What is the difference between pre-emption rights and rights of first refusal?
Both terms are about giving existing shareholders priority to buy shares before they are sold to an outsider. It is a common way to maintain control in a closed, unlisted company and avoid the involvement of unwanted external parties. However, they work slightly differently in practice:
1. Pre-emption clause on transfers (Förköpsförbehåll in the articles of association)
A pre-emption clause for transfers is written into the *articles of association* (which are public). It means that if a shareholder decides to sell their existing shares, the shares must first be offered to the other shareholders in the company. If anyone accepts, they have the right to buy the shares on the same (or predetermined) terms.
2. Pre-emption rights (during new share issues or in shareholders' agreements)
The concept of pre-emption rights is used in two different contexts:
- During a new share issue: According to the Swedish Companies Act, existing owners have a pre-emption right (priority right) to subscribe for *new* shares when the company raises money, so as not to be diluted.
- In the shareholders' agreement (Right of First Refusal, ROFR): The owners can agree among themselves in a confidential shareholders' agreement that they must offer each other their shares before selling them to an external party.
Why are they used?
Almost all unlisted startups and growth companies have some form of pre-emption or post-sale purchase right clause (hembud). The purpose is to keep the ownership group closed – the idea is that those who helped build the company should have the first option on the shares if someone chooses to sell.