Pre emption rights give existing ordinary shareholders first refusal on new ordinary shares, in proportion to what they already hold, so their stake cannot be diluted without their say. For new issues the right comes from section 561 of the Companies Act 2006 and can be excluded or disapplied through the articles or a special resolution. On transfers of existing shares there is no statutory right at all; any first refusal comes only from the articles or a shareholders’ agreement.

Which share issues does the statutory right cover?

Section 561 applies to an allotment of “equity securities”. Section 560 defines these as ordinary shares and rights to subscribe for, or convert securities into, ordinary shares. “Ordinary shares” here means every share except one whose rights to dividends and capital are capped at a specified amount, so a classic fixed preference share sits outside the rule, but a preference share that also participates in surplus profits does not.

Three points about scope catch people out:

  • Granting an option, warrant or conversion right is itself the allotment of equity securities (section 560(2)). The later issue of shares when the right is exercised is not a fresh allotment for pre emption purposes, so the protection bites at the grant.
  • A sale of treasury shares counts as an allotment of equity securities (section 560(3)), although treasury shares are ignored when working out who holds what (section 561(4)).
  • The offer goes only to holders of ordinary shares, in proportion to their share of the ordinary share capital by nominal value.

The Act then carves out four types of allotment entirely:

  • bonus shares (section 564);
  • equity securities paid up wholly or partly otherwise than in cash, such as shares issued to buy a business or another company’s shares (section 565);
  • securities held under or allotted under an employees’ share scheme (section 566);
  • allotments made as part of a restructuring plan sanctioned under Part 26A for companies in financial difficulty (section 566A).

How does the statutory offer have to be made?

Under section 561(1) the company must offer each ordinary shareholder, on the same or more favourable terms, a proportion of the new securities as nearly as practicable equal to their proportion of the ordinary share capital. It can only allot to anyone else once the offer period has expired or every offeree has accepted or refused. A shareholder can renounce in favour of someone else, and the renouncee can take the shares (section 561(2)).

Section 562 governs the mechanics. The offer can be in hard copy or electronic form, must state a period for acceptance, and cannot be withdrawn during that period. The period must be at least 14 days, running from the date a hard copy offer is sent or supplied or the date an electronic offer is sent. A holder with no registered address in the United Kingdom or an EEA State who has not given one can be reached by notice in the Gazette.

The Act does not require declined shares to be offered a second time to those who accepted. Many bespoke articles add an “excess application” round, so check the articles before allotting leftovers to an outsider.

What are the routes for switching the right off?

Route Available to How it works Duration
Section 567 exclusion Private companies only The articles exclude sections 561 and/or 562, generally or for allotments of a particular description. Any provision in the articles inconsistent with those sections counts as an exclusion. As long as the articles say so
Section 568 class rights Any company Where the articles give holders of a class of ordinary shares their own first refusal and the company follows it, section 561 does not apply to that allotment. As long as the articles say so
Section 569 power Private company with only one class of shares The articles or a special resolution let directors allot as if section 561 did not apply, or applied with modifications they decide. Falls away if a second class is created
Section 570 power Any company whose directors hold a general section 551 authority The articles or a special resolution let directors allot under that authority free of section 561. Ends when the section 551 authority is revoked or expires; renewable for no longer than the renewed authority
Section 571 resolution Any company whose directors hold a section 551 authority A special resolution disapplies or modifies section 561 for a specified allotment. Ends with the authority; renewable on the same basis
Section 573 Sales of treasury shares Articles or special resolution, on the same lines as sections 570 and 571. As for those sections

A section 551 authority must state the maximum number of shares and an expiry date no more than five years ahead, so a section 570 disapplication tied to it has the same shelf life. Under sections 570(4) and 571(4) directors can still complete an allotment after expiry if the offer or agreement was made while the power was live and it contemplated allotment after expiry. For how the authority to allot itself works, see allotting shares.

What does a section 571 special resolution involve?

This is the route for a one off disapplication, for example to let a single investor subscribe. Section 571(5) to (7) adds a procedure on top of the 75% vote that section 283 requires for a special resolution:

  1. The directors must recommend the resolution.
  2. Before it is proposed, they must make a written statement setting out their reasons for the recommendation, the amount to be paid for the securities and their justification of that amount.
  3. For a written resolution, the statement goes to every eligible member with or before the resolution; for a general meeting, it is circulated with the notice.

Section 572 makes it an offence knowingly or recklessly to authorise or permit anything misleading, false or deceptive in a material particular in that statement, with up to two years’ imprisonment on indictment. A copy of the special resolution must reach Companies House within 15 days (sections 29 and 30); see filing resolutions at Companies House.

How do pre emption rights on transfers differ?

Nothing in the Act gives shareholders first refusal when another member sells. Section 544 simply says shares are transferable in accordance with the articles. The model articles for private companies contain no transfer pre emption; article 26(5) only lets the directors refuse to register a transfer. If shareholders want a right to buy a departing member’s shares, it has to be written into bespoke articles or a shareholders’ agreement.

Because transfer pre emption is contractual, so is the remedy. The usual enforcement point is registration: under section 771 the company must either register a transfer or give notice of refusal with reasons within two months of the transfer being lodged, and directors should refuse where the procedure was skipped. The mechanics of a typical clause are covered in transferring shares.

What applies to listed companies?

Listed companies rely on annual special resolutions under sections 570 and 571. The Pre Emption Group’s 2022 Statement of Principles, published by the FRC, sets out what investors will normally support, as a matter of practice rather than law: authority to issue non pre emptively for cash up to 10% of issued ordinary share capital in any one year, a further 10% for an acquisition or specified capital investment, and in each case an extra 2% used only for a follow on offer.

How does it work in practice?

Illustration only. A private company has 1,000 ordinary £1 shares and no other class: Asha holds 600 and Ben 400. Its articles are the unamended model articles, so sections 561 and 562 apply in full. An angel investor wants 250 new shares at £20 each.

  • Follow the statutory route. The company offers 150 shares to Asha and 100 to Ben, open for at least 14 days. If both decline in writing, the company can allot all 250 to the investor before the 14 days expire, because every offer has been refused.
  • Disapply by special resolution. Asha’s 60% is short of the 75% needed, so Ben’s vote is decisive. In a company of this shape the minority shareholder effectively holds a veto over dilution unless the articles already exclude the right.

What happens if the rules are broken?

Section 563 makes the company and every officer who knowingly authorised or permitted the breach jointly and severally liable to compensate anyone who should have received an offer, for their loss, damage, costs and expenses. Proceedings must start within two years of the return of allotment being delivered to Companies House, or of the grant where the securities are options or conversion rights. Section 568(4) and (5) give the same remedy and time limit for breach of a class pre emption provision in the articles. A shareholder who has been diluted may also consider an unfair prejudice petition.

What are the common mistakes?

  • Assuming that because directors of a one class private company can allot under section 550, pre emption is also switched off. It is not; that needs section 567 or section 569.
  • Letting a section 570 power lapse unnoticed when the section 551 authority reaches its expiry date.
  • Treating a new class of preference shares as outside the rule when it participates in profits beyond a fixed amount.
  • Running an offer period shorter than 14 days, or withdrawing the offer early.
  • Passing a section 571 resolution without circulating the directors’ statement first.

Company directors can protect the business against the cost of an HMRC check with tax investigation insurance, which pays up to £100,000 of accountant’s fees with Solar Protect. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.