RE: Companies House18 May 2021 18:36
What are the disadvantages of pre-emption rights?
Despite their many benefits, there are a few potential disadvantages to pre-emption rights. In certain situations, these rights can impact the commerciality of a business, deter prospective investors, and cause disputes within a company.
Potential disadvantages include:
•Restricting the commercial freedom of shareholders to sell some or all of their shares to a third party of their choosing
•Deterring third-party buyers – it may be an unattractive prospect to spend significant time and money negotiating the purchase of a company if the sale may never conclude due to shareholder protections in place, which may block the sale
•The potential for future discord within the company, which may prevent third-party investment or buyers
•Restricting the company’s investment options and lowering its valuation, e.g., if a potential investor makes an offer to purchase new shares and the existing shareholders waive their pre-emption rights, the potential investor may be concerned that they offered too much and withdraw their offer. Subsequently, the company may have to sell the shares to existing members at a lower value.
•Existing shareholders may be forced to waive their pre-emption rights if they are not in a position to purchase available shares, thus causing involuntary dilution of their holdings
•Waiving these rights can send a negative signal to third parties – existing shareholders have a better understanding of the company, so their choosing not to reinvest could be interpreted as cause for concern
•A majority shareholder who holds more than 75% of a company’s shares has the power to disapply these rights, thus impacting the interests of minority shareholders.
To minimise these risks whilst reaping the benefits of pre-emption rights, a degree of flexibility is key, coupled with open and effective communication between the company and its shareholders
GLA
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