In brief: The preferential subscription right (PSR) in Morocco protects PLC shareholders against dilution during capital increases. It can be waived individually or cancelled by the extraordinary general assembly with a statutory auditor’s report and a two-thirds majority of the votes of shareholders present or represented, subject to the voting exclusions in Article 193 of Law 17-95.
Advising on capital operations, corporate governance, and statutory audits since 2011, Upsilon Consulting’s chartered accountants provide authoritative guidance on PSR procedures.
The Cancellation of the Preferential Subscription Right During a Capital Increase
In our article Capital Increase we explained that shareholders in Morocco benefit from a priority right to participate in capital increases. In reality, the law on the Moroccan limited liability company does not clearly state this right. In an LLC, approval of a transfer to a third party and preferential subscription rights are distinct mechanisms. Such a transfer requires a majority of partners representing at least three quarters of the shares. Capital increases follow the rules for amending the bylaws under Article 75 of Law 5-96.
It is different in a public limited company. A PLC’s bylaws may require company approval for transfers of shares to third parties under Article 253 of Law 17-95. This restriction is prohibited for listed shares.
The preferential subscription right (PSR) allows, however, the protection of shareholders in a PLC against the risk of dilution.
It is, indeed, a right that the law grants to existing shareholders at the expense of new ones. Article 189 of Law 17-95 gives shareholders priority to subscribe to new cash shares in proportion to the number of shares they hold.
Definition of the Preferential Subscription Right (PSR)
The preferential subscription right in a public limited company is the right that allows shareholders of a PLC to purchase new shares during a capital increase in cash. This right is inherently attached to shareholder status. The law grants it to existing shareholders in proportion to their respective shares in the capital.
In Morocco, Article 189 of Law 17-95 on public limited companies stipulates the following:
“Shareholders have a preferential right to subscribe to new cash shares, in proportion to the number of shares they hold. Any clause to the contrary is deemed unwritten. During the subscription period, this right is negotiable or transferable under the same conditions as the share itself. Shareholders may individually waive their preferential right.”
Each shareholder decides whether to exercise, transfer or individually waive their PSR. The extraordinary general assembly may cancel it under Articles 192 and 193 of Law 17-95. Unlike the annual ordinary general meeting of the PLC, which rules in particular on the accounts, decisions affecting the capital fall to the extraordinary general assembly.
In the remainder of this article, we will discuss this right in a broad sense and particularly explain how this right can be cancelled and why.
The Preferential Subscription Right (PSR): Everything You Need to Know
What does the PSR consist of?
Also called the irreducible subscription right, it is one of the shareholder’s pecuniary rights.
This right allows each shareholder to subscribe to new shares during a capital increase in cash. The preferential subscription right (PSR) available to each shareholder is proportional to their participation in the share capital.
The PSR is attached to shares; its holder may waive it individually and the extraordinary general assembly may cancel it under Law 17-95. A shareholder’s participation cannot be reduced in favor of a third party (or another shareholder) except in cases expressly provided for by law (for example, the case of PSR cancellation).
However, Article 190 of the law on PLCs stipulates that “If the general assembly has expressly decided so and if certain shareholders have not subscribed to the shares to which they were entitled on an irreducible basis, the shares thus made available are allocated to shareholders who have subscribed, on a reducible basis, to a number of shares exceeding their entitlement, in proportion to their share in the capital and within the limits of their requests.”
What Happens If Reducible Subscriptions Are Not Sufficient?
Article 191 of Law 17-95 governs the unsubscribed balance: it is allocated according to the general assembly’s decisions, or the increase is limited to the amount subscribed if the assembly that decided or authorised it expressly allowed this option.
- The balance is allocated in accordance with the decisions of the general assembly; thus, for example, if one of the shareholders expresses interest during the assembly, the latter may allocate said shares on the spot (subject to signing a subscription form and payment);
- The assembly may also decide to limit the increase to the subscribed amount (however, the preliminary assembly must have provided for this option in its text);
- If the increase is not fully subscribed and a limitation to the amount subscribed was not authorised, the subscription is deemed void under Articles 188 and 191 of Law 17-95.
Calculation of the Preferential Subscription Right (PSR)
The value of the preferential subscription right corresponds to the loss in value that each existing share suffers following the issuance of new shares.
Thus, the PSR is the ratio between the amount due to the capital increase and the initial capital.
