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Shares: pre-emptive rights of purchase

When a company seeks additional capital by the issue of a new block of equity shares, existing shareholders stand to suffer by having the value of their holdings diluted. To prevent this, they were in the past frequently given pre-emptive rights to purchase the new shares, usually by means of a rights issue. The Companies Act 1980 made the granting of pre-emptive rights obligatory for all companies, whether public or private. It stated that no equity securities, which could be other than ordinary shares, should be issued for cash unless each existing holder of such securities was given the right to apply for and obtain such a proportion of the issue as corresponded to his existing holding, and on no less favourable terms than those available to subscribers generally.

A private company may exclude the need to offer pre-emption rights in its memorandum or articles and public companies may also give directors power to modify these requirements of the Act.

Reference: The Penguin Business Dictionary, 3rd edt.