Deed of waiver of pre-emption rights

What is a deed of waiver of pre-emption rights and when should you use it?

A Waiver of Pre-emption Rights can be used for disapplying contractual pre-emptive rights in a shareholders agreement.

It can also be used to waive pre-emption rights in the company’s constitution, but the ability to waive such rights depends on the specific wording of the constitution.

Generally, if the constitution allows for it, shareholders can waive their pre-emption rights.

However, if it is not allowed for then the only way in which rights can be disapplied is by changing the constitution itself by a special resolution.

In private limited companies, the constitution often provides for the possibility of pre-emption rights being excluded or applied with certain conditions.

This template letter is designed to be signed by all the company’s shareholders.

The shareholders under this deed are waiving their pre-emption rights in respect of a proposed allotment (issue) or transfer of shares in the company.

A pre-emption right is a right of first refusal that existing shareholders may hold in relation to any planned new share issues or share transfers.

It effectively requires any new shares or transferred shares to be offered to the existing shareholders first (in proportion to their existing shareholdings) before they can be offered to any new shareholder.

Pre-emption rights exist to protect existing shareholders from the dilution of their existing rights of ownership and control over the company and from the potential introduction of new shareholders.

This right allows them to preserve their percentage shareholding and avoid their existing ownership stake diminishing in size by subscribing for the new shares themselves (provided they have the funds available to do so).

It also acts as a mechanism to prevent shares transferring to a potentially unwanted  new shareholder outside of the company.

Therefore, any change to this right must be agreed upon or waived by the Shareholders.

A waiver should be executed by the shareholders as a deed, meaning that it will need to be signed and witnessed.

Note that a waiver of this type will require the unanimous consent of all the shareholders, so it may only be practical for companies with a relatively small shareholder base.

A special resolution passed by written resolution will in contrast only require a 75% majority and therefore may be more practical if obtaining unanimity will prove difficult.

However for companies with a small and unified shareholder base, this waiver will be a very useful alternative to seeking formal disapplication via the special or written resolution procedure.