Principles

Pre-emption rights give existing shareholders in a company the right to subscribe for their pro rata share of any new shares in that company issued for cash, providing them with protection against inappropriate dilution of their investments. Pre-emption rights are enshrined in law and, under the Companies Act 1985, may be disapplied only by a special resolution of shareholders at a general meeting of the company.

The Pre-Emption Guidelines were published in 1987 by the original Pre-Emption Group to provide guidance on the considerations to be taken into account when assessing the case for disapplying pre-emption rights.

In 2004 Paul Myners was asked by the Department of Trade and Industry (now the Department for Business, Enterprise and Regulatory Reform) to examine the impact of pre-emption rights on the ability of some companies to raise finance for innovation and growth. In his report, published in 2005, he concluded that pre-emption rights were valuable to shareholders and should remain a cornerstone of UK company law, and recommended that the Pre-Emption Group should be reconstituted to review and if necessary update the Pre-Emption Guidelines. A copy of the Myners report can be downloaded from: the BERR website.

The Statement of Principles was published in May 2006 to replace the Pre-Emption Guidelines. It aims to provide clarity on the circumstances in which flexibility might be appropriate and the factors to be taken into account when considering the case for disapplying pre-emption rights and making use of an agreed authority for a non-pre-emptive share issue. It is not a set of rules; rather, it is intended to provide a basis for discussion of the business case between companies and their investors.

An updated version of the Statement of Principles was published in July 2008. It contains a limited number of changes, which:

• Clarify that convertible instruments are covered by the Statement of Principles;
• Recognise that shareholders would not normally have concerns if there was no dilution of value as a result of the proposed issue;
• Recommend that companies should not seek an authorization for more than a maximum of 15 months, in line with current practice.