The right of first refusal

The right of first refusal

The right of first refusal is a legal figure designed to protect the shareholders of a company in situations of capital increase. This right allows existing shareholders the opportunity to maintain their proportional interest in the company when it issues new shares. The main purpose of this mechanism is to avoid the involuntary dilution of the equity interest of existing shareholders by ensuring a balance between the financing needs of the company and the rights of the shareholders.

The right of first refusal is based on the principle of shareholder protection. In many legislations, this right is regulated by the corporate or commercial regulatory framework. For example, in the field of corporations, it is stipulated that when a company issues new shares as part of a capital increase, the existing shareholders have a preferential right to acquire these shares in proportion to their existing share.

In Spain, this right is regulated by the Capital Companies Law, and according to Article 304 of this law, the shareholders have preference to subscribe the new shares issued by the company, unless this right is expressly and justifiably excluded by the general meeting of shareholders. The exclusion of the right of first refusal must be supported by strategic reasons and justified in a report prepared by the directors and, in some cases, in an independent report.

When a company decides to carry out a capital increase by issuing new shares, the general steps for exercising the right of first refusal are as follows:

1. Communication to the shareholders: the company must inform the existing shareholders about the capital increase, detailing the conditions of the issue, such as the price of the new shares, the deadline for exercising the right and the number of shares available.
2. Deadline for exercising the right: the shareholders have a limited period (generally stipulated by regulation or the articles of association) to decide whether to exercise their right. This period is usually short, but sufficient for the shareholders to evaluate the offer.
3. Subscription of shares: the shareholders who wish to maintain their percentage in the company acquire the shares corresponding to their proportional participation. If this right is not exercised, these shares may be offered to other shareholders or third parties.

An important aspect is that the shareholders may decide not to exercise their right of first refusal. In that case, they accept the dilution of their interest in the company.

Although this right is a valuable tool for the shareholders, it is not absolute. The right can be excluded if the general meeting approves it, provided that such exclusion is justified as being in the company’s best interest. This may occur, for example, when the company needs to attract strategic investors.

The regulatory framework also allows this right to be traded on secondary markets. Shareholders who do not wish to subscribe to new shares can sell their pre-emptive rights to other interested parties, generating liquidity for themselves and allowing others to acquire a larger stake.

The right of first refusal has a significant impact on the company’s corporate structure and strategic decisions. From the perspective of the shareholders, it represents a safeguard against dilution, allowing them to protect their influence and political rights in the company.

On the other hand, from a business perspective, this right can be seen as a constraint on the flexibility to attract new investors. Companies must strike a balance between protecting existing shareholders and attracting additional capital, especially in contexts where new resources are essential to the growth or survival of the company.

The right of first refusal is a key element in the design of modern corporate structures. It protects existing shareholders from dilution of their shareholding and, at the same time, allows companies to access fresh capital. However, its exercise and possible exclusions must be carefully managed to ensure that both the interests of both the shareholders and the company are respected.

Transparency, effective communication and justification of any exclusion are essential to preserve the confidence of the shareholders and ensure the long-term viability of financing strategies.