Overview of a Letter for Waiver of Shareholders’ Pre-Emptive Rights

Preemptive rights provide shareholders an opportunity to buy additional shares of the company in the future before they are offered to new investors.

A letter for waiver of shareholders’ preemptive rights ensures that preemptive rights have been forfeited by an existing shareholder.

This assures the new investors they will be able to purchase the shares about to be issued.

What are Preemptive Rights?

Preemptive rights provide an “anti-dilution right” to the shareholders by giving them an opportunity to buy more shares before they are offered to new investors in order to maintain the same level of shareholding and/or voting rights as the company grows.

Why are Preemptive Rights important to shareholders?

The preemptive right is important to shareholders because it protects them from dilution of their share in a company. Whenever a company issues more shares, minority shareholders could lose their voting power because as more shares are issued the company’s ownership becomes more diluted. In such a scenario, a preemptive right can give those shareholders the opportunity to add more shares to their portfolio whenever a company issues more shares.

Why might a shareholder sign a waiver of preemptive rights?

An existing shareholder might be asked to sign a waiver of his preemptive rights in order to satisfy new investor due diligence that shares going to be issued will not be subject to opposition by an existing shareholder exercising his preemptive rights.

What is a waiver of preemptive rights?

A letter for waiver of shareholders’ preemptive rights is a binding statement by the shareholders that they wish to forfeit their right of preemption, effectively stating that they do not intend to take part in the purchase of additional shares. After the removal of preemptive rights, shareholders won’t be able to add more shares to their portfolio whenever a company issues a greater number of shares again in the future.

For example: Let say a company issued 1000 units of Initial Public Offering (IPO) and an individual purchased 10 units of that IPO, which comprises 1% of the total shares.

Now after a certain time, if the same company issued 1500 more shares in the market, a shareholder with preemptive rights can purchase additional 15 shares (which is 1 % of the total shares issued) to maintain his/her percentage of share ownership. 

The shareholders who exercise a preemptive right could purchase these additional shares, in which case they will have (10+15=25 shares), i.e.; 1% of the shareholding in the company. But those who have signed the waiver will still have only 10 shares, i.e.; 0.4% of the shareholding in the company.

What are the types of preemptive rights?

There are two types of preemptive rights. I.e.; the weighted average provision or rachet-based provision.

  1. Weighted average provision: Under this provision, a shareholder can buy additional shares at a price adjusted to take into account the difference between the original and new price of the shares (price of original shares – price of new shares).
  2. Ratchet-based provision: Under this provision, if the price of newly issued shares is less than the old one, then a shareholder is compensated with a greater number of shares to match their percentage of ownership in the company.

How do you waive pre-emption rights?

Pre-emption right on an issue can be waived by a company’s articles of association. It can be waived with a special resolution. The resolution will have to be signed by holders of at least 75% of the company’s issued shares. When this threshold is met, the pre-emption right is waived. However, these kinds of waivers only apply to shares specified in the particular resolution. For blanket waivers’, an amendment needs to be made in the articles of association.

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