Pre-emption rights

Pre-emption rights are the rights of shareholders to be offered any new issue of shares before the shares are offered to non-shareholders.

The offer of shares to shareholders is usually required to be pro-rata to their existing shareholding. It most commonly takes place through a rights issue.

The purpose of pre-emption rights is to ensure that shareholders have an opportunity to prevent their stake being diluted by new issues.

In the UK (and most other countries) pre-emption rights are required for publicly traded companies; by both company law and listing rules.

It is possible for shareholders to waive pre-emption rights. This is useful for situations where a rights issue would not be cost effective; it is often cheaper to issue new shares through a placing.

Pre-emption rights also do not apply to the sale of treasury shares: both for obvious practical reasons and because transactions in treasury shares cannot lead to dilution of holdings.

Copyright Graeme Pietersz © 2005-2020