Published on: 19 June 2025

How does pre-emptive rights work in stock transactions?

How does the right of first refusal in stock transactions work?

Short answer: the right of first refusal in share transactions means that existing shareholders have the first opportunity to buy (newly issued or existing) shares before they may be issued or sold and transferred to a third party. This right not only prevents shareholders from being faced with unexpected new faces at the table, but also prevents their equity interest from being diluted just like that when new shares are issued.

Pre-emptive right when new shares are issued

When new shares are issued, existing shareholders have a statutory pre-emptive right (Article 2:206a of the Dutch Civil Code). This means that they may – in proportion to their current interest – be the first to purchase the newly issued shares. Thus they retain their voting right and economic interest. After all, if a shareholder decides not to buy new shares, while other shareholders or third parties do, his interest will decrease. This is because the total number of shares increases, while his own interest remains the same. This is called dilution of the equity interest.

The pre-emptive right when shares are issued can be excluded or limited in the articles of association. However, any exclusion or limitation will have to be made for each issue and substantiated separately.

Pre-emptive right when transferring existing shares

Pre-emptive rights also play an important role in the sale of existing shares. The law has a standard blocking arrangement (Article 2:195 of the Civil Code): a shareholder who wants to sell (part of his shares) must first offer them to the other shareholders. This safeguards the private nature of the B.V. and prevents the unwanted entry of third parties. Many private limited companies (BVs) have included a blocking arrangement in the articles of association for this reason. Such an arrangement limits the free transferability of shares in order to prevent “strangers” from simply becoming shareholders and thus gaining control of the BV.

The articles of association or shareholders’ agreement usually specify precisely how this preferential right must be exercised: for example, deadlines, pricing and distribution if several shareholders wish to purchase. If the pre-emptive right is violated, the transfer may be invalid and/or there may be a breach of contract.

Example

Imagine: you and your business partner are the two shareholders of a B.V. (50% each). Both the articles of association and the shareholders’ agreement include an offering arrangement. You decide to sell your shares to a good acquaintance, an outsider, for €100,000. Because of the pre-emptive right, you must first offer your 50% share package to your co-shareholder, under the same conditions (including the price of €100,000).

Your business partner is then given, say, one month to respond. If he decides to make use of his preferential right, he must indicate within that period that he wants to acquire your shares for €100,000. In that case, you sell the shares to your partner, who then becomes 100% owner of the company.

If your business partner does not accept the offer (and thus does not exercise his preferential right), then you are free to sell the shares to the outsider under the agreed conditions within, say, a period of three months. Thus, the procedure remains fair: you receive the agreed price, and your business partner has had the opportunity to participate or at least avoid the arrival of a stranger.

Note that if you sell directly to a third party without first offering to the existing shareholders, that transfer may be legally invalidated for violation of the statutory right of first refusal. Moreover, your business partner can sue you for breach of contract if the pre-emptive right was stipulated in the shareholders’ agreement.

Conclusion

A well-developed pre-emptive right – in articles of association and/or shareholders’ agreement – prevents discussions and ensures continuity within the company. When formulating the right of first refusal, much attention must be paid to the wording, terms and mutual expectations. Once the sale or issuance of shares has taken place, it is often too late to bring these agreements into focus.

Would you like to include a pre-emptive right in the articles of association or in a shareholders’ agreement, or are you in any way involved with pre-emptive rights and would you like to know more about this? I will be happy to help you.