Preemptive Right Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Preemptive Right, written in plain English, along with examples of how it is used.

What is Preemptive Right?

n.In a corporate business when new stocks are issued the existing shreholders are given the right to purchase shares in proportion to the shares that they are already holding.

History and Meaning of Preemptive Right

A preemptive right, also known as a preemption right or right of first refusal, is a legal concept that enables existing shareholders to maintain their relative ownership percentage in a company when new shares are issued. In other words, if a company decides to issue new stock, existing shareholders have the right to buy a proportionate amount of the newly issued shares before they are offered to anyone else.

The purpose of the preemptive right is to protect existing shareholders from dilution of their ownership stake. Without this right, existing shareholders could be left with a smaller percentage of ownership in the company as a result of the new shares being issued.

Examples of Preemptive Right

  1. Company A decides to issue 100,000 new shares of stock. As part of offering these shares, the company's existing shareholders are given the right to purchase a proportionate amount of the new shares before they are offered to the general public.

  2. When Company B issues new stock, it must first offer the shares to its existing shareholders based on their current ownership percentage before selling the shares to other investors.

  3. As part of a stock purchase agreement, the buyer agrees to honor the preemptive right of the company's existing shareholders if new shares are issued in the future.

Legal Terms Similar to Preemptive Right

  1. Right of first refusal - gives the holder the right to match or better any offer made on a particular asset before it can be sold to someone else.

  2. Drag-along right - gives majority shareholders the right to force minority shareholders to agree to a sale or merger of the company.

  3. Tag-along right - gives minority shareholders the right to sell their shares if the majority shareholder decides to sell their shares.