How is the pre-emptive right in share issuance regulated by law?

During the process of capital raising, pre-emptive rights in share issuance have always been one of the most important legal mechanisms for safeguarding the interests of existing shareholders and maintaining stability in a company’s ownership structure. The following article provides a comprehensive overview of the concept, conditions for exercise, governing legal provisions, and practical issues commonly arising in relation to pre-emptive rights in share issuance.

I. Introduction to issues relating to pre-emptive rights in share issuance

In the course of capital raising, pre-emptive rights in share issuance play a crucial role in protecting existing shareholders from the risk of dilution of ownership interests and loss of control. Such a mechanism grants shareholders the priority right to subscribe for newly issued shares before the company offers them to external investors, thereby preserving the ownership structure and reducing the risk of hostile takeovers.

However, the exercise of pre-emptive rights in share issuance is not merely a technical issue; it is associated with notification obligations, disclosed information requirements, offering price determination, and legal procedures. In practice, numerous violations arise from offering shares to third parties at lower prices, delaying or failing to notify shareholders, or transferring pre-emptive rights without authorization, leading to disputes and legal liabilities.

II. Understanding pre-emptive rights in share issuance

1. What are pre-emptive rights in share issuance?

Pre-emptive rights in share issuance refer to the rights of existing shareholders to subscribe for newly issued shares in proportion to their current shareholdings when the company issues additional shares to increase its charter capital.

Such a mechanism enables shareholders to avoid dilution of ownership interests, voting rights, and corporate control while maintaining stability in the ownership structure and minimizing the risk of external takeovers.

Pursuant to Point c, Clause 1, Article 115 of the Law on Enterprise 2020, as amended and supplemented in 2022 and 2025, ordinary shareholders have the right of first refusal to purchase newly offered shares. In addition, Clause 2, Article 124 of the Law on Enterprise 2020 provides for the offering of shares to existing shareholders in proportion to their current ownership ratios.

Accordingly, pre-emptive rights in share issuance serve not only to protect shareholders’ interests but also as a corporate governance mechanism designed to ensure transparency in a company’s capital increase process.

2. When are shareholders entitled to pre-emptive rights in share issuance?

Shareholders are entitled to pre-emptive rights when a joint-stock company decides to issue additional ordinary shares to increase its charter capital. In such circumstances, ordinary shareholders and existing shareholders are entitled to subscribe for newly issued shares in proportion to their existing ownership interests (Point c, Clause 1, Article 115 and Clause 2, Article 124 of the Law on Enterprise 2020), thereby preventing dilution of their economic interests and voting power. It constitutes a fundamental principle for protecting shareholder rights and ensuring transparency and fairness in corporate capital-raising activities.

However, Point c, Clause 2, Article 124 of the Law on Enterprise 2020 also stipulates that shareholders may transfer their pre-emptive rights to other persons. Furthermore, Clause 3 of the same Article allows the company to sell any unsubscribed shares to existing shareholders or other persons on terms no more favorable than those originally offered to shareholders, where the intended offering is not fully subscribed by shareholders and transferees of pre-emptive rights.

3. What is the difference between ordinary subscription rights and pre-emptive rights in share issuance?

By nature, an ordinary subscription right is the right of an investor to acquire shares according to terms agreed with the company or another shareholder. Such rights commonly arise in share transfers, private placements, or investment agreements. Ordinary subscription rights are not intended to protect ownership ratios, are not required to be allocated proportionately, and do not impose any obligation on the company to prioritize a particular party. They are essentially civil and commercial rights based primarily on contractual arrangements and market principles.

By contrast, pre-emptive rights in share issuance are statutory rights protected by law, allowing existing shareholders to subscribe for newly issued shares in proportion to their ownership interests when the company issues additional shares to increase capital (Point c, Clause 1, Article 115 and Clause 2, Article 124 of the Law on Enterprise 2020). The purpose of pre-emptive rights is to prevent dilution of ownership interests, preserve voting power, protect control rights, and ensure fairness among shareholders.

III. Legal provisions relating to pre-emptive rights in share issuance

1. How Do the Law on Enterprise and the Law on Securities regulate pre-emptive rights in share issuance?

- Pursuant to Point c, Clause 1, Article 115 of the Law on Enterprise 2020, ordinary shareholders in a joint-stock company have the right to purchase newly offered shares corresponding to their proportion of ordinary shares held in the company. Further detailed provisions are set out in Clause 2, Article 124 of the Law on Enterprise 2020. Accordingly, the company must provide written notice to shareholders within a reasonable period, being at least fifteen (15) days before the expiration of the subscription period. The notice must specify:

• The number of shares available for subscription;
• The shareholder’s ownership ratio;
• The offering price;
• The subscription deadline; and
• Shareholder information.

