Do you want to maintain control of a company because a capital increase is going to be carried out? One way to protect the ownership percentage held by partners or shareholders is through pre-emptive subscription rights.
This right allows those who are already part of the company to participate in certain capital increases before third parties outside the company. As a result, they can prevent their stake from being diluted or their decision-making power within the company from being reduced.
In this post, we explain what pre-emptive subscription rights are, how they are regulated, the deadlines for exercising them, whether they can be transferred or waived, and when they may be excluded.
What are pre-emptive subscription rights and where are they regulated?
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In general terms, pre-emptive subscription rights are rights granted to the partners or shareholders of a commercial company to acquire new equity interests or subscribe for new shares issued by the company before third parties outside the company.
Strictly speaking, in limited liability companies, this is known as the preferential right to assume new equity interests, while in public limited companies, it is known as the preferential right to subscribe for new shares. However, in practice, the expression “pre-emptive subscription right” is often used generally to refer to this protection granted to partners or shareholders in the context of a capital increase.
This right allows existing partners or shareholders to maintain their ownership percentage in the company’s capital and prevents their position from being diluted. This is especially relevant in family-owned companies, companies with several partners or companies where the entry of new investors is expected.
Pre-emptive subscription rights are regulated in Article 304 and the following articles of the Spanish Companies Act (LSC). Article 304 establishes the following:
- In capital increases involving the issue of new equity interests or new shares, whether ordinary or privileged, against cash contributions, each partner shall have the right to assume several equity interests or subscribe for several shares in proportion to the nominal value of those they already hold.
- There shall be no pre-emptive right when the capital increase is due to the absorption of another company, the absorption of all or part of the spun-off assets of another company, or the conversion of bonds into shares.
Therefore, this right allows partners or shareholders to assume equity interests or subscribe for shares in proportion to their participation in the share capital, provided that the capital increase is made against cash contributions and none of the legally established exceptions applies.
From a legal perspective, this right operates as an option, not as an obligation. Partners or shareholders may choose to exercise it to maintain their ownership percentage, or they may decide not to do so, allowing those equity interests or shares to be assumed or subscribed by other partners, shareholders or interested third parties.
In addition, this right may be transferred to another person, although the transfer will be subject to the same restrictions as the sale of the equity interests or shares from which it derives.
What are pre-emptive subscription rights used for?
Pre-emptive subscription rights are mainly used to protect the position of partners or shareholders in the event of a capital increase.
When a company issues new equity interests or new shares, the ownership percentage of existing partners or shareholders may be reduced if they do not participate in the capital increase. This reduction is known as dilution and may affect both the economic value of their stake and their decision-making power within the company.
For this reason, the pre-emptive subscription right gives existing partners or shareholders priority to participate in the capital increase in proportion to their previous stake. In this way, they can maintain their percentage in the share capital and prevent the entry of new partners or investors from altering the existing balance within the company.
This right is especially important in companies with several partners, family-owned companies, corporate groups or growing companies, where a capital increase may have significant effects on control, decision-making and the future corporate structure.
In practice, pre-emptive subscription rights may be used to:
- Avoid dilution of the current partners’ or shareholders’ ownership stake.
- Maintain the balance of power within the company.
- Protect control in family-owned companies or closely held companies.
- Organise the entry of new investors.
- Reduce conflicts between partners in capital increase processes.
- Strengthen the legal certainty of the corporate transaction.
What is the deadline for exercising the right?
The deadline for exercising the pre-emptive subscription right derives from Article 305 of the Spanish Companies Act.
Generally, the following rules should be considered:
- In limited liability companies, the deadline will be the one established in the capital increase resolution.
- In public limited companies, the deadline will be determined by the directors.
- In any case, the deadline for exercising the right may not be less than one month from the publication of the announcement of the offer to assume new equity interests or subscribe for new shares in the Official Gazette of the Commercial Registry.
In addition, in limited liability companies and in public limited companies with registered shares, the management body may replace the publication of the announcement with written notice to each partner or shareholder. In that case, the deadline will begin to run from the date on which that notice is sent.
Monitoring this deadline is especially important because, if the partner or shareholder does not exercise the right within the established period, they may lose the opportunity to maintain their ownership percentage in the company.
