Here you will learn all about the concept of retention of title such as what it is, how it affects share ownership and what the pros and cons are. 

What are pre-emption rights?

A pre-emption right is a legal provision that ensures that shares are offered to existing shareholders, or the company itself, before shares are sold to external stakeholders. The purpose of a pre-emption clause is to control ownership in a particular company by keeping decision-making, or all ownership, within a certain circle. 

The rules that determine how the retention works and is structured are contained in the articles of association, and the law that regulates retention is the Companies Act.

What are the advantages and disadvantages of retention of title?

Below we explain the main advantages and disadvantages of retention of title. 

Benefits and advantages

• The company is protected against hostile takeovers as the retention of title ensures that the ownership structure does not undergo an unwelcome change. 
• The company can take a long-term view, knowing that it does not have to adapt to the demands of external shareholders. 
• The corporate culture and values can be maintained when ownership is kept within a specific circle such as a family or a lineage. 

Disadvantages

• Companies with pre-emptive rights have limited liquidity as the shares are more difficult to sell than normal. To give an example listed companies normally have millions of stakeholders, while reserved companies usually have only a few. 
• Share transactions are usually more complicated than usual to carry out as you have to take into account the pre-emption clause.
• If several parties want to buy the shares offered by the seller, a legal conflict may arise. 

What are the different types of pre-emption clauses? 

There are two preemption clauses that are particularly common, which are: 

• Enhanced pre-emption rights, which are the most common pre-emption rights, meaning that existing shareholders have a right of first refusal on the shares regardless of who the new owner is. 
• Family right of first refusal, which is a limited right of first refusal that states that existing owners have the right of first refusal if the new owner received the shares via, for example, gift, division or inheritance. 

Frequently asked questions

Here we provide you with answers to frequently asked questions related to retention of title. 

What happens if you sell your shares without respecting the pre-emption clause?

The sale will then be annulled. 

Are oral pre-emption clauses valid? 

No, oral pre-sales conditions are not valid, they must be in writing and contain information such as price and conditions of sale. 

How long do you have to use the right of first refusal?

Normally, the pre-emption right can be exercised for about 2 months, after which the seller may dispose of his shares in any way he wishes. 

Can a pre-emption clause be changed?

Yes, a pre-emption clause can be changed by the articles of association are amended, which requires a decision by the general meeting

What happens if several people want to buy back shares?

Most commonly, they are divided equally between interested buyers unless otherwise stated in the articles of association. It is important to have clear rules on this, which everyone understands, so that disagreements do not arise.