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Shareholders naturally play an important role in a company. Their investment raises capital which fuels business growth and innovation, giving the company the chance to flourish in today’s competitive market.
However, investing funds into a company can be tricky business with various risks involved. That’s why pre-emptive rights clauses are commonly included in a company’s shareholders agreement, ensuring that shareholders have an opportunity to maintain their ownership percentage.
Keep reading to learn more about how shares work and why pre-emptive rights are vital in 2025.
How Do Shares Work In A Company?
Shares represent the ownership an investor receives when they invest money into a company. In exchange for their funds, an investor is granted a percentage of the company’s equity – essentially, they own a portion of the business.
The way a shareholder manages their shares and their corresponding rights is dictated by a Shareholders Agreement alongside a Company Constitution. These documents provide clarity on how decisions are made and how ownership interests are maintained over time.
| Example Jamie invests $100,000 into a company. In return for his investment, he receives 10% of the company’s shares. |
The number of shares an investor receives depends on the company’s valuation. For example, in a large, established company, the same amount of capital might secure only a small percentage of ownership, whereas in an early-stage startup, that investment could translate into a significantly larger share of the pie.
What Are Pre-emptive Rights?
Pre-emptive rights essentially give certain shareholders a right of first refusal when new shares are offered. In practical terms, before shares are sold to external parties, they are first offered to existing shareholders, allowing them the first opportunity to increase their stake.
If shareholders decline this opportunity, the remaining shares can then be offered to the public. Accepting these rights enables shareholders to grow their investment and protect their percentage of ownership.
Pre-emptive rights are particularly attractive as they help maintain a proportional ownership level, even when new shares are issued – a vital benefit when facing unforeseen changes such as a shareholder exit or the company’s decision to go public.
The additional shares acquired through pre-emptive rights are typically proportional to the shareholder’s existing holding, ensuring fairness across the board.
How Do I Give Pre-emptive Rights?
Pre-emptive rights should always be set out in writing – usually as a clause within the shareholders agreement. This clause is agreed upon when an investor decides to place their funds into the company, forming part of the contractual relationship between the parties.
When Would I Give Shareholders Pre-emptive Rights?
Typically, shareholders receive pre-emptive rights at the commencement of their relationship with the company. These rights are incorporated into the shareholders agreement at the time of their investment.
In many early-stage companies, pre-emptive rights serve as an incentive for investors to take on the risks of backing a startup. They also act as a form of compensation for the risks associated with investing in a new venture.
Do I Need A Pre-emptive Rights Clause?
Yes – if you intend to offer pre-emptive rights to your shareholders, it is crucial to have a clearly defined clause in place. This clause should specify the terms on which the rights are offered, the exact conditions under which they can be exercised, and any related restrictions or limitations.
Because drafting these clauses accurately can be challenging, it’s always wise to consult a legal professional. For more detailed information on shareholders’ legal protections, visit our Shareholders Agreement page.
How Do I Transfer Shares To Another Person?
The transfer of shares is generally governed by the Shareholders Agreement or the Company Constitution. These documents detail the necessary steps and often include a provision for offering a right of first refusal to existing shareholders before any share transfer to a third party.
In 2025, the process has been further streamlined through electronic methods, ensuring faster transfers and enhanced transparency. Once the internal procedures are completed, the purchaser pays the previously agreed amount to the selling shareholder, and the new shareholding is registered. It is essential to notify the Australian Securities and Investments Commission of the change within 28 days.
What Does A Shareholders Agreement Cover?
A Shareholders Agreement is a legally binding document that governs the relationship between the shareholders of a company. It typically outlines key details such as:
- Who the shareholders are and what percentage of the company they hold
- The duties and obligations of the shareholders
- The relationship between the shareholders and the company’s directors
- The protocol when a shareholder wishes to exit
- Dispute resolution procedures
For further insights on how these agreements safeguard your investment, you may also find our comprehensive guide on Shareholders Agreements and Company Constitutions particularly useful.
What Does A Company Constitution Cover?
A Company Constitution is one of the most critical internal documents a company can adopt. It sets out the operational framework of the company and outlines the roles and responsibilities of its key management.
This document typically covers important aspects such as the composition of the board of directors, voting rights, the role of the company secretary, and other internal governance matters.
Moreover, a Company Constitution can override the replaceable rules provided under section 141 of the Corporations Act 2001, although the Act remains the supreme legal authority in all other contexts. If a company opts not to have its own constitution, the replaceable rules will automatically apply.
Regular Review of Legal Documents
As we progress through 2025, it is essential for companies to periodically review their shareholder agreements, pre-emptive rights clauses, and company constitutions to ensure they remain compliant with current legislation and industry standards. Regular reviews, ideally on an annual basis, can help identify areas for amendment and fortify your company’s governance practices. For more guidance, refer to our Legal Requirements for Starting a Business guide and explore our Company Set-Up services.
Key Takeaways
Pre-emptive rights provide shareholders with confidence by guaranteeing them the first opportunity to purchase new shares, thus maintaining their ownership percentage. Here’s a brief recap of what we’ve covered:
- Pre-emptive rights give shareholders the first right to purchase new shares issued by the company.
- These rights are typically granted at the beginning of the shareholders’ relationship with the company.
- They help maintain proportional ownership even when the company expands its share capital.
- A clearly written pre-emptive rights clause, usually found in the shareholders agreement, is essential.
- Shareholders agreements cover key aspects regarding share ownership and the process for transferring shares.
- Allocating shares in a startup can differ significantly from established companies, reflecting the unique risks involved.
- Company constitutions set out how the company is run and can override replaceable rules under the Corporations Act 2001.
Given the evolving business landscape in 2025, regularly reviewing your company’s legal documents is more important than ever. Updated agreements not only protect your investment but also ensure that your company remains agile and compliant amid changing market conditions.
If you would like a consultation on pre-emptive rights for company shareholders or need assistance updating your legal documents, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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