For example, when the capital goes from 40 million dirhams to 50 million dirhams: 10M / 40M = 1/4. Shareholders therefore have the right to subscribe to one new share in exchange for the four existing shares they hold.
This Preferential Subscription Right Can Be Cancelled. What Does This Involve?
How Is the PSR Cancelled?
First of all, to have the preferential subscription right, one must necessarily be a shareholder of the company, i.e., own shares. And this right is only provided for capital increases in cash and is optional for shareholders.
It is a legitimate right of each shareholder. Thus, the shareholder can either exercise their right by participating in the capital increase, or they can sell it on the market. In this second case, they receive financial compensation since they are not participating in the capital increase.
Shareholders have, in proportion to the number of their shares, a preferential right to subscribe to cash shares issued to carry out a capital increase. The exercise period must be at least twenty days from the opening of subscription. It may close early if all irreducible rights have been exercised, under Article 197 of Law 17-95.
The maintenance of the preferential subscription right during a capital increase can operate either by irreducible subscription or by reducible subscription.
- First, irreducible subscription: holders of the preferential subscription right may subscribe to shares during the subscription period within the limits of the PSRs they hold. The assembly cannot reduce the number of shares granted within this limit.
- Then, reducible subscription means that shareholders holding the preferential subscription right may subscribe to a number exceeding their PSR. If expressly decided by the assembly, available shares are allocated to shareholders who subscribed on a reducible basis, in proportion to their share in the capital and within their requests, under Article 190 of Law 17-95.
Shareholders may maintain this right just as they may waive it. Additionally, this right may be cancelled.
Waiver and Cancellation of the PSR
The preferential subscription right is a personal right; consequently, the holder of this right may decide whether or not to exercise it.
Waiver of the Preferential Subscription Right
The holder of a preferential subscription right may waive exercising their right. This waiver is manifested by their simple refusal to use it or by the transfer of their preferential right.
The preferential subscription right may be negotiable. During subscription, the PSR is negotiable or transferable under the same conditions as the share itself, including applicable transfer restrictions, under Article 189 of Law 17-95.
Cancellation of the Preferential Subscription Right
The general assembly that decides on the capital increase may proceed to cancel the preferential subscription right (PSR). It may do so either for the entire capital increase or for certain tranches of this increase. It decides based on the report of the board of directors or the management board and on that of the statutory auditor(s).
The general assembly may cancel this right in favor of one or more persons and must mention the cancellation in the agenda, under penalty of nullity. Cancellation requires a two-thirds majority of votes of shareholders present or represented. Designated beneficiaries and persons covered by Article 193 of Law 17-95 do not vote; their shares are excluded from quorum and majority calculations.
The law requires a report from the statutory auditor in the event of PSR cancellation. Thus, the statutory auditor must indicate in their report:
- Their opinion on the reasons leading to the cancellation;
- Whether the calculation bases used to determine the issue price are accurate and fair;
- In the dated and signed special report, their opinion on cancellation and its grounds; the issue price, its amount, range or conditions for setting it; the accuracy and fairness of the calculation bases; and the effect of the issue on the shareholder’s position as presented by the board, under Decree 2-09-481.
Key Takeaways
- The preferential subscription right, in Morocco, is a right specific to the shareholder.
- The assembly may cancel the Preferential Subscription Right.
- This cancellation allows the entry of major investors into the company’s shareholding.
- The extraordinary general assembly may cancel the PSR. The statutory auditor gives their opinion on this cancellation.
- Each shareholder may transfer or waive their PSR.
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Frequently asked questions
What is the preferential subscription right (PSR) in Morocco?
The PSR is a legal right granted to existing shareholders of a public limited company (PLC) that gives them priority to subscribe to new shares during a capital increase in cash. This right is proportional to their existing shareholding and protects them against dilution.
Can the preferential subscription right be cancelled?
Yes, the extraordinary general assembly can decide to cancel the PSR for the entire capital increase or for specific tranches. This cancellation requires a statutory auditor's report and a two-thirds majority of the votes of shareholders present or represented, subject to the voting exclusions in Article 193 of Law 17-95, and must be mentioned in the meeting agenda under penalty of nullity.
How is the value of the PSR calculated?
The PSR value corresponds to the loss in value that each existing share suffers following the issuance of new shares. It is calculated as the ratio between the amount of the capital increase and the initial capital. For example, if capital goes from 40 million to 50 million dirhams, the ratio is 1/4.
