Shareholders’ Statutory Pre-emption Rights

A member’s shares in a company are transferable personal property. In a private company however, restrictions can be placed on the transfer of shares. This restriction is normally implemented by granting the directors of a private company the discretion to refuse to register the transfer of shares to a person of whom they do not approve and/or requiring the shareholder who wishes to sell their shares to first offer those shares for sale to the existing members of the company.

Section of the Companies Act, 2014 gives the existing members of a private company a Statutory ‘Pre-emption’ right. This means that, where new shares in the company are issued, the existing shareholders have an automatic right of first refusal to purchase these shares in proportion to their existing shareholdings. Parties other than the existing shareholders will, therefore, only be entitled to purchase newly issued shares in the company if the existing shareholders decline to exercise their pre-emption rights.

Under the Statutory Pre-emption scheme, the offer of shares to the existing shareholders must be served to the members and must provide a period of not less than 21 days during which the offer can be accepted and during which the offer cannot be withdrawn.

The Statutory Pre-emption rights can be removed by the memorandum of association, the articles of association or by a special resolution of the company passed by 75% of those members voting. Where a resolution to this effect is to be put before a meeting of the company, in addition to the notice of the meeting, the directors must also furnish the members with a written statement explaining their reasons for the proposed departure from the Statutory Pre-emption scheme.

Statutory pre-emption rights are not given:

  • To the holders of preference shares
  • Where the allotment is an allotment of preference shares
  • Where the allotment of shares is in respect of an employees’ share scheme
  • Where the allotment is to be paid for, either wholly or partly, for non cash consideration
  • Where the memorandum or articles of association or the constitution of a private company, or a special resolution of a general meeting of the company, exclude the operation of Section of the Companies Act, 2014
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