Subscription rights

A pre-emption right, or right of pre-emption, is a contractual right to acquire certain property newly coming into existence before it can be offered to any other person or entity. Also called a "first option to buy." 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.

In practice, the most common form of pre-emption right is the right of existing to acquire new 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. 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 . In many jurisdictions, subscription rights are automatically provided for by statute, for example the UK, but in other jurisdictions it only arises if provided for under the constitutional documents of the relevant company, for example the US. In such countries shareholder rights are often violated leading to proceedings at the Court of Justice of the European Union.

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.

The Companies Act 2006 is the source of shareholder pre-emption rights in English companies. Under section 561(1) of the Companies Act 2006 a company must not issue shares to any person unless:

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.

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