Contract clause
Pre emptive rights clause: first right to buy new shares
A pre emptive rights clause requires a company to offer new shares to its existing shareholders in proportion to their holdings before offering them to anyone else. It sets the offer period, how each entitlement is calculated, what happens to shares nobody takes up, and which issues are excluded, such as shares for an employee plan.
Every new share issued to someone else shrinks each existing holder's percentage, so this clause is the main defence against being diluted without a say. It also shapes how quickly a company can raise money, which is why investors and founders negotiate its exceptions as hard as the right itself.
Nuwan Madhusanka · Co-founder
4 min read · Published
Sample clause
a shareholders agreement for Saltmarsh Analytics Pty Ltd, a fictional Adelaide agricultural data company with three founders and two seed investors
8. Pre Emptive Rights 8.1 Before issuing any New Securities, the Company must offer them to each Shareholder in proportion to the number of Shares it holds, at the same price and on the same terms as they are proposed to be issued to others. 8.2 The offer must be made by written notice stating the number of New Securities, the price and the terms, and remains open for 10 Business Days. 8.3 A Shareholder accepting its full entitlement may also apply for New Securities not taken up by others, and those are allocated among applicants in proportion to their holdings. 8.4 New Securities not taken up under clauses 8.2 and 8.3 may be issued to any person within 60 days after the offer closes, at a price and on terms no more favourable than those offered to Shareholders. 8.5 This clause does not apply to Shares issued under the Employee Share Plan up to the Plan Limit, on conversion of Convertible Notes already on issue, or with the approval of Shareholders holding at least 75 per cent of the Shares.
Sample wording, not legal advice.
Variants
Major shareholders only
Companies that want to keep offers simple by limiting the right to holders above a set size.
The Company must not issue New Securities to any person unless it has first offered to each Major Shareholder, being a Shareholder holding at least 5 per cent of the Shares, its proportionate share of those New Securities on the same terms. Each Major Shareholder has 10 Business Days to accept. Shareholders holding less than 5 per cent of the Shares have no rights under this clause.
New issues and transfers both covered
Close family or partnership style companies that want new shares and existing shares both offered inside the group first.
The Company must offer any New Securities to existing Shareholders in proportion to their holdings before issuing them to others, and a Shareholder wishing to sell any Shares must first offer them to the other Shareholders in the same proportions under clause 11. In each case the offer remains open for 15 Business Days, and securities not taken up may be issued or sold to others within 60 days on terms no more favourable.
United Kingdom statutory pre emption replaced
A UK private company, where the Companies Act 2006 gives statutory pre emption on allotments of equity securities for cash that the articles or a special resolution may disapply.
The pre emption rights in section 561 of the Companies Act 2006 do not apply to any allotment of equity securities by the Company. Instead, before allotting any equity securities for cash, the Company must offer them to the holders of Ordinary Shares and Preferred Shares in proportion to their holdings, on the same terms, for not less than 14 days, excluding allotments under the Share Option Scheme and allotments approved by Investor Majority consent.
What to negotiate
Exceptions
Founders want broad carve outs so routine issues do not need a formal offer: employee option plans, conversions of existing notes, shares issued to buy a business, and issues to a strategic partner. Investors accept carve outs that are capped and listed, but resist a general exception for anything the board approves, since that empties the right of meaning.
Who gets the right
Offering every new round to every small holder slows fundraising and adds paperwork. Companies often limit the right to holders above a threshold, such as 5 per cent, or to named investors. Smaller holders accept this where their position is protected in other ways, such as a class consent for any issue at a lower price.
Over allocation and timing
A short offer period suits the company, which may have a new investor waiting. Holders want enough time to find funds, commonly 10 to 15 business days. Over allocation lets committed holders take up shares others decline, which helps the company fill the round and keeps shares within the existing group.
