Law guide: Business start-up

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Limits on issuing shares

Limits on issuing shares

Pre-emption rights

What are pre-emption rights?

The directors might not always be able to issue, or 'allot', shares to whomever they choose. Shareholders in a company often benefit from 'pre-emption rights', which are rights of first refusal. This means that the directors must first offer any new shares to the current shareholders in the same proportions as their current shareholdings before they offer them to anyone else. It's only if the current shareholders refuse that these can be issued to an outsider. These rights protect current shareholders from having their voting rights and other rights in the company diluted by the company issuing more shares to other people.

This rule doesn't apply to shares allotted under an employee share scheme.

The Companies Act 2006 gives shareholders 'statutory pre-emption rights'. These apply if the company's articles of association (the company's set of rules) don't contain their own pre-emption rights clause or don't say that the statutory pre-emption rights won't apply. The default, or 'model', articles for a private company limited by shares don't contain a pre-emption rights clause, so the statutory pre-emption rights would apply to companies with these articles.

Removing pre-emption rights

The company can, however, remove ('disapply') pre-emption rights to allow the directors to issue shares to other people.

The company can disapply pre-emption rights for allotments in general, or just for a specific allotment of shares.

In a private company with just one class of shares, the shareholders can remove the statutory pre-emption rights indefinitely by passing a special resolution. A private company can also change its articles to say that pre-emption rights are disapplied generally.

Alternatively, pre-emption rights could be removed just for particular allotments of shares by changing the articles to say this, or by special resolution to disapply them (see Shareholder meetings for more information on resolutions).

If the directors wish to remove the rights for a specific allotment of shares, they need to send all members a written statement. The statement must set out the reasons for the special resolution, how much the company will receive for the shares and must justify this price.

Financial help for buying shares

The general rule is that a public company can't give anyone financial help, such as loans and gifts, to enable them to buy shares in that company or in its subsidiaries. Private companies are generally allowed to give financial help to enable someone to buy their shares. However, private companies that are subsidiaries of public companies aren't allowed to give financial help to anyone to buy shares in the parent public company.

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