preemptive right
Noun: A preemptive right is a contractual or legal privilege granted to existing shareholders of a corporation. It gives them the first chance to purchase a proportionate number of new shares issued by the company before the shares are offered to the public or other investors. This right is designed to protect shareholders from having their ownership percentage and voting power reduced (a situation known as dilution) when the company seeks to raise more capital by issuing additional stock.
The term is used primarily in corporate finance, securities law, and investment contexts. It describes a specific shareholder safeguard. - It is often discussed in shareholder agreements, corporate charters, and during events like a new issue or secondary offering of stock. - The right is typically proportional, meaning a shareholder who owns 5% of the company has the right to buy 5% of the new issue to maintain their exact ownership stake.
- Activating the right:
- Purpose of the right:
- Waiving the right:
- Preemptive right offering: This refers to the formal process where a company issues new shares and extends the purchase opportunity to its existing shareholders first. The offer usually has a fixed subscription price and a specific time window.
- Legal basis: In many jurisdictions, the preemptive right is not automatic but must be explicitly provided for in a company's articles of incorporation or bylaws. Its strength and application can vary by state or country.
- Subscription right: A synonym often used interchangeably with preemptive right, particularly referring to the short-term, tradable certificate issued to shareholders that evidences this privilege.
- Anti-dilution provision: A broader term for mechanisms (which can include preemptive rights) designed to protect investors from a decrease in the value or percentage of their ownership.
- Rights issue: The name for the corporate action or event where new shares are offered to existing shareholders, utilizing their preemptive rights.
- Subscription privilege
- First refusal right (in the specific context of new share issues)
- Dilution: The reduction in ownership percentage and often earnings per share that a preemptive right is designed to prevent.
- New issue: The offering of new securities, such as stocks or bonds, to investors.
- Pro rata: In proportion. Preemptive rights are usually offered on a basis relative to existing holdings.
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the right granting to shareholders the first opportunity to buy a new issue of stock; provides protection against dilution of the shareholder's ownership interest