Shareholders may exercise or decline their pre-emptive rights and may transfer such rights to another person. If a shareholder fails to register or respond within the prescribed period, the shareholder is deemed to have waived the pre-emptive right.

- Under the Law on Securities 2019, as amended and supplemented in 2024, share issuance constitutes a form of public offering of securities. Clause 7, Article 4 of the Law on Securities 2019 defines share subscription rights as securities issued by a joint-stock company that grant existing shareholders the right to purchase newly issued shares under predetermined conditions.

2. Under the Law on Enterprises, what information must be included in the notice regarding the exercise of pre-emptive rights in share issuance?

Pursuant to Point b, Clause 2, Article 124 of the Law on Enterprise 2020, a notice regarding the exercise of pre-emptive rights must include the following main information:

• Full name, contact address, nationality, and legal identification details of individual shareholders;
• Name, enterprise registration number or equivalent legal identification number, and head office address of organizational shareholders;
• Number of shares currently held and ownership percentage of the shareholder;
• Total number of shares proposed to be offered and the number of shares available for subscription by the shareholder;
• Offering price;
• Subscription period;
• Full name and signature of the company’s legal representative.

The notice must also be accompanied by a share subscription registration form issued by the company. If the registration form is not returned to the company within the prescribed period, the shareholder shall be deemed to have declined the pre-emptive subscription right.

3. What are the most common violations relating to pre-emptive rights in share issuance?

• Failure to allocate subscription rights proportionately to existing shareholders: It is the most common violation in non-listed and family-owned companies, infringing governance rights, control ratios, and economic interests.
• Failure to disclose or inadequate disclosure of information in public offerings: Common issues include incomplete or inaccurate disclosures concerning the use of proceeds, investment risks, offering prices, or treatment of unsubscribed shares.
• Unreasonably shortening or restricting subscription periods: Companies may attempt to limit pre-emptive rights by imposing excessively short subscription periods, delaying notices, or using improper notification methods, particularly disadvantaging minority shareholders.
• Unlawful restrictions on the transfer of subscription rights: Although the law permits shareholders to transfer subscription rights, some companies impose invalid restrictions or burdensome procedures that effectively deprive such rights of economic value.
• Non-transparent pricing of offered shares: Undervaluation may result in loss of corporate assets and affect shareholders who do not subscribe, while overvaluation may render subscription rights economically worthless.
• Shareholder disputes arising from capital issuances intended to alter control: In non-public companies, share issuances are sometimes deliberately structured to dilute opposing shareholders. Such conduct is often difficult to address due to its strategic control-related nature.

IV. Questions regarding pre-emptive rights in share issuances

1. Can pre-emptive rights in a share issuance be transferred, and if so, how?

Pre-emptive rights in a share issuance are transferable. Pursuant to Point c, Clause 2, Article 124 of the Law on Enterprise 2020, as amended and supplemented in 2022 and 2025, existing shareholders are entitled to transfer their pre-emptive rights to subscribe for shares to other persons. Such a provision confirms that pre-emptive subscription rights constitute a valuable legal asset capable of being transferred.

The transfer of pre-emptive rights is commonly conducted through:

• A written transfer agreement concerning the subscription rights or a transferred share subscription form;
• Confirmation by the company recognizing the transferee as the person entitled to exercise the rights;
• Payment of the share subscription price in accordance with the offering notice;
• Compliance with the registration deadline and procedures prescribed by the company.

Allowing the transfer of pre-emptive rights helps protect shareholders’ interests by enabling them to realize value from their rights even if they choose not to exercise them personally. It also enhances flexibility in share allocation, mitigates ownership dilution risks, and creates a market mechanism for share offerings.

2. What risks may arise from transferring pre-emptive rights in a share issuance without approval from the General Meeting of Shareholders?

The unauthorized transfer of pre-emptive rights to subscribe for shares without approval from the General Meeting of Shareholders may lead to various legal and transactional risks for both shareholders and the company, including:

• Risk regarding the validity of the transfer transaction: If the transfer is conducted in contravention of resolutions of the General Meeting of Shareholders or the company’s Charter, the transaction may be declared wholly or partially invalid and may not be recognized by the company during the issuance process. Consequently, the transferee may be unable to exercise the subscription rights, resulting in wasted time and transaction costs.
• Risk of non-recognition of shareholder status: Upon completion of the subscription process, only persons whose names are entered into the shareholder register acquire shareholder status. If the transfer is beyond the transferor’s authority, the company may refuse to recognize the transferee as a shareholder, even if the transferee has paid both for the rights and the subscribed shares.
• Risk of shareholder disputes: Common disputes may involve the transfer price of the pre-emptive rights, shareholder status, and voting rights after the issuance.
• Risk of failure of the company’s issuance plan: Unauthorized transfers may disrupt the intended share allocation structure, affect strategic ownership ratios, and create difficulties for strategic investors or potential acquirers.

