Pre-emption right
A pre-emption right, right of pre-emption, or first option to buy is a contractual right to acquire certain property newly coming into existence before it can be offered to any other person or entity.[1] It comes from the Latin verb emo, emere, emi, emptum, to buy or purchase, plus the inseparable preposition pre, before. A right to acquire existing property in preference to any other person is usually referred to as a right of first refusal.
Company shares
In practice, the most common form of pre-emption right is the right of existing shareholders to acquire new shares issued by a company in a rights issue, a usually but not always public offering. In this context, the pre-emptive right is also called subscription right or subscription privilege.[2] This is the right, but not the obligation, of existing shareholders to buy the new shares before they are offered to the public. In this way, existing shareholders can maintain their proportional ownership of the company, preventing stock dilution.[3] In many jurisdictions, subscription rights are automatically provided for by statute, for example the United Kingdom, but in other jurisdictions it only arises if provided for under the constitutional documents of the relevant company, for example the United States. In the United States, it is rare for publicly listed companies to grant pre-emptive rights to shareholders, but it is common for unlisted companies to grant pre-emptive rights to venture capital and private equity investors. The European Union has brought an infringement action against Spain based on the claim that the lack of statutory pre-emptive rights under Spanish law violates the Second Company Law Directive.[4]
Other situations in which pre-emption rights are seen to arise are in property developments; parties close to the investors are often given a right of pre-emption in relation to new flats or condominiums within a development.
Overall, pre-emption right is similar to the concept of a call option.
In companies in the United Kingdom
The Companies Act 2006 is the source of shareholder pre-emption rights in British companies. Under section 561(1) of the Companies Act 2006 a company must not issue shares to any person unless:
- It has made an offer (on the same or more favourable terms) to each person who already holds shares in the company in the proportion held by them; and
- The time limit given to the shareholder to accept the offer has expired.
By virtue of section 562(5), the period given to the shareholders to accept such an offer must not be less than 14 days.
The effect of these provisions is that a company cannot allot shares to new shareholders until it has offered them to their existing shareholders. The company must give the shareholders at least 14 days to decide whether or not they wish to purchase the shares. Private companies and in some cases public companies can choose to disapply or modify the satutory pre-emption rights either generally or in respect of a specific allotment (sections 569 to 573 of the Companies Act 2006)
Historical meanings
In earlier time, "pre-emption right" has had a separate and distinct meaning to that given to it today.[5]
Under international law, the right of preemption formerly referred to the right of a nation to detain merchandise passing through its territories or seas, in order to afford to its subjects the preference of purchase. This form of right was sometimes regulated by treaty. A treaty between the United States and Great Britain in 1794 agreed that:
whereas the difficulty of agreeing on precise cases in which alone provisions and other articles not generally contraband may be regarded as such, renders it expedient to provide against the inconveniences and misunderstandings which might thence arise. It is further agreed that whenever any such articles so being contraband according to the existing laws of nations, shall for that reason be seized, the same shall not be confiscated, but the owners thereof shall be speedily and completely indemnified; and the captors, or in their default-the government under whose authority they act, shall pay to the masters or owners of such vessel the full value of all articles, with a reasonable mercantile profit thereon, together with the freight, and also the damages incident to such detention.
In the United States in the eighteenth century, when an individual bought the preemption right to land, he did not buy the land. He was only buying the right to buy the land.[6] In the case of the Phelps and Gorham Purchase, the syndicate paid Massachusetts USD$1,000,000 for the pre-emptive rights, and then paid the Indians, who thought they owned the land, $5,000 cash and an annual $500 annuity forever for their title to the land.[7]
See also
References
- Garner, Bryan A., Editor-in-Chief (2009). Black's Law Dictionary. St. Paul, Minnesota, USA: Thomson Reuters. ISBN 978-0-314-19949-2.
Right of pre-emption. A potential buyer's contractual right to have the first opportunity to buy, at a specified price, if the seller chooses to sell within the contractual period. Also termed 'first option to buy'.
CS1 maint: multiple names: authors list (link) - Preemptive right definition on InvestorWords.com
- Subscription rights explained on thismatter.com
- K. Grechenig, Discriminating Shareholders through the Exclusion of Pre-emption Rights? - The European Infringement Proceeding against Spain (C-338/06), European Company and Financial Law Review (ECFR) 2007, p. 517-592.
- www.lectlaw.com
- Henry, Marian S. (February 25, 2000). "The Phelps-Gorham Purchase". Archived from the original on 27 February 2014. Retrieved 31 December 2012.
- Milliken, Charles F. (1911). A History of Ontario County, New York and Its People Vol. 1. Lewis Historical Publishing Co. pp. 15. Retrieved 2008-01-25.
