What are pre-emptive rights and do Ontario shareholders get them automatically?
Pre-emptive rights (also called anti-dilution rights or pre-emption rights) give existing shareholders the right to purchase their proportional share of any new shares the corporation proposes to issue, before those shares are offered to outside parties. This allows shareholders to maintain their ownership percentage and avoid dilution.
Under the Ontario Business Corporations Act, shareholders do not automatically have pre-emptive rights — they must be expressly included in the articles of incorporation or in a shareholder agreement. This is an important point: many shareholders in Ontario private corporations do not realize their ownership percentage can be diluted without their consent unless pre-emptive rights are in place.
If your shareholder agreement or articles include pre-emptive rights, the corporation must notify you of any proposed share issuance and give you the opportunity to subscribe for your pro-rata portion within a specified time. If you choose not to exercise the right, you waive it for that particular issuance and your ownership percentage decreases.
Pre-emptive rights are a standard ask for investors putting money into a private company. If you are an existing shareholder and your agreement does not include them, consider negotiating for their inclusion, particularly before any external financing round that could dilute your stake.
Key takeaways
- Pre-emptive rights let existing shareholders maintain their percentage by buying into new issuances.
- They do not arise automatically under the OBCA; they must be in the articles or shareholder agreement.
- Without them, a corporation can issue new shares to outsiders and dilute existing shareholders.
- Investors commonly require pre-emptive rights as a standard term.