There is an obligation set down within the UK Companies Act that, whenever a company issues shares for cash, those shares must first be offered to existing shareholders. This right of pre-empting gives rise to rights issues.
A right of first refusal for an existing shareholder to purchase a proportion of any shares to be issued or transferred, the proportion invariably being the percentage that their existing shareholding is to the entire issued capital.
Where a company proposes to issue new shares, existing shareholders may have the right to be offered a pro-rata part of the new shares before they are offered to a new shareholder. The rights are contained either in the Articles of Association or imposed by Section 89 Companies Act 1985. These rights may be disapplied either generally or in relation to a particular new issue by a provision in the Articles of Association or a special resolution. In relation to sales of existing shares, similar rights require a shareholder wishing to sell shares to offer them first to existing shareholders before being able to transfer to outsiders. These rights are common for private companies and are found in the Articles of Association.
When a UK company issues new shares, it is obliged by law to give existing shareholders the opportunity to purchase the new shares on a basis pro rata to their existing shareholding in the company. This right is usually implemented by means of a Rights Issue. Pre-emption rights may be disapplied where a shareholders’ resolution to that effect has been passed.