Pre-emptive rights are rights that give the existing shareholders of the company the first right to purchase any shares that an existing shareholder may be selling. Such pre-emptive rights are important for a variety of reasons. The existing shareholders may not want the shares of the company to be transferred to someone who is not an existing shareholder especially if that individual does not share the same vision and direction of the existing shareholders. Also, the sale of a majority stake to another individual or company may be detrimental to the company especially if the proposed new shareholder is a competitor of the company. Imagine a scenario where a majority shareholder of a company that deals with supplying components to Apple Inc. is proposing to sell his shares to a rival supplier. The existing shareholders may use their pre-emptive rights to acquire the shares that are on sale rather than allow a rival to obtain a majority stake in the company. These pre-emptive rights may also vest in preferred parties who are not existing shareholders. However, for the basis of this article, we will base the explanation on existing shareholders to keep the concept as simple as possible.
There are 3 types of Pre-emptive Rights:
- Right of first look
- Right of first refusal
- Right of last refusal
Right of first look:
This right gives the existing shareholders a chance to make an offer on the shares that are for sale. In this case, the seller of the shares will indicate to the existing shareholders his intention to sell the shares. The existing shareholders will make him an offer for his shares for sale. In the event he does not take up the offer from the existing shareholders, he cannot sell the same shares to another person outside of the existing pool of shareholders for more favourable terms. The terms in question include, but are not limited to the price of the shares.
Right of first refusal:
This right gives the existing shareholders a chance to accept or reject the terms of the sale proposed by the seller of the shares before he offers these same terms to those outside of the pool of existing shareholders.
Right of last refusal:
This right gives the existing shareholders the right to accept or reject the terms of the sale proposed by the seller of the shares after he offers these terms to those outside of the pool of existing shareholders. This is not popular because it does not give an advantage.
These Pre-emptive Rights are important as it protects minority shareholders from any oppressive actions. For example, if the majority shareholder wants to transfer his shareholding to someone, the minority shareholder can use his Pre-Emptive Rights to prevent this from happening. It also allows the shareholder to acquire shares from the majority to preserve or increase his interest in the company. In the event that Pre-Emptive Rights are present and the relevant shareholders were not allowed to exercise these rights before the transfer of shares, such a transfer will be deemed invalid.
The editorial team at singaporesecretaryservices.com