The key question is: what happens if not all equity interests are assumed in a limited liability company when the pre-emptive right is exercised?
In these cases, the management body will offer the unassumed equity interests to the partners who did exercise their right, so that they may assume them within a period of no more than 15 days from the end of the period established for exercising the pre-emptive right.
Once that period has ended, the new equity interests may be offered to third parties outside the company.
Can the pre-emptive subscription right be transferred or waived?
The pre-emptive subscription right operates as an option for the partner or shareholder, not as an obligation. This means that it can be exercised to maintain the ownership percentage in the company, but it may also not be exercised or may be waived.
Three main situations may arise when it comes to practice:
- The partner or shareholder exercises the right and participates in the capital increase.
- The partner or shareholder does not exercise the right within the corresponding period, in which case they may lose the possibility of maintaining their ownership percentage.
- The partner or shareholder transfers the right to another person, provided that the applicable legal and statutory conditions are respected.
In limited liability companies, the voluntary transfer of the preferential right to assume new equity interests may be made in favour of the persons who, under the law or the articles of association, may freely acquire equity interests. In addition, the articles of association may recognise the possibility of transferring this right to other persons, subjecting that transfer to the same system and conditions established for inter vivos transfers of equity interests.
There are public limited companie where pre-emptive subscription rights may be transferred under the same conditions as the shares from which they derive.
Therefore, before waiving or transferring this right, it is important to review the articles of association, the capital increase resolution and any possible restrictions applicable to the transfer of equity interests or shares.
This review is especially relevant in closely held companies, family-owned companies or companies with shareholders’ agreements, since a poorly planned waiver or transfer may alter the balance between partners or facilitate the entry of third parties into the company.
Can this right be excluded?
Yes, the pre-emptive subscription right may be excluded, fully or partially, but not automatically or at the company’s discretion.
According to Article 308 of the Spanish Companies Act, when the company’s interest so requires, the General Meeting, when approving the capital increase, may decide to exclude the pre-emptive right fully or partially.
For the resolution to be valid, several requirements must be met:
- The directors must prepare a report justifying the proposed exclusion of the pre-emptive right.
- That report must indicate the value of the new equity interests or shares and identify the persons to whom they will be allocated.
- The notice convening the General Meeting must clearly state the proposal to exclude the pre-emptive right.
- The nominal value of the new equity interests or shares, together with the issue premium or assumption premium, must correspond to the real value attributed to the equity interests in the directors’ report or, in the case of shares, to the fair value resulting from the report of an independent expert.
The exclusion of pre-emptive subscription rights may be necessary, for example, when the company wants to allow the entry of a strategic investor, strengthen its equity, close a financing transaction or incorporate a partner who brings value to the business project.
However, since this is a measure that may directly affect the ownership percentage of current partners or shareholders, it must be properly justified and documented with particular care.
In family-owned companies, closely held companies or companies with several partners, the exclusion of this right may have a significant impact on the company’s internal balance. For this reason, before approving it, it is advisable to review the articles of association, any shareholders’ agreements and the possible consequences for control of the company.
Implications of pre-emptive subscription rights for partners and family-owned companies
The exercise of pre-emptive subscription rights has an important strategic implication for partners or shareholders, as it makes it possible to avoid dilution of their stake in a capital increase.
When a company issues new equity interests or shares, partners who do not participate in the increase may see their percentage in the share capital reduced. This not only affects the economic value of their stake, but also their ability to influence decision-making.
For this reason, this right is especially relevant in companies with several partners, family-owned companies or growing companies, where the entry of new investors may change the internal balance of the company.
In the case of family-owned companies, pre-emptive subscription rights can help maintain control within the family group and prevent a capital increase from altering the ownership structure planned for the business project.
Therefore, before approving a capital increase, it is advisable to analyse how it will affect each partner’s ownership percentage, whether there is a risk of dilution and whether the articles of association or shareholders’ agreements regulate any specific aspects regarding the exercise, transfer or exclusion of this right.
Corporate legal advice to regulate pre-emptive subscription rights
If you have any questions about how to exercise this right or how to regulate it in the articles of association, at LEIALTA our team of expert advisors is available to guide you and carry out the necessary procedures on your behalf. If you need support, please do not hesitate to contact us. We will be happy to help you with the process.
