What are pre-emption rights — and how are they disapplied?
By SuLe · Updated 24 June 2026
Pre-emption rights give existing shareholders first refusal on new shares a company issues for cash, in proportion to their current holdings — a statutory protection against dilution under Companies Act 2006 s.561. Before allotting shares to a new investor you must either honour these rights or disapply them, by special resolution (75%) or through the articles.
Key facts
- Section 561 of the Companies Act 2006 gives existing shareholders first refusal on new shares issued for cash, pro rata to their holdings.
- Their purpose is to let shareholders protect their percentage against dilution.
- Statutory pre-emption can be disapplied by special resolution (75% of votes) or in the articles (ss.569–571).
- Investors expect the statutory right disapplied for their round, but usually want contractual pre-emption in the shareholders' agreement for future issues.
- An allotment made in breach of pre-emption rights can be challenged.
What are pre-emption rights?
Pre-emption rights are a shareholder's statutory first refusal on new shares. Under Companies Act 2006 s.561, when a company issues new shares for cash it must offer them first to existing shareholders, in proportion to what they already hold.
The purpose is anti-dilution. Without them, a company could issue shares to a favoured party and quietly shrink everyone else's percentage; pre-emption gives each shareholder the chance to buy enough of the new shares to keep their slice intact.
The right attaches to shares issued for cash. Shares issued for other consideration — for non-cash assets, say — fall outside the statutory right, though the articles or a shareholders' agreement may extend protection further.
How are pre-emption rights disapplied?
For a funding round, the new investor needs the exact shares agreed, so the existing shareholders' first refusal has to be cleared out of the way. There are two routes.
The first is a one-off disapplication by special resolution — 75% of the votes cast. This is the common route at a round: the shareholders resolve, just before allotment, to disapply s.561 for that specific issue.
The second is a standing disapplication in the articles, under ss.569–571. Many investor-ready articles modify or switch off statutory pre-emption so the company has flexibility to allot, with contractual protection handled separately.
Why do investors want pre-emption both removed and added?
It looks contradictory but it is not. Investors want the statutory right disapplied for the round they are joining, so their allotment goes through cleanly rather than being offered round the existing shareholders first.
Having joined, they usually want pre-emption back — contractually, in the shareholders' agreement. This contractual pre-emption gives them first refusal on future share issues, letting them defend their own percentage in later rounds.
So a typical round both disapplies the statutory s.561 right for this allotment and writes a bespoke contractual pre-emption regime into the shareholders' agreement for the future. The two operate at different points in time.
| Question | Statutory pre-emption (s.561) | Contractual pre-emption (SHA) |
|---|---|---|
| Source | Companies Act 2006 | Shareholders' agreement |
| Applies to | New shares issued for cash | As drafted (can be broader) |
| Disapplied by | Special resolution or articles (ss.569–571) | Amended by agreement of the parties |
| Investor view at their round | Wants it disapplied | Wants it drafted in for the future |
| Purpose | Protect existing holders from dilution | Let investors defend their percentage later |
Worked example
Hannah and Deep run Kelvin AI Ltd, with 90,000 ordinary shares between the two founders and one earlier angel. They agree a £400,000 seed with a new lead who wants 40,000 new preference shares.
Because the shares go to one incoming investor, the existing three shareholders' s.561 rights are in the way. At completion they pass a special resolution disapplying pre-emption for this allotment, and the founders and angel sign waivers. The new articles then include a standing disapplication and the shareholders' agreement adds contractual pre-emption for future rounds — so the lead can protect its stake next time, while this round completes cleanly.
Where founders go wrong
Allotting first and dealing with pre-emption later
— the disapplication must be in place before the allotment, or it can be challenged.Assuming model articles remove pre-emption
— statutory s.561 applies unless disapplied; do not assume it has been dealt with.Confusing statutory and contractual pre-emption
— one is the s.561 right you disapply for the round; the other is what you draft into the shareholders' agreement for the future.Forgetting waivers from existing shareholders
— a clean disapplication usually pairs the special resolution with signed waivers so the allotment is unassailable.
Related questions
What exactly are statutory pre-emption rights?
Under Companies Act 2006 s.561, when a company issues new shares for cash it must first offer them to existing shareholders in proportion to their current holdings. The point is to let shareholders protect their percentage against dilution. The rights apply to shares issued for cash, not shares issued for other consideration.
How are pre-emption rights disapplied?
Two main routes. A one-off disapplication is passed by special resolution — 75% of votes — usually just before a round so the new investor gets exactly the shares agreed. Alternatively the articles can disapply or modify pre-emption on a standing basis under Companies Act 2006 ss.569–571, which many investor-ready articles do. [More: What board and shareholder resolutions does a funding round need?]
Do investors want pre-emption removed or kept?
Both, at different moments. They want statutory pre-emption disapplied for the round they are joining, so the allotment goes cleanly to them. But they usually then want contractual pre-emption written into the shareholders' agreement, so they get first refusal on future issues and can defend their own percentage later. [More: What are pro-rata rights?]
What happens if I ignore pre-emption rights?
An allotment made in breach of pre-emption rights can be challenged, and the company and its officers can be liable to compensate shareholders who were wrongly denied their entitlement. In practice it also stalls your round, because the investor's solicitor will not complete on shares whose allotment is legally vulnerable.
Pre-emption is the step founders most often skip, and an allotment made without disapplying it is legally vulnerable — exactly what an investor's lawyer refuses to complete on. A SuLe solicitor can get the resolutions, waivers and articles right so your round closes cleanly. Book a free investment readiness check
Keep reading: How do I issue new shares in a UK company? · What board and shareholder resolutions does a funding round need? · What is an SH01 and when must I file it? · What are pro-rata rights? · What documents do I need to close a seed round in the UK? · Should I use model articles or bespoke articles of association?
Primary sources: Companies Act 2006 · GOV.UK — Running a limited company
