Wednesday, 25 January 2012

Preemptive Right

Preemptive Right Definition:
Preemptive rights give existing shareholders the opportunity to purchase new share offerings before they are available to the investing public.
Preemptive rights are also called preemption rights or subscription rights.

Basically, when a company decides to issue more shares of stock, current shareholders have the right to buy the new shares of common stock before the general public can buy the new shares of stock. The idea is to allow current shareholders to maintain their proportional ownership of company without experiencing value or control dilution caused by the new issue.

Preemptive rights often allow the existing shareholders to purchase shares of stock at a discount to the public offering price. Existing shareholders are allowed to purchase the new issue within a set window of opportunity, often two to four weeks.

Preemptive rights also allow the existing shareholder to buy a set number of shares of the new issue depending on how many shares the shareholder currently owns. The number of shares allowed to the shareholder relative to current holdings is referred to as the subscription ratio. The subscription ratio is stated in a document given to existing shareholders, called the subscription warrant.

Because the preemptive right often allows the shareholder to purchase the new issue at a discount, and because purchasing shares of the new issue allows the existing shareholder to maintain proportional ownership and voting power, it is usually in the shareholders best interest to make use of the preemptive right and to buy the maximum allowable shares of the new issue.


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