can maintain control over who becomes a shareholder.
However, they can also slow down fundraising processes since you must go through the pre-emption procedure before approaching new investors.
Existing shareholders can voluntarily waive their pre-emption rights, often done during funding rounds when bringing in new investors is beneficial for the company's growth.
This waiver typically requires a special resolution or unanimous shareholder consent, depending on your company's governing documents.
Issuing shares without following proper pre-emption procedures can result in the share issuance being declared invalid by courts.
Affected shareholders may also claim damages for the dilution they suffered, making it crucial to follow the correct legal process.
Pre-emption rights can complicate fundraising timelines since existing shareholders must be given adequate time to consider purchasing new shares.
However, most investors understand this process, and many shareholders willingly waive their rights when quality investors want to join the company.
Yes, pre-emption rights can be disapplied through special resolutions or by amending your company's articles of association.
Many growing companies choose to remove or modify these rights to make future fundraising more efficient, though this requires careful consideration of existing shareholders' interests.