Majority waivers
Investors who cannot follow on sometimes waive their rights to help a round close. Agreements usually allow a waiver by a stated majority of holders, binding everyone, which saves chasing signatures. Minority holders ask that such a waiver apply only where the new shares are issued at the same price and on the same terms offered to the new investor.
The risk of leaving it out
Without a pre emptive rights clause, directors of a company whose constitution displaces the replaceable rule can issue new shares to anyone, subject to their duties, and existing holders may see their percentage fall with no chance to buy in. Where the replaceable rule does apply, its simple form rarely deals with over allocation, carve outs or timing, so issues stall on technical arguments.
The statutory starting points
In Australia, the Corporations Act includes a replaceable rule for proprietary companies requiring new shares of a class to be offered first to existing holders of that class in proportion to their holdings, unless the company in general meeting authorises otherwise, and a constitution can displace or modify it. In the UK, the Companies Act 2006 gives shareholders statutory pre emption on allotments of equity securities for cash, which private companies can exclude or disapply. In Delaware, stockholders have no pre emptive rights unless the certificate of incorporation grants them, so US investors rely on contract.
Pre emption and anti dilution
The two clauses protect against dilution in different ways. Pre emption protects percentage ownership by letting holders buy their share of any new issue, but only if they have the money. Anti dilution protects the value of an investor's earlier price if new shares are issued more cheaply, whether or not the investor buys more. A priced down round can trigger both, and the agreement should say whether taking up pre emptive rights affects any price adjustment.
Where it sits in a generated document
A generated shareholders agreement carries pre emptive rights as a numbered clause in the share issue section, with the carve outs as separate sub clauses that are easy to amend later. The offer period, any threshold and the 60 day window are written in as content. The document does not cite the Corporations Act, the Companies Act or Delaware law, so statutory references in a draft should be checked.
Documents that carry this clause
Questions people ask
Do shareholders in an Australian company automatically have pre emptive rights?
Shareholders in a proprietary company have a replaceable rule right to be offered new shares of their class in proportion, unless the constitution displaces it or the company in general meeting authorises a particular issue. Public companies have no equivalent replaceable rule, so their shareholders rely on the constitution, a shareholders agreement or, for listed companies, the listing rules.
What is over allocation in a pre emptive offer?
Over allocation lets a shareholder who takes up its full entitlement also apply for shares that other holders decline. Those extra shares are usually divided among applicants in proportion to their holdings. It helps the company fill the offer from existing holders and lets committed holders increase their stake without waiting for a new investor.
Do pre emptive rights apply to employee share options?
Usually not. Most agreements exclude shares or options issued under an approved employee share plan up to a limit, because offering each grant to every shareholder would make the plan unworkable. Investors typically accept the carve out while negotiating the size of the pool, since the pool dilutes every holder in the same proportion.
Can pre emptive rights be waived?
Yes. An individual holder can decline its entitlement, and many agreements let a stated majority waive the rights for a particular issue on behalf of all holders. Minority holders often ask that a majority waiver apply only where the new shares are issued at the same price and on the same terms offered to everyone else.
What is the difference between pre emptive rights and a right of first refusal?
Pre emptive rights apply to new shares the company issues and let holders keep their percentage. A right of first refusal applies to existing shares a shareholder wants to sell and lets other holders buy them before an outsider does. Some agreements use pre emption loosely for both, so the drafting should say which transactions are covered.
How long should a pre emptive offer stay open?
Long enough for holders to consider the terms and arrange funds, commonly 10 to 15 business days, with a shorter period sometimes allowed for urgent bridge funding if a majority agrees. The offer should state the number of securities, the price and the terms, because the period cannot fairly start until those details are known.
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Create a document with OneCraftRelated clauses
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- Right of first refusal clause: matching an outside offer for sharesA right of first refusal clause lets shareholders match an outside offer before shares are sold. Sample wording with 20 business days and a ROFO comparison.
- Information rights clause: what investors are told and whenAn information rights clause sets which reports investors receive and when. Sample wording with monthly accounts, audited accounts in 120 days and variants.
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