The Pre-emption right in Limited Liability Companies

The Pre-emption right in Limited Liability Companies

In the world of Limited Liability Companies (LLC), the pre-emption right is a key tool to protect the interests of the Shareholders and to maintain internal control of the Company. The pre-emption right is regulated by the Spanish Companies Act (LSC) and plays a crucial role during share transfers, mainly in the case of capital increases. In the following, we will explore these rights in detail and how they apply in the context of limited liability companies.

Right of pre-emption

The pre-emption right is a mechanism that allows the existing Shareholders of a limited liability company to acquire shares that are offered to third parties before they are sold outside the group of Shareholders. This right is regulated in Articles 107 et seq. of the LSC and its main purpose is to preserve the composition of the group of Shareholders, which in limited companies is usually very intimate and personalised.

Unless another procedure has been stipulated in the Articles of Association or in the Shareholders’ Agreement, when a Shareholder wishes to sell his shares, he must notify the other Shareholders of his intention to do so, specifying the terms of the offer. The Shareholders have one month to exercise their pre-emption right. If the Shareholders choose not to exercise this right, the selling Shareholder may proceed with the sale to third parties under the same initial conditions.

The pre-emption right, provided for in Article 304 of the LSC, applies during capital increases in a limited Company. This right allows existing Shareholders to take up new shares in proportion to their current shareholding, thus avoiding dilution of their ownership percentage in the Company.

The pre-emption right is triggered when the Company increases its capital by issuing new shares. Each Shareholder has the right to take up a number of new shares proportional to its current shareholding in the Company. However, this right does not apply in cases of merger by acquisition of another company, demerger of a company or the conversion of obligations into shares.

Exercise of the pre-emptive right 

The exercise of the pre-emptive right must be made within the prescribed time limits:

• Deadline for Exercise: in the case of the pre-emptive right, the deadline for exercising the right is set in the resolution on the capital increase. However, this period may not be less than one month. Shareholders must give notice of their intention to exercise this right within the prescribed period.
• Second Pre-emptive Right: if only some Shareholders exercise their pre-emptive right, the shares not taken up shall be offered to the Shareholders who did exercise the right for an additional period of up to 15 days. If, after this period, there are still shares available, the Directors may allot them to third parties.

Exclusion of pre-emptive rights

Article 308 of the LSC provides for the possibility for the General Meeting to exclude the pre-emptive right in whole or in part in special situations. For this exclusion to be valid, certain requirements must be met:

1. Directors’ report: the directors must prepare a detailed report specifying the value of the shares and justify the price of the new shares. This report must include the persons to whom the new units or shares are to be attributed.
2. Notice of the general meeting: the notice of the general meeting should include the proposal to exclude the pre-emptive rights, the type of new shares, and the right of the Shareholders to examine the report at the registered office. It should also be possible to request these documents free of charge.
3. Valuation of New Shares: the nominal value of the new shares, plus any additional premium, must correspond to the actual value attributed in the directors’ report.

Pre-emption rights are essential to protect Shareholders in a limited partnership during share transfers and capital increases. These rights allow the Shareholders to maintain their shareholding in the Company and avoid dilution of their influence, ensuring stability and control within the group of Shareholders. Understanding and applying these rights is essential for any Shareholder wishing to protect its interests and ensure the proper functioning of the Company.