Pre-emption right

Subscription rights (English pre-emptive right) is a possible right of an existing shareholder to subscribe for young ( new ) shares in a rights issue.

  • 3.1 Reasons for the exclusion of subscription rights
  • 3.2 Consequences for Investors
  • 4.1 Switzerland
  • 4.2 United Kingdom


The reasons why existing shareholders have a subscription right is granted, are manifold. First, the issuance of subscription rights in Germany is mandatory in the case of a capital increase of over ten percent, unless extraordinary circumstances exist. This is intended mainly the existing shareholders are protected as a capital brings with it the dilution effect, whereby the effective portion of the respective company falls. This can be on the influence of the voting rights attached to ordinary shares his terms and in relation to the relative dividend share in common and especially on preferred shares both in terms of the case.

Furthermore, it is often easier to move existing shareholders to purchase additional shares to advertise as a completely new shareholders. The subscription rights therefore also constitutes an incentive for existing shareholders, at least to draw from the young shares a part directly and thus maintain the relative share of the voting rights or in the dividends so partially. The subscription ratio, which is / new shares is given by the ratio of old shares, ensures that each existing shareholder subscription rights obtained in exactly the amount that he needs in order not to dilute its stake. By the Theoretical ex -rights price ( TERP ) determined, including the issue price of new shares is subtracted and the difference thus obtained is divided by the subscription ratio, the calculated value of a "whole" subscription rights can be determined. Alternatively, this value of a "whole" pre-emptive rights by dividing the difference between the price of the old shares and the issue price of the new shares are calculated with the increased to 1 Ratio.

  • Value of a "whole" subscription right = ( TERP - Issue price new shares ) / Ratio
  • Value of a "whole" subscription right = (old stock price - issue price of new shares) / (Ratio 1)

A capital increase with subscription rights

With a capital increase with subscription rights are to be offered to existing shareholders, the new shares in accordance with the subscription rights pursuant to § 186 AktG price for a period of at least two weeks (14 days ). Except as provided in this 14-day subscription period are no stock market holidays, the existing shareholders therefore are ten trading days on the adoption of the rights offering. Either the exact issue price of the new shares must be specified before the start of the subscription period or the rules by which it is determined later. In the latter case, the exact issue price of the new shares must be given no later than three days before the subscription period. All the new shares that were not acquired at the end of the subscription period through the exercise of subscription rights, are then usually placed in a bookbuilding procedure by the underwriters in the market. The price for this is often short set below the then current share price.

For example, the subscribed capital of an AG of 50 million to 60 million with a ratio of 5: 1 increments, each shareholder will receive for five old shares the right to one new share ( new share) to acquire the capital increase. For each old share held, shareholders will receive one subscription right. Absence of a shareholder the necessary rights in order to acquire one new share can, he may redeem all or part of its allotted subscription rights to sell or let also forfeited his rights to him missing options.

The shareholders of a company (share class A) may be granted to shares of the same class of shares, subscription rights, as well as on any other class of shares as also are special cases such as the rights issue on fixed-income instruments with conversion option ( convertible bonds), dividend-right certificates, bonds and instruments possible option right.

Optional ( currently not mandatory in Germany ) directed the underwriters a subscription rights trading one to an easy way to offer to existing shareholders to sell their subscription rights during the subscription period.


In the first decades of joint stock companies there were no subscription rights regime. However, it was common for capital to sell the new shares to the existing shareholders. This changed in the early 20th century, as in the United States, the Portland bank and the company Continental Trust Co. capital conducted and the new shares to foreign investors sold without offering them to existing shareholders pro rata to purchase. In subsequent trials was first ruled that this was not permissible due to the dilution effect and the resulting injustice and the existing shareholders a general subscription right is to be granted.

In Germany, mandatory subscription rights for the first time with the General German Commercial Code ( ADHGB ) in 1861 were introduced.

Exclusion of subscription rights

Not every capital there is necessarily subscription rights. Shareholders may at an ordinary capital increase to exclude subscription rights (3/4 majority in the General Assembly).

A further condition of the exclusion of subscription rights, that the increase of the share capital is less than ten percent of the capital increase and the issue price the current market price is not significantly below. As is "essential" to consider a limit of about five percent in Germany.

The subscription rights may only take place under very valid reasons. These reasons may, for example, the acquisition of foreign companies, parts of companies or participations exist if in these cases, the new shares will be used as payment. Another good reason is also the admission of the shares of the respective company for trading on a foreign stock exchange on which the shares have not been admitted to trading, and at which the new shares will then be issued.

While part of the exclusion of subscription rights was already provided for in the Stock Corporation Act of 1861, this part of the exclusion, the example a large shareholder does not preclude any other but already, according to current case law rather problematic. This is seen particularly from the standpoint of equal treatment of shareholders, whereas previously the prevailing view was that this was a general exclusion of subscription rights, with the particularity that the third party to which the new shares are allocated, is already a shareholder. This problem would be especially interesting if with such a construct should be attempted gradually, by the partial dilution of a 95 - to achieve dominance %, with the then the remaining shareholders of a squeeze-out would hinausdrängbar.

So this is done in the nationalization of the real estate financing bank Hypo Real Estate Holding AG as a result of FMStG and FMStErgG, where there is a squeeze-out, however, was already at 90 %. The guided by the state SoFFin decided by a majority vote at the AGM a rights issue with preemptive rights of the other shareholders in order to then decide due to the dilution effect and a participation of now 90 % of the share capital by a re- HV, the squeeze-out. Thus, the remaining shareholders were forced out and the bank was nationalized. Principle was justified and the adoption of the applicable laws with the necessary rescue systemically important banks to stabilize the German financial market to prevent a repeat of the events surrounding the Lehman Brothers Holdings Inc. investment bank in the United States in September 2008.

Reasons for the exclusion of subscription rights

The subscription rights must be excluded if the corporation wants to issue employee shares.

Consequences for investors

If the subscription rights excluded, so investors have no way at discounted subscription rights in the capital to participate. Thus initially the proportion of an investor in the share capital remains nominally the same, but while the volume of total share capital increases. Thus, a shareholder effectively a lower ownership stake in the company than before the capital increase, which is called anti-dilutive. Consequence of all this is that the share price of each company strongly or less strongly decreases, which is to be evaluated from the perspective of investors as negative.

Situation in other countries


Switzerland is one of the few countries that - unlike, for example Germany - do not provide for exclusion of subscription rights in capital increases by a small percentage of the share capital, see Swiss Code of Obligations.

Exclusion of subscription rights is only possible in Switzerland, for important reasons, such as an acquisition of other companies, make this absolutely necessary. Just as with the approval of a capital increase ordinary shares and a possible reduction or complete elimination of subscription rights of at least 2 /3 of the shareholders present at a shareholders' meeting must be decided.

United Kingdom

In the UK case of capital, provided that they take place against cash contributions and no emissions of bonus shares are to forgive subscription rights generally to all shareholders pro rata. An exception is made for shares from employee stock plans ( § 566 ). The regular subscription period is 21 days, but can be reduced by appropriate decision on up to 14 days ( § 562 ).