3. What tax and accounting considerations should be noted when shareholders exercise pre-emptive rights in a share issuance?

When shareholders exercise pre-emptive rights in a share issuance, both tax and accounting implications should be carefully considered to ensure legal compliance and avoid potential risks.

- For a tax, the transfer of share subscription rights may generate taxable income depending on the taxpayer:

• For resident individuals, income derived from securities transfers is subject to personal income tax under Point g, Clause 4, Article 2 of the Law on Personal Income Tax 2007 (as amended), with detailed guidance provided under Article 11 of Circular No. 111/2013/TT-BTC.
• For organizations, such income is included in taxable corporate income under Article 3 of the Law on Corporate Income Tax 2008 and Article 7 of Circular No. 78/2014/TT-BTC.

- For an accounting, under Circular No. 200/2014/TT-BTC and Vietnamese Accounting Standards, where shareholders exercise subscription rights, any excess of the issuance price over the par value of the shares must be recorded as share premium. In the case of a transfer of subscription rights, proceeds received are recognized as financial income or other income, depending on the substance of the transaction.

In addition, companies must properly record all issuance-related expenses in accordance with the fee schedules prescribed under Circular No. 25/2022/TT-BTC, as amended by Clause 1, Article 1 of Circular No. 43/2024/TT-BTC.

4. How are violations handled when shares are offered to external investors at a price lower than the price offered under pre-emptive rights?

Potential legal consequences include:

• Civil liability of managers and sellers: Persons responsible for the offering may be deemed to have abused their authority, breached their fiduciary duties, or caused damage to shareholders or the company. Liabilities may include compensation for damages, restitution of unlawfully obtained benefits, and joint liability of members of the Board of Directors, the Director, or the General Director if they approved the transaction (Clause 1, Article 165 and Clause 1, Article 166 of the Law on Enterprise 2020, as amended and supplemented in 2022 and 2025).
• Administrative sanctions in the securities sector (for public companies): Violations involving the implementation of a share issuance contrary to the plan approved by the General Meeting of Shareholders may be sanctioned under Article 15 of Decree No. 156/2020/ND-CP, as amended by Clause 13, Article 1 of Decree No. 128/2021/ND-CP. Failure to safeguard shareholders’ rights in a capital increase offering may result in fines of up to 600 million VND, together with remedial measures such as cancellation of the issuance, repayment of raised funds, or amendment of the issuance plan (Clause 5, Article 10 of Decree No. 156/2020/ND-CP).

5. Can a company incur criminal liability for violating pre-emptive rights in a share issuance?

In practice, violations of pre-emptive rights may lead to indirect criminal liability if the share issuance is used to obtain unlawful benefits, misappropriate assets, manipulate ownership structures, or cause damage to shareholders, the company, or the market.

For example: In the case of public companies, implementing a share issuance contrary to the plan approved by the General Meeting of Shareholders, thereby harming shareholders or causing suspicious ownership fluctuations, may constitute the offense of Stock Market Manipulation under Article 211 of the Criminal Code 2015, as amended and supplemented in 2017 and 2025.

V. Are you looking for a reputable legal expert to assist with matters relating to pre-emptive rights in share issuances?

If you are seeking reliable legal assistance regarding pre-emptive rights in share issuances, you may consider law firms specializing in corporate law and capital markets. Such firms possess experience in handling matters including share offerings, shareholder rights protection, transfer of subscription rights, and capital restructuring.

Selecting the right legal advisor can help businesses minimize legal risks, ensure regulatory compliance, and optimize their share issuance strategy. Before engaging legal services, companies should clearly discuss the scope of work, professional fees, and required documentation.

In conclusion, pre-emptive rights in share issuances play a vital role in protecting shareholders’ interests, preserving corporate control, and ensuring transparency throughout the capital-raising process. Proper compliance with procedural requirements, notification obligations, and pricing mechanisms is essential to reducing the risk of disputes and legal violations. Where a company deliberately infringes upon pre-emptive rights, legal consequences may include compensation for damages, administrative penalties, and even cancellation of the issuance plan. Accordingly, understanding and complying with pre-emptive rights is indispensable for conducting efficient and sustainable share issuances.

The information above is provided for reference purposes only. Should you require legal advice tailored to a specific situation, please contact NPLaw for prompt assistance.