A preemption right (also called a right of first refusal) is the right to acquire shares from a shareholder who wishes to sell them.

The beneficiary of the preemption right can be :

• one or more specific shareholder(s) of the company
• all shareholders of the company, in which case each of them will have a pari passu right to acquire a fraction of the shares for sale which will be proportionate to the number of shares the respective shareholder already holds as compared to the total number of shares held by all pre-emption beneficiaries)
• a third party

The pre-emption right may be structured in such a way so that to give preference to some shareholders over others. The shareholders having the right to exercise their pre-emption right by priority to the remaining shareholders will thus have a first-rank pre-emption right, whereas the remaining shareholders will have a second-rank (some of them may even have a third-rank) pre-emption right. A first rank pre-emption beneficiary will therefore have the right to purchase the shares for sale by priority to all other pre-emption beneficiaries. A second-rank pre-emption beneficiary will have the right to purchase the shares for sale only in the event that the first-rank pre-emption beneficiary does not exercise its pre-emption right (or does not pre-empt all shares which are for sale), etc.

A pre-emption right is generally intended to :

• enable the shareholders who wish to remain in the company to acquire by preference the shares of the selling shareholder and therefore avoid that a third, unknown party, becomes a shareholder of the company
• preserve the existing equity participation balance between the remaining shareholders by preventing a single shareholder from acquiring the entire participation of the selling shareholder (pari-passu pre-emption right), or, alternatively
• enable a specific shareholder (or a group of shareholders) to increase their shareholding participation by priority to the remaining shareholders (first-rank pre-emption right)

A pre-emption clause is a clause which restricts the freedom of shareholders to sell their shares. Because of this restrictive character, a pre-emption clause is given strict interpretation by French courts.

Thus, if a pre-emption clause was drafted as applying to the “sale of shares”, it will not apply to the sale of financial instruments other than shares (such as, convertible bonds, warrants or other instruments or rights which give right to shares), or to transactions other than a “sale” of shares (such as pledge of shares as a collateral or even a donation of shares).

A pre-emption clause must therefore be drafted with caution, to include in the clause all possible scenarios and provide for a clear pre-emption process.