When you become a shareholder in a UK company, you gain more than just a stake in the business, you also get certain rights designed to protect your investment. One of the most important (and sometimes overlooked) is your pre-emption right, or ‘right of first refusal’ as its also known. 

As we’ll explain, understanding these pre-emption rights is super important if you want to retain a decent degree of control of the company you’ve invested in. In order to stop future shares, and hence influence, being divvied up between you and the next Tom, Dick or Harry(s) who wants to throw their money in. 

So here we’re going to cover what pre-emption rights are, how they work in practice, and key issues to be aware of, especially if you’re keen to protect your slice of the pie when new shares are issued. 

For smart business owners, investors, or those just getting to grips with shareholder rights, this detailed guide is a must read. 

What are pre-emption rights?

Let’s begin by clarifying exactly what pre-emption rights are. Pre-emption rights give existing shareholders the first opportunity to buy new shares before they’re offered to anyone else. Basically it’s a ‘first dibs’ rule that helps protect your ownership percentage if the company decides to issue more shares.

Let’s say a company wants to raise funds by bringing in new investors. Without pre-emption rights, your stake could be diluted, meaning your share of the company gets smaller. But with pre-emption rights in place, you get the chance to maintain your percentage by buying a proportionate number of the new shares first.

These rights are a key part of UK company law and are designed to stop shareholders being edged out of their own company without warning. They’re particularly important in private companies, where shares aren’t publicly traded and control really matters.

{{ltd-guide}}

How pre-emption rights work in practice

So, how do pre-emption rights play out in the real world? Let’s walk through a quick example.

• Imagine a company with four equal shareholders. 
• The business decides it needs more cash and plans to issue 1,000 new shares.
• Thanks to pre-emption rights, each of the existing shareholders has the option to buy 250 of those new shares before they’re offered to anyone else.

There’s usually a formal process involved - the company will send a written offer to existing shareholders, giving them a set amount of time to take up the offer (commonly 14–21 days). If some shareholders choose not to buy their full allocation, any leftover shares can then be offered to others, whether that’s new investors or the other existing shareholders.

In the UK, pre-emption rights are backed by law under the Companies Act 2006 (section 561, if you fancy a read). However, the rules can vary slightly depending on whether you’re dealing with a private or public company, and whether those rights have been waived or changed in the company’s governing documents.

Why pre-emption rights are important for shareholders

As we mentioned at the beginning,  pre-emption rights can make a big difference to your influence and value as a shareholder. First and foremost, they protect you from dilution. If new shares are issued and you don’t have the chance to buy your fair share, your percentage of ownership shrinks. 

That could mean less say in company decisions, a smaller slice of future profits, and if things go really well, a reduced share of any eventual payout.

For minority shareholders, pre-emption rights are especially valuable. Without them, there’s a real risk of being pushed to the sidelines by larger shareholders or new investors. These rights help level the playing field, ensuring everyone gets a fair shot when the company raises more capital.

Pre-emption rights help you hold on to what’s yours. They’re a key part of your wider shareholder rights, and something you definitely don’t want to overlook.

When pre-emption rights can be disapplied

While pre-emption rights are a strong safeguard for shareholders, they’re not always set in stone. In some situations, companies can choose to disapply or remove these rights—either temporarily or permanently.

This usually happens through a special resolution, which requires the approval of at least 75% of shareholders voting in favour. If passed, it allows the company to issue new shares without first offering them to existing shareholders.

You’ll often see this in startups or companies raising external investment, especially from venture capital firms. Investors may insist on a clean slate when coming on board, and that might involve sidelining pre-emption rights to speed up fundraising or simplify the share structure.

Pre-emption rights can also be modified or removed entirely in a company’s Articles of Association or through a shareholders’ agreement. That’s why it’s so important to check the small print—what’s included by default under the Companies Act might not apply in your particular business.

{{cta-limited-company}}

How to check your pre-emption rights

Not all pre-emption rights are created equal, and in some cases, they might not apply at all.

So how do you know where you stand?

1. The first place to look is your company’s Articles of Association. These set out the company’s internal rules and may include, modify, or completely remove the default pre-emption rights that come from the Companies Act 2006. If your company has adopted model articles, you may be covered, but it’s always worth checking.
2. Next, review any shareholders’ agreement, if there is one. These agreements can add extra layers of protection or spell out specific processes for share issues, sometimes even going beyond what’s set out in the law or articles.
3. If things still aren’t clear, or if you suspect your rights have been disapplied without your knowledge, it’s a good idea to get some professional advice.
4. An accountant, solicitor or corporate advisor can help you understand your position, and what actions you can take if needed. When it comes to shareholder rights, being informed is your best defence.

Going pre-emptive

Pre-emption rights give you the chance to protect your ownership, avoid unwanted dilution, and stay in control when new shares are issued.

Company founders, investors and smaller stakeholders alike, should take time to learn exactly what rights they have, and make sure they’re clearly set out in your company documents.

It’s also a good idea to try to ascertain what plans existing shareholders may, or may not, have to sell their shares in the future when you initially invest, and put plans in place in the event of shares being offered to you. 

If you’re unsure where you stand or need help reviewing your shareholder rights, don’t hesitate to get advice. A little clarity now can save you a lot of headaches down the line