Section 45 of the Companies Act 1997 is the minority shareholder’s protection against being diluted.
Section 45 — the right
Shares issued or proposed to be issued by a company that rank or would rank as to voting or distribution rights, or both, equally with or prior to shares already issued shall be offered to the holders of the shares already issued, in a manner and on terms that would, if the offer were accepted, maintain the existing voting or distribution rights, or both, of those holders.
(2) An offer shall remain open for acceptance for a reasonable time.
(3) The constitution may negate, limit, or modify the requirements of this section.
Which issues attract the right
| New shares rank… | Section 45 applies? |
|---|---|
| Equally with existing shares as to voting or distributions | Yes |
| Prior to existing shares — e.g. a preference share ranking ahead on capital | Yes |
| Behind existing shares in every respect | No |
| Equal as to voting only, behind as to distributions | Yes — the section says “voting or distribution rights, or both” |
| Equal as to distributions only, non-voting | Yes — same reason |
It does not matter whether the new shares are of an existing class or a new one. What matters is whether they rank equally with or prior to shares already on issue as to voting or distributions. A new class of preference shares ranking ahead on capital is squarely within section 45.
Note also who the offer must go to: the holders of the shares already issued — all of them whose position would otherwise be affected, not merely the holders of the same class.
“Would maintain the existing rights”
The offer must be structured so that a shareholder who accepts in full ends up in the same relative position as before. In practice that means:
- Pro rata entitlement. Each holder is offered the number of new shares that preserves their percentage of votes and of distributions.
- Same terms. The price and terms offered to existing holders must be the terms on which the shares are to be issued — an offer at a higher price than the outsider will pay does not maintain anything.
- Real acceptability. A theoretical entitlement on conditions no shareholder could meet does not satisfy the section.
Section 45(2) does not fix a period. What is reasonable depends on the size of the issue, the amount to be found, and the shareholders’ circumstances. A few days to raise a substantial sum is unlikely to be reasonable; a period long enough for a shareholder to obtain finance and take advice generally is.
A board that compresses the period to defeat a shareholder it does not want on the register risks breaching section 112 and exposing the company to a section 152 claim.
Section 45(3) — the constitution may vary it
The right is a default, not a floor. A constitution may negate it entirely, limit it (for example, to issues above a stated size, or to holders of a particular class), or modify it (for example, by prescribing the offer period, the method of communication, or the treatment of unaccepted entitlements).
| Modification | Effect |
|---|---|
| Negate entirely | The board may issue to anyone without offering to existing holders — common where investors expect flexibility |
| Fix the offer period | Replaces the uncertain “reasonable time” with a stated number of days |
| Excess entitlement | Allows shareholders who accept in full to apply for shares not taken up by others |
| Carve-outs | Employee share schemes, issues on conversion of securities, issues under an agreed funding round |
| Extend the right | Apply pre-emption to all issues, including shares ranking behind existing shares |
Removing section 45 from a constitution requires a special resolution under section 33(2). If the removal affects the rights attached to a class, the interest group process in section 98 applies and an affected shareholder may require the company to buy their shares under section 99.
If the board issues shares without complying
Section 45 does not say the issue is void. The remedies are elsewhere:
- Section 142 — an injunction restraining the company from conduct that contravenes the Act or the constitution. Speed matters: an injunction before the register entry is far more effective than a claim afterwards, since under section 49 a share is issued when the name is entered on the share register.
- Section 152 — the prejudiced shareholder remedy, where the affairs of the company have been conducted in a manner that is oppressive, unfairly discriminatory or unfairly prejudicial. Dilution of a minority by a selective issue is a classic case.
- Section 143 — a derivative action, where the wrong is properly the company’s.
- Section 147 — a personal action against a director for breach of a duty owed to the shareholder.
- Section 71 — an application to rectify the share register.
Even where the constitution negates section 45, a board issuing shares must still act in good faith and in what it believes to be the best interests of the company under section 112, and must not use the power for an improper purpose — such as diluting an inconvenient shareholder or entrenching itself before a vote. A properly negated pre-emptive right removes the statutory step; it does not license a collateral purpose.
Sources
- Companies Act 1997 — ss 33, 43–45, 47, 49, 71, 98, 99, 112, 142, 143, 147, 152
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.