30/11/2011

The question: Are pre-emptive rights of shareholders a security interest and therefore required to be registered as such under PPSA? Here, we restrict our comments to pre-emptive rights given to shareholders in a shareholders agreement. (Pre-emptive rights are often also found in a company’s constitution.)

Pre-emptive rights do two things: 

Firstly, they allow shareholders, particularly in proprietary companies, to avoid having their shareholding diluted by new share issues. Pre-emptive rights include the right to be offered new shares in the company, in proportion to their current shareholding in the company.

Secondly, pre-emptive rights require a shareholder who wants to sell shares to offer them first to existing shareholders before being allowed to offer them to persons who are not shareholders.

So, are pre-emptive rights of shareholders a security interest under PPSA and should they be protected by registration under PPSA?

Section 12(1) of PPSA defines a security interest as an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation. Look at each of the phrases in bold.

A shareholder’s pre-emptive rights under a shareholders agreement is an interest in personal property. This is confirmed by section 10 of PPSA, which defines personal property as property other than in land. So, personal property includes goods, shares and intangible property such as trade marks and licences.

Where shareholders agree to regulate their conduct in relation to the issue or sale of shares in the company, we consider that the shareholders agreement "documents" a transaction.

Generally, a shareholders agreement will secure the obligations of other parties to grant existing shareholders pre-emptive rights. Any failure to do so could be enforced by an aggrieved shareholder commencing legal proceedings. However, some actual personal property must be charged or secured to ensure compliance, in order to make those rights a security interest under PPSA. 

Personal property is rarely secured to ensure payment in shareholder agreements. It is possible that, with the introduction of PPSA, a clause like the following may become popular:

"A [the party who grants the pre-emptive rights to eg remaining shareholders] expressly charges all his interest in his personal property, of whatever type and wherever located, both present and after-acquired, to ensure his compliance with the pre-emptive rights provisions under this agreement".
  
In summary, if a shareholder’s personal property is expressly charged to ensure he complies with the pre-emptive rights provisions under a shareholders agreement, those pre-emptive rights are security interests under PPSA. Therefore, all relevant provisions in the PPSA must be complied with to ensure the maximum protection for the parties relying on the security interests.

Of course, in each case, it is important to know precisely what pre-emptive rights (if any) are actually given to shareholders. The pre-emptive rights would ideally be:

• clearly set out; and
• give the shareholder a contractual right to require the other shareholders to act in certain ways in specific cases and to take action in respect of certain secured personal property.

This approach means that there can be no blanket rule covering every existing shareholders agreement. Each shareholders agreement must be viewed on its actual wording and the circumstances of each particular case, in order to see if it is a security interest and should be registered under PPSR.

If you would like us to review your shareholders agreement to assess whether it is subject to the PPSA or if you would like to amend a current agreement to allow you to register your pre-emptive rights on the PPSA Register, please contact Gareth Johnson or David Nicoll at TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.