12 Apr

Most standard constitutions are entitled to issue shares on the board of directors. While this power to issue shares may be limited by contractual provisions contained in the shareholders` pact described above, it is also appropriate to consider whether to impose on directors the obligation to offer shares to existing shareholders in proportion to their holdings before issuing shares to a third party. These are called “pre-emption rights.” These pre-emption rights are included in Section 69 (6) of the Act, but are not applied in general admissions, so that the issuance of shares and compensation to the beneficiaries of these shares are entirely left to the discretion of the board of directors. However, it is also common for parties to decide to adopt a more personalized version of these pre-emption rights in the Constitution, which provides that directors must offer existing shareholders the opportunity to acquire these new shares in proportion to their existing holdings and give those shareholders a certain period during which they can indicate whether they wish to benefit from them. In addition, it may be expected that shareholders who have expressed an interest in acquiring more of their individual rights and who offer them the remaining shares may, at this stage, transfer the shares to third parties if the shareholders are not fully utilized, return to shareholders who have subsequently expressed an interest in taking their individual rights and offer them the remaining shares, or that the directors may, at this stage, issue the shares to third parties. Such bespoke pre-emption rights also provide, as a general rule, that they may or may not be applied with the agreement of all or part of the shareholders. This ability to waive or not apply pre-emption rights is useful where there is a consensus that the company requires investments that go beyond what can be provided by existing shareholders, thereby avoiding delay in compliance with the pre-emption procedure. In private companies, it is customary to impose an obligation on a shareholder who wishes to sell his shares to allow some or all co-shareholders to buy them. These are also called “pre-emption rights” and are usually found in the Constitution for reasons that I will detail later. Shareholder agreements are practically in companies where there is a minority shareholder whose interests can be ignored by being rejected by other shareholders, especially if they hold less than 25% of the shares. A right to participate in management is generally important for a shareholder who is actively involved in the company`s activities.

Considerations vary depending on the balance of participation. 50/50 participations deliberately establish equal representation and voting rights. Minority or 50/50 shareholders may want to veto important business decisions. In these circumstances, the pre-purchase procedure is often modified so that directors can find purchasers of shares that become available, whether those purchasers are existing or new employees, or the directors can choose the company themselves to repurchase the shares it may hold as own shares available for the future new issue, or that the company can cancel the shares thus repurchased.