What is Shareholders’ pre-emption rights?
Shareholders’ pre-emption rights, also known as rights of first refusal, are legal provisions that give existing shareholders the right to purchase new shares in a company before they are offered to external investors. These rights are typically granted to protect shareholders from dilution of their ownership percentage when the company issues additional shares. Pre-emption rights allow shareholders to maintain their proportionate stake in the company if they choose to exercise these rights.
Key Features of Shareholders’ Pre-emption Rights
- Protection Against Dilution: The primary purpose of pre-emption rights is to protect existing shareholders from the dilution of their ownership interest. If a company issues new shares, existing shareholders have the option to purchase them in proportion to their current holdings, ensuring that their ownership percentage remains the same.
- Priority in New Issuances: When a company decides to issue additional shares, shareholders with pre-emption rights are given the first opportunity to buy the new shares at the same price and under the same terms as external investors. This gives them the ability to maintain their influence and voting power within the company.
- Transferability: In some cases, pre-emption rights can be transferred to others, allowing shareholders to sell their rights to buy new shares if they choose not to exercise them. However, this is not always the case, and the terms of the pre-emption rights may vary depending on the company’s articles of association or shareholder agreement.
- Waiver of Rights: Shareholders may agree to waive their pre-emption rights, allowing the company to issue shares to other investors without offering them to existing shareholders first. This can occur if shareholders do not want to purchase additional shares or if they believe the issuance is in the best interest of the company.
Pre-emption Rights in Switzerland
In Switzerland, pre-emption rights are governed by the Swiss Code of Obligations and are typically included in the articles of association of a company. The rights apply when a company issues new shares, and existing shareholders are usually offered the chance to purchase these shares in proportion to their existing holdings. These rights are especially common in public companies and private limited companies (GmbH) to prevent significant changes in control or ownership that could be harmful to the interests of the current shareholders.
Switzerland’s legal framework allows companies to opt for certain flexible arrangements regarding pre-emption rights, such as restricting or eliminating these rights under specific conditions. However, the principle of protecting shareholders’ interests against dilution remains a key element of corporate governance in Swiss companies.
Pre-emption rights can be valuable in maintaining control over a company, particularly in cases where large shareholders seek to prevent others from gaining too much influence. The rights are a crucial element of equity financing and are often a point of negotiation in shareholder agreements or investment contracts.