A businessman decided to establish a company with his two friends, as they believed combining their expertise would result in a successful business. The businessman and one of the friends held 45 shares each, and the other friend held 10 shares.

When establishing the company, one of the three had drafted the Company’s Constitution and Shareholders’ Agreement, but failed to get both documents reviewed and signed by the other shareholders.

The friend with 45 shares soon decided to sell his shares, and because the above documents were not signed, he did not have to offer his shares first to the other two shareholders, and instead could offer his shares to any third party.

The businessman decided to take legal advice as he was worried that he would lose control of his business if a stranger bought shares in the company.  He was shocked to discover that pre-emptive rights (that is the requirement to offer shares to other shareholders first) only applies if they are specifically recorded in the governing documents of the company.

What are pre-emptive rights?

Pre-emptive rights ensure that a shareholder who wishes to sell all or part of its shares, must first offer them to the other existing shareholders in the company, proportionate to their current shareholding in the company.

It is important to note that the Companies Act does not deal with pre-emptive rights in relation to share transfers. It is therefore important to ensure that pre-emptive rights are included in either (or both) the Company’s Constitution or the Shareholders’ Agreement.

If pre-emptive rights are not included in these documents, you run the risk of the shareholder offering their portion of shares outside of the company, to any third party. This can become a problem, especially for small companies, as it may well mean that the existing shareholders will be in business with a stranger, and face the very difficult situation of having decisions made for the company by shareholders they did not plan to be in business with, and did not want to be in business with.

Pre-emptive rights are fundamental for many companies and without them you run the risk of losing control of your company.

To avoid landing yourself in the businessman’s situation, it is recommended that you seek legal advice to ensure that either your Company’s Constitution or Shareholders’ Agreement provides shareholders with pre-emptive rights in regards to share transfers, and that the documents are properly signed by all appropriate parties.

Claire Tyler
Commercial Lawyer