Pre-emption Rights in Real Estate and Business Shares: Do You Have the Money on the Table?

A pre-emption right gives a particular person priority in purchasing an asset if its owner decides to sell it. If the owner wishes to sell an asset or right to a third party, the owner must first offer it to the holder of the pre-emption right on the same terms. The holder may exercise the right within a specified period and acquire the asset or right on the same terms as those agreed with the third-party buyer.

At first sight, a pre-emption right appears straightforward and easy to understand. It soon becomes apparent, however, that its regulation raises a number of questions and that the applicable rules differ significantly depending on whether the transaction concerns the sale of a co-ownership interest in real estate or a business share in a limited liability company.

The key difference lies in the meaning of the requirement that the holder of the pre-emption right be allowed to purchase on the “same terms” as the third-party buyer.

Pre-emption Right in Respect of a Business Share

The pre-emption right in respect of a business share is regulated by Article 481 of the Slovenian Companies Act (ZGD-1). It provides that, when a business share is sold to a third party, the existing shareholders have priority over other persons on the same terms, unless the articles of association provide otherwise.

The law is based on the premise that, because of the close relationship between the shareholders, the identity of any person becoming a shareholder of the company is important. It therefore enables the existing shareholders to prevent an unwanted third party from entering the company. A shareholder intending to sell their business share must notify the other shareholders in writing of the intended sale and its terms and invite them to confirm their willingness to purchase within one month of receiving the notice. If several shareholders wish to purchase the business share, they acquire it jointly in proportion to their existing business shares.

Equality of terms means that the holder of the pre-emption right steps into the position of the third-party buyer and accepts the entire set of elements comprising the proposed transaction. These include not only the purchase price, but also the method and deadlines for payment, any security to be provided and other contractual elements that together define the transaction’s economic and legal substance.

Since ZGD-1 allows considerable contractual autonomy in this area, the content of the pre-emption right must always be considered in conjunction with the articles of association. The articles may regulate the right in greater detail, restrict it, extend it or exclude it.

The provisions most commonly modified relate to the procedure, applicable deadlines, the class of persons entitled to exercise the right and whether the right also applies to transfers between existing shareholders. Its essential nature nevertheless generally remains unchanged: the holder enters into the transaction in place of the third-party buyer and accepts all the material economic and legal terms applicable to that buyer.

Pre-emption Right in Respect of Real Estate

Under Article 66 of the Slovenian Property Code (SPZ), co-owners have a statutory pre-emption right when a co-ownership interest in real estate is sold. If several co-owners exercise the right simultaneously, each may exercise it in proportion to their undivided interest. The provisions of the Slovenian Obligations Code (OZ) apply, as appropriate, to the substance and manner of exercising the right.

Unlike a pre-emption right in respect of a business share, a pre-emption right over real estate cannot be exercised merely by declaring acceptance of the offer. To exercise the right validly, the holder must, at the same time as declaring their intention to purchase the property, either pay the full purchase price specified in the owner’s notice of the intended sale or deposit it with the court (Article 508(2) OZ).

The deadline for exercising the pre-emption right and simultaneously paying the purchase price is 30 days from receipt of the owner’s notice of the intended sale (Article 508(1) OZ). If the notice provides for a later payment date, the holder may take advantage of it only by providing adequate security (Article 508(3) OZ). Regarding such security, the case law has confirmed that a mere undertaking or declaration by the buyer is insufficient. Actual security must be provided that, in realistic circumstances, enables the claim to be satisfied—for example, a mortgage over appropriately valued real estate.

This arrangement protects the seller against the potential insolvency of the holder of the pre-emption right and ensures that exercising the right does not place the owner in a worse position than if the transaction had been concluded with the third-party buyer.

The exercise of a pre-emption right over real estate is therefore fundamentally linked to whether the holder is actually able to pay the purchase price immediately or provide adequate security for its payment. In other words, the holder’s short-term liquidity is crucial.

The payment deadline is particularly short: 30 days from receipt of the notice. Nor is simultaneous performance automatically guaranteed. The holder must pay the purchase price before the conditions for registering title in the Land Register have been satisfied, which exposes the holder to risk. Bank financing, for example, is therefore difficult to arrange without an appropriate agreement with the seller.

It follows that the holder of a pre-emption right does not, in reality, purchase the property on the “same terms” as the third-party buyer. This is an important distinction from the pre-emption regime under ZGD-1 and one that is frequently overlooked or misunderstood.

What Does This Difference Mean in Practice?

In view of the shortcomings described above, the first step in practice is generally to attempt to agree a contract with the seller that takes account of both parties’ interests and enables the purchase to proceed on terms that resemble those offered to the third party as closely as possible. If an appropriate agreement cannot be reached, it is essential to ensure that the pre-emption right is exercised correctly and within the prescribed time limit. This includes providing adequate security correctly and in good time if the holder wishes to rely unilaterally on the payment terms available to the third party. If the holder can provide such security, this will generally also ensure simultaneous performance, since real estate transactions are ordinarily structured in a manner that implements the principle of concurrent performance and protects both parties. In any event, appropriate negotiations and interpretation of the statutory provisions should be used to establish at least some mechanism for concurrent performance, even where the holder has the purchase price immediately available. One possible solution is to deposit the purchase price in a notary’s escrow account within 30 days of receiving the owner’s notice.

This issue does not generally arise in connection with pre-emption rights under ZGD-1. Particular attention must nevertheless be paid to the articles of association, which may regulate the pre-emption right in greater detail or differently from the statutory provisions. The procedure must be carried out correctly; otherwise, there is a risk of a dispute among the shareholders.

Although the purpose of the pre-emption right is the same in both cases, the practical conditions for exercising it differ substantially. In the case of business shares, the principal focus is on correctly implementing the procedure and complying with the articles of association. In the case of real estate, the distinguishing feature is that the holder must already be ready and able to pay the entire purchase price or secure its payment when exercising the right. Even where negotiations make it possible to establish a mechanism for concurrent performance, the holder must have the entire purchase price or adequate security immediately available if the seller insists upon it. If the holder does not have it or fails to provide it, the pre-emption right will not have been validly exercised.

In both cases, therefore, the successful exercise of a pre-emption right depends not only on the existence of the right itself, but also on timely legal and practical preparation for its exercise.