Pre-emption provisions in articles of association

The articles of association are the rules governing the internal regulation of a company. It is quite common for private companies to include pre-emption provisions in the articles of association. In essence, instead of allowing the director(s) an absolute right to 'block' any proposed change in the company's ownership, the insertion of pre-emptive rights provisions allows for existing members/shareholders to sell their shares so long as they first offer them for sale to the other existing members/shareholders (if any).

Following is a brief summary of the pre-emption/share transfer provisions which UKcorporator will include in the articles of association if you answer 'yes' to the question:

1. The directors may refuse to register any transfer of shares where the shares are not fully paid, or where the company has a lien over the shares, or where certain 'formal requirements' of the transfer have not been met (e.g. the payment of stamp duty), or where the transfer is in respect of more than one class of share or is in favour of more than four transferees.

2. Subject to 1 above, the directors must register a transfer of shares where the transfer does not 'substantively change' (loosely speaking) the underlying ownership of the share (e.g. merely a transfer to new trustees, or a transfer by a holding company to its subsidiary), or where the transfer is to someone 'close' (loosely speaking) to the seller (e.g. to a relative, or to someone under the seller's will).

3. Again subject to 1 above, the directors must register a transfer of shares to an 'outsider' so long as the seller has first offered the shares to existing members/shareholders (if any) in accordance with the prescribed 'pre-emptive rights procedure', and the existing members/shareholders have not purchased the shares under that procedure. Speaking very generally, the 'pre-emptive rights procedure' is as follows: The shares initially must be offered to existing members/shareholders (if any) at the same price at which the seller otherwise proposes to sell them to the outsider. If purchasers for all the shares are not found amongst the existing members/shareholders at this price, and the seller does not withdraw the shares from sale, then the shares must be independently valued at a 'fair price' and re-offered to existing members/shareholders at the 'fair price'. Any shares left unsold under this regime may then be sold to the outsider. Further, the seller has various opportunities, at various stages of the procedure, to withdraw the shares from sale.

If you answer 'no' to the question, the articles of association generated by UKcorporator will provide, in essence, that the director(s) will have absolute discretion to reject any proposed transfer of shares as the director(s) see fit. This provision may not be suitable in some cases - it might be thought, for example, that the director(s) may be tempted to favour their own relatives or associates in exercising the discretion.
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