Pre-emption right

What it means

A pre-emption right is the right of a certain person to buy an asset or stake first if the owner decides to sell it. The owner must first offer it to the holder of the right on the same terms offered by a third party, and only if the holder declines may it be sold to someone else.

In companies, pre-emption rights are most often agreed over a stake in the articles of association of a limited company or over shares in the statutes of a joint-stock company. They protect shareholders from unwanted newcomers and help preserve the balance of power.

A pre-emption right may also arise by law, for example between co-owners of property, or by contract, such as when land is sold on condition that the seller can buy it back. A contractual pre-emption right over property can be entered in the land register as a right in rem.

How it works in practice

When drafting articles of association we decide with clients whether to include a pre-emption right, who it applies to, at what price and within what period it must be exercised. An unclear rule, for example one without a method for calculating the price, leads to disputes on a share transfer.

Pre-emption rights are often combined with other mechanisms in a shareholders’ agreement, such as the right to join a sale and the obligation to join it, known as tag-along and drag-along. Together they govern how stakes can change without deadlocking the company.

When a stake subject to a pre-emption right is transferred, we document the offer to the other shareholders, the deadline and their response. Without this record the holder can later claim their right was breached.

What to watch out for

If the owner sells without offering the asset to the holder of the right, the sale may be challenged. With a contractual pre-emption right not registered as a right in rem, the holder generally only has a claim for damages against the seller, not a right to the asset itself.

A pre-emption right with an overly long deadline or an unclear price can make a sale of the stake practically impossible. For minority shareholders this may mean they cannot exit the company. We therefore set the rules so that they protect without blocking a reasonable sale.