Pre-emptive rights are legal relationships either created by a statute or through a contract. By the exercise of these rights, priority is given to the right holder over and above others as regards the potential acquisition of the relevant subject matter. Only upon refusal by such right holder, is this opportunity given to a third party to negotiate.
In India, the statutory pre-emptive rights of a shareholder in a company have been recognized statutorily through the Companies Act, 2013, as well as by the extant security exchange laws. Whereas, in the case of contractual pre-emptive rights, they are enforced as per the Indian Contract Act, 1872.
As per the statutorily recognized pre-emptive rights, the rights are held by the shareholders of a corporation by virtue of which additional shares shall not be issued by the company to a third party, without the shares first being offered to all its existing shareholders.
In the case of the contractual pre-emptive rights, they are, typically, an arrangement between the shareholders of the corporation that, in the case of transfer of shares, the exiting shareholder shall first offer those shares to the non-exiting one.
It leads to great confusion for many, as the context in which the term is used statutorily and contractually varies to a great degree. Through this article, an attempt is made to discuss the concept of pre-emptive rights in a company, its statutory and contractual presence in companies regulated as per the laws of India and review judicial developments and understand its relevance in today’s time.Business Law Review