A pre-emptive right lets an existing shareholder buy a proportional share of any new shares a corporation issues, before those shares reach anyone else, so a new financing round cannot dilute the shareholder’s percentage ownership without first giving them the chance to keep pace.
Under the Canada Business Corporations Act, a pre-emptive right is not automatic. Section 28(1) gives shareholders the right only “if the articles so provide,” and only then are shareholders of a class entitled “to acquire the offered shares in proportion to their holdings of the shares of that class, at such price and on such terms as those shares are to be offered to others.” A corporation incorporated without that clause in its articles gives its shareholders no pre-emptive right at all, and a board is free to issue new shares to anyone it chooses, at any price it negotiates.
Even where the articles do grant the right, section 28(2) carves out three situations where no offer to existing shareholders is required: shares issued “for a consideration other than money,” shares issued “as a share dividend,” and shares issued “pursuant to the exercise of conversion privileges, options or rights previously granted by the corporation.” Our sister firm’s guide to Ontario shareholder agreements puts the commercial purpose plainly: “Pre-emptive rights stop a majority diluting a minority through a new share issue.”
Because the statutory default is silence, a minority co-investor who wants this protection in practice usually gets it through a unanimous shareholder agreement rather than relying on the articles alone — the same contract vehicle that typically carries the deal’s other transfer and dilution protections.
A fund holds 22% of a portfolio company incorporated under the CBCA with a pre-emptive right written into its articles. The company needs a $4,000,000 follow-on equity round from a new investor. Before the board can allot the new shares to that investor, it must first offer the fund the right to subscribe for up to 22% of the new issuance at the same price and terms, so the fund can choose to maintain its 22% stake or let it dilute. If the same round were instead funded by converting a promissory note under an option granted the year before, section 28(2)(c) means no offer to the fund is required at all — the pre-emptive right simply does not reach that transaction.
See also: Right of first refusal · Tag-along right · Unanimous shareholder agreement.
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