Here’s Everything You Need To Know About Pre-Emption Rights

Here’s Everything You Need To Know About Pre-Emption Rights

Pre-emption rights give current shareholders the legal privilege to buy more shares before they’re offered to outside parties in a startup.

What Are Pre-Emption Rights?

Pre-emption rights pertain to the legal privileges granted to existing shareholders of a company, entitling them to purchase additional shares or ownership stakes before they are offered to external parties. In a shareholders’ agreement, pre-emption rights are contractual provisions that define the conditions and procedures governing how existing shareholders can acquire shares or interests that another shareholder intends to sell or transfer within the company.

Pre-emptive rights of shareholders are statutory rights conferred by the company law, allowing current shareholders to acquire new shares issued by the company before they are made available to external investors. These rights serve to maintain the existing ownership structure of the company.

What Role Do These Rights Play In The Startup Context?

Pre-emptive rights play a crucial role in preserving ownership and control of a startup among its current shareholders.

This safeguard is vital in upholding the continuity of decision-making authority and control within the group already committed to the startup’s development.

What Are Pre-emption Rights Under The Companies Act 2013?

The pre-emption rights under the Companies Act 2013 in India are delineated in Section 62 of the Act. This section outlines the regulatory framework governing the issuance of shares, including the rights of existing shareholders to acquire additional shares before external parties.

Who Cannot Claim Pre-emption Rights?

Pre-emption rights are generally reserved for existing shareholders and not all individuals or entities can assert these rights.

Individuals like external investors or non-equity holders typically do not have the entitlement to claim pre-emption rights. However, this may vary based on the company’s specific provisions.

What Are The Different Types Of Pre-emption Rights?

Pro-rata Pre-emption Rights: Existing shareholders have the opportunity to purchase additional shares in proportion to their current ownership percentages when the company issues new shares.

Rights Of First Refusal: Shareholders possess the right to match any offer made by an external party to buy shares before the shares can be sold to that external party.

Rights Of Co-sale: Existing shareholders can sell their shares in tandem with another shareholder who intends to sell their stake, ensuring they have an opportunity to exit their investment concurrently.

Tag-Along Rights: In the event that a majority shareholder decides to sell their stake, minority shareholders can “tag along” and sell their shares on the same terms and conditions.

Drag-Along Rights: Majority shareholders have the authority to compel minority shareholders to sell their shares if they opt to sell their stake in the company.