Key points
- The pre-emption clause gives a priority right to buy the shares of a shareholder who wishes to leave the start-up, ahead of any third party.
- The first step is to identify who benefits from this right.
- This right may be open to all shareholders, to one class of shareholders or to a single shareholder.
- The clause may provide for priority “ranks”, for example Rank A shareholders, then Rank B shareholders.
- In a fundraising, founders often opt for a pre-emption right that takes priority over the investors’ right.
- The scope of the clause depends on the objectives of those who draft it and on the founders’ vision.
The right to be preferred in a start-up
The pre-emption clause enshrines a simple right: granting a preference, a priority right to buy the shares (actions or parts sociales, together “the securities”) of a shareholder who wishes to leave the start-up, ahead of a third-party buyer.
The first step is to identify who benefits from this right. A sensitive question: who will have the absolute privilege of going before everyone else to buy shares in the company?
Will this holy grail belong to all shareholders without any distinction? Or will only one class of shareholders be favoured? Will this key right be reserved for a single shareholder?
The question is crucial, because the holder of this right will have a decisive influence on how the start-up’s share capital evolves.
This is why, in a fundraising, a start-up’s founders often opt for a pre-emption right that takes priority over the investors’ right. In that case, the pre-emption clause can be drafted to provide for different levels of priority (the “ranks”), allowing one shareholder or one class of shareholders to acquire the shares of an outgoing shareholder ahead of the other shareholders. These are referred to as first-rank or Rank A shareholders.
Only if the Rank A shareholders decide not to pre-empt, or to pre-empt only part of the shares offered for sale, would one shareholder or one class of lower-rank shareholders in turn have the right to pre-empt. These are referred to as second-rank or Rank B shareholders, and so on.
Spirit and letter: a pre-emption clause that reflects the start-up’s objectives
The pre-emption clause only takes on its full meaning in light of the objectives of those who draft it. Its effects will differ according to the vision of the start-up’s founders, as expressed in the clause.
Is the clause meant to build an impassable wall between the shareholders and the outside world, in the hope of forging closer ties among the shareholders and encouraging the affectio societatis (the shared intention to be partners) that fosters cohesion within the company?
In that case, the clause would act as a border guard, preventing the uncontrolled and disorganised entry of opportunistic strangers into the shareholder base.
Or is the aim rather to help preserve a fragile, pre-existing balance of power?
The point would then be to prevent one shareholder from gaining the upper hand over all the others, by providing that the pre-emption right may only be exercised jointly and in proportion to each shareholder’s stake.
Could one also imagine wanting to give a person (a shareholder or a third party) the opportunity to increase their stake ahead of everyone else?
This is often the case when the aim is to stop powerful minority shareholders from gradually becoming majority shareholders one day. Or, conversely, when, with a view to succession, the aim is for minority shareholders or third parties to be able to take over the reins of the company one day.
To that end, the lawyers at Hashtag Avocats assist you in drafting this clause, to help the transactions proceed on a sound legal footing and to protect your company’s interests.
For assistance: start-up formation lawyer: articles of association, founders’ agreement, BSA-AIR.
