Insights
Pre-emption rights and disapplication for listed companies
Pre-emption rights give existing shareholders the first refusal of newly issued equity, in proportion to what they already hold. In the United Kingdom the right is statutory, in section 561 of the Companies Act 2006. A company placing shares with a new investor must first disapply that right, by special resolution or under its articles, and place within the limits of the authority it disapplied.
Key takeaways
- Three sections carry the UK right. Section 561 requires the offer, section 562 gives holders at least 14 days to accept, and section 563 makes the company and its officers liable to compensate.
- Two resolutions, not one. Authority to allot under section 551 may run five years; the disapplication under section 570 or 571 expires with it.
- Directors' statement with criminal consequences. A section 571 disapplication needs a circulated statement of reasons, price and justification; section 572 makes a misleading one an offence.
- Convention binds before the statute. The Act names no percentage; the Pre-Emption Group's Statement of Principles sets what an annual general meeting will pass.
- Pre-emption is a market variable. Delaware grants no pre-emptive right unless the certificate does, and an ASX or Hong Kong placing meets a listing-rule cap instead.
What statutory pre-emption requires
Section 560 defines equity securities as ordinary shares and rights to subscribe for or convert into them. A convertible instrument is inside the regime when it is issued, not when it converts.
Section 561(1) is the prohibition: a company must not allot equity securities to a person unless it has first offered to each holder of ordinary shares, on the same or more favourable terms, a proportion as nearly as practicable equal to the proportion in nominal value that holder holds of the ordinary share capital. Section 562 sets the mechanics and an acceptance period of at least 14 days; section 563 makes the company and every officer who knowingly permitted a contravention liable to compensate anyone who suffered loss.
Exceptions sit at sections 564 to 566A, and section 573 covers a sale of treasury shares. UKLR 9.2.1R repeats the duty as a listing rule, and UKLR 9.2.2R switches it off where a disapplication has been authorised under section 570 or 571.
The two authorities a placing sits inside
A placing needs both. Authority to allot comes from section 551: the directors may allot, or grant rights to subscribe or convert, only if authorised by the articles or by resolution, and the authorisation must state a maximum amount and an expiry date not more than five years out.
Disapplication is the second authority. Section 570 applies where general authority already exists: the articles or a special resolution may empower the directors to allot as if section 561 did not apply, and the power expires with that authority. Section 571 is the narrow instrument for one identified allotment, and it carries disclosure: the directors must circulate a statement of their reasons, the amount to be paid and their justification of it, and section 572 makes a knowingly or recklessly misleading statement an offence.
So the question before a placing is not whether pre-emption has been disapplied, but how much of the disapplication is left.
Headroom, not the statute, sets the size
The Act's outer limit is five years and it names no percentage. The annual ceiling, and the much shorter life shareholders actually grant, are convention — and the convention is written down. The Pre-Emption Group's Statement of Principles, issued in 2022, states its size criteria in terms of issued ordinary share capital in any one year, and its duration criterion as 15 months or the next annual general meeting, whichever is shorter. The Principles are not law; their force is reputational.
| Tranche | Size | Use |
|---|---|---|
| General authority | 10% in any one year | Any purpose |
| Additional authority | A further 10% | Only an acquisition or specified capital investment announced with the issue, or made in the preceding 12 months and disclosed in the announcement |
| Follow-on headroom | 2% against each tranche above | Only a follow-on offer to shareholders left out |
| Duration | 15 months, or the next annual general meeting | Whichever is shorter |
| Percentages are of issued ordinary share capital, excluding treasury shares. | ||
How a placing sits inside a disapplication
The Principles also govern conduct. The issue should be made as far as practicable on a soft pre-emptive basis; the discount should be held to 5 per cent at most, and discount is defined to include expenses directly attributable to the issue; a post-transaction report is expected within one week of completion; and any follow-on offer carries an individual cap, set by the issuer, of not more than £30,000 per ultimate beneficial owner.
One paragraph matters most to an instrument. Other than for regulatory-capital instruments issued by financial institutions, the initial conversion price of a convertible issued non-pre-emptively under a general disapplication should not be lower than the market price of the underlying shares at pricing. A UK placing can carry a convertible note, but not an in-the-money one; the arithmetic is on dilution and conversion mechanics. A facility drawn in tranches consumes the same authority on every draw.
Pre-emption across the markets on this site
The table states the source of the right, how it is set aside, and what binds the size of a placing.
| Market | Source of the right | How it is set aside | What binds the size |
|---|---|---|---|
| United Kingdom | Statute: s.561 CA 2006; UKLR 9.2.1R | Special resolution, s.570 or s.571 | Convention: the Pre-Emption Group tranches; 5% discount |
| Germany | Statute: Bezugsrecht, §186(1) AktG | Three quarters of the capital represented, §186(3); or the board under §203(2) | Simplified exclusion: a cash increase up to 20% of capital, priced near the market |
| Sweden | Statute: företrädesrätt, 13 kap. 1 § ABL | Two thirds of votes cast and of shares represented, 13 kap. 2 § | Authorisation runs only to the next annual general meeting |
| Norway | Statute: fortrinnsrett, §10-4 allmennaksjeloven | Two thirds of votes cast and of capital represented, §§10-5 and 5-18 | Authorisation: two years at most, and it must say whether §10-4 may be set aside |
| Australia | Listing rule only: ASX Listing Rule 7.1 | Security-holder approval, or an exception in Rule 7.2 | 15% in a rolling 12 months, plus 10% for an eligible entity under Rule 7.1A |
| Singapore | Listing rule: prior approval, SGX Rule 805 | General mandate by ordinary resolution, Rule 806 | 50% of issued shares, of which 20% other than pro rata; 10% discount cap |
| Hong Kong | Listing rule: shareholder consent, Rule 13.36(1) | Pro rata offer, or the general mandate, Rule 13.36(2) | 20% of issued shares, lapsing at the first annual general meeting; nothing 20% or more below the benchmarked price |
| United States | None unless the certificate grants it, DGCL s.102(b)(3) | Nothing to set aside | Nasdaq Rule 5635(d): a 20% issuance below the Minimum Price |
| Sourced from the statutes and rulebooks below. General information, not legal advice. | |||
Markets with a statutory right set it aside with a supermajority. Markets without one cap the quantity a general mandate may cover, and several cap the discount as well.
General information, not legal advice. This page summarises statutes and listing rules as they stood on the date of review. Whether an issue is within an authority, what majority it needs and what must be disclosed depend on the company's constitution and its market. Take advice from counsel qualified in the relevant jurisdiction.
Primary sources
- Companies Act 2006 — Part 17 Chapter 3, sections 560 to 577
- Companies Act 2006 — section 551
- Companies Act 2006 — section 570
- Companies Act 2006 — section 571
- Companies Act 2006 — section 572
- Pre-Emption Group — Statement of Principles, 2022
- FCA Handbook — UKLR 9.2
- Aktiengesetz — §186
- Aktiengesetz — §203
- SFS 2005:551 — Aktiebolagslagen, 13 kap.
- Allmennaksjeloven — §10-4
- Allmennaksjeloven — §10-5
- Allmennaksjeloven — §5-18
- Allmennaksjeloven — §10-14
- ASX Listing Rules — Chapter 7
- SGX Mainboard Rules — Chapter 8
- HKEX Main Board Rules — rule 13.36
- SEC — Nasdaq Rule 5635(d), rule text as filed in SR-NASDAQ-2018-008
- Delaware General Corporation Law — s.102(b)(3)
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Pre-emption rights: frequently asked questions
What are pre-emption rights?
A right of first refusal over newly issued equity. Section 561 of the Companies Act 2006 requires a company to offer equity securities first to each holder of ordinary shares, in proportion to what that holder already holds.
What is disapplication of pre-emption rights?
A shareholder resolution that switches the statutory offer requirement off so the directors can allot to someone else. Section 570 does it generally, alongside the authority to allot; section 571 does it for one identified allotment.
How long does a disapplication of pre-emption rights last?
As long as the allotment authority it sits on: authority under section 551 may run for up to five years. The Pre-Emption Group asks for no more than 15 months, or the next annual general meeting, whichever is shorter.
What percentage can a UK company issue non-pre-emptively?
The Companies Act sets no percentage; the convention does. The 2022 Statement of Principles supports 10 per cent of issued ordinary share capital in any one year, plus a further 10 per cent for an acquisition.
Can a company place shares without shareholder approval?
Only inside an authority shareholders have already given. A UK placing runs on the disapplication voted at the last annual general meeting, and the test is how much of it is unused.
Do pre-emption rights apply in the United States?
Not by default. Section 102(b)(3) of the Delaware General Corporation Law provides that no stockholder has a pre-emptive right unless it is expressly granted in the certificate of incorporation.
Headroom first
Tell us what is left on the authority.
Unused disapplication, the date of the next annual general meeting and the discount you can defend decide the size of a placing in a pre-emption market. Send those three and the conversation starts at the right number.