Pre-Emptive Right
Also known as: Right of First Refusal, ROFR, Pre-Emption Right, Right of First Offer.
What is Pre-Emptive Right?
A pre-emptive right entitles existing shareholders to be offered newly issued or transferred shares in proportion to their holding before those shares are offered to outsiders. Under Companies Act 71 of 2008 Section 39, pre-emption is the default for private companies on new issues, and is commonly extended to transfers by the MOI or shareholders agreement.
Drafted and reviewed by
Attorney & Founder, My-Contracts.co.za · Legal Practice Council of South Africa (LPC F17333)
Definition and context
A pre-emptive right (or right of first refusal) gives existing shareholders priority to acquire shares that a company proposes to issue, or that another shareholder proposes to sell, before those shares may be offered to a third party. The right protects shareholders against dilution and against unwanted new co-owners. South African law distinguishes pre-emption on new issues and pre-emption on transfers.
Section 39 of the Companies Act 71 of 2008 creates a default pre-emptive right on new share issues for private companies: a private company's board must offer newly issued shares to existing shareholders pro rata before issuing them to outsiders, unless the MOI provides otherwise. Section 39 does not apply to public companies. Pre-emption on transfers is not statutory — it must be expressly created in the MOI under Section 15(7) of the Companies Act or in a shareholders agreement. The typical mechanism requires a selling shareholder to issue a "transfer notice" specifying price and terms; other shareholders then have a defined period to accept pro rata, after which unaccepted shares may be sold to the identified third party on terms no more favourable than those offered to the insiders.
In practice, pre-emptive rights are the cornerstone of minority protection in closely held South African companies, and are paired with tag-along, drag-along, and deadlock provisions. Drafters must address valuation mechanics (independent auditor, DCF, last-round price), partial acceptance, deemed offers on change of control of a corporate shareholder, and exceptions for permitted transfers to related parties and employee share schemes. Breach of a pre-emptive clause sounds in specific performance or damages.
Where this term lives in law
Companies Act 71 of 2008
Sections: 15(7), 39
Governs the incorporation, governance, and winding-up of companies in South Africa.
Frequently asked questions
What is the difference between a pre-emptive right and a right of first refusal?
In South African usage the terms are often used interchangeably, but technically a pre-emptive right gives existing shareholders the first opportunity to buy shares on terms set by the seller or on a formula, whereas a right of first refusal lets the seller negotiate terms with a third party first and then obliges them to match those terms internally. Section 39 of the Companies Act uses "pre-emption" in the pro-rata new-issue sense.
Does Section 39 of the Companies Act apply to all companies?
No. Section 39 creates a default pre-emptive right on new issues only for private companies. Public companies are expressly excluded. A private company may also opt out by an MOI provision; the MOI may alternatively expand pre-emption to cover transfers as well as issues.
Can a shareholders agreement override the MOI on pre-emption?
No. Section 15(7) of the Companies Act provides that any shareholders agreement must be consistent with the MOI and the Act — a conflict is void to the extent of the inconsistency. Drafters should mirror pre-emption mechanics in both the MOI and the shareholders agreement, with the MOI as the controlling document.
What happens if shares are issued in breach of a pre-emptive right?
Under Section 39(6), the issue is valid but affected shareholders may apply to court to set it aside or for appropriate relief. Where pre-emption is purely contractual (transfer cases), the remedy is typically specific performance compelling the seller to offer the shares, or damages measured by the loss of the pre-emptive opportunity.
Contract templates using this term
4 templates reference Pre-Emptive